Summary
Transcript
He’s been called the greatest money making machine in history, a man with Jim Rogers analytical ability, George Soros’s trading ability, and the stomach of a riverboat gambler. That’s how fund manager Scott Vessert describes Stanley Druckenmiller. And it’s no wonder Druckenmiller’s track record averaged 30% returns for four decades. And what’s even more impressive than that, the guy never loses. He never had a single down year and only had five losing quarters out of 120 quarters altogether.
Wow. And if you want to know what his secret is and how you can use it to have the same market beating returns, well, of course you do. We all do. So when he admitted his secret of how early in his career he realized the truth of how markets actually worked, and how this led to his historic run as the goat, the greatest of all time in investing, we should all be paying attention.
So in this video, we’re going to discuss what Stanley Druckenmiller’s big realization was. We’re going to look at how he learned to approach the markets totally different than the Warren Buffett’s of the world. And we’re going to look at how I use this in my investing today and how you can do the same thing as well. So let’s go. All right. Welcome back. If you’re new to the channel, my name is Mark Moss, and I make these videos to change the way you think about money, because almost everything you’ve learned is wrong.
And if you listen to what we’re about to break down from one of the greatest investing legends of all time, you’ll realize that he approached it completely differently because, yes, even everything he had learned was wrong. All right, so we’re talking about the goat, the greatest of all time, Stanley Druckenmiller. He’s famous in the investing world for outperforming any of the more contemporary peers, consistently delivering extraordinary returns throughout the use of unconventional investment strategies.
Notice unconventional, as in contrarian? Because if you want different results than everyone else, you have to do something different. Right? But he wasn’t always that way. In fact, Stanley Druckenmiller had to relearn it. He had a shaking revelation early in his career that led to his unique abilities. And of course, we can learn and we can use the exact same things. Now, for me, I’ve built my career by learning growth hacks, by learning how to use leverage.
And one of those is found in a quote called success leaves clues. I talk about it all the time. Tony Robbins said, quote, people who succeed consistently are not lucky. They’re doing something different than everyone else. They have a strategy that works. And if you follow their strategy and you sow the same seeds, then you’ll reap the same rewards. Let’s break down what he said there. So the people who succeed consistently are not lucky.
So Stanley Druckermiller, 40 years without a down year, 30% returns. That was not luck. He did something differently to the next part. They’re doing something different than everyone else. He did something different than everybody else. And so the last part says, if we can find their strategy and follow it, we could have about the same rewards. And so that’s what we’re going to break down. Now, I’ve studied most of the greats because I believe successfully, is clues.
If you’ve seen me breaking down stuff from Warren Buffett, you’ve seen me breaking stuff down from Ray Dalio. A lot of stuff we can learn from both of those, all right? But when it comes to investing greats, Drux, his name is the top of the list. And when you study him, you get the sense that he was built, like I said, in a laboratory deep in the jungle somewhere, where he was put together piece by piece to create the perfect investor, because he has every character trait that would make up a very good speculator, a good investor, a good trader.
He has all of those in spades. Things like mental flexibility, independent thinking, to think contrarian, extreme competitiveness for that drive to keep going, tireless curiosity so he could continue to try new things and learn, and of course, deep self awareness so he could ask himself what was really going on so we can get deeper. But again, Druckenmiller wasn’t always this way. Instead, he had to discover what his edge was.
He had to unlearn everything he had been taught in order to see and do things his own way. And the beauty is his secret. It’s actually very easy. It’s so easy that you and I, we can do the exact same thing. But first, before we talk about the secret, let’s talk about his failed path. Now, in the book written, called the New Market Wizards, which we’ll put a link down in the show notes down below.
Highly recommend it. The new market wizards. It was written by Jack Schwager, and he writes about Druckenmiller early in his investing career. And he said, quote, when I first started out, I did very thorough papers covering every aspect of a stock or industry. Before I could make the presentation to the stock selection committee, I first had to submit the paper to the research director. I particularly remember the time I gave him my paper on the banking industry.
I felt very proud of my work. However, he read through it and said, quote, this is useless. What makes the stock go up and down, end quote. Imagine that. Imagine coming out of school, learning everything about fundamental analysis, doing all this work, feeling very proud of it, giving it to your boss, and he says, this is useless. You gave me a bunch of worthless paper, but what makes the stock go up and down? Now, at this, Druckenmiller was taken back.
