Activist investor Paul Singer called out central bank interference in the stock market in some of his most explicit terms yet in a June 30 Elliott Management letter to investors reviewed by ValueWalk. A de-linkage between stock and bond prices may be in the offing, as the Elliott Management founder, currently managing $33.2 billion, is keeping his eye on key signs of inflation and sounded a familiar tone.
Elliott Management Letter - Timing of market collapse impossible to predict, but Singer makes the case for its causation
It is not economic optimism that is the reason for stock to remain sanguine in the face of such global uncertainty. What is at play is central bankers and their “obvious determination not to let equity markets fall” that is holding up stock prices, Singer wrote.
The fact stocks are higher as the optimism following the US Presidential election has “not turned sour” is in large part due to the Fed supporting both bond and stock markets. But what has been created is a nest of complexity which will be difficult to untangle.
“The combination of central banker-applied brute force” that comes from “buying everything in sight” is what has encouraged risk taking and dampened volatility. Rapping the “deity-like central banker pronouncements” that come from a variety of regional sources which appear like “frisky free-lancing.”
“We have thought, and still think, that confidence in central banks and policymakers has been unjustified and thus could erode or collapse at any time,” Singer wrote, pointing to major financial institutions that remain after the 2008 financial crisis “overleveraged and opaque… with record amounts of debt and derivatives.”
The market collapse that Singer is looking for “is always impossible to predict” in terms of timing, and could “happen abruptly and without warning.”
Elliott Management Letter - looking to avoid "rooting interest" in stock market direction
In a world where the market could come apart, Singer takes a decided NonCorrelated approach. “Elliott aims to have as little ‘rooting interest’ as possible, aiming to have a mix of strategies in the portfolio “which are subject to idiosyncratic rather than market forces.”
Singer’s ideal portfolio is one that cannot be “pushed around by masses of investors.” He has hedges in place against broad movements in both the stock and bond markets and is not emotional but rather driven to be as “scientific and data-driven as possible.” Even still, Singer admits that portfolio management is not all mathematical, but rather “in essence it is an art as much as a science.”
Part of that art is recognizing when to manage risk in a dead calm market.
There is a mantra in algorithmic analyst circles that the longer a free market is suppressed, the worse the mean reversion pain will become, a point Singer latches onto. “The seemingly permanent governmental suppression of volatility in markets makes the selection of hedges a painstakingly difficult process,” he writes, warning of risk at a time when market volatility measured by the CBOE VIX index is recording near all-time lows.
When markets are suppressed in one area, a corollary impact is typically felt to various degrees.
“The effective ‘cap’ on volatility seems to apply most firmly to the financial assets and indices owned by the general and institutional investing public, not necessarily to the complicated positions held by hedge funds.”
Singer, who is perhaps best known for investing in distressed debt, likes this area as well as public sector equity activism. In distressed securities, he likes the beaten down retail sector along with energy and commodity areas.
In an economic world driven by central bank academic theories that are untested and have been executed without a risk management or logical exit plan, investors need to wake up and smell the coffee.
“Investors should come to grips, intellectually and viscerally, with the likelihood that most financial and monetary policymakers’ knowledge of the world is somewhere between ‘close to nothing’ and ‘way less than zero,’” the Elliott Management letter stated. The real issue in this environment is return of capital, not return on capital.