Ten years ago, Stanley Druckenmiller issued a dire warning …

Druckenmiller is one of the world’s greatest investors. He is famous for forcing the devaluation of the British pound in 1992. He was working for hedge fund legend George Soros at the time. This trade generated more than $1 billion.

He also founded hedge fund Duquesne Capital in 1981. Over the next 30 years, he averaged 30% annual returns. That’s more than four times better than the S&P 500 over the same time frame. In fact, Druckenmiller never had a losing year over his 30 years at the fund.

A few years before the credit crisis, Druckenmiller warned investors that Federal Reserve Chairman Alan Greenspan was creating an “epic mortgage bubble, which was sure to crash.” If you followed his advice, you probably saved a lot of money, as stocks plunged by more than 30% in 2008.

Druckenmiller made this famous call at the Ira Sohn conference. That’s one of the most prestigious investor conferences in the world where legendary fund managers like David Einhorn, Jim Chanos, Jeffrey Gundlach and Larry Robbins (to name a few) share their favorite investment ideas.

Two weeks ago, I flew to New York City to attend this year’s Ira Sohn conference. I sat in the third row at the Lincoln Center behind hedge fund legend Bill Ackman.

About midway through the conference, Druckenmiller took the stage and issued another warning for investors …

He told the audience:

“I guess ‘get out of the stock market’ isn’t clear enough. I now feel the weight of the evidence has shifted the other way; higher valuations, three more years of unproductive corporate behavior, limits to further easing and excessive borrowing from the future suggest that the bull market is exhausting itself.”

Druckenmiller said the Fed has created a bubble that’s “many magnitudes worse” than the mortgage bubble created 10 years ago.

He also highlighted how U.S. debt is out of control … how China’s debt problem is “even worse” …and how corporations are “stuck in mud, forlorn to growth, unwilling to invest, and are addicted to share buybacks to gin up their stock.”

Druckenmiller says the Fed has “no end-game” in sight. They essentially “provided cheap money to borrow from future growth.”

His top recommendation for investors? To buy gold.

During his presentation, he talked about how net debt (as a percent of cash flow) is surging. Yet, profit for these same companies has already peaked. You can see this for yourself in the chart below.

In other words, this tells us the Fed’s easy-money policies — which have inflated assets (stocks, real estate) since the credit crisis — are no longer working. Companies are taking on more debt … but this cash is no longer producing profits.

Druckenmiller also highlighted the huge troubles in China and other parts of Asia. These countries have been the growth engine of the world. Yet, growth has slowed to a crawl, which will impact developed nations like Europe and the U.S. — who generate a large portion of revenue from Asia.

Companies can always use more leverage (take on more debt) to help grow their businesses …

But Druckenmiller presented another interesting chart. It’s the total credit market debt in the U.S. as a percentage of Gross Domestic Product (GDP).

As you can see from the blue line in the chart below … credit market debt (which is already 350% of GDP) has started to tail-off over the past few years …

A decline in credit market debt (deleveraging) may seem like a good thing …

However, this is an indication that we are headed for deflation. That’s something the Fed has been trying to avoid by keeping interest rates at historically low levels.

Looking at the bigger picture …

Total credit market debt already amounts to 350% of GDP … global interest rates are already near zero … in fact, rates are negative in Japan and Europe.

This is a clear sign the world cannot take on any more debt (as we see in the chart above with the blue line tailing-off). And as I mentioned earlier, profits are falling like a rock.

Druckenmiller presents a great case that stocks could fall sharply from here. After all, earnings drive stock prices.

And based on the data … earnings are no longer growing, and the easy-money policies by the Fed are no longer working.

However, this does not mean you should rush to sell every stock in your portfolio. There will likely be a shift from high-growth names (think names like Netflix, Tesla and Priceline) into value stocks with strong balance sheets that pay above-average yields (e.g., AT&T and Johnson & Johnson, to name just two).

In other words, this is not the time to add risk to your portfolio. Rather, it’s time to play defense and closely follow your stop-losses on open positions.