"There's A Lot More Bodies Coming"

Stanley Druckenmiller predicts more regional banks will fall.

Stanley Druckenmiller being interviewed by Kiril Sokoloff.

The Consequence Of Eleven Years Of Free Money

At the 2023 Sohn Conference this week, Kiril Sokoloff, the chairman and founder of 13D Research & Strategy,  interviewed Stanley Druckenmiller, who was George Soros's lead portfolio manager for twelve years and also ran his own successful hedge fund, Duquesne Capital. They discussed various topics related to the economy, markets, geopolitics, and investing, but this was the part that jumped out at me:

When you have free money, people do stupid things. When you have free money for 11 years, people do really stupid things. So there's stuff under the hood, it's starting to emerge. Obviously the regional banks, recently we had Bed Bath & Beyond...

I'll just pause here to remind readers that we bought puts on Bed Bath & Beyond ( $BBBYQ ) in the Portfolio Armor Substack back in January. 

Okay, back to Druckenmiller: 

I would assume there's more bodies coming. The regional banks, the median regional bank has 43% of their loans in commercial real estate. About 40% of that is office. And we've had this huge change in lifestyle due to COVID, number one, the Great Resignation. But number two, people aren't going to the office, so we've had a higher vacancy rate than we had in 2000. 

Not to keep making this about us, but we’ve been betting against regional banks for a while here.  

Back to Druckenmiller on regional banks and what's coming next (emphasis mine), 

I am not predicting something worse than 2008, so I don't want to see headlines tomorrow that I said something worse than 2008 is coming. But I think it's naive not to be open-minded to some sort of possibility of that effect. The banks have got themselves in a balance sheet problem before the loan losses have started because of obviously the mismatch of liabilities and assets with Treasuries on their balance sheet, they basically have stuff yielding two, two and a half percent that their cost of funds is five percent on. So before we even get into an economic contraction, many of the banks already have impaired balance sheets. If you pile on losses in commercial real estate, credit card losses, the stuff that normally happens in recessions, and you take the fact that we have had this big asset bubble going into it, and you take the fact that we just had the most rapid increase in in interest rates from the bottom in history, I think it's just naive, not to be open-minded about something really bad happening. Again, it is not my forecast. But as a risk manager, it has to be part of my matrix and my equation in thinking about it. 

More Where That Came From

There's lots more in the interview, including Druckenmiller's thoughts on ESG (he basically thinks it's BS), China versus Taiwan (he's a China hawk, unfortunately, who thinks the U.S. ought fight a war over Taiwan with China, if China tries to take the island that's legally considered part of China). You can watch the whole thing here: 

But let's focus for a moment about the part I excerpted above. 

What Should You Do With This Information?

If you're a conservative investor, you should consider hedging (as a reminder, we have a website and an iPhone app that can help you with that). And if you're a more enterprising investor, you should consider placing some bets against regional banks. Readers may recall we talked about doing more of that earlier this week. 

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