Paul Singer’s Elliott Management happens to be one of the few big hedge funds that’s seeing attractive opportunities and is beefing up its capital to stay ready. In the latest quarterly letter, which was obtained by ValueWalk, the fund notes:
“Since we have been finding attractive opportunities in these two disciplines [U.S/European activist equity and real estate positions], and because of our willingness to take on labor-intensive projects, we are nearly fully invested and thus able to add to the firm’s capital.”
Rising assets, attractive investments
While the letter does not elaborate on what investment opportunities have come up in the past quarter, Elliott has kept coming up in news for one thing or the other so we get the gist. Elliott explains what kind of equities grab the hedge fund’s interest: the fund looks for positions where Elliott has some control over the end result and its efforts can be rewarded, and where the setup is not influenced by interference from governments. Elliotts’s fund, Elliott International and Elliott Associates have $3.3 billion in uncalled cash which the funds can deploy up until Jan 2016. Total assets stand at $23.3 billion, excluding the new capital.
Before Paul Singer gets to his latest opinion of the Fed and its money-printing habits, the letter discusses the media’s attention on bad hedge fund returns. He says that it is only logical that hedge funds who actually hedge their positions will not perform as well as those who are only riding the bull market. Paul Singer says that funds who have generated positive returns over the medium and long term can only do so by owning more forms of investments than just stocks and bonds. He also adds that in present times when return on bonds is at its lowest and stocks are highly vulnerable to correction, looking elsewhere is the only viable option.
Paul Singer on insolvency, empty promises
Paul Singer is brutally honest about the actual state of the U.S. economy in his latest missive. He says that U.S. is ‘deeply insolvent’ with the current annual federal deficit crossing $7 trillion including unfunded liabilities, as opposed to the assertions that the deficit is under control and is just a trillion dollars. Paul Singer is not just critical of the state of the U.S. economy, he goes on to say that most in the EU, U.K and Japan are misreporting facts and distorting numbers, and that each economy is in huge trouble and equally insolvent. He says,
” We are talking about the underlying structural issues of the federal budget deficit, economic growth, the deeply contentious Affordable Care Act, and the long-term insolvency of the country due to the [U.S] government having made (and continuing to make) massively unpayable promises for the future.”
Paul Singer calls the recent shutdown debate a theatrical enactment of what a real shutdown will look like in due course with rising inflation and more political drama. He says that it is deeply unsettling but highly probable that at this rate, these over-indebted countries will succumb to collapse over the next few decades. In his exact words, it will happen “before your grandchildren start looking for their Social Security checks.”
“As bad as the insolvency is, it would be infinitely worse if governments started to believe that just because they can print money, they can inflate their way out of these long-term obligations. That will not work and would lead the world down the road to total ruin. “
Good news, really bad news
Paul Singer says that despite the many regulatory bills and new laws overseeing financial institutions, the banking system of the world remains just as opaque and overleveraged as before. On the positive side, major U.S. and European banks have reduced dabbling in risky trades and are more or less solvent for now. The bad news is that it’s hard to estimate the health of these financial institutions going forward as they remain largely opaque and still exposed to high leverage. Moreover, the violent reaction of investors to every kind of news – and as a result the instability of markets – only makes one wonder what the extent of the turmoil will be if there is a change in perception of the solvency of these banks.
Yellen would be the wrong direction
Not surprisingly, Paul Singer is not happy with Janet Yellen’s probable nomination as the next Fed chair. He says that just like Bernanke, she seems incapable of accepting that the Fed’s data-driven financial models have predicted and estimated bad results before and during the financial crisis and are just as likely to make the same mistakes again.
He also says that the Fed lacks courage to accept that their bond-buying program has distorted the economy and has put it at risk of higher inflation:
“We believe that continued QE will not accelerate the economic recovery. We also believe that the recovery and the economy are distorted and unfair to ordinary citizens who do not own stocks or high-end real estate, which are priced at their highs. ZIRP and QE, therefore, are placing the economy at severe risk of another financial crisis and possibly a spike in inflation for no societal benefit.”
Paul Singer holds up Paul Volcker as an exemplification of courage and tough decision making, with his sky-high interest rates which he implemented three decades ago, and contrasts him to Bernanke’s total lack of courage with his misplaced ideas that printing money would create jobs. He says that Bernanke’s methods include lip-service, providing painkillers and artificial respiration, instead of a long-term remedy. Elliott also does not think that the Fed’s inability to supervise financial institutions during the crisis can be overlooked, saying that the authorities managed things poorly and simply watched as the crisis unfolded. He jokes that it would be similar to him saying to investors,
“We thought that risks were building, but we didn’t think they would crash the markets, so we didn’t hedge and we lost a big chunk of your money. That said, we promise that we now know what we are doing, so have a nice day.”
QE should have been emergency relief only
Paul Singer also trashes the argument that without QE, the economy would have been in a worse state. He says that the package should have worked to provide for immediate liquidity needs only, and real and proactive policy measures should have been adopted to achieve long-term solutions. He says that the even more frustrating part is that the entire developed world has taken it upon itself to adopt the easy policy course instead of going for pro-growth policies. He says that the ultimate choice is between a worse and much-worse course of action:
“If QE loses effectiveness and the plug is pulled, the economic consequences can be disastrous, because the Fed didn’t force the President and