Paul Singer Interview October 7, 2013 with CC Transcript

We now welcome Jerry Baker and Paul Singer.

Thank you very much, ladies and gentlemen. Welcome back to a short break. As you heard, I'm joined by Paul Singer, founder, CEO, and co-CIO of Elliott Management Corporation. Paul, the title of this session is, 'If You Think Financial Repression Is Bad, Wait Till You See What Comes Next'—the invitation being for us to discuss what are going to be the, what are the likely effects, the fallout from the ultimate unwinding of all of this financial, all this monetary stimulus we've seen. But if I may, if you don't mind, it seems to have been the view of some of the, many of the people so far who've expressed a view that we're a long way from that stage yet. We just heard on the last panel, Bruce saying that actually the Fed's not gonna taper for a while.

Janet Yellen's gonna take over, probably isn't gonna be until next year. And even when they begin tapering, if you think about it, that's only restraining the growth of the balance sheet of the Fed. It's not even beginning to unwind the overall scale of the balance sheet. So people have talked about QE Infinity and all of that. So this topic of easy money, I mean, do you think we're into these extraordinary measures for a very long time to come?

You know, once they... once they start something like this, it's not atypical for a time to come when they feel or they actually act as if they feel, as if they have a tiger by the tail. And what I mean by that is, at some point in a process like this—some people say it's money printing, some people say it's not; I think it's the functional equivalent of money printing—it hasn't really done very much that's good, and it's created a lot of distortions and inequalities, the exacerbation of inequality, et cetera—we can talk about that in a few minutes—without having lit up growth, catalyzed and lit up a self-sustaining rapid growth, if four or five years later, growth is still a two-ish percent real.

And they think they still have the runway because of the lack of reported inflation. They still have the runway to keep doing it, but they saw—they must have seen that because of the events of May-June, where the utterance of a single word, which they thought was elegant and clever, the word 'tapering'—one can only imagine the conference table when somebody came up with a word and other people were high-fiving and saying, 'What an elegant, fantastic little word, tapering. How lovely and gradual.' So they come up with a word. They utter the word. And of course, modern markets have the capacity to create events, not just predict them. And so the markets took away just about all of the basis points that the medium and long end had traversed on the downside.

So rates today, the 30-year rate is not that different from the rates in the spring of 2009, after a brief trip 125 basis points or so lower. So before the rate of monetary debasement is even reduced a little bit, that happens. That's the tiger by the tail metaphor. So they're sitting and saying, 'My goodness.' Perhaps, perhaps if they're sensible, they're saying, 'My goodness, we said this and we kind of bought $3.5 trillion on our balance sheet—balance sheet. There's no reported inflation, but look at the distortions. Stocks are at an all-time high. Growth is sluggish. And it doesn't look as if it's ramping up in any kind of accelerating way. What's going to happen if we actually slow down the buying or stop buying?'

So I think that at the moment, given the reaction of the May-June markets and the growth, possibly growth-suppressive implications of that 60-, 70-, 80-point rise, basis point rise, tapering is kind of off the table. You know, I think that's one of the most important points we could talk about is the role of markets in leading policy by the nose rather than the opposite. Can I just—sorry to interrupt you—so just to be—

Come back to this point about the duration now of QE, whatever you want to call it. So does it matter? I mean, we're headed towards a $4 trillion balance sheet for the Fed. The Fed funds rate is anchored at less than 25 basis points. Can we just go on? I mean, somebody expressed the view earlier today they're just going to go on doing that forever. I mean, does it matter if they keep the balance sheet at that level, if they keep that level of accommodation going?

