Stanley Druckenmiller, who boasts one of the hedge-fund industry’s best long-term track records of the past three decades, said it would be a “big deal” for financial markets if the Federal Reserve were to completely end its asset purchases as outlined over the next 12 months.
“How in the world does anyone think when the actual exit happens that prices are not going to respond?” Druckenmiller said today on Bloomberg Television’s “Market Makers” with Erik Schatzker and Stephanie Ruhle, given the selloff in bonds and emerging markets in the past few months on the mere hint that the Fed might taper its purchases.
The Fed is poised this month to start reducing unprecedented bond purchases that have fueled a four-year market rally, economists said. Chairman Ben S. Bernanke has said the central bank may end its bond-buying program in mid-2014 if the economy finally achieves sustainable growth.
Jeffrey Gundlach, manager of the $36 billion DoubleLine Total Return Bond Fund, said yesterday the Fed is making a “big mistake” by moving ahead with its exit plan without pegging it more closely to market conditions.
The Fed will probably reduce asset purchases to $75 billion this month from $85 billion previously, a Bloomberg survey of 34 economists showed. The Federal Open Market Committee will slow Treasury purchases to $35 billion from $45 billion while maintaining mortgage-bond buying at $40 billion, according to the survey.
“I really don’t care whether we go to $70 billion or $65 billion in September,” Druckenmiller said. “But if you tell me quantitative easing is going to be removed over nine or 12 months, that is a big deal.”
The purchases have subsidized all asset prices, he said, and completely stopping them would mean “the market will go down.”
Druckenmiller, who now runs a family office, said he has very small investment positions, including being long some Japanese equities and short the yen, with no big bets given the uncertainty over when the Fed might end its purchases. That depends in large part on who becomes the new Fed chairman, he said, as speculation focuses on possible candidates including Janet Yellen and Lawrence Summers.
“It’s pretty naive to say the next Fed chairman won’t matter,” he said. “It is a really, really important appointment” given the impact that the Fed has on financial markets.
Druckenmiller decided to stop managing client money in 2010 after three decades in the business, including more than 10 years as chief strategist for billionaire George Soros. From 1986 through 2010, he produced average annual returns of 30 percent at his hedge fund Duquesne Capital Management LLC.