In an excellent interview with Goldman’s Tony Pasquariello, Stanley Druckenmiller revealed that the investor euphoria taking over the stock markets right now is the wildest cocktail he has ever seen in trying to figure out a roadmap. The expert outlined that the current rally has been largely fuelled by the Federal Reserve’s money-printing policies and the multiple rounds of federal fiscal stimulus, which not only failed to assist jobless workers but also increased the inequality gap and the size of the already massive national debt. More concerningly, in a year when 11 million remain unemployed, the U.S. has registered the largest increase in personal income in 20 years, right in the middle of a dramatic economic collapse, and, of course, all of that happened due to the enormous policy support.
“The juxtaposition of the various policy responses is somewhat breathtaking,” the economist argues. Since 2018, the money supply represented by M2 has grown 25% more than nominal GDP. In other words, there was a 25% increase in liquidity. In contrast, Druckenmiller points out that in China, M2 to nominal GDP is still where it was 3 years ago. That is to say, while we’ve had a massive liquidity input primarily because of transfer payments and Fed stimulus while also registering very little investment rates, China hasn’t borrowed anything from its futures and did the very opposite the U.S. has done when it comes to government policies.
The expert says that taking into account that China, Japan, and Korea have started the year on a very good note, and considering how much the U.S. borrowed from the future, he thinks Asia is the big winner coming out of the virus-induced recession. In short, Asia owns foundry, memory, they are also ahead in robotics. For that reason, he says that he thinks the next 5 years for Asia will look a lot better than for the U.S., because at some point we have to pay back in terms of productivity, in terms of higher wages, and in terms of a lower dollar due to all these transfer payments the federal government has made over the last nine months and will likely continue to do it. “Long-term Asia is going to be an outperformer vs. the U.S., and especially in the currency market. Net investment into China just passed the U.S. ever this year, and it’s the beginning rather than the end of a trend,” he highlighted.
In conclusion, moving towards more philosophical topics, Pasquariello asked how Druckenmiller would characterize “the state of American capitalism”, and the economist disclosed to be worried, because even in the best days of capitalism, there’s always been a “stain” marking the US, which was the widespread belief that the system was actually meritocratic, but as he elucidates, in some sectors of our society it feels much more like we are in a caste system. We have a lot of neighborhoods in our country where millions of Americans just don’t have the opportunity to pull up their bootstraps and work hard, he said. “That’s always been there and is something we need to address. Which is why I am not sure the events of last summer were a bad thing. It’s my own view that they were a good thing because people need to be woken up to the fact that the American Dream is a great thing but there are a significant amount of kids without access to the American dream the way I had.”
In sum, as the U.S. continues to engage in money printing policies, we will continue to inflate the stock market bubble, and set the dollar to a major collapse. When all of this money finds its way back into the economy, we will be trapped into hyperinflation while the wealth gap between the rich and the poor will keep expanding. It’s no wonder why the American dream is now so distant from most part of our population. Our system is structured in a way that will always benefit the elites while jeopardizing the living standards of our citizens. As we plunge deeper into recession, the American dream becomes nothing but a dream.