Billionaire investor Stanley Druckenmiller sees a “hard landing” for the US economy through late 2023 as the Federal Reserve’s aggressive monetary tightening pushes into recession.
“I’ll be stunned if we 23 don’t have a recession. I don’t know when, but by late 23 for sure. I won’t be surprised if it’s not larger than the so-called average garden variety,” Druckenmiller said Wednesday at CNBC’s Delivering Alpha Investor Summit. “I’m not ruling out something really bad.”
Druckenmiller, one of Wall Street’s most respected figures, has expressed concern about the liquidity situation in the bond market after the Fed’s quantitative easing during the coronavirus pandemic and its near-zero interest rate policy have created an asset bubble over the past decade.
Between 2008 and 2015, the Federal Reserve left the key interest rate of the Fed Funds in a range of 0% to 0.25% in order to counteract the financial crisis and its consequences. The Fed also cut interest rates again to almost zero in March 2020 in response to the COVID-19 pandemic. In addition, a decade-long streak of quantitative easing doubled the central bank’s balance sheet to nearly $9 trillion.
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By injecting additional liquidity into the financial system, the Fed also helped generate significant gains in stocks, bonds, real estate, and other assets.
On a rock bottom, the Dow Jones Industrial Average DJIA is up over 40% at +1.88%, while the S&P 500 SPX is up over 60% at +1.97% and the Nasdaq Composite COMP is up +2.05% up over 80% in March 2020 and December 2021, according to Dow Jones Market Data.
However, the central bank began quantitative tightening in June, raising interest rates by 75 basis points in three consecutive meetings. It was the Fed’s toughest policy move since the 1980s to tame hotter-than-expected inflation.
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According to Druckenmiller, the Fed made mistakes in its risk-reward bet, and the ramifications of that “will be with us for a long, long time.”
“We put up this ridiculous ‘temporary’ theory, 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, which they (Fed) would no longer forecast. They would be data dependent, waiting to see the whites in inflation’s eyes. Guess what? You saw the whites of her eyes.”
US stock indexes rebounded from 2022 lows on Wednesday, helped by a sharp fall in Treasury yields and a surprise intervention by the Bank of England in the UK government bond market. The Dow Jones Industrial Average gained 1.9%, while the S&P 500 and Nasdaq each gained 2%.