Paul Singer, CEO of Elliott Management, has been in the news lately for his fight with the Government of Argentina. However, he also is an extremely shrewd investor. Paul Singer managers over $20.5 billion in his famous hedge fund, which he started in 1977. The hedge fund has an annual return over 14% since its inception. Paul Singer recently spoke at The Archstone Partnerships Annual Managers Meeting, we have some notes from the conference below.
QUESTION: In a world where you have to worry about a market crash and the U.S. currency dramatically dropping in value, where’s a safe haven; is it another currency and if so, which ones and if not, where would it be?
PAUL SINGER: I’m glad you asked that, because I have a note on that and I forgot to mention is. “Safe haven” are the most dangerous two words in the investing landscape today. Why? Because today people are actually—and this is the best free advice you ever got—remaining invested in 30-year bonds. U.S. bonds at 2.75%, euro 30-year bonds at 2.2%; and Japanese
bonds at 1.7%. These are crazy, extreme levels. They have lots more risk than they do reward. They are not safe havens. The fact is you’ll get your dollar back 30 years from now, when the old joke says, “That will be $500,000 for the next three minutes.” They are not safe havens. They’ve been treated as safe havens. One thing I alluded to was when people realize the 30-year at 2.5% and that inflation itself is almost that or maybe greater than that even now, let alone if the economy picks up. Even if the economy doesn’t pick up globally, the loss of confidence could cause a massive rise in long-term interest rates. So that’s not a safe haven.
What is a safe haven? Gold is not a safe haven. Gold is something we’ve had a long position in for quite a while. In a world in which money is not only unmoored from anything but undisciplined, gold is the only thing that has been actually accepted as money for thousands of years. The supply of gold is extremely limited. The central banks of the growing countries—China, India and others—are vastly under-owned in gold. The institutional investing community is vastly under-owned in gold. So gold is one answer, but it’s not a complete answer. Very few investors would be comfortable, including myself, with more than 5% or 10% at most of their portfolio in gold.
There are solid things like real estate that is underleveraged that can hold its value, and stocks of multi-national companies. I do a very specific strategy: If hyperinflation happens, investing strategies become very problematic.
The answer to your specific question is there are times when there is no good safe haven. Safe haven to me is somewhere you can get a fair return and not worry about it. There is no asset with that characteristic today; and the one that has those words attached to it—long-term bonds—is the furtherest thing from safe.
QUESTIONER: Just to go a little further: Do things like Canadian currency or another country’s currency make any sense?
PAUL SINGER: I don’t want to opine on currency relationships. Some people think the Canadian currency is good, or the Australian dollar or Swiss francs. I don’t want to opine on a particular asset that will go up versus the dollar. Canada is a wonderful place. It’s in the weird position of being the kid brother protected by the United States. If something happens to the United States and you really didn’t want the U.S. dollar, I’m not sure how much protection the Canadian dollar would give.
Manual processes are very attractive to me, a certain kind of activism. We get on bankruptcy committees, and I want to take a moment to talk about why bankruptcy investing became and is still our favorite investing activity. It obviously has ebbs and flows of when paper is available at the right prices, the right situation with the right characteristics. But in bankruptcy investing, much of which we call process-driven investing, you’re entering a process. There is usually operational or financial or both chaos. The process determines the interlocking, interwoven fights among different classes of creditors, different parts of a capital structure and different groups of bondholders or other stakeholders—that’s the process. Cutting down claims or resolving claims is how you make or don’t make money. That’s what we call process-driven investing.
The distinction can be made most vividly in a case that came up a while ago, MCI WorldCom. WorldCom took over MCI as one of the things it did several years before its bankruptcy. It went under. We had positions of different kinds, but we took a major position in MCI bonds because we thought they were structurally superior. We thought the holders of WorldCom bonds would probably be interested in owning the stock of the company afterward. By owning the MCI bonds and quite vigorously advancing the cause of their structural superiority, we realized, first, we thought we were right; and second, we thought we were simplifying the case, since we did not have to have a valuation fight with the WorldCom bondholders. We needed to get them to agree with our position. It was not exactly a melting ice cube, but there was time pressure. So we went for the MCI bonds. We said 80 cents or 85 cents or whatever, and we said it a billion times. They either got tired of us or something, and