‘Brace For Rampant Inflation’: Hedge Fund Billionaire Stunned At “Market Craziness”, Sees “Trouble Ahead”

In 2012 Elliott Management’s Paul Singer correctly warned that financial system leverage and technology would “serve as an accelerant in the next crisis”:

“The major message that I want to give you (and I’ve invited challenge on both parts of my thesis here and I’ve never had anybody challenge it): The major financial institutions in the US and around the globe are utterly opaque; and The next financial crisis will happen faster, more suddenly.“

Risk did indeed happen fast, numerous times since.

In 2014, Singer went more aggressively after the central banks and their arrogant largesse:

“There is no reason to suppose that they [central bankers] understand the modern financial system and economy to any greater extent than they did in 2007 (that is to say, not at all). Nevertheless, they plow ahead, expressing total confidence that what they are saying and doing is wise and not dangerous drivel.”

…

“It is unlikely that these unprecedented and experimental government policies of such gargantuan scope will actually create the desired result and allow themselves to be able to be unwound without great shock and disruption to the global financial system.”

His solution at the time:

“Although the levitation of financial assets has yet to levitate gold, we will grit our collective teeth on that score and await either ‘asset price justice’ or the ‘end times,’ whichever comes first.”

Justice was to come a couple of times since.

Interestingly, 2014 was when Singer began to warn about inflation and the potential for social unrest:

“…inflation is spreading in both scope and intensity. If and when it breaks out in an inescapably broad way, there will be a crowd of seriously confused policymakers making excuses and claiming that inflation does not in fact exist; it is not their fault; it was completely unpredictable; and/or it will actually be good for people.

“We believe that if and when inflation goes from being something that affects only a particular list of assets (a growing list, presently a combination of things owned by the well-off plus a number of things that are basic necessities) to a widespread “in-your-face” phenomenon affecting the cost of living of almost the entire population, then the normal yardsticks of risk, return and profit may be thrown into the garbage can. These measures may be replaced by a scramble by citizens and investors to preserve value on a foundation of shifting sand, together with societal unrest that may make the current politically-useful “inequality” riffs, blaming the “1%” and attacking those “millionaires and billionaires” who refuse to “pay their fair share,” look like mere warm-ups for real class warfare.”

He hasn’t always been right, obviously, as he claimed in 2016 that Donald Trump (if elected) would “cause a widespread global depression.” Quite the opposite happened, and the depression, it turns out did not happen until China (allegedly) unleashed COVID on the world.

Which brings us to Singer’s prophetic 2019 warning that a 40% crash was coming for the stock market.

“global debt is at an all-time high. Derivatives are at an all-time high and it took all of this monetary easing to get to where we are today and I don’t think central bankers, or policymakers or academics are in any better shape to predict the next downturn and I think we are the high end of the risk spectrum.”

He then ominously added that “I’m expecting the possibility of a significant market downturn.”

“December [2018] supported the notion that they’re trapped,” he said.

“What they should have done, and what they should do now, is try to restore the soundness of money. They should not be cutting rates right now. They should be calling on the congresses and parliaments around the developed world to take steps to deal with the economic slowdown in growth.”

He was right again in 2020 as all hell broke loose everywhere and prompted more of the policies he has been warning of since at least 2012.

And now – after 10 years – Singer is readying himself for the final victory lap, as he tells investors in his latest letter that he can’t wait to say “I told you so” having long-warned of an ugly end to the Fed’s extreme (and getting extreme-er) easy-money policies.

“We believe that hindsight will show the champion of head-smacking craziness in the American stock market to be the period playing out right now,” the 76-year-old exclaimed, adding that a “flamboyant line-up” of excesses will come back to haunt investors.

The (very visible) invisible hand behind all this excess is, in Singer’s (correct) opinion, The Fed (and the rest of the world’s central banking copycats) as he echoes Michael ‘Big Short’ Burry’s recent warnings of out of control “rampant inflation” that will shock policy makers, stock pickers and bond investors, alike.

“‘Trouble ahead’ is signaled by a rare combination of low-quality securities, staggering valuation metrics, overleveraged capital structures, a scarcity of honest profits, a desperate dearth of understanding evinced by the most active traders, and economic macro prospects that are not as thrilling as the mobs braying ‘Buy! Buy!’ seem to think,” he wrote.

Having registered annualized gains of about 13%, Elliott’s performance over 44 years suggest Singer is worth listening to as Bloomberg reports he clearly exuded frustration at what he sees as the hysteria driving everything from Bitcoin to government debt – a “return-free risk,” as his letter put it.

Specifically, Singer is not a big fan (to understate it extremely) of Bitcoin:

“Pulling out your hair is an option, though only if you have hair to spare,” the mostly bald Singer wrote.

“Hiding under the bed to avoid people who gloat about being long Bitcoin can get…tiring. Deep breathing exercises can work, but only for short periods. We continue to press on for the day when we can say, ‘We told you so.’”

In conclusion we go back to Singer’s 2012 warning.

“Nobody in America has actually seen, or most people probably can’t even contemplate, what an actual loss of confidence may look like.

If you think about some of these elements and how they might interact, you might come up with other paths of transmission or risk and pain. But I wouldn’t go about your business thinking it’s business as usual in a typical post-crisis, post bear market recovery.”

Given the chaos in Treasury markets this week, it seemed apropos.