While there have been some very prominent recent entrants into the billionbear club, such as BIll Gross, Jeff Gundlach, Carl Icahn and George Soros, who only recently switched from being bullish on the market to predicting gloom, one name has been a staple when it comes to warnings about the disastrous consequences of the new normal’s monetary policy: Elliott Management’s Paul Singer.
And, sure enough, in his latest letter he does not disappoint, dispensing with his usual dose of what Kate Kelly calls “bleakness“, warning that the bond market is “broken“, and when the unprecedented central bank actions of recent years can no longer prevent a market decline – which considering that both the BOJ and ECB are running out of monetizable bonds may be sooner than many expected – “the subsequent loss of confidence could be severe.”
As Singer admits in Elliott’s Q2 letter to investors, what the fund, up 6% YTD, is seeing, is “the most peculiar period we have faced in 39 years.” The details are familiar to those who have read Singer’s previous laments (most recently here) on central planning: too much central bank power, too much monetary debasement, inevitable inflation, and “when it happens it could be swift and impossible to tamp down.”
Not surprisingly, Singer touches on a very popular topic in a world of nearly $14 trillion in negative yielding bonds, namely the scramble for safety, and surprised by the “continued stampede” to buy such bonds, he says that today’s environment marks “the biggest bond bubble in world history”, leading him to declare that “the global bond market is broken.”
Singer is stumped by the “mentality that flies to an asset class regarded as a “safe haven” even when there are low or nonexistent returns attached to it and no guarantee that current conditions will persist”, and warns buyer of negative yielding debt to “hold such instruments at your own risk; danger of serious injury or death to your capital!”
Actually, it is far less complicated than that: bonds are no longer being bought for current yield purposes (which does not exist in NIRP world) – an honor instead delegated to dividend yielding stocks, which can wipe out several years of dividends in an instant, as happened earlier today to CXW – but simply for capital appreciation, as demonstrated last week by the failed BOE QE buyback operation, where the central bank would literally pay anything to a willing seller, and yet was unable to find one in an offerless market. Of course, the culprit behind this irrational scramble is well-known: central banks.
Which leads us to Singer’s next point, namely that “trading in this market is particularly difficult”, something hedge funds which haven’t generated any collective alpha in 5 years know too well.
“Everyone is in the dark,” Elliott notes. “Experience doesn’t count for much, and extreme confidence may be fatal.”
Singer’s gloomy conclusion is almost as apocalyptic as that of Carl Icahn from his latest Bloomberg TV interview: “the ultimate breakdown (or series of breakdowns) from this environment is likely to be surprising, sudden, intense, and large.”
End of the investing world aside, the hedge funder says he is seeing opportunity in the distressed-energy sector despite the rebound of oil and gas prices from their lows. The fund also has been building up its gold position “in a conditional format,” to ebb losses “should prices fall back from their recent strength.”
Finally, Singer says that “it seems to us that investments and trading strategies which make money in a value-added way, in a different manner than the returns obtainable from the passive ownership of stocks and bonds, are especially good additions to institutional portfolios in the world going forward,” the letter states. As Kelly adds, that may be a more challenging argument for the average hedge fund competitor, which according to the HFR composite is up just 3 percent through July versus an S&P 500 that’s up more than 6 percent. Furthermore, considering Steve Eisman’s latest “big bet”, this time against the hedge fund industry’s well-known “2 and 20” compensation model, many active managers may not be in business long enough to see the “ultimate sudden, intense breakdown” predicted by Singer.
One person, however, who will be there is fellow billionaire Carl Icahn, ready and waiting for the apocalypse, as per his comments we noted yesterday:
“I have hedges on, I’m more hedged than I ever was. I will tell you there’s certainly good companies. [The market] is way overvalued at 20 times the S&P and I’ll tell you why: a lot of it is a result of zero interest rates. It’s just what I said. You have zero interest and a lot of buybacks. … I think the market is at literally very high levels because of zero interest rates. There’s going to be a day of reckoning here. I’ve seen it many times in my life. When things look good, they look great. You go into the sky. But that’s when you have to really pull down and really stop buying. That being said, I’m not going to tell you it’s going to happen tomorrow, next week, even next month, even next year possibly. But it’s going to happen, and you have to change the direction of our economy. I can’t say it plainer than that. “
And while we await the moment it all comes crashing down, we are starting a database of memorable quotes by billionaires who are predicting both the end of the world, and also believing they can somehow hedge for it. We hope to present it to readers just as soon as the world’s central planners finally decide they have had enough of propping up the “market.”
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