He didn’t understand the question. Wasn’t it profits and projections that moved the price up? Well, Druckenmiller went on to say in the book, he said, quote, the comment acted as a spur. Thereafter, I focused my analysis on seeking to identify the factors that were strongly correlated to a stock’s price movement, as opposed to looking at all the fundamentals. Frankly, even today, many analysts still don’t know what makes their particular stock go up or down, end quote.
So, a couple of things there. One, he didn’t take offense to it. He didn’t get mad. He didn’t go cry. No. He said the comment acted as a spur. So this was his self reflection. He was able to take that constructive criticism and learn from it. So then what he said is, okay, what are the factors? I had to go find, what are the factors that move the price of the stock, not the fundamentals.
He said, many of the top analysts don’t know this. All right, so this hits on something I say all the time, that the quality of your life comes down to the quality of your questions. The more precise questions get more precise answers, which is why when everyone’s talking about AI chat, GBT, Google, Gemini is going to make everyone super smart. I say, no, it’s not. It’s not going to make everyone smarter.
They only make smarter people smarter. The smarter people are the ones that ask better questions. But anyway, let’s get back to Druckenmiller. So his question he had to find the answer to, which was, quote, what did make stocks go up and down? So if it’s not fundamentals like revenue and profits that drive stock prices up and down, then what is it? Now, before we break his insights down, it’s necessary to point out that the financial world is chock full of noise.
It’s chock full of nonsense. It’s filled with really smart people who know lots of data, lots of analytics, lots of numbers, but they don’t understand how the world really works. They’re so in the weeds on the technical information that they miss the forest for the trees, as the saying goes. Also, because the financial system’s incentive structure is set up so that as long as an analyst, they sound smart, as long as they pretend to know why a stock is going up, they get rewarded.
And this holds true for all the talking heads, all the experts, all the ones that you see on social media like this, except for those who are actually trading real money, because if it’s your money on the line, you either learn the game or you don’t, you lose out. Now, of course, Druckenmiller was one who actually competed in the arena, so he was forced to learn early on what actually drive prices.
Here’s what he found. He said, quote, earnings don’t move the overall market. It’s the Federal Reserve board. Focus on the central banks and focus on the movement of liquidity. Most people in the market are looking for earnings and conventional measures, but it’s liquidity that drives markets, end quote. So it’s not earnings that move the market. That’s where everyone’s focused the fundamentals. He says, no, it’s the Federal Reserve.
It’s the central banks. It’s the liquidity. And he said, most people are looking for earnings in conventional measures. That’s what most people do, which is why they have most average results. What he does is he focus on liquidity. That’s what drives markets. As a matter of fact, let’s just hear a clip directly from him. I don’t think there has been any greater engine of inequality than the Federal Reserve bank of the United States.
I just had the best year I’ve had in 15 years. Last year. Everyone wealthy I know is making a fortune. And why are we making it? Because this guy is printing money like there’s no tomorrow. And all the data says the people that benefit from money printing are rich people that know how to navigate the markets. All right, so there you heard it directly from the goat himself, Stanley Druckenmiller.
So now if it’s liquidity that drives markets, then what is liquidity? Well, liquidity is the expansion and the contraction of money, specifically credit. Right. It’s the biggest variable that drives demand in an economy, and it’s something that we should always be following very closely. And who do you think has the biggest lever on liquidity? Of course he said it. It’s the Federal Reserve. It’s the Federal Reserve. It’s other major central banks, which is why we always need to be paying attention to what they’re doing, what the Fed is doing, which is why I talk about the Fed all the time.
Now, I’m not bashing the usefulness of what are commonly bought as fundamentals. Things like earnings per share, book value, revenue growth, things like that. They’re important. Of course they are. They’re very important at a singular stock level. But what I’m saying is these are only a few pieces of a much larger puzzle. Now, the dictionary defines the word fundamental as, quote, a central or primary rule or principle on which something is based.
So if there’s one central or primary rule on which all fundamentals are based, well, it’s market liquidity. Liquidity is the Macdaddy of fundamental inputs, and it’s not surprising that it’s actually the least known and the least understood. Okay, so now that we understand that what drives prices is liquidity, and we understand now what liquidity is, the next question is what drives liquidity? Again, it’s the fed, it’s the central banks, it’s the price and availability of credit.
And it’s this demand that’s driven by the tightening and the easing of credit. All right, so let’s dig into the weeds a little bit on this. All right, so I want to make sure you can understand this properly. And then once you do, I’m going to show you how we can watch this most important indicator and how we can play this. But now, what we usually think of as money, which is the stuff we buy things with, is comprised of both hard cash and credit.
