According to Bank of America’s most recent Credit Investor Survey, the biggest issue now on the minds of institutional fixed income investors is the prospect quantitative bubbles, or rather, the failure of central banks to withdraw the punch bowl at an appropriate rate without upsetting markets.
Paul Singer, the founder of Elliott Management, is having the same thoughts.
In his second quarter letter to investors, Singer opines that the current state of play in both the markets and the economies of the developed world today can be described as “waiting for the handoff” -- waiting for the transfer of responsibility for grow and sound money from money printing to “a mix of the kind of policies which we and others have been advancing as the correct way to increase growth rates in the developed world”.
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Paul Singer on quantitative bubbles
These policies have been lacking since the crisis. In fact, almost all of the economic advancement that has occurred over the past ten years has been thanks to extremely accommodative monetary policy, and there have been virtually no structural reforms or growth orientated policies from developed nations.
Light-touch regulation and easy money policies are cited as being the primary causes of the financial crisis. Regulators will tell you that we’ve learned many lessons from the past and regulations put in place since 2008 will prevent such a scenario from ever unfolding again. However, Singer disagrees, arguing in his letter that monetary policy today is “far looser, by orders of magnitude, than policies which, before the GFC, generated real estate and debt bubbles, misallocation of resources, rising inequality, and led to the crash.”
He goes on to say that the sluggishness in growth since 2009, has not been a result of technological changes, income inequality, and changing demographics, but it has instead been a direct consequence of quantitative bubbles or excessive monetary policy with little reform on the fiscal side. Ultra easy monetary policy has created “massive increases in asset prices” and “wrecked havoc on the retirement plans” of millions who rely on yield for income.
Quantitative bubbles - Lack of fiscal action leaves no room for maneuver
The lack of action from governments to help on the fiscal side of the equation concerns Singer. After ten years of money printing, central banks have run out of headroom to stave off any renewed recession. The only avenue left would be to double down on quantitative bubbles of existing policy commitments, increasing asset purchases further and pushing interest rates even deeper into negative territory. Such a reaction may “finally be the catalyst for a loss of confidence in paper money and a sudden upturn in gold prices,” a “frightening” turn in perceptions that “few investors, economists, central bankers or fiscal authorities are ready for.”
Elliott’s founder believes that the developed world is running out of time to achieve its handoff without upsetting markets and the wider economy.
Unemployment incentives are one area Singer believes needs reform. Government programs that provide significant long-term benefits to the unemployed are generally “not carefully tailored to make fine distinctions” and can “provide strong disincentives for some people to work or even seek employment.” These programs, he writes, are not creating social justice instead they are, “creating demeaned citizens and preventing people from experiencing the dignity and contribution to society of work.”
The lack of wage growth since the financial crisis demonstrates how these programs to the unemployed can severely damage the labor market. Stagnant wages prove “that there is something wrong with the existing prosperity-delivering mechanism,” according to Singer.