Stanley Druckenmiller: market liquidity won’t last.

Stanley Druckenmiller, chief executive, Duquesne Family Office

“The risk-reward for equities is maybe as bad as I’ve seen it in my career,” reckons Stanley Druckenmiller, the former hedge-fund manager who made $1bn when he and George Soros bet that Britain would be forced to take sterling out of the European Exchange Rate Mechanism on Black Wednesday (16 September 1992). Investors banking on abundant liquidity are set for a shock.

“The consensus seems to be ‘don’t worry, the Fed has your back’,” Druckenmiller told the Economic Club of New York earlier this month. Forecast earnings for the US market have collapsed: even assuming a partial recovery in profits next year to around $145 per share, the S&P 500 trades on around 20 times earnings, which is high given uncertainties due to Covid-19 and the likelihood of soaring bankruptcies. But investors assume that “the stimulus is much bigger than the problem and liquidity going forward is just massive”.

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However, while liquidity is very strong now, that’s only because the Federal Reserve has bought trillions of dollars in assets over the last couple of months, pumping money into markets. All that excess liquidity won’t last. The US budget deficit has soared and so the Treasury must issue trillions more in debt over the next few months. This will mop up everything the Fed has already injected and more. “The wild card is that the Fed can always step up its purchases relative to what it’s saying it is going to do now, but I don’t really know why it would have tapered from $500bn a week to $7bn a day if it were ready to ratchet right back up again.”