Now, the amount of hard cash in the system is relatively stable. It doesn’t change a whole lot. The credit though, right? Because we’re in a debt based monetary system, the credit is extremely elastic. That’s what’s changing all the time because it can be created by any two willing parties. It’s this flexibility that makes it the main factor in driving liquidity and demand. Now, the majority of credit, and therefore money in this form of money in debt, money is created outside of the traditional banking sector and the government most is created between businesses and customers.
When a business purchases wholesale supplies on credit, money’s created. When you open a best Buy credit card for that new tv, credit, money’s created, right? When you purchase stocks on margin from your broker, money’s created. The logic’s pretty simple, right? The more liquidity, the more credit in the system, the more money there is, and the more money there is. This creates more demand. The more demand then in turns pushes markets higher.
Which leads us to the very next question. What are the largest levers that affect the amount of credit and money and liquidity in the system. And the answer is the price of money. Now, most people don’t realize this, that we buy money. Yes, we use money to buy goods, of course, right. We use money to buy goods or services, but we also buy money. If I want to buy a $1 million business, I want to buy a $1 million apartment building, and I don’t have a million dollars, then I can go buy the $1 million by going to the bank.
Right? What’s the price to buy the money? It’s the price of the money. It’s the interest rate. And like with most prices, when they’re cheap or on sale, people buy more of them. I use the example like an iPhone. If an iPhone is $1,000, they sell X amount of iPhones. But if they went on sale for $200, you think people would buy more of them? And of course they would.
Right? And so we have to understand that the price of money is set by both central banks and the private market, but the primary rate is set by central banks. All right? The central bank rate is the largest factor in determining what the cost of money is. And the cost of money, in turn, determines the liquidity and demand in the entire system. So we want to be focused on that.
When the cost of money is low, low interest rates, more demand is created in two ways. One, we just talked about. One, when it’s cheaper, people buy more of it. But two, it makes sense to exchange lower yielding assets for riskier, higher yielding ones, which pushes up asset prices. So people take on more debt to go buy more assets. I take on more debt to build more apartments.
I take on more debt to do more margin trading. Right. And that’s what pushes up asset prices even higher. Now, this affects the stock market in two ways. One, share prices rise as investors trade up to riskier assets. And two, companies total sales increase because of higher consumer demand caused by cheaper credit. Now, liquidity affects both the denominator, the earnings, and the numerator, the price per share in stock valuations as it drives markets higher.
Okay, so now that you understand liquidity, we now have to know how to gauge how to measure it. How do we know how much liquidity is there? Right. We need to know that so we can multiply and protect our capital and profit. So how do we do that? All right. The market is a future discounting machine, meaning that the moves matter. That’s why a lot of times, I want to show you the charts.
I want to show you the graphs. I want you to see the moves, but the moves matter more in the future than in the past. So we want to learn the difference of leading indicators and lagging indicators. Right. So the key to being a good investor is to identify the factors that will drive markets going forward, not what drove them in the past. We want to understand the past so we can understand the cause and effect, but we’re looking for leading indicators that tell us where things will be in the future.
Now, going back to Druckenmiller, he said in a recent interview that, quote, his job for 30 years was to anticipate changes in the economic trends that were not expected by others and therefore not yet reflected in prices, end quote. So basically what he’s saying is if you focus on the future or you want to focus on the future, not the past, he was trying to anticipate the changes into the future of what people weren’t expecting.
So, like back in November of 2022, when I kept saying there’s no crash coming, and January 23, I said, it’s time to start buying, it’s because, well, we’ll show you how we measure it. I was anticipating these changes even though most people weren’t, because they were looking at lagging indicators as opposed to these leading indicators. All right, so how do we do that? How do we watch liquidity? Well, thankfully, the Federal Reserve and the central banks of the world, they report this number to us.
That’s good. First, now we can see the price of money being set at the Fed funds rate. Now, you can look at this chart right here, and you can just see what the price of money is. Again, when it’s more expensive, people buy less of it. When it’s cheaper, people buy more of it. We can also look at the balance sheets from the Federal Reserve and other central banks, and we can see when the balance sheet, when there’s more money going into the system or less, we can see the money printing binge now totals 8.
8 trillion. It’s up from 4 trillion at the start of 2020. Now it is down a little bit at the peak, 9. 6 trillion in this little taper. The Fed’s been trying to do. So that’s been adjusting the price of money, and in turn, it’s adjusted the money supply. But that’s the Fed, not the global equity. We’re going to come back to that in a second. But again, that tells us what happened, right? Remember, we want to know what’s going to happen.
