When people talk about the best day traders and hedge fund managers, Stanley Druckenmiller is one name that always comes within the top ten Forex Traders of all time.
Who is Stanley Druckenmiller?
Stanley Druckenmiller is known among his contemporaries as not only a visionary, but also someone who is always keen to learn and pass on his knowledge, techniques, and wisdom.Much of the Druckenmiller financial triumphs come from his measured approach to both success and failure and his aggressive trading methodology, with the caveat that cautions traders against using over-leverage to make money. He reasons that overleveraged trades are what cause the biggest losses.
Two of the most significant trade evaluation strategies for making market entry are technical analysis and liquidity, and Druckenmiller believes that while valuation is a great tool to judge market movement, traders should employ extensive technical analysis to detect market liquidity, which demonstrates and confirms the market’s movement.
After graduating in 1975, with Economics and English degrees from Bowdoin College, Druckenmiller joined the Pittsburgh National Bank as an oil analysist, moving through to take over as head of equity research by 1978. In 1981, while still in his twenties, he started his out on his own with Duquesne Capital Management, and in 1988, he joined George Soros to head up the Quantum Fund, where he worked until 2000, when he left to focus full time on Duquesne Capital until 2010 when the fund closed.
These days Stanley Druckenmiller’s estimated net wealth is more than $4 billion; he works out of a family office, Board Chairman of Harlem Children Zone and contributes significantly to charity.
The Biggest Winning Trades
Two of Stanley Druckenmiller’s most significant winning Forex Trades came with Soros’ Quantum Fund and both taking long bets on Deutsche Mark.Prior to the opening of the Berlin Wall (commonly known as the fall of the Berlin Wall 1989) andUnification of Germany in October 1990 there was a massive devaluation of the German Mark, which Druckenmiller believed to be overcautious and felt that there would be a massive strengthening of the Deutschemark with Germany’s reunification. His initial trade; a multimillion-dollar bet on the Mark to rally was increased when George Soros told him to buy two billion German Mark. The result was a massive 60% ROI.
Just two years later, Soros was in his quest to break the Bank of England going short on the pound. Druckenmiller – also under the Quantum Fund umbrella – went long on the German mark on the assumption that the fallout from Soros trades would devalue the pound against the mark. With absolute confidence in what his boss, Soros was doing to the pound; Druckenmiller bought British stocks to get the benefits of the BoE having to cut interest rates to increase exports in order to become more competitive with European rivals. The “bet” paid off so Druckenmiller bought German Bonds knowing that investors would hedge their stock losses by buying bonds when their stock prices fell with the growth of the British export market.
Top-down Investment Technique
Stanley Druckenmiller achieved a perfect trade by utilising a top-down investment approach: trade selection for a massive return on investment made through a comprehensive study of macroeconomics.
Look at the German Deutschemark vs. British Pound scenario:The political situation in Germany meant the Berlin wall was coming down and there would be a reunification of Germany, and at the same time, the Deutschemark was vastly undervalued. In the long term, however, the reunification meant that the mark would increase in value with the improvement in the German manufacturing sector.
Working in tandem with Soros, Druckenmiller went long on the mark. Shortly afterwards the mark picked up, so Soros went short on the pound. At the same time, Druckenmiller bought German bonds, knowing that when the pound fell and the BoE (Bank of England) had to reduce interest rates, the British exports would pick up making the German stocks devalue, but raising the value of their bonds.
This is a perfect example of investors, in this case Soros and Druckenmiller, using macroeconomic factors; currency, interest rates, GDP and trade balances to vary their investment allocation into those areas where they could reap greatest financial benefit rather than making small company specific trades and thereby limiting their gains. In this broader spectrum, they heightened their exposure to a far wider scope of investment and reaped the rewards.
The bottom line of course is that they had the vast wealth to invest in the first place, which is why their trades were devastating to the British pound, but that does not mean that smaller trader can’t make top-down trade investments , using the same macroeconomic factors and with lesser funding, but with the same percentage winning payout.
George Soros was an early mentor in Druckenmiller’s career.
“The way to build long-term returns is through [the] preservation of capital.” – George Soros
Stanley Druckenmiller - The Greatest Lesson I Ever Learned ..., https://acquirersmultiple.com/2017/11/stanley-druc...
In a speech to the Lone Tree Club Druckenmiller told guests that when he got into business, he heard that “bulls make money, bears make money and pigs get slaughtered. “However, he told the audience that as he was a pig, and put paid to the “slaughter”, since being a pig is the reason why his long-term returns on investment are superior to the bulls and bears of the trading world.
Being a pig to Druckenmiller means being greedy but also being very careful when “putting all your eggs in one basket”; not every Druckenmiller trade was a winner, although his losses are not given the same notoriety as his wins.
