"New York -- 'Men and nations behave wisely," the Israeli statesman Abba Eban observed, "when they have exhausted all other resources." Imagine if our economic policy makers listened to Paul Singer instead. Mr. Singer, 78, is founder of Elliott Management and one of the world's most successful hedge-fund proprietors. Before the financial crisis of 2008, he tried to alert investors and public officials about the dangers of subprime mortgages. In the 15 years since, he's repeatedly warned that the landmark Dodd-Frank Act of 2010, and the expansive monetary policies along the way, were inviting disaster.
Will policy makers finally start listening? He isn't betting on it. "I think that this is an extraordinarily dangerous and confusing period," he says at the Manhattan office of his charitable foundation. (Elliott's headquarters moved to West Palm Beach, Fla., in 2020.) Mr. Singer is dressed casually and appears relaxed, but his message won't put investors at ease.
"Valuations are still very high," he says. "There's a significant chance of recession. We see the possibility of a lengthy period of low returns in financial assets, low returns in real estate, corporate profits, unemployment rates higher than exist now and lots of inflation in the next round."
His pessimism about the soundness of the dollar and other currencies isn't new. He's watched and worried for years as the Federal Reserve and other central banks settled into a more or less permanent emergency footing in which the answer to virtually every economic and financial challenge is to create more money.
This fueled the rise of cryptocurrency, which Mr. Singer describes as an "alternative for people to express a kind of libertarian impulse, a kind of disdain or criticism of central banks' fiat money." But while he may share the disdain for the work of central bankers, he says crypto is "completely lacking in any value. It is not a substitute for gold, but it has taken away some of the demand side for gold." He adds: "There are thousands of cryptocurrencies. That's why they're worth zero. Anybody can make one. All they are is nothing with a marketing pitch -- literally nothing."
Since the 2008 crisis, the Fed and other central banks have undertaken various rounds of "quantitative easing" -- creating money to buy government bonds and other assets. The artificial demand for such assets holds down interest rates, which enables political authorities to spend lavishly, run massive deficits and take countries deeper into debt.
Mr. Singer saw inflation coming at the start of the Covid pandemic. "We think it is very unlikely that central bankers will move to normalize monetary policy after the current emergency is over," he wrote in an April 2020 letter to investors. "They did not normalize last time" -- meaning after the 2008 crisis -- "and the world has moved demonstrably closer to a tipping point after which money printing, prices and the growth of debt are in an upward spiral that the monetary authorities realize cannot be broken except at the cost of a deep recession and credit collapse."
He meant that last scenario as a relatively optimistic one: "Credit collapse, although terrible, is not as terrible as hyperinflation in terms of destruction wrought upon societies. Capitalism, which is economic freedom, can survive a credit crisis. We don't think it can survive hyperinflation." Saving, investment and commerce all depend on a trustworthy currency, so it's imperative "to keep a good distance away from the tipping point in which confidence is destroyed."
As consumers and savers know all too well, inflation began its sharp rise in 2021, yet the Fed continued its money-creation binge into 2022. That leads Mr. Singer to form a conclusion about how central bankers will respond to the next downturn: "What happens to public policy in that recession? The answer is easy. They start printing again, and they bring interest rates right back down. They'll get the wrong lessons from what happens to inflation in a softening of the global economy."
Mindful of the history of the 1970s, when inflation retreated several times only to come roaring back, Mr. Singer figures short-term declines will convince policy makers that they've slain the beast. They'll "probably go back to their playbook," resuming the policy of easy money. But inflation will come back, "possibly more than the current round, then interest rates have to go higher for longer. If the Fed and the European Central Bank "get out of this one with no substantial pain, it would be extraordinary."
Mr. Singer knows a thing or two about financial pain imposed by reckless governments. After founding Elliott (his middle name) in 1977, he built the firm with expertise in distressed debt. Today it manages $55 billion in assets on behalf of individuals and institutions. Along the way he famously, and successfully, sued Argentina to force it to honor the terms of its borrowing.
