Stanley Druckenmiller sees the 70s market-crushing inflation dead ahead and has expressed concern about whether or not the Fed has won the battle against inflation.
The Fed and its Western-aligned central banks exited, in the second half of 2024, the most aggressive rate hikes in decades to tame generational high inflation.
Stress on the bond market did not go unnoticed, with the treasury market crash in 2023, the worst in history, putting extreme stress on the collateral base of banks.
Five banks that year collapsed.
“Stanley Druckenmiller sees the 70s market-crushing inflation dead ahead”
STANLEY DRUCKENMILLER
With auto subprime delinquencies in early 2024 shaping up to be worse than in 2008 and roughly 600 dollar store closures in the first half of 2024, it became apparent that demand-pull inflation was dead in the water. Lower middle-income households were crushed fom high debt service payments.
Higher unemployment levels then pivoted the Fed’s focus from inflation to rising unemployment. So, the Fed declared the end of its rate hiking cycle in September 2024 with a 50 basis point cut and another 25 basis points in October.
But the current Fed fund rate of 4.5% and 4.75% is still in the tight range and a headwind on the economy. The cost of service debt for households and the public sector remains high.
Despite this Fed fund rate remaining within the tight range,Stanley Druckenmiller sees the 1970s inflation repeating in 2025
In 1970, it reached 5.5% and then continued to trend up in a range from 5.5–14.4% through the 1970s before culminating at 14% in 1980.
Stanley Druckenmiller is betting that the Fed will resign itself to higher inflation, and he has bets against US treasury bonds that account for 15 to 20% of his portfolio.
“Stanley Druckenmiller is betting that the Fed will resign itself to higher inflation”
WEALTH TRAINING COMPANY
Treasury bond yields move in tandem with the Fed fund rates, so a trajectory of falling Fed fund rates typically leads to declining bond yields as demand for bonds increases, with investors flocking to lock in the current yields.
Here is the anomaly; Bond yields are rising early in the Fed rate-cutting cycle and it should be the opposite.
Why are the Fed rate cuts not triggering a rally in treasury bonds leading to declining bond yields?
Moreover, why is Stanley Druckenmiller selling treasury bonds early in the Fed’s rate-cutting cycle?
“I’m worried the Fed has declared victory too early” – Stanley Druckenmiller
Here is the answer
Druckenmiller reportedly mentioned concerns about fiscal recklessness and worries about the US Government’s growing debt load. He believes investors are tolerating the government’s financial situation because the US dollar is the world’s reserve currency.
Stanley Druckenmiller is also concerned that the Fed hasn’t beat back inflation:
“I’m worried the Fed has declared victory too early… I don’t have conviction like I had in 2021, that inflation was going to go up, that’s when the money supply was growing 40% and all sorts of things were happening, but I also don’t have conviction that they’ve snuffed this thing out and won the battle,” he said.
The cost-push inflation of the 70s was not due to demand, as the economy was in a recession, so prices were rising because the money supply was increasing faster than the demand for dollars, reducing its purchasing power. Sounds similar to today?
Nixon’s petrodollar deal saved the dollar and reduced inflation.
