Warsh mentor and legendary trader Druckenmiller held a closed-door meeting: US interest rates are too low, dovish stance is absurd, and AI may have a profit bubble.

Stanley Druckenmiller slammed dovish Federal Reserve members at a closed-door meeting on Wall Street and warned of an AI valuation bubble.

Druckenmiller was a longtime mentor to U.S. Treasury Secretary Bessant and Federal Reserve Chairman Warsh, and previously worked for Soros, participating in the historic battle to destroy the British pound. His family office, Duquesne Capital, amassed a vast fortune. Warsh was a partner at Duquesne Capital before becoming Chairman of the Federal Reserve.

According to the Financial Times, Druckenmiller stated at a closed-door meeting hosted by Piper Sandler in New York on Thursday morning that interest rate cuts were "no longer necessary," adding bluntly, "It's absurd that Federal Reserve members have repeatedly claimed that the federal funds rate is restrictive."

At the same time, Druckenmiller also warned of the risk of an "earnings bubble" in the AI industry and revealed that its position in the AI sector has been reduced to 20% compared to six months ago.

On Thursday, the yield on the 30-year U.S. Treasury note rose 7 basis points to 5.36%, its highest level since 2007; meanwhile, the yield on the 10-year Treasury note approached the 5% mark. Short-term Treasury yields also rose as the market gradually priced in expectations of a Federal Reserve rate hike next week.

Interest Rate View: Rising Bond Yields Are Supported by Fundamentals

Druckenmiller stated that, given the current economic situation, the capital expenditure boom, and the global capital scramble, any deviation in bond yields would be "at best low." He characterized the recent sustained rise in yields as a "slow, fundamentally driven upward trend," and said that this trend is "not worrying."

"I believe in common sense; you just need to look at the prices of various assets around the world to understand," he said.

Druckenmiller's market position in the macro field is closely watched due to his special relationship with the current Federal Reserve Chairman. He called Warsh one of his "closest friends" and said he would be "an excellent Fed Chairman," but also indicated that he no longer maintains direct communication with Warsh.

AI Warning: From an "Incredible Journey" to Starting to Worry

While Druckenmiller acknowledges that AI investments have yielded substantial returns for Duquesne—with most of its recent profits coming from AI bets rather than traditional macro strategies like currencies or bonds—he has clearly become more cautious. He revealed that Duquesne's AI holdings have been reduced to 20% of what they were six months ago.

"This whole AI wave has taken us on an incredible journey," he said, "but I think the construction cycle is late enough that people need to start to be wary."

He warned that there is a disturbing narrative on Wall Street that suggests high corporate profits will drive the market up indefinitely.

"We are likely in a profit bubble because this AI construction boom will eventually end. Frankly, the banking industry is also making AI deals, and these people have made hundreds of millions of dollars by taking related companies public."

Druckenmiller stated that his deep understanding of AI comes in part from the young analysts "embedded in the AI research lab circle" within the company.

Currency strategy: Short the euro and the pound, but dare not short the dollar.

Regarding exchange rates, Druckenmiller stated that he has been shorting the euro and the pound since the beginning of the year, but emphasized that his current position is far smaller than his historical levels—he has historically built exchange rate bets equivalent to twice his net worth.

He said he dared not short the dollar because the United States has a huge global advantage in the field of AI, while Europe is "absolutely not present" in this race.

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