Billionaire investor Stanley Druckenmiller foresees a “hard landing” for the economy by the end of 2023.
Looming Recession
Druckenmiller attended the CNBC Delivering Alpha Investor Summit on Wednesday, where he said, “I will be stunned if we don’t have a recession in ‘23. I don’t know the timing but certainly by the end of ‘23. I will not be surprised if it’s not larger than the so-called average garden variety. I don’t rule out something really bad.”
Druckenmiller is one of Wall Street’s most respected minds. He has expressed concerns about the liquidity situation in the bond market following the Fed’s quantitative easing during the pandemic. He believes that the near-zero interest rate policy in the past decade has created an asset bubble.
An Asset Bubble Is Created
The Federal Reserve held the fed funds target rate around 0% to 0.25% between 2008 and 2015 in an attempt to counter the financial crisis and its aftermath. The Fed also reduced interest rates to near zero in March 2020 in response to the pandemic. A decade-long period of quantitative easing has doubled the central bank’s balance sheet to around $9 trillion.
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By adding this additional liquidity to the financial system, the Fed helped fuel large gains in the stock market, bonds, housing and other assets.
Because of rock-bottom interest rates, stocks like the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite skyrocketed. However, good things never last forever, and the quantitative tightening in June raised interest rates by 75 basis point rate hikes. This change happened over three consecutive meetings.
This rate increase is the toughest policy move by the Fed since the 1980s, when they had to bring down inflation.
High Risk, What’s the Reward?
Druckenmiller says he believes that the Fed made numerous mistakes on their risk-reward bet and that the repercussions will stick with us for a long time. “We come up with this ridiculous theory of ‘transitory,’ so we have 5 trillion in fiscal stimulus, we have 5 trillion in QE,” he said. “And if you remember, the monetary framework in the fall of 2020, they (Fed) were no longer going to forecast. They were going to be data-dependent and wait until they see the whites of inflation’s eyes. So guess what? They saw the whites of their eyes.”
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On Wednesday, the Fed again stepped up its aggression in the fight against inflation. They agreed to the third straight increase in interest rates, which could mean more hikes before the year is over. Officials stated they would be raising their benchmark federal-funds rate by 0.75%, which would bring it up to a range of 3% to 3.25%.
The news of this hike sent stocks plunging again, and the yield on the 10-year Treasury note also rose to 3.53%. This hike would mark an 11-year high for the note.
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