Et Tu, Druckenmiller?

Yesterday, I had two column ideas in mind.  Although I touched upon my concerns about the Treasury’s recent intervention into the market for its long-dated bonds, I opted for the more timely topic of the failure of US-Canada trade talks.  While I don’t regret that decision, I had planned to delve more deeply into the topic of the bond market today.  That will still be the case, but the discussion has now been shaped by famed investor Stanley Druckenmiller’s op-ed in this morning’s Wall Street Journal.

Put simply, Druckenmiller’s piece is rather scathing.  It was intended to cut much more deeply than a critical opinion by a prominent hedge fund manager might otherwise do so.  Stanley Druckenmiller founded Duquesne Capital in 1981 and ran it until he closed it in 2010.  More importantly, he was the lead portfolio manager at George Soros’ Quantum Fund from 1988 to 2000.  During that time, he was at Soros’ right hand when they “broke the Bank of England” in 1992.  This legendary trade occurred when the BOE tried to prop up the sagging pound to avoid withdrawal from the first European Exchange Rate Mechanism (something that seems quaint in the post-Brexit environment), but succumbed to market pressure, abetted by Soros’ huge short position.  Those who were short pounds profited immensely.

Treasury Secretary Scott Bessent joined Soros Fund Management (SFM) in 1991.  While he later rose to head the firm’s London office, he clearly took a back seat to Soros and Druckenmiller in 1992’s windfall, but also had to learn valuable lessons from that experience.  It has been widely reported that Bessent was a protégé of Druckenmiller’s and that the two talked regularly, if not daily.  It is impossible to read today’s op-ed without considering why a long-time mentor would choose to publicly chastise a former protégé so virulently and publicly.

The thrust of Druckenmiller’s criticism is that the current intervention is at best a temporary measure that not only fails to address the root cause of the recent rise in long-term rates but also blunts the message from “the only fiscal disciplinarian the U.S. has left.”  For that reason, he characterizes the long-term Treasury yield as the “most important price in the world.”  Put simply, Druckenmiller is unhappy with the path of fiscal policy and is dismayed that his former protégé is undertaking cosmetic measures that run counter to market messages that might force Congress and the administration to improve the situation.  This is a message that he clearly preferred to deliver with maximum public effect.

While researching some of the facts for this piece, two interesting facts jumped out at me. 

• First, from 2011-2025, Federal Reserve Chair Kevin Warsh was a partner at the Duquesne Family Office, Druckenmiller’s successor firm to Duquesne Capital.  Thus, he undoubtedly has access to the ears not only of the current Treasury Secretary, but also to the current Fed Chair.  Bear in mind that the Treasury’s moves are reminiscent of the Fed’s once-stimulative “Operation Twist” policy.  It seems clear that the op-ed favors the policies of the more recent partner over the long-time protégé.
• Second, later in Bessent’s career at SFM, he made another billion for SFM in 2013 with a similar bet against the Japanese yen.  On July 31^st, this became a source of recent Treasury intervention.  Bessent had to know that this would also be at best a temporary fix.  That intervention certainly arrested the relentless decline of the yen, but about half of the original “shock and awe” of the initial move has since dissipated, and the currency seems to be reverting to its prior trend.

JPY/USD, 3-Months, Daily Bars

Source: Interactive Brokers

In yesterday’s piece, I made an analogy linking intervention to fighting a powerful tide, writing:

If the tides are moving in one direction or another, it takes an awful lot to shift them.  I experienced this firsthand while kayaking in the Bay of Fundy last week.  Unless you’re paddling furiously and continuously, the tides, whether monetary or market, will take you wherever they’re going, whether you like it or not.

This is at the root of Druckenmiller’s critique.  He is asserting, quite understandably, that rising deficits are creating huge tidal forces that are futile to fight unless major changes to fiscal policy are undertaken to shift them.  (I will add my opinion that the immense capital requirements of AI companies are adding to that wave.)  These are people with immense first-hand experience in how major market forces work, and it is clear that a mentor is trying to remind his long-time protege of that.