The stock market has entered the “mania” phase of the rally. This is according to legendary hedge fund manager Stanley Druckenmiller during an appearance yesterday on CNBC.
Druckenmiller says the fiscal and monetary stimulus efforts to help the country recover from the coronavirus pandemic have effectively merged the Federal Reserve and the Treasury Department. It now fuels the incredible rally in stock prices.
“The merging of the Fed and the Treasury, which is effectively what’s happening during Covid, sets a precedent that we’ve never seen since the Fed got its independence,” Druckenmiller said. “It’s obviously creating a massive, massive mania in financial assets.”
He adds that Fed Chairman Jerome (Jay) Powell did an admirable job during the initial economic lockdown, but says the additional liquidity measures are now “excessive.”
“I hear a lot of people on the air applauding Jay Powell, saying he saved the world, and I do think he did a great job in March, I think the followup has been excessive and I just want all of you guys cheering him on to remember The Maestro in 2005 and how that worked out.”
Druckenmiller said investors are drunk on the punch of low interest rates and the un-ending belief in the “Fed put.”
“Everybody loves a party … but, inevitably, after a big party there’s a hangover. Right now, we’re in an absolute raging mania.”
He also takes issue with the latest round of stock splits in companies like Tesla and Apple. In such companies. prices shoot higher before the split for no fundamental reason at all.
“We’ve got commentators encouraging companies to do stock splits. Companies then go up 50%, 30%, 40%, big market cap companies on stock splits. That brings no value, but the stocks go up.”
From August 11 when Tesla announced it would do a 5-for-1 stock split until it took effect on August 31, the stock rallied 82.5%. Apple announced a 4-for-1 stock split on July 30, and from that day until it took effect on August 31, the stock jumped 34.2%. Both stocks have fallen significantly since the split.
With so much uncertainty in the markets, Druckenmiller says he doesn’t know which way the markets will head going into the election.
“I have no clue where the market is going to go in the near term,” he said. He further stated, “I don’t know whether it’s going to go up 10%; I don’t know whether it’s going to go down 10%.”
He says the recent dip in the markets still doesn’t bring us to a fair valuation, because he says that doesn’t matter anymore.
“I just want to remind people that there is no valuation support because we dropped 10%. That hasn’t mattered because we are so far outside the valuation realm, with the Fed doing what they are doing that it doesn’t matter. I would say the next three to five years are going to be very, very challenging.”
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