We want to be forward looking. So more importantly, here’s what we want to do? We want to listen to what the Fed calls forward guidance. It’s right in the name forward guidance. You see, the federal reserve used to use something called Fed speak. You’ve probably heard that word before. All right? Now this was a technique that was managing investors expectations by making it deliberately unclear. Deliberately unclear. What they were doing is they were trying to confuse you by using unclear statements regarding monetary policy in order to prevent markets and market participants from anticipating.
Right. They didn’t want their statements to move markets. So we were always trying to kind of read between the lines and what’s the Fed really going to do? Because they were trying to trick us. All right, but Fed speak, that was before Fed speak was employed by the old guard, right? That was employed by Alan Greenspan, the Fed chair from 1986 to 2006. But as I say, something changed.
The answers have changed, all right? And today Fed speak has been replaced by a new strategy. And today, the new strategy of Fed transparency. And it’s known as forward guidance. Now, this was pioneered by Fed chair Ben Bernacki, and it’s exactly what Jerome Powell uses today. Forward guidance attempts to influence, so unlike the old way Fed speak, they were trying to obfuscate what they were trying to say, so they didn’t influence.
But today, forward guidance attempts to actually influence the financial decisions of their participants, you and I, households, businesses, investors. And they do that by providing a guidepost for the expected path of interest rates. So they’re trying to tell us in advance what the price of money is going to be in the future. Now, forward guidance attempts to prevent surprises that might disrupt the markets and cause significant fluctuations in asset prices.
They literally want to tell us what to expect in the future. Let me give an example. We saw inflation raging. 2020, 2021. Asset prices were going up. The price of everything was going up. The Fed was trying to ignore inflation, and it became such a big deal. Finally, November of 2021, Jerome Powell goes on and says, okay, finally we’re going to start to raise the price of money.
We’re going to start to raise the fund rates. They announced it in November of 2021, but it wasn’t until January or February of next year that they actually did something. You see, they wanted to give us a couple of months to front run to get in front of the moves they’re going to do. It’s the whole purpose of what they’re doing. All right? He’s also continued to do this.
We just saw Jerome Powell, Fed Chair Jerome Powell go on 60 minutes just a couple of weeks ago to address the entire nation now, I did a video breaking all this down. We’ll link to it down in the show notes down below because you probably want to go hear directly from him. But here’s a couple of the highlights. One, again, forward guidance. He admitted to the people, he said this publicly, and when you go on 60 minutes, you’re trying to address the nation.
Right. One, he admitted they made mistakes. What mistakes did they make? They made mistakes acting too slow. That’s what he said. So if he’s admitting the mistake, that means he’s not planning to make the same mistake again. So he moved too slow before. Okay? That means he’s going to move faster. Now, two, he said they’re not committed. The Fed is not committed to a 2% inflation number that everyone’s fixated on.
So you hear a lot of people, oh, they can’t pivot, they can’t lower rates. Inflation is not back down to 2%, blah, blah, blah. Well, he literally said in forward guidance that they’re not committed to that. Number three, he said they would rather move too soon than too late. That’s what he said. So that means that they would rather risk. And he tells us why they’d rather move too soon, because it’s not as bad as if they move too late.
It’s catastrophic. Again, go listen to the interview. Link it down below. Four, he said that they have a plan in place to deal with any bank distress. So a lot of people are saying, oh, but mark, the BTFP, it’s going to end. The banks are going to know it’s ending in March. And what are the banks going to do? And don’t you see that these banks are having distress and blah, blah, blah? You? I do, sure, I know three banks failed 2023, but it went without a hiccup.
And he said they have a plan in place to deal with more of that. All right, so they’re telling us exactly what’s going to happen. What does this all mean? It means more liquidity. And it’s not just the Fed. It’s not just the Fed. The United States. While it’s for sure the biggest driver, we also have to watch what the other major central banks are doing. So there’s four major central banks.
The Fed, of course, Federal Reserve. We have the ECB, the European Central bank, the BoJ, the bank of Japan and the PBOC, the chinese bank. Right? We have to watch all of those. And what we can know, the bank of Japan, they’re sticking with their ultra easy policies. They were hoping to try to pivot off of it. But in the last week or two, that all imploded. And they have to stick with their ultra easy policies because, well, can’t taper a Ponzi.
