Having previously warned that "the ultimate breakdown from this environment is likely to be surprising, sudden, intense, and large," Elliott Management's Paul Singer slammed the "amazing arrogance" of policy-makers who have "created a tremendous increase in hidden risk, risk that investors don't exactly know." As CNBC notes, Singer issued cautionary words for the path ahead, "it's a very dangerous time in the global economy and global financial markets," adding that gold was "under-represented" in investors' portfolios.
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Singer added:
Policies are exacerbating inequality, restlessness.
Economies fragile because of debt, low rates.
Sees risk both stocks, bonds can decline simultaneously.
Sees risk in inflation surprising everyone.
Gold underrepresented in portfolios.
As CNBC reports, Singer faulted the Federal Reserve and others for creating unusual dangers that are unique in the "5,000 years-ish" history of finance due to low and negative interest rates.
"What they have done is created a tremendous increase in hidden risk, risk that investors don't exactly know or have faced about their holdings," he said at the conference presented by CNBC and Institutional Investor. "I think it's a very dangerous time in the global economy and global financial markets."
Singer spoke as the Fed weighs whether to enact just its second rate increase in more than 10 years and its first since December, the hedge funder said policy makers acted with "amazing arrogance" when he and others were warning of the financial crisis that would explode in 2008.
In the current situation, he said, the best central bankers can do is say that things would have been even worse had they not acted after the crisis.
He issued cautionary words for the path ahead.
"With roughly $15 trillion on the major central bank balance sheets, with all of these rates at zero or even crazily below zero, you have a very delicate situation which cannot be solved by a sledgehammer," Singer added. "You need some finesse."
Watch the following brief clip at your own risk…
As we noted previously, 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.
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