Stanley Druckenmiller Warning on Rates, Long-Term Risks — and IBM

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Stanley Druckenmiller is considered to be one of the greatest hedge fund managers in the world. At CNBC’s Institutional Investor Delivering Alpha conference on Wednesday, Druckenmiller gave some key warnings and views on credit bubbles, zero interest rates, and more. He also gave a warning about International Business Machines Corp. (NYSE: IBM) and companies following its mentality.

Druckenmiller’s speech focused on central bank risks building by keeping interest rates too low for too long, with a warning that it could create serious problems ahead. He also admitted that it might not end badly, and that he hopes he is wrong in his assessment.

Another risk was highlighted as the current initial public offering market being frothy and too much risk being taken by investors. Druckenmiller’s aim — to get to more of a neutral interest rate environment.

Druckenmiller, who is now only 61, closed down his firm named Duquesne Capital Management in 2010. He joked that he no longer had the guts to keep making super-sized bets like he was used to making before he retired.

CNBC’s Joe Kernen also got to interview him live. If you prefer the video format, that can be seen here. Otherwise you can read the unedited transcript below, and the instance relating to IBM is on page 3.

JOE KERNEN: All right. So when we have talked in the past, you were even more, I guess, strident about your biggest bets, biggest money. And we know how well you’ve done. We heard Julian Robertson. We know you 30 percent compounded return for years and years and years, betting against central banks. So if you can find a mistake, that’s what you want to key on. It sounds like you’ve found a mistake. And given the depth of the recession in 2008 and now the type of measures the Fed has used, these were shock and awe measures compared to what was done in 2002 and 2003, and the notion that we could have something commensurate in terms of a bubble or in terms of a bubble bursting really scares me to the point where I listen to you, and if I believe what you’re saying, I’m not sure what to hold. I’m not sure whether I hold anything at this point.

STAN DRUCKENMILLER: Well, that’s a great question. First of all, at this point in time I don’t see this as systemic. What we believe in 2005 and 2006 was that you had double leverage going on. People borrowed to buy their home and then they were borrowing against their home and the shadow banking system had accumulated those debts. While the Fed thought the crisis was containable, we thought no such thing because when the bad stuff gets into the banking system itself, it has huge, wider implications for the broader economy.

The current situation is a little trickier, Joe. First of all, like ’04, I don’t have great certainty how this mistake will end. In fact, I’m not even sure it’s going to end badly.

JOE KERNEN: And it wouldn’t be housing this time.