You know that, right? We can’t forget about the dragon in the east. Of course, China, China’s PBOC doesn’t want to be left out. Instead, they want to lead the easing party. For the last couple months, the country’s been manipulating liquidity in their economy to prevent a complete collapse in their financial markets. They’re having a really rough time. They already cut banking reserves to get more liquidity. Back in January, they added more liquidity via reverse repos.
I mean, they are trying to shovel in as much liquidity as they can. But why? Why are they working so hard to keep liquidity high? Well, because like I said, with Japan, just like every other central bank, they have to keep the Ponzi going or the whole thing falls apart. And as you can see on the chart I have on the screen right now, just over this last weekend, China’s plunge protection team, the PPT, they’ve been hard at work trying to keep the stock prices from going down.
And yeah, in the US, we have one of those as well. When stock prices start going down too low, the president, the executive branch’s team goes to work actively keeping stock prices up. That’s what China’s team has been doing. And they want to continue to push stock prices higher. And how do they do that? By providing more liquidity. And they’re going to continue to increase the liquidity, increase the money printing until it no longer works.
Governments are going to continue to do this. They have option one, go out of business, or option two, print money. And they’re going to choose option two. Eventually it’s not going to work anymore, but until then, it’s going to work. As the folks at cross border capital pointed out in this chart up here, China’s increasing liquidity creates positive GDP momentum. Now, this development in China is really worth paying attention to because while China has been easing and pumping liquidity into the market, the US has still been sort of in this holding period.
Right? They’ve been in this pause before the pivot. The Powell told us that they’re going to pivot this year, 2024, but they’re trying to kind of drag their feet. But that’s about to change. The battle of liquidity is on a global scale. Right? We have too many investors in the world, in the western world, they get overly fixated, they get overly focused on the Federal Reserve. And then they ignore the liquidity decisions of the foreign central banks.
Now, the US is still the top dog, but countries like China have a very significant impact that can overwhelm the US in certain situations. And as you can see here, China has been growing their central bank balance sheet at a rapid rate, basically like what the US has been doing over the last 15 years. And there’s massive trouble brewing in the eastern world. And this is going to bring an estimated $2 trillion of liquidity into the market.
And if that happens, investment assets globally are going to benefit. Now, you have to understand that we live in a digital, hyperconnected world today. Your local geography, it can have an impact on you. But the global liquidity situation is the final boss. Now, whenever I talk about this on Twitter or Instagram or whatever, which if you’re not following me on there, you should at one mark Moss. But when I talk about this, people quickly point to a chart of the Fed M two and say, but mark, liquidity is going down.
Look, here’s a chart of the M two. But I say, look, you’re missing the forest for the trees. I said, listen, it’s a global liquidity we have to look at. If you look at the global picture, as you can see from the chart on the screen, you can see between the four major central banks, liquidity is actually screaming higher. And remember, the markets are forward looking, right? It’s not what happened.
It’s what the markets think will happen. All right, you want to know what the biggest indicator of all, the Watchford liquidity is? The largest borrower in the world. The largest creditor. Who’s that? The United States government. And their continued growing debt and spending that’s driving markets more than anything else. You know who what it is? Well, it’s the US government. As I said, if you guessed that, you’d be right.
Now, per the government’s own projections as laid out by the CBO Congressional Budget Office, they’re projecting steady deficit growth, meaning more and more debt, say debt growth with no decline at all. And not just for the next few years. The CBO is projecting the federal budget will go out of control even if we have no wars or no recessions for the next 30 years. Do you think that’s going to happen? Because it seems like we’re sort of in wars right now and recessions are right around the corner.
But per their own numbers, we’re set to have a larger and larger deficit as the federal government continues to spend more and more and more every single year. That means that more debt, more liquidity and more inflationary pressure is what the markets are forward looking at now. On another note, going back to druck, he said, quote, I’ve always loved to play games and face it, investing is one big game.
He said, you need to be decisive, open minded, flexible and competitive. End quote. He also advised that, quote, if you’re early on in your career and they give you a choice between a great mentor or higher pay, take the mentor every time. This means that you should never give up learning and that the returns will come eventually. Now, if you want to watch the full presentation when I break down two other investing secrets, then go ahead and watch this video right here.
And if you want to know where the liquidity machine is actually going to go based off of rates, then you’re really going to want to listen to what Janet Yellen from the treasury has to say. You can watch that video right here. Now, as always, if you like this video, make sure to click on the like button. Give me likes. If you don’t like it, give me a thumbs down.
That’s okay. At least tell me why in the comments down below. Subscribe if you’re not already subscribed. And that’s what I got to your success. I’m out. .
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