You are a free subscriber to Me and the Money Printer. To upgrade to paid and receive the daily Capital Wave Report - which features our Red-Green market signals, subscribe here. The Interviews That Shaped The Post-GFC Market... No. 5 - Druckenmiller, 2018This was the day that I lost hope in modern finance... but I figured out how to make a lot of money in the process...
Dear Fellow Traveler: This week, I’m doing something different. I’m going to lay out what I consider to be the five most important interviews for the financial markets in the post-2008 Great Financial Crisis world… We have to view today’s market through the lens of the post-2008 and even post-COVID events… (What sets up the Wave Speech) So, let’s countdown… and we start with No. 5… In October 2018, Stanley Druckenmiller sat down with Real Vision… Druckenmiller didn't mince words when talking about the impact of algorithms on the equity markets. He said that algorithms had “taken all the rhythm out of the market.” And Druckenmiller, one of the greatest liquidity-focused investors of his time, said he was confused by algorithmic behavior. This is Stan Druckenmiller talking. The guy who broke the Bank of England. Who generated 30% annual returns for three decades without losing. If he's confused, the rest of us are trying to perform brain surgery with oven mitts. Algorithmic ApocalypseDruckenmiller built his career on reading price action versus news. For 35 years, he used this discipline to generate legendary returns. But as he told Real Vision, "When you take away price action,” it becomes extremely difficult to manage. The machines had fundamentally broken his process. And if they'd broken Stan Druckenmiller's process, they've broken the markets… It's like watching Mike Tyson lose to a chess computer… in a boxing match.
So… the moment humans think BUY!… the robot robot screams SELL! at the speed of light across a mountain range that had been bored into... The moment a stock starts moving in any direction - the exact moment human traders would traditionally lean into momentum - algorithms slam the brakes with massive counter-trend trades. This was something that I started to notice when eyeing Volume Weighted Average Price (VWAP). The blue line below is the one-minute volume-weighted average price.
The green-differently shaded bands around the Blue line are one standard deviation, two standard deviations, and three standard deviations from the one-minute price… That chart was from July 28… It’s subtle, but powerful. Like a Wu-Tang ninja… or food poisoning… If you layer Bollinger Bands on top of VWAP deviation bands… Look at what happens when we snap outside of the Bollinger Bands temporarily on a one-minute chart as we move into the fourth standard deviation of price… (where there are no more colors anymore at 11:15 am and 2 pm that day…)
We are seeing these short-term snap-backs… driven by algos. It’s right there… And that’s just one day randomly selected from the last few weeks… In that chart. And it’s happening constantly… Back in June, remember when Jamie Dimon warned about the bond market cracking? (Even though it’s cracked two times a year for six years?)
The market sold off for a few minutes, bounced outside the third deviation of price… and whipped right back up… Why? Algos… This can be extremely lucrative if it pays off in a world now dominated by 0DTE (same-day expiration) options on the SPY and QQQ. Basically, just pay attention to the on-the-hour moves (especially around 2 pm), and buy the at-the-money call expiring the same day… Set a tight stop… sometimes it loses 10% of your stop is tight. Sometimes it goes up 300% because there’s an irrational run that makes no sense... I’m not kidding… But if you’re someone trying to short the momentum of this market, these moves are like having a robot punch you in the face every time you try to walk forward. Eventually, you stop trying to walk. Surrender to IrrationalityThe most telling part of the interview wasn't Druckenmiller's analysis. It was felt like an admission of defeat. He noted that he wouldn’t be able to generate the types of historical returns he saw in the past if the algos continued to behave that way… The most successful macro trader in history said the game fundamentally changed. The strategies that worked for decades - that built fortunes and broke central banks - no longer functioned in a market dominated by machines. If you're wondering why the stock market feels completely disconnected from reality, this is just one of your answers. Why does the market melt lower for five hours, along the second standard deviation, and give up 2%, only to then recover all the losses in the last hour? Algorithms. Why do perfectly good companies get demolished for no reason after they report incredible earnings? Algorithms and positioning. We've built a financial system where machines trade against other machines using models that assume humans are still making the decisions. These algorithms are programmed based on how markets used to behave when humans were driving this bus... But when everyone's using algorithms based on the same historical patterns, those patterns become meaningless. And it shows… constantly… Markets are supposed to be evolution in action. The adage goes that good companies should survive, bad companies should die, and prices should reflect reality. But when machines are programmed to fight every price movement based on statistical models, you get a market that's completely divorced from fundamentals. And a place where retail traders just become exit liquidity for machines… This market is not about survival of the fittest anymore… It’s about the survival of the fastest… um… fiber optic cable. When the greatest macro trader of our generation admits he can't figure out the market anymore, that's not a trading signal… It's a fire alarm… five engines… blasting. The machines ended the old game. Now you have to play the new game… We do it every day… Stay positive, Garrett Baldwin About Me and the Money Printer Me and the Money Printer is a daily publication covering the financial markets through three critical equations. We track liquidity (money in the financial system), momentum (where money is moving in the system), and insider buying (where Smart Money at companies is moving their money). Combining these elements with a deep understanding of central banking and how the global system works has allowed us to navigate financial cycles and boost our probability of success as investors and traders. This insight is based on roughly 17 years of intensive academic work at four universities, extensive collaboration with market experts, and the joy of trial and error in research. You can take a free look at our worldview and thesis right here. Disclaimer Nothing in this email should be considered personalized financial advice. While we may answer your general customer questions, we are not licensed under securities laws to guide your investment situation. Do not consider any communication between you and Florida Republic employees as financial advice. The communication in this letter is for information and educational purposes unless otherwise strictly worded as a recommendation. Model portfolios are tracked to showcase a variety of academic, fundamental, and technical tools, and insight is provided to help readers gain knowledge and experience. Readers should not trade if they cannot handle a loss and should not trade more than they can afford to lose. There are large amounts of risk in the equity markets. Consider consulting with a professional before making decisions with your money.
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