“Rule number one: never lose money – Rule number two: don’t forget rule number one!”- Warren Buffet
He went on to stress that money management should outweigh any emotional convictions and that even if your choices appear smart at the time, if the situation and trading conditions change, you have to be ready to modify your original “bet” and make corrections or, lose everything.
Liquidity of Central Banks
Early on in his career, Stanley Druckenmiller learned that the best trades come by keeping a close eye on what the Federal Reserve Board and Central Banks around the world are doing to manage their liquidity.
The role of a Central Bank (and the Fed): as independent institutions, the role of a Central Bank is to provide monetary policy, which regulates the banking sector in an attempt at keeping unemployment low, stabilising the fiat currency and preventing inflation.
Economic growth is affected by the central control of liquidity within the financial system and this is effected with the use of three tools:
- Financial Reserves – each bank within the country is required to show their cash on hand at the end of each trading day.
- Open Market Operations – banks use these to buy and sell securities from member banks, which give them the opportunity to change the amount of cash on hand within the banking sector, without affecting the national reserve. This was the method used by the Federal Reserve in 2008 crisis; the Fed bought government bonds and mortgage-backed securities to stabilise the banking system in a form of quantitative easing by adding US$4 trillion to its balance sheet.
- Interest Rates – target interest rates are set as an interest rate guide for charges to member banks, and which affect bonds, loans and mortgages. To prevent inflation the central banks use contractionary monetary policy, which means raising interest rates and slowing growth. The opposite; expansionary monetary policy, growth is stimulated through lowering interest rates in the attempt at preventing or limiting a period of recession.
Hindsight shows that the central banks do not always get it right, timing is key as with the Fed – interest rates were low in 2003/2004, and then they misread the situation in 2006. It takes a few economic quarters for the effect of interest rates to filter through the economy as seen with the delay and miscalculation of the subprime mortgage fiasco – by the time the Fed lowered interest rates, the proverbial bubble had burst, there was blood everywhere.
Economists have been discussing deflation for some time, which is causing bond yields to drop and inflation figures to evaporate. However, the central banks around the globe, fearing the worst have put off plans to increase interest rates especially after equity and commodity markets crashed in December 2018.
What is the breakeven inflation rate?
The breakeven inflation rate is a market-based measure of expected inflation. It is the difference between the yield of a nominal bond and an inflation-linked bond of the same maturity Ref: http://www.bondeconomics.com/2014/05/primer-what-is-breakeven-inflation.html
Deflation comes from buyer resistance to price increases and this is due to the unfavourable unemployment figures, especially in sectors where high wages had slowed the intake of new employees. Also in the housing markets where buyers are resisting any price increase and where consumers are pushing the price of wireless and mobile services down.Verizon are showing the worst figures, down on the S&P 100 by 4% in March of this year.
World indexes are showing that Germany, Japan and the USA all have lower than expected 10-year trends on commodity and bond prices, which has lowered the breakeven levels.
In Druckenmiller’s view betting on current market trends could end badly for long-term investors, because there has been a four to six year build-up of risk, so any investment is mere speculation on a turn around, which might not happen based on what traders are seeing today.
Bearish Forex Market
With regard to the Euro, Druckenmiller is bearish and his predictions always to be correct. The global money printing is linked to the US because the dollar appears to be the central currency by which all others are measured. When Shirakawa of the Japanese central bank did not print any money, but the US was printing money, the Yen began growing stronger until it hollowed out the Japanese economy and they were forced into flooding their trading system with currency to avoid a crash.
With the latest POTUS, tariffs imposed on EU (European Union) goods, it served as a reminder that the Airbus trade tariffs would affect all the countries using the Euro as their fiat currency. Druckenmiller believes that there are some countries with clear deflation levels and because they are part of the European Union, their fiscal delinquencies will be one of the factors influencing the down turn of the Euro value. The German economy is battling with high unemployment levels and there is still the elephant in the room – Brexit. Druckenmiller’s view of the European Union is that rather than pull the countries of the region together, the disparity among the member countries in terms of their economy, is having the opposite effect.
Druckenmiller is an American Investor, Philanthropist, and Hedge Fund Manager has been involved in the trading of long or short positions in many areas, based on macroeconomic developments. Not all his trades were as legendary as when he and Soros took down the Bank of England in 1992, but he has gone on to make billions over the years.
His ability to read the markets is legendary, but one of the most appealing aspects of the man is that he remains humble and inspiring to others due to his willingness to share his knowledge. Another key character trait that makes Stanley Druckenmiller exceptional is his fearless ability to change course mid-stream – in 1987, he got the trade dead wrong, but changed sides and came out ahead by the end of the crash.