Pay heed to Druckenmiller

Abraham George Macro View

As expected, yesterday’s CPI number was very hot. This must have been a surprise to those who were taking the guidance from the Fed on the inflation trajectory. For all the others, it should be no surprise as it was undoubtedly visible in the policy making and soaring asset prices. The year over year change at 4.2% was the highest since 2008. By far, the most important number was the month-over-month change. From Mar to Apr, the consumer price index rose by .8%. If we annualize this month-over-month number, we are looking at a trajectory of double-digit annual inflation.

The Fed is very adamant that the present supply chain and pent- up demand related price rises will normalize soon. But what the Fed and politicians don’t want to talk about , is the impact on prices from the trillions of dollars that they are dumping onto the economy. Listen to one of the greatest macro-traders of all time, Stan Druckenmiller. When he shares his views, it’s a good idea to pay attention. He understands the big picture better than most of us. Firstly, his view is shaped by global liquidity. Secondly he has a lot of influence among market veterans.

Over the past 40 years he made money by interpreting the impact of central bank policy and at no time in his career has the situation been so much glaring to him. Over the past 17 months he grew his $5 bio dollar fortune by 50%. So what does he think now? He thinks the Fed should be ending their emergency policies and making its first rate hikes very soon. Instead the Fed is telling us they wouldn’t raise rates for another two years. They are still buying $40 bio worth of mortgage bonds each month, despite the fact that the housing market is booming and supply is tight.

They are still buying $80 bio a month of treasuries, despite the fact that the economy is growing at twice the long term trend rate, and is on path to grow at double digits in the second quarter. To top all this, they are asking Congress to continue rubber stamping yet another , multi - trillion dollar spending program.

Druckenmiller says the end result will be that the investors will vote with their pockets (sell Treasuries) when the government is spending so irresponsibly. At the moment, the Fed bond buying is masking any signal of disapproval from the bond market investors. Druckenmiller thinks this policy stance (from the Fed and the Congress) at this stage of the recovery is toxic. This will lead to a massive debt service burden for the country which in his view, will ultimately be resolved in a devaluation of the dollar and the loss of the world reserve currency status. The real pain will come when foreigners will lose faith in the dollar and start dumping it. It may not happen tomorrow, but the path is certainly being cleared for that.

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.