“We’re going into extra innings,” legendary fund manager Stanley Druckenmiller told CNBC [Thursday] morning.
What Druckenmiller means is that stock prices (and the prices of other “risky” assets) are going much higher. I’ll explain why below… and what happens afterward. (It’s a scary conclusion.)
So why does Druckenmiller say asset prices are going higher?
Because the Federal Reserve “blew it.”[ad#Google Adsense 336×280-IA]Let me explain…
Druckenmiller is worth listening to… He and George Soros (his business partner at the time) orchestrated what might be the most famous trade in history – betting directly against England’s equivalent of the Federal Reserve.
The two made a profit of $1 billion on this trade.
Clearly he knows a thing or two about central banks like the Fed…[Last] week, the markets expected Fed Chairman Ben Bernanke to announce he was taking his foot off the accelerator – that the Fed’s massive economic stimulus program would become just a little less massive. But Bernanke didn’t do it.
The Wall Street Journal called it “a large failure of nerve.”
And Druckenmiller has strong words about what it means. He says it’s the largest-ever redistribution of wealth from the middle class and poor to the rich.
You see, Bernanke’s latest move (or lack thereof) will cause assets like stocks and real estate to rise in price. And those assets aren’t owned by the middle class and poor. They’re owned by the rich.
Billionaires, like Druckenmiller, are already making money on this. “I had a very good day [on Tuesday],” he told CNBC.
But Druckenmiller says this “wealth effect” will not end well. He predicts when the Fed actually starts to tap on the brakes, asset prices will go down fast.
How far will prices fall? Further than you can imagine. Druckenmiller says, “From beginning to exit, the wealth effect from [quantitative easing] will be negative, not positive.”
So the man who made $1 billion from a bet against the Bank of England is now making two bets on the Federal Reserve:
1) Asset prices in the U.S. will soar in the intermediate term.
2) Asset prices will give back all those gains when the Fed’s stimulus ends.
I call this idea the “Bernanke Asset Bubble.” I know it won’t end well. But in the meantime, stocks will soar.
So buy stocks today. And definitely plan on selling down the road…