'We didn't learn anything' - Billionaire investor Stanley Druckenmiller says the next financial crisis could be worse than the last, and lays out how it might happen

Reuters / Brendan McDermid

• Billionaire investor Stanley Druckenmiller - who formerly managed money for George Soros, ran his own hedge fund, and now oversees a family office - says conditions are ripe for a financial crisis that could put the last one to shame.
• In an exclusive interview conducted by RealVision.com and seen by Business Insider, Druckenmiller discusses what he thinks will likely cause the next meltdown.
• Druckenmiller also weighs in on a wide range of other topics, including the influence of passive investing, the Federal Reserve, the trade war, and various investment philosophies.

Stanley Druckenmiller has just about had it with historically low interest rates.

In his mind, they've infected financial markets and led to exorbitant pockets of debt all around the world. More than anything, he's worried about the reckoning that's bound to transpire as global central banks make borrowing more expensive.

The billionaire investor said as much during a recent interview with RealVision.com. The chat was conducted by Kiril Sokoloff, the chairman and founder of 13D Global Strategy & Research, and a market legend in his own right.

The former lead manager of George Soros' Quantum Fund, Druckenmiller later oversaw $12 billion as chairman and president of Duquesne Capital Management. He now manages his own wealth as a family office.

The crux of Druckenmiller's argument is that, after a decade of easy lending, investors worldwide will be shaken to their core by tighter monetary conditions. Once the endless supply of cheap money that's flooded global markets starts to dry up, all bets will be off, and a market collapse will be in order.

"With the monetary tightening, we're kind of at that stage of the cycle where bombs are going off," Druckenmiller told Sokoloff. "My assumption is one of these hikes - I don't know which one - is going to trigger this thing."

What Druckenmiller does know for sure is that reduced liquidity will be the culprit. It's a sentiment that's been echoed by experts across Wall Street for months, and the general idea is that markets will seize up once the money flow they've become so accustomed to gets more constricted.

We're kind of at that stage of the cycle where bombs are going off.

Druckenmiller argues that emerging markets could be ground zero for any global financial meltdown. There's been "no more egregious recipient of free money" during the ongoing cycle than EM, where he already sees "possible contagion" that could spread into developed markets.

"It's going to be a shrinkage of liquidity that triggers the whole thing," said Druckenmiller. "And frankly, it's already triggered it in emerging markets. And that's kind of where it always starts."

Ultimately, this toxic combination of factors could end up generating a global meltdown that puts the one from a decade ago to shame, says Druckenmiller. After all, the last instance was driven by excessive risk-taking and unsustainable amounts of leverage. And wouldn't you know it, eerily similar circumstances exist now.

It's going to be a shrinkage of liquidity that triggers the whole thing.

"Intuitively, you can make a case that we're going to have a financial crisis bigger than the last one, because all they did was triple down on what, in my opinion, caused it," he said. "We seem to learn something from every crisis, and this one we didn't learn anything."

If you're considering brushing off Druckenmiller's warning, consider his nearly unparalleled track record over the past 30 years. During that period, he's earned 30% compounded annual returns, and never experienced a down year. In 120 quarters, he's only been down in five of them.

So act against Druckenmiller at your own peril. In the meantime, enjoy some excerpts from the rest of his lengthy conversation with Sokoloff:

Why he's having a tough year, by his standards

"I - maybe because I have a bearish bias - kind of had this scenario that the first half would be fine, but then by July, August, you'd start to discount the shrinking of the balance sheet. I just didn't see how that rate of change would not be a challenge for equities, other than PEs, and that's because margins are at an all time record."

"We're at the top of the valuation on any measures you look, except against interest rates. And at least for two or three months, I've been dead wrong."

Why algorithms are a thorn in his side

"These algos have taken all the rhythm out of the market and have become extremely confusing to me. And when you take away price action versus news from someone who's used price action news as their major disciplinary tool for 35 years, it's tough, and it's become very tough. I don't know where this is all going."

"A lot of these algos apparently are based on standard deviation models. So just when you would think you're supposed to pile on and lift off, their models must tell them, because you're three standard deviations from where you're supposed to be, they come in with these massive programs that go against the beginning of the trend."

What he'd do if he was in charge of the Fed

"I would raise rates every meeting as long as I could. And the minute you got substantial disruption, I would back off."

"We have this massive debt problem. If we don't normalize, it's going to accelerate and cause a bigger problem down the road. If we do normalize, we're going to have a problem. And unfortunately, we're going to have a much bigger problem than we would have if we had normalized four or five years ago."

His philosophy on making large concentrated bets

"As the disclaimer, if you're going to make a bet like that, it has to be in a very liquid market, even better if it's a liquid market that trades 24 hours a day. So most of those bets, for me, invariably would end up being in the bond and currency markets, because I could change my mind."

"I like to buy not in the zero inning and maybe not in the first inning, but no later than the second inning. And I don't really want to pile on in the third or fourth or fifth inning."

Why investment managers should be self-aware

"One of my most important jobs as a money manager was to understand whether I was hot or cold. Life goes in streaks. And like a hitter in baseball, sometimes a money manager is seeing the ball, and sometimes they're not."

"In my opinion, when you're cold, you should be trying for bunts. You shouldn't be swinging for the fences. You've got to get back into a rhythm. That's pretty much how I operated. If I was down, I had not earned the right to play big."

Why Trump's approach to trade is all wrong

"Probably the most destructive thing Trump has done in the global trading system is figure out how powerful a weapon the US banking system is, and how powerful sanctions are."

"Yes, you should use this weapon once in a while. But when you start just shooting it all over the place, and you're now shooting it at Canada, at Europe, here or there, that's a lot different than shooting at Iran or Russia."

"He's like a little kid that found this water gun, and he's just running around going all over the place with it. And the biggest danger I see is we lose that trust that America is good."