Stanley Druckenmiller: "It's Going To End Very Badly" (Interest Rate Manipulation)

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Former hedge fund manager Stanley Druckenmiller, founder of the $12 billion hedge fund Duquesne Capital Management (which he closed in 2010) and former head of George Soros' Quantum Fund between 1988-2000 (Wikipedia), warned CNBC viewers on March 5, 2013 that all of this interest rate manipulation by the Fed will "end very badly." He thinks the mispricing of risk will either create another period of mal-investment similar to the 1980s and 2007-2008, or create high inflation if the Fed has to monetize the debt. Here are selected quotes from the video. Important stuff here!

Stanley Druckenmiller: "It was easy to know when QE1 and QE2 were going to end. This thing will probably end, even though I think QE is going to go on forever just because all the lobsters are about to get in the pot. And maybe we're in the 7th or 8th inning. But they are going to get boiled at some point. But right now supply and demand looks great." (for stocks)

Stanley Druckenmiller: "Well, bonds are being subsidized by the same thing equities are. If you print enough money, everything is subsidized: real estate, bonds, stocks... You know we all think we're clever in whatever we're in, but there's no reason bonds should go down if they're printing – I mean what is the government buying, Kevin, 80% of the bonds?"

Former Fed Governor Kevin Warsh: "If you look at the last three years or so, the Fed's purchases have been about 75% to 80% of all the new issuance coming out of Treasury. We used to say that the Chinese were the largest buyers of Treasury debt. Now it's the Federal Reserve."

Stanley Druckenmiller: "One of the frustrated things we mentioned in our piece was those purchases are canceling market signals. The bond market and the stock market have provided wonderful signals for many years as to potential problems out there or potential signals. And when you cancel those signals, whether it be to Congress or to markets themselves, you could run into a problem. I mean, I thought we were done with wage and price controls back in the 70s; um, this is the biggest price control of my lifetime. It's one thing to control short-term interest rates. It's another thing when you're taking 75 to 80% of the bond supply and holding that price down. And we had a lot of what I would call mal-investment, dislocations back in the 70s. I think at some point in time we're going to find out, and it may be years, exactly where you had a misallocation of resources here. But this is a big, big gamble to be manipulating the most important price in all of free markets." (interest rates)

Stanley Druckenmiller: "I don't know when it's going to end, but my guess is it's going to end very badly. And it's going to end very badly because, again, when you get the biggest price in the world, interest rates, being manipulated, you get a misallocation of resources. And this is going to end in one or two ways: with a mal-investment bust, which we got in '07-'08. We didn't get inflation. We got a mal-investment bust because of the bubble that was created in housing. Or it could end with just monetizing the debt and off we go in inflation. So that's a very binary outcome. They're both bad. They're both off in the future, I don't know when. The one thing I would say, if you're going to play – and I'm a professional investor without clients and I am playing in the game – for God's sake play in liquid instruments..."

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