Stanley Druckenmiller fears a recession is on the way after more than a year of aggressive interest rate hikes from the Federal Reserve have failed to quash inflation. The famed hedge funder, who now operates the Duquesne Family Office, said Wednesday that despite the economys recent resilienceheadlined by a low unemployment rate and positive first-quarter GDP growthhe believes a hard landing is inevitable.
Our central case is theres more shoes to drop, particularlyin addition to the asset marketseconomically, he told Bloomberg Wednesday.
For years now, Druckenmiller has criticized Fed officials for blowing up an asset bubble in stocks, real estate, and other sectors after the Global Financial Crisis, with their easy money policies. And even after the Fed switched stances and started raising rates in 2022, leading to a dismal year for markets, he believes theres more downside aheadthat wasnt the bubble popping.
The veteran investor argued that high interest rates could lead to more issues in key sectors of the economy like what happened with regional banks in March, when Silicon Valley Bank rapidly failed, forcing regulators to step in and backstop depositors. He pointed to the ailing commercial real estate market, and particularly the office sectorwhich Fortune previously reported is in the midst of a crisis at the momentas one area that could be in trouble. But he also warned that a credit crunch could be on the way, as banks capital dries up and they take fewer risks amid slowing economic growth.
Theres a lot of stuff under the hood when you go from this kind of environment, the biggest broadest asset bubble ever, and then you jack interest rates up 500 basis points in a year, I think the probability is that Silicon Valley Bank, Bed Bath & Beyond, theyre probably the tip of the iceberg, he said.
Druckenmiller has been sounding the alarm about the potential for a 2023 U.S. recession for over a year now. The billionaire, who has famously never had a down year as an asset manager, said in September of last year that he would be stunned if we dont have a recession in 23.
I dont know the timing but certainly by the end of 23. I will not be surprised if its not larger than the so-called average garden variety, he told investors at CNBCs Delivering Alpha Investor Summit.
Later that month, Druckenmiller warned that higher interest rates could slow economic growth, leading to a high probability that the stock market will be flat for a decade. And in May of this year, he repeated his dire warnings, arguing that the economy was teetering on the brink of a hard landing, and when it crashes, bankruptcies will surge, unemployment will jump over 5%, and corporate profits will drop at least 20%.
Fellow billionaire investor Jeffrey Gundlach, the founder of the investment firm DoubleLine Capital who is known as the bond king, also fears that the economy is on shaky ground at the moment. Gundlach told DoublineCapital investors on a webcast Tuesday that economic indicators are absolutely full-on recessionary, CNBC reported.
He pointed to the Conference Boards Leading Economic Index (LEI), which declined 0.6% in April and 4.4% between October 2022 and April 2023. The LEI is meant to help predict turning points in business cycles and includes components such as building permits, jobless claims, and the ISM New Orders index, which tracks manufacturing firm orders. The Conference Boards Justyna Zabinska-La Monica, a senior manager of Business Cycle Indicators, said in a statement that the LEI continues to warn of an economic downturn this year.
Its pretty clear that we have the look of soon to be at the front end of a recession, Gundlach said of the data.
Still, theres an elephant in the room hereA.I.
Euphoria over the technology has gripped investors in recent months, leading A.I.-related stocks and ETFs to surge. And Druckenmiller, who is worth nearly $10 billion, according to Bloombergs Billionaires Index, said Wednesday he sees opportunity in the technology, even if valuations are stretched.
They havent separated the wheat from the chaff yet, but I do believe, unlike crypto, that A.I. is real and it could be as transformative as the internet, he said.
