Hedge Fund manager Paul Singer Sees Gloom In The Boom

Paul Singer, Elliot Mgmnt

Legendary hedge fund manager, Paul Singer, who founded Elliot Management Corporation and currently serves as its CEO, has also added his chorus to the growing list of contrarian investors disbelieving the FED’s capacity to drive the U.S. economy into a sustainable growth path and, importantly, is also challenging the current asset price rise seen in the US stock markets in particular.

Singer believes that central banks are deviating from their traditional task of protecting the domestic currency value and promoting financial stability. The FED, BoE and BoJ in particular are all engaging in complex experiments that, in his words, “potentially put the current status quo in Western society at risk” – strong words.

It was former Fed Chairman Alan Greenspan how embraced the use of low interest rates and liquidity injections to combat bouts of market instability and bubble popping but it is under “helicopter” Ben Bernanke’s watch where he is pushing monetary policy to the edges with the current open-ended asset purchase program. Singer believes that the central banks no longer know what they’re doing and they fail to understand the complex inter-connections of modern finance.

Monetary policy is now following a clear path in which there seems to be a ‘cult’ of central banking and where the FED assumes the role of maestro and economic ‘guru’ with the US economy the rest of the world as an extension. It seems to believe that it is possible for monetary policy to substitute fiscal measures and government reform – major error as we are seeing in Europe. A prime example of this is the current goal of the FED with its asset purchase program – that is it will remain effective until the unemployment rate hits 6.5% and beggar the creation of new bubbles and the very real dangers of mid cycle inflation.

Along with the cult of central banking it seems goes a decrease in the importance of discipline. Hard-nosed central banks are a thing of the past and the credibility and discipline which the Germans always tried to coat their Bundesbank with is now resolutely an old-fashioned ideal. Central banks once obsessed over inflation, price stability, savings protection etc but it seems that’s no longer a priority. Dual-mandated central banks such as the FED are willing to exchange price level stability for growth. They believe, certainly in the eyes of the likes of Singer, that it is possible to create wealth with, what is to all intents and purposes, an asset management program.

The FED is making it easier for the US government to service their debt as yields have been artificially depressed and they are gaining momentum in convincing households to buy shares again as a way to generate real returns with cash rates negative. Problem is that risk appreciation is also being tossed out of the window again. We all know how that tune ends too… The FED has succeeded in turning the US economy into a big casino, where people make fortunes out of wild swings on asset prices instead of wealth being created by new ideas, investment, work and value creation. Savers are seeing their assets destroyed while speculators win.

Singer believes that the FED hasn’t been able to understand the complexity of the financial inter-connections behind the 2007 crisis and also that it didn’t act appropriately or on time. No one at the FED understood the big picture and they panicked in turning into emergency mode after the system was collapsing and on the verge of freezing up completely. It then acted in the simplest way, as just a liquidity provider of last resort.

With such a background in mind, one must acknowledge how risky the current quantitative easing policy is. The short-term effects seem to be great as the equity market keeps on posting record highs with the Dow now over 15000 and the S&P 500 hitting daily records. The problem is in the long run… Chances are that inflation will pick up sometime in the future, erasing savers’ wealth and redistributing itself to the debtors – precisely what the embattled and indebted Western Governments want, even if it is the dirty secret nobody wants to speak out loud. At that point, the equity market will also have to catch up with the real economy and which means a potentially propitious drop in value…

There is a complete absence of meaningful government reforms around the world and a lack of fiscal policy measures to drive growth higher and in a sustainable way. Money printing is certainly the medicine “du jour” – a great (short term) pain reliever but, in the long run, it will most likely kill the patient.

So just how will the FED effectively exit its asset purchase program? That question remains unanswered for the near future and, unfortunately, we believe that question also remains unanswered in the brains of FED policy decision-makers. With all this in mind, it does make sense for one to put some money into gold – just in case. With paper currencies being devalued by the day and gold out of favour, now is potentially a good time to create some exposure.

For more info on the Fed’s bubble blowing antics, take a look at our guide below.