Subsidies and Elevator Shafts

Out along the edges
Always where I burn to be
The further on the edge
The hotter the intensity
--Kenny Loggins

At 21 - 22 min in his recent interview Stan Druckenmiller discusses the role of quantitative easing (QE) in boosting stock and other asset prices. In his view, "QE has subsidized all asset prices and when you remove that subsidization the market will go down."

The interviewer responds, "That would suggest that a lot of what we see in asset prices is illusory, and if you take the Fed away, the fundamental underpinnings just aren't there."

Druckenmiller wistfully pauses and then shares that his first mentor and boss used to tell him that "it takes hundreds of millions of dollars to manipulate a stock up, but the minute you have this phony buying stop, it can go down on no volume. It can just re-price immediately."

This has him looking for signs that the Fed's 'phony buying' is going to stop. Because as soon as it does, prices are likely to fall down the elevator shaft.

So, we have millions of investors, including the 'smartest' ones, engaged in risky behavior that they know is being subsidized, and they plan to keep doing so until they get the signal that the subsidization will stop. At which time they will all exit their positions, presumably with the goal of keeping their gains.

Stan Druckenmiller obviously thinks he has an edge in being able to forecast the end of QE.

Others, whether they feel the same edge, obviously believe that they will not crash and burn either.

You don't have to be as smart as SD to recognize the danger of this situation.

position in SPX