The timing is difficult, but I will say in our shop we tend to use anecdotal information a lot.
In terms of the timing, I have left much less certainty on that than I do on whether we're going to have a hard landing or a soft landing. But if you're just looking at the odds, they're very tough. It's hard to look at that constellation of factors, know that we've only had a few soft landings since 1950 and all of them were preceded by what I would call proactive rather than reactive Fed policy, and believe we're going to have a soft landing. This exuberance comes at a time of rising interest rates, recession threats and tightening of bank lending).Īs I just described, now we have a big hike in interest rates. Book value is the company's value in its financial accounts determined by subtracting its liabilities from the value of its assets.
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It has only been higher in this period during the dotcom era of 2000 and the Fed-induced free money and loose monetary policy until 2022. (Editor note: As an example of a broad asset bubble, consider this chart, sourced from Multpl, of the S&P500 Price to Book Value ratio. So I'm sitting here staring in the face at the biggest asset and probably the broadest asset bubble - forget that I've ever seen that I've ever studied - and it went on for 10 or 11 years and then as the grand finale the government spent US$5 trillion on COVID and the Fed financed 60% of it. And number two, big maxim in my business is Don't Fight the Fed. Number one, the worst economic outcomes tend to follow too easily-engineered asset bubbles. They raised rates 500 basis points (5%) in the last year. Then realising they have probably made the biggest mistake in the history of the Fed, they slammed on the brakes. This obviously led to everything I just described. What I was surprised by was that for the next year, while all that happened, Jerome Powell’s Fed (Federal Reserve, the US central bank) continued to have their foot on the gas, they continued to buy US$120 billion of bonds a month while rates were zero. I was not surprised that SPACs went crazy, Bitcoin went crazy, Dogecoin went crazy, equities went crazy. I was not surprised about a year later when inflation reached 9%. You had a booming economy, we're coming out post-COVID and it was clear post-vaccines that we were on our way to maybe the most rapid recovery I have seen in my lifetime. I think it was actually just a little over two years ago, I went on national television and said we had monetary policy that was the most reckless and extreme relative of the economic circumstances I had ever seen. Basically, every time we've had interest rates below 2% going back 500 years, it's been followed with a difficult economic time. Chancellor's book is a real tour-de-force, and it describes how this has been going on for over 500 years. I was only looking at the past 100 years or so. As you know, I've been saying for years that my observation was the worst economic outcomes tended to follow asset bubbles. I (recently) read Edward Chancellor's The Price of Time. The entire interview went for over an hour, but we have selected these highlights. At the 2023 Sohn Investment Conference in the US on, Duquesne Family Office CEO Stanley Druckenmiller spoke about the US Federal Reserve’s actions in the last two years and its impact on investing conditions.
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