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While Glenview’s Larry Robbins sees value in the US Federal Reserve’s five year zero interest rate policy, Paul Singer, ever the risk manager, is considering how punch drunk the party might have gotten. The question to be answered is: how angry are party participants going to become when the free punch bowl is replaced by actual market forces.
“By all measures, the U.S. stock market is currently frothy,” Singer proclaims, as he glances with “amazement” at the “Fed’s magic act” of using manipulative policy tools of purchasing debt like a high frequency trader sells stocks to create downward price momentum on interest rates.
This article is one of three detailing Paul Singer’s Q2 letter to investors, sign up for our free newsletter to catch all the coverage
Then Singer tosses in the zinger, the truth many people might be feeling but isn’t evident in the data. “Substantial inflation is occurring in many asset classes,” he says, as the cost of living continues to erode the middle class. But judging from the economic statistics all is good in the world of inflation, right?
While present in many parts of the global economy, inflation “is not presently recognized or captured by the traditional metrics upon which the Fed relies,” Singer writes.
Paul Singer on inequality
Singer charges that the government measures inflation based on “a combination of things owned by the well-offs” and does not measure basic necessities. So while middle America may be feeling a pinch, the official government statistics measure the pain felt by the wealthy – which isn’t much. Singer, sounding like a populist, calls this measure of inflation that benefits the wealthy an “in-your-face” phenomenon.
Singer says such real inequality can be used “together with social unrest” to make attacking the 1 percent in society, and blaming “millionaires and billionaires” who “refuse to pay their fair share” as political tools that could make the current inequality debate “look like a mere warm-up to real class warfare. Singer expresses concern that if society continues to tilt so obviously in favor of the top 1 percent it’s going to get worse.
“This observation should come as no surprise,” Singer says, as interest rates have been zero for over five years and the U.S. Federal Reserve has spent over $4 trillion dollars (and counting) of newly-printed money to buy bonds, driving down the forward rate of return on financial assets. For investors this has created a frenzy for yield that has a dangerous side.
Elliott says that “central bankers think they are the masters of the universe” because the world has bestowed on them the monumental task “to deliver continuous stability and prosperity.” This, of course, isn’t how free markets work. They move in cycles from pain and gain. No pain, no gain. That’s not on the mind of the Fed, Singer points out.
Sarcastically labeling the Fed “master chefs” that “have but one vat next to them on the policy table,” and that vat contains a secret witches brew labeled “QE.” This is the “easy button” of economics that says the wealthy can live in a dream world. “They seem to think that all they need to do is dip into this vat, ladle on some QE, and asset prices will rise, the economy can be supported, jobs can be created and growth can be achieved.”
What they don’t say is there witches brew contains nasty growth hormones and unnatural filler that could cause a rejection. With QE, Singer argues, the Fed thinks there will be “no side effects, no indigestion, and no other factor would make them put the vat away and demand other ingredients.”
Paul Singer on timing
Like all risk managers, Paul Singer doesn’t know when the witches brew is going to boil over and explode, but he advocates being prepared.
“Since confidence in paper money, central bankers and political leaders is unjustifiable and out of line with reality, the loss of such confidence could conceivably occur at any time, leading to the next ‘run’ on the global financial system,” Singer writes, pointing to a behind the scenes discussion currently raging.
Singer says the “great sages” are delusional to think the US and other advanced economies “have decades to get their financial systems and entitlement programs in order.”
Here he approaches a tricky calculation. It doesn’t matter if you are a Democrat or Republican. Recognizing the math of a market reality, as Singer did in 2008 when he accurately warned the European Union of coming collapse, isn’t about political gain.
“In reality, only the markets can determine when time has expired – not the politicians or pundits and certainly not the central bankers.”