Stanley Druckenmiller, one of the world’s best-known and most successful hedge fund managers, is back in the news after the transcript of an interview with billionaire investor Ken Langone hit the web over the past day or so.
The interview was done in January, when the market – and it seems Druckenmiller – thought the US economy was stronger than the recent data flow suggests.
What stands out in the interview is Druckenmiller’s concern that the current Fed settings have led Americans to take on more risk and corporate America to take on more debt.
He pointed out that in 2013 and 2014 US corporations “issued $1.1 trillion in debt, 50% more than they did in the ’06, ’07 period.” He highlighted the deterioration in credit quality of the debt as well noting that “71 percent of the debt that’s been issued in the last two year is B rated. So, not only have we issued a lot more debt, we’re doing so at much less standards.”
That means things could get ugly if the US economy weakens, Druckenmiller said.
Look, if you think we can have zero interest rates forever, maybe it won’t matter, but in my view one of two things is going to happen with all that debt. A, if interest rates go up, they’re screwed and, B, if the economy is as bad as all the bears say it is, which I don’t believe, some industries will get into trouble where they can’t even cover the debt at this level.
When Druckenmiller said this on January 18, the US economy was widely estimated to be in solid shape. But since then economic data has undershot expectations with the Citibank economic surprise index hitting its lowest level since 2011.
Druckenmiller stressed in his speech that he liked to look 18 months out and gave compelling reasons for the US economy to be in solid shape on this time frame. This also meant he had a solid case for the Fed to hike rates.
But I wonder what he would make of the weak data and its impact on highly leveraged US coporations.
If, as he says, the current situation is a re-run of the pre-GFC years then the corporate debt market, especially energy bonds, will be watched very closely by traders.
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