Lately Mr. Singer and his firm have become better known as activist investors in such public corporations as Salesforce and Toshiba and in private equity. Last year Elliott led a consortium of investors that bought Nielsen Holdings, the market-measurement company best known for its TV ratings.
In light of current investment fads, a clarification is in order. Elliott's activism tends to be the old-fashioned kind -- not inquisitions driven by political agendas, but efforts to hold management accountable and make underperforming companies profitable. His approach to policy is analogous -- focused not on ideology but on the conditions that create prosperity.
The recent federal bailouts of well-heeled uninsured depositors at Silicon Valley Bank and Signature Bank reinforce his lack of confidence in financial regulators. In an interview for these pages in 2011, he warned about the broad discretion the then-new Dodd-Frank law gave government officials to deal with what they deem systemic risks. The "atmosphere of unpredictability" doesn't "make the system any safer," he said. "This is nuts to be identifying systemically important institutions."
A dozen years later, he still thinks it's nuts: "As we've seen with SVB and Signature, virtually any institution can be deemed systemically important overnight and seized, with the government then completely empowered to determine what happens to various classes of creditors."
The result is to destroy market discipline and encourage bankers to behave recklessly. He recounts a conversation on the trading desk at his firm following the recent weekend of bank bailouts. "If they hadn't guaranteed all the deposits," a colleague said, "things would've gotten very ugly in the markets on Monday."
Mr. Singer replied: "That is entirely true. Things would've been ugly. But is that what regulation is supposed to be? Wrapping all market movements in security blankets?"
He expands on the point: "Is that the way you get sound finances, or do you get people stretching risk parameters, stretching, stretching, stretching? Do you get careless bank executives? I know these guys got fired, but all concepts of risk management are based around the possibilities of loss. Take it away, it's going to have consequences." The government sent tough messages, but "in the first crisis they folded. They just plain folded."
He worries that the current market trouble is only the beginning. "We think this crisis is a result of overleverage, overvaluations, bubble securities, bubble asset classes," he says. "And this is just one episode. It's not the same, but it is something like the collapses of those Bear Stearns subprime credit funds in the spring of 2007." They were felled by bets on risky mortgages and served as a preview of the financial crisis to come.
Does this mean we are headed into an era of panics? "I'm not sure about that," he says. "I believe that's more than possible, but what I think is more likely is an extended period of time of jagged moves as people come to grips with the excesses in the financial system."
How should investors try to navigate this terrain? "Keeping out of trouble is a key focus," he says. "At such times, some consider the safest bet to be relatively short-term U.S. government debt. Because of the inverted yield curve" -- in which yields are higher on short-term debt than long-term bonds -- "such debt pays a decent return with virtually no chance of a negative outcome. Beyond that, in times of stress, many believe their portfolio should have some gold, as it is the only 'real' money and has occupied that status for literally thousands of years."
Gold certainly has been valued throughout history, though it's also true that for more than 200 years U.S. stocks have delivered total average real returns of more than 6% annually.
During that time the American economy has managed to survive numerous episodes of politicians and regulators folding, failing and fumbling. How do we chart a course back toward sound money and long-term prosperity? "The optimistic scenario," Mr. Singer replies, "would entail pro-growth reforms across the board, including tax reductions, entitlement reforms, regulatory streamlining, encouraging energy development including hydrocarbons . . . cutting federal spending, selling the asset holdings on central bank balance sheets."
The list goes on, including more accurate measurements of the health of financial houses and of inflation itself, as well as the hiring of "sound-money monetary officials, so that unlimited money-printing and minuscule and risk-provoking interest rates are merely unpleasant memories from the past."
That all sounds excellent, but one suspects the Biden administration and the Fed see resources yet to be exhausted." [1]
1. The Weekend Interview with Paul Singer: The Man Who Saw the Economic Crises Coming
Freeman, James. Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 08 Apr 2023: A.11.
