During his recent interview with How Leaders Lead, Stanley Druckenmiller explained how he predicted the 2008 financial crisis thanks to a Lehman Brothers analyst. Here’s an excerpt from the interview:
Druckenmiller: That was pretty easy and I had a lot of conviction. Again I think one of the big sins of the FED, which we just relived again is, they tend to keep monetary policy too loose for political reasons when the punch bowl should be pulled away.
And by ’05-’06 I looked at a 50-year trend line of housing, which unfortunately you can’t see it through a microphone, but think of a steadily rising line 3% a year with very little variance around that line for 50 years and then all of a sudden it shoots straight up in the sky for 4 or 5 years.
So you’re clearly in a bubble like nothing we’ve ever seen. And then this analyst comes into me from Lehman Brothers of all places, and this is May of ’05. And he lays out to me their subprime calendar and he says there is no way this thing can last past the third quarter of ’07. This guy’s like a math genius.
It’s got the whole schedule lined up and he says all hell’s going to break loose, and I gave a speech at the Ira Sohn conference that’s basic plagiarizing everything he told me, and predicted the whole thing.
And then ’06 was a frustrating year David because everybody else is making a ton and I was short betting that the world was going to come to and end, and I think I was up 5%, my competitors were all up 10 or 15, but then in ’07 when all hell broke loose we were well-positioned.
But it was a historical bubble. It was obvious. Just because housing prices went up for 50 years every year doesn’t mean they’re going to continue to go up if all the circumstances have changed.
People had borrowed $800 billion dollars against their homes and they were flipping them and doing all this crazy stuff. It was kind of obvious.
You can listen to the entire interview here:
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