Investing legend Stanley Druckenmiller reveals why the 'best economic predictor' has him worried about the next crisis - and breaks down where you should be putting your money
- "By far the best economic predictor I've ever met is the inside of the stock market," said billionaire investor Stanley Druckenmiller on Monday.
- He identified three areas of the market that concern him right now.
- Druckenmiller also offered two trading recommendations to hedge against a meltdown, including Treasuries, "the best game in town."
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When it comes to predicting what's in store for the economy, macroeconomic data itself is not great.
That's according to billionaire investor Stanley Druckenmiller, who said he learned this despite dropping out of a doctorate in economics program at the University of Michigan. He went on to make a fortune by accurately predicting the economy's booms and busts.
"By far the best economic predictor I've ever met is the inside of the stock market," Druckenmiller said Monday at an event hosted by the Economic Club of New York.
He was referring to companies and industries that are so tethered to the cycle that they provide a reliable lead on where the rest of the economy is headed. He named trucking and retailers as being among the select few.
He then went on to pinpoint three areas within the market that concern him right now:
- The SPDR S&P Retail exchange-traded fund is down 21% from its August high.
- The S&P Metals and Mining index is also down by more than 20% from its high, and
- The Russell 2000, which captures a wide breadth of small-cap companies, is down 14% from its peak.
Druckenmiller threw in a fourth element that goes beyond stock-market internals but also has him convinced that now is not the time to be betting heavily on risky assets. Corporate profits, including those filed by private companies for tax purposes, fell in the first quarter for a second straight period as the initial boost of tax reform faded and the trade war intensified.
"I've never seen a recession before corporate profits peaked," Druckenmiller said. "It turns out corporate profits looked pretty bad in the first quarter: they were down. And if you look at margins, labor, tariffs, everything else going on, it's inconceivable to me that that wasn't the peak in corporate profits."
He added: "It's not saying we're going to be in a recession, but it's saying you better be careful and keep your eyes open."
What does keeping one's eyes open look like in practice? Druckenmiller found out while golfing a few Sundays ago.
He said he was hitting the links when President Donald Trump tweeted on May 5 that the US would raise tariffs on $200 billion worth of Chinese goods.
Druckenmiller, like most investors, was caught off guard by this tweet that sunk global stock markets in the following days. But he acted quickly and rushed into the safety of the bond market.
"When the Trump tweet went out, I went from 93% invested to net flat, and bought a bunch of Treasuries," Druckenmiller said. "Not because I'm trying to make money, I just don't want to play in this environment."
This trade turned out to be hugely prescient and profitable. Since the May 5 tweet, bond prices have surged and the yield on the benchmark 10-year note has slumped nearly 400 basis points to its lowest level since 2007.
Given the bond market's big move, he said Treasuries are no longer as interesting a trade as they were a few weeks ago. But he added: "If you believe the economy is going to deteriorate, they're the best game in town. Gold's not bad either."