By increasing borrowing costs and reducing liquidity, interest rate hikes have the potential to cool asset bubbles. But despite the Federal Reserve’s aggressive rate hikes, billionaire investor Stanley Druckenmiller doesn’t believe the bubble has dissipated.
“I’m sitting here staring in the face at the biggest and probably the broadest asset bubble — forget that I’ve ever seen, but that I’ve ever studied,” he said at the 2023 Sohn Investment Conference.
“It went on for 10 or 11 years and then it’s the grand finale,” he said.
If bubbles don’t cool off, they can burst and send shockwaves across the economy.
“The worst economic outcomes tend to follow too easily engineered asset bubbles,” Druckenmiller said.
So how should investors prepare for the grand finale?
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Wait For The Dip?
If you are running a long-short hedge fund, Drukenmiller’s suggestion is to manage your exposure to the markets.
“Keep your gross low, be open-minded, and if we get a hard landing, there are going to be unbelievable opportunities,” he said. “And I don’t want to miss those opportunities by blowing my money now and having some 20% or 30% loss where my head is all screwed up when those opportunities present themselves.”
In other words, don’t go all in. This way, when the market takes a turn, you’ll have both the money and mental clarity to pick up high-quality assets on the cheap.
Drukenmiller already finds some opportunities attractive.
Biotech And AI
The billionaire investor points out, “There’s always growth.”
There’s no shortage of growth stocks in today’s market, so which ones should investors focus on?
“This is really hard to figure out which names, but biotech has been a big underperformer in the last three to five years, and there are tremendous things going on in cancer and other areas,” he said.
Druckenmiller is putting his money where his mouth is. According to the latest Form 13F filing, the fourth-largest publicly traded holding at his firm — Duquesne Family Office — is Eli Lilly and Co. LLY, a global pharmaceutical company with extensive biotechnology capabilities.
Artificial intelligence (AI) is another area where Druckenmiller sees potential.
“I actually think the AI thing is very, very real and could be every bit as impactful as the internet, literally,” he said. “It could be a beautiful opportunity in a hard landing just like [2001 and 2002] were a beautiful opportunity when the tech bubble burst, going forward for companies who benefit from the internet.”
The accomplished fund manager reveals that his firm has been “participating in AI” by owning shares of Microsoft Corp. MSFT and Nvidia Corp. NVDA.
Real Estate
Druckenmiller also has an interesting take on real estate.
When discussing how the median regional bank has 43% of its loans in commercial real estate, he points out that “around 40% of that is in office.”
And office buildings aren’t doing that well these days. Because of the Great Resignation and more people working from home, Drukenmiller said, “We have a higher vacancy rate than we had in 2008.”
But it’s a different story for housing.
“Housing has obviously gone down dramatically given the 500 basis-point increase in interest rates,” he said.
“But unlike [2007 and 2008], we actually have a structural shortage in single-family homes going into this. So if things got bad enough, I could actually see housing — which is about the last thing you would think of intuitively — could be a big beneficiary on the way out.”
The best part? It’s easy for retail investors to invest in housing — and you don’t actually need to buy a house to do it. Publicly traded real estate investment trusts own income-producing properties and pay dividends to shareholders. And if you don’t like the stock market’s volatility, crowdfunding platforms allow retail investors to invest directly in residential real estate with as little as $100 through the private market.
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