Paul Singer says in plain words that Detroit’s recent insolvency is just a preview of what a full-fledged collapse of U.S economy will look like. In the third quarter letter, which was reviewed by ValueWalk, Paul Singer takes a jab at the Fed’s strategy of ‘saving’ the economy with huge amounts of money-printing and says that unfortunately states in the U.S cannot do the same.
Read more about what Paul Singer said in his Q3 letter (as we first reported) here.
“In the U.S., states cannot file for bankruptcy. Cities can, however, and there is a special provision in federal bankruptcy law reserved for cities. Furthermore, unlike countries, states and cities cannot print their own currency. When they overspend or overpromise, they beg for money from the federal government.”
Obamacare is a fiasco
Paul Singer also says that a system can be infested with bad debt and bad leadership for decades but when the crash happens, it is a matter of hours or minutes in which the house of cards comes down. Singer’s letter also notes that when states get into such trouble, courts can give them easy flexibility in paying out creditors. Paul Singer says that Detroit’s bankruptcy is a “coming attraction” to further municipal insolvencies.
He goes on to point out that the recent turmoil in markets that shook all economies across the globe imply just how flawed the Fed’s data-driven models are when markets make calls over which the Fed has little control,
“If the markets decide that confidence should be lost in governments and currencies, then such confidence will be lost when the markets decide to reflect that loss of confidence in market prices. If the markets decide that inflation is inevitable as a result of structural rigidities plus QE and ZIRP, then bond prices will collapse, gold and commodities will soar, and inflation will spike.”
Paul Singer also comments on the U.S. healthcare system and its latest development, Obamacare. He says that the existing setup in the U.S. had many structural flaws and high costs, but it is a system which has more or less satisfied people in the past. But despite of the shortcomings that Singer finds in the U.S. healthcare system, he has no love lost on the Affordable Care Act, also known as Obamacare. He says that the leading flaw in the reforms is that it makes it impossible for any employer to predict future costs. He also criticizes the way the bill was discussed and projected in the House, with costs ranging over seven years, whereas revenues spanned over ten years, adding that the insurance platform provides to,
“Millions of people who either could not afford it or chose (mostly because of their youth) not to purchase it. Let’s put a bookmark here: The country is already insolvent because of the unpayable total of its long-term promises (Medicare, Medicaid, Social Security, and underfunded pensions.), and ACA is not yet included in the numbers.”
Paul Singer on the lowest labor participation rate
The letter comments on one nasty statistic – labor participation rate. He says that it has now fallen to a 40-year low, adding that the truth about labor participation breaks the facade of falsely improving jobs data; in reality we are still at recession levels. The letter talks about how modern technologies are replacing the need for manpower. Paul Singer says that policies have to keep up with the advancements and be creative in producing new jobs. Since there is no real solution that can hire back the same people for the same jobs that have now become obsolete, the only way to go about it is adaption. He says that it is poor management of the government that it is encouraging the unemployed to get benefits rather than putting their skills to work and if it continues to happen it will lead to class warfare and slower growth.
“The job of government leaders (which is currently being done incredibly poorly) is to make sure their educational systems are as high-quality as possible, including a good amount of vocational training, and that their employment policies are as flexible as possible in order to avoid employer flight. Sovereigns must become platforms for, and remove impediments to, entrepreneurship, innovation and start-ups. It is not a solution to the employment challenge for policymakers to behave like Luddites or protectionists.”
Paul Singer also points out that competition from emerging markets and their growing talent is also an impediment to improving employment data in the U.S. He says that the developing world has grown a habit of basking in past glories and has become increasingly uncompetitive in policies and practice.
“The best and only sustainable growth is that which emanates from the human mind – from smarter and more creative efforts and better organizations. ‘Growth’ from policies that depend on beggaring thy neighbor by depreciating one’s currency, erecting trade barriers or cutting wage rates is often chimerical, and such policies are ultimately likely to backfire.”
Complex calculations no equal to human experience
Paul Singer also trashes the hype about correlations and how they have been interpreted as being a predictor of future profit and loss. He says that the complex calculations regarding correlations and value-at-risk have been designated by computers and just like last time, the machines that are designed by humans can make the same mistakes and miscalculations that they have done in past. He goes on to say that human experience and intuition can never take place of complex algorithms,
“As we painfully know from past experience, there is no substitute for applying judgment, experience and intuition to historical and current facts when it comes to risk control, and this is something that computers are uniquely unqualified to do well. There is also no substitute for providing a margin of safety in sizing positions, especially given the history of markets in recent years, which have been (and continue to be) increasingly linked by groupthink and sheer size of positions.”
Paul Singer concluded the quarterly letter by explaining Elliott’s long-term strategy. He said that there are no eternal or definite realities when it comes to capital protection, and that the fund is always striving to find the right combination of hardworking and humble.