Trade Like a Billionaire

Few traders in history have the capacity to seamlessly transition across asset classes, zooming out to see the big macro picture and in to see the minutia of a company’s 10Q but Stan Druckenmiller ranks as one of the few who have succeeded in so doing.

Stan’s thesis has been that the Fed is really in a bind, and not least because the fiscal situation is so horrendous. He had a thesis that when they lower rates, the short-end of the curve will see rates fall but at the long-end rate will in fact rise.

He expressed so much confidence in that view that he said his old mentor George Soros would be disappointed in him for not betting more on the trade, but at the time he had about a 15% exposure to it.

So how do you join him for the ride, if he’s right?

Key Points

• • Druckenmiller’s Bet – He believes the bond market, not the Fed, controls rates. His thesis: Fed cuts will lower short-term rates, but long-term rates will rise due to inflation.
  • How to Trade It – He’s positioned for rising long-term yields (falling bond prices). Investors can follow with TBF (ProShares Short 20+ Year Treasury Fund).
  • Key Indicators – Watch interest rates, the dollar, and oil. When all rise, markets struggle.

What’s Stan Betting On?

If you zoom out to the 10,000 foot-view level, Stan is betting that the bond market controls rates, not the Fed. And moreover that inflation will get worse.

If he’s right, longer-term yields will rise and that means longer-term bond prices will fall. For those who have been around equity markets all their lives, playing in the bond market can lead to some trepidation during the first merri-go-round. But it doesn’t have to be that way.

One approach to betting on lower long-term bond prices and higher long-term yields is to buy TBF, the ProShares Short 20+ Year Treasury fund. Make no mistake about it, this isn’t a sexy trade that will have AI-chip manufacturing type returns but it has the potential to be a 12-month winner.

In fact, it’s not just Stan who thinks so but Cem Karsan too. He is convinced that rates are headed towards 6.5% by year-end, even if the direction to arriving there isn’t a straight line.

3 Key Indicators to Watch

If Karsan and Druckenmiller end up being right, one of the 3 key indicators that warn of bad times to come will have spiked, interest rates.

The other two to pay close attention to are the dollar and oil. A rise in all three has historically led to nothing good for markets.

Stan talks about that back in 2000 when all three went high and yet the markets stayed elevated but his research on the ground showed businesses were really struggling and then it was only a matter of time before the news seeped out in earnings releases and ultimately the markets fell off a cliff.

Since that scenario hasn’t come to play yet, the best approach for now is to simply stick with the interest rate lever, and TBF might be as good as any vehicle to play the trend over the next 12 months of rising rates.

For full disclosure Druckenmiller has said that he’s in the position and took a large stake but he won’t be adding to it at this time, suggesting he’s already made some handsome returns and isn’t keen to give them back by taking on a larger position now.