Druckenmiller predicts higher inflation

Stan Druckenmiller is one of the biggest traders of all time especially when it comes to global macro investing. One of his greatest quotes: “It’s liquidity that moves the markets”.

From his thirty odd years of continuous success and those who knows his style, it is very clear that he understands the big picture better than anyone as his views are largely based on understanding global liquidity. The markets are drunk on liquidity. The world is swimming in more money than it can handle but the Fed and Treasury in coordination with other central banks are still willing to give more.

Druckenmiller thinks the markets are setting itself up for an inflationary boom. Many leading economists will disagree with him. But I will go with Druckenmiller considering his track record and real skin in the game. However he is cautious in what he says “it will be an inflationary boom if the authorities get it right or it will be a deflationary bust if they get it wrong”. He thinks they just cannot afford to get it wrong.

So in a situation like this valuations won’t really matter and he believes inflation will hit 10% in the coming years. That will be a big departure from the current state of affairs. With the Fed having openly stated that they will take a risk with inflation and intentionally be behind the curve nominal GDP could rise big time. At some point Fed will be chasing inflation. Intuitively, I think the biggest risk should be in the long end of the bond markets.

Equities

Believe all of yesterday’s up move is a relief rally and are corrective. There are no gaps to be filled from the highs so far. Think the next wave of selling should start soon and prices can take it below 3000 in the S&P 500.

Bonds

As long as bonds remain capped under 178^17 the risk is to the downside. We think there is much greater potential for bonds to break down but this consolidation has been very frustrating.

Euro

Prices retraced to 1.1830 area. Think this must have completed the upside pressure or it may still challenge the highs at 1.1866 on Sep 4. Our preferred scenario is for a move down to 1.1600.

Gold

Gold is at a make or break situation. It is important for gold to move below 1870 to eliminate any upside pressure. The outer boundary from current levels is at 1993. A move above that will open the risks of gold challenging its previous highs at 2072 and even breaking it before it tops out.

Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.