Hedge Manager Druckenmiller Says Crash Coming
May 7, 2016 (EIRNS)—The Zero Hedge website reported a May 4 investor presentation by former long-time hedge fund manager Stanley Druckenmiller—an early partner of British agent George Soros—in which Druckenmiller forecast an early financial crash due to extreme debt leveraging of U.S. corporations for non-productive purposes. Druckenmiller is known for having pointed in 2005 to the excessive leverage in the mortgage securities/derivatives market as indicating an approaching leveraged debt collapse.
Druckenmiller’s "apocalyptic" facts, as Zero Hedge calls them, are simple and widely known. Eight years of increasingly senseless central bank money-printing has tremendously inflated assets, particularly stocks and government bonds, while penalizing every form of productive investment. Added Debt/added GDP in the U.S. economy has gone from 2.5:1 to 4:1 in less than a decade. In the entire U.S. non-financial corporate sector, net profits have gradually sunk into negative territory while net debt is growing by more than 20%/year. "Never in the post-World War II period has this happened," Druckenmiller said.
"Until the cycle preceding the great recession, the peaks had been pretty much coincident. Even during that cycle, they only diverged for two years, and by the time EBITDA turned negative year over year, as it has today, growth in net debt had been declining for over two years. Again, the current five-year divergence is unprecedented in financial history!"
Further, since 2005 the use of this exploding debt mass for stock buybacks and mergers-and-acquisitions, has completely crushed out both capital investment and building of cash reserves. "The debt today has been used for financial engineering, not productive investments." The result has been wild leveraging of the corporate sector, in contrast to households which were forced by impoverishment to "deleverage." Druckenmiller concluded,
"The corporate sector today is stuck in a vicious cycle of earnings management, questionable allocation of capital, low productivity, declining margins, and growing indebtedness."
Druckenmiller extrapolated his current crash warning from his warning of a leveraged debt collapse in 2005. Predictably, the only action he advised was investment in gold.