Is Druckenmiller wrong?
Few people on Wall Street have garnered as much respect from the investment community as Stanley Druckenmiller. A master of all markets, his spotless record and daring trades made him an idol for generations. As for the Central Bankers who were on the other side of them, he was the boogeyman. He is a BSD of the highest order.
He’s also long bonds, betting that the government will actually do the right thing and get serious about the deficit.
“One of the reasons I bought the Treasurys a ways back was I thought [House Budget Chairman Paul] Ryan was serious. I mean I heard some serious things that I hadn't heard in a long time."
Has he placed too much faith in government this time?
"The Treasury borrowing committee letter speaks about catastrophic financial crises, comparing it to Fannie and Freddie. That's not what we're talking about here…Here are your two options: piece of paper number one—let's just call it a 10-year Treasury. So I own this piece of paper. I get an income stream obviously over 10 years . . . and one of my interest payments is going to be delayed, I don't know, six days, eight days, 15 days, but I know I'm going to get it. There's not a doubt in my mind that it's not going to pay, but it's going to be delayed. But in exchange for that, let's suppose I know I'm going to get massive cuts in entitlements and the government is going to get their house in order so my payments seven, eight, nine, 10 years out are much more assured," he says.
Then there's "piece of paper number two," he says, under a scenario in which the debt limit is quickly raised to avoid any possible disruption in payments. "I don't have to wait six, eight, or 10 days for one of my many payments over 10 years. I get it on time. But we're going to continue to pile up trillions of dollars of debt and I may have a Greek situation on my hands in six or seven years. Now as an owner, which piece of paper do I want to own? To me it's a no-brainer. It's piece of paper number one."
…markets know the difference between a default in which a country will not repay its debts and a technical default…
If the market implodes on day two of the technical default, Mr. Obama and Congress would be motivated to finally come to agreement. "My guess is that the bond market would rally as long as it believed the ultimate outcome was going to be genuine entitlement reform—that we wouldn't even have to find out about a meltdown because it wouldn't happen."
As you’d expect from Druckenmiller, this is very astute analysis. And quite contrarian I might add, seeing that the likes of Paulson and Rogers are going the other route.
The only problem with this is that it’s a bet on good government, and with the ghosts of fuckups past constantly reminding us that entitlements are easier to give than to take away, the odds of seeing an Obama – Congress agreement before 2012 are way against him.
How about you monkeys? Will you ever bet on congress doing the right thing? It has happened before you know, I’ve heard some stories.
As for me, as hairy as this is, I might be willing to pull the trigger on this one. Like him though I’d be looking for the exit as soon as I get in.
Have a good one WSO.
I'd just diversify and have a some of each pie...however, in this case i really don't trust the politicians
Read that article the other day and found it very interesting....not sure if the politicians will do the right thing, which is kind of sad. Given the elections are "around the corner", I think his analysis is a bit flawed, but I hope he is right.
I read this as well, Druckenmiller is well ahead of any of us. He even said in the article he didn't like the reaction to Paul Ryan's plan. I wouldn't be relying on the politicians to change, I know that.
A lot of finance people are very gloomy because a Democrat is in office, but the simple truth is that the American system works and is self correcting. Cromwell once said, "Americans tend to do the right thing, but not until they've tried everything else first." If the budget doesn't get dealt with soon, then in 2016 a Cris Christie wrecking ball type will get elected.
The US isn't going anywhere.
I like Druckenmiller's position. The market certainly isn't pricing in some disaster for the near future in spite of all the debt ceiling talk (a recurring conundrum: http://www.ritholtz.com/blog/2011/05/debt-ceiling-limits-through-the-ag…). The fact that he's flexible on his position shows his trading roots as well, a far cry from the dogmatism Bill Gross is displaying. I'm definitely pessimistic about the budget and I don't think Paul Ryan is the brightest tool in the shed (or perhaps he's just blindly partisan) although I laud him for making the deficit his focus.
I think the current drop in rates is due to the market pricing in the risk-off nature of the end of QE2. Rates priced in QE2 from the moment Bernanke started it until it actually started then immediately looked forward to its end. As rate hikes seem more and more remote and commodity prices hobble the recovery, Treasuries are a natural safe haven. What actually happens once QE2 is over is anyone's guess but there can't be too much upside left to Treasuries unless some serious reforms to curb the deficit are passed (I'm not holding my breath).
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