The future is something that is not something you can peer into from today. It will matter tremendously if confidence is lost. How could confidence be lost? Confidence could be lost if some combination of a rise in the price of commodities and gold, a consciousness of inflation or inflationary potential, a continued lack of accelerating growth, social unrest, an acceleration of QE. Forget tapering. I think tapering is off the table, but it will matter. Considering the Japanese model, stable society, enough growth to keep people sort of happy, high savings, nobody really caring that they don't get a return on their savings, that's not necessarily where America and Europe uh... are or or uh... or will be and i think that this this discussion that goes something like well uh... inflation is one point three i'm making this up uh... one point three one point five whatever it is let's let it go to two one point seven or two or if it goes to two and a half that's fine too that kind of conversation

is a conversation that's possibly bereft of an understanding of what happens when people actually may change their mind in a very, very significant way. I'll tell you, as an investor, we have direct—we calculated that we have direct beneficial owners of about 130 million people in my fund. But the investors that we have probably manage or have under their control several trillion dollars. And I talk to my investors on a periodic basis. I've yet to find one institutional investor. And they range from sovereign wealth funds to pension funds and endowments, et cetera. I've yet to find one that has any significant positioning for inflation. So inflation is impossible. There'll be signs of it. There are no signs of it.

There's slack in the global economy. And the way I think about that is, the perception of inflation, the first wisps of either commodity inflation, wage inflation, tightening because of inefficiencies perhaps, not necessarily because of wonderful business conditions, the first whiffs of a change in direction may cause a self-reinforcing, a set of market events, including some of the ones that I've described, which might include a sharp fall in bond prices, which strangely might also—strangely because of the risk parity theory—cause a fall in stock prices, rapid increases in commodities. There could be a lot of... gold in particular, the currency.

Well, it's strange because the U.S. currency is one of these things in life that's graded on a curve. And against what? And when I say to myself, 'Against what?' I look: the yen, the euro, please. The... So... against gold would be something that would be electrifying because of the narrow window of supply or funnel of supply for gold. The supply of gold is not expandable very much at all. And global institutions, the growing global economy, sovereigns are under-owned in gold. So some combination of people changing their mind about bonds, wanting to front-run the Fed,

But from what I hear you saying, people are not in that position yet. Your investors, nobody's positioned for that yet. Is it just going to be some sort of singularity that happens that suddenly changes their minds?

Again, let's use the data points of history not as once-in-a-lifetime events, but as possible clues to the future. And May/June of 2013 was a clue, just as the 2008 crash was a different kind of clue. And the clue in May/June 2013 was a slight change, a perception that maybe the game is sort of not accelerating, the game of money printing, supporting asset markets. And so the answer to your question is: it is, as is the case in every serious market event, it's completely unpredictable, and it can arise basically with a moment's notice. So, you know, anybody in my position as a money manager who thinks that he or she can predict or assess when the tide is going to be turning, when the conditions are ripe for a loss of confidence in paper money, I think is making a very large mistake.

And the people that made that mistake, by the way, in 2008—many of them either had their track records or their businesses shattered.

We've had paper money, fiat money for 40 years, or certainly for the last 40 years or so, and we've had these periodic crises. I think you, however, think this is a more—that there is a more fundamental risk here, that this isn't just another of these phases that we're going through, that perhaps this is a crisis of paper money, of fiat money itself. Is that right? And so, when you talk about this event changing investors' views and undermining their confidence, it undermines their confidence not just that inflation is suddenly going to pick up, but that the whole structure of the monetary system that we've been operating under for 40 years is going to be undermined. Is that what you think?

Well, it's funny that you use the phrase '40 years' because it's actually something that I keep in my mind, that there's a slippery slope in a lot of aspects of financial markets, securities, trends. And sometimes, if things go on that are stupid and they keep going on and it keeps getting worse and worse and the country, the system, the company, the investor isn't punished, instead of saying, 'Well, maybe I was early,' you tend to say, 'I guess I'm wrong.' And that could be a bull market in stocks. It could be a fall in interest rates. It could be a lot of different things. But in this case, what I'm talking about is the—is the debasement of paper money. And paper money is very hard to keep its value.

And it's very easy for politicians to abuse paper money, fiat money. And somewhere, the gradual process of cutting loose the dollar and the developed countries' currencies from anything real or from discipline has been going on for a long time. In the United States in 1971, Richard Nixon, the conservative who wasn't a conservative, severed the last remaining link of the dollar to gold. And so after that, it fell to central bankers, to the Fed, Fed chiefs, to maintain the demeanor, the policies, the words, to give an impression of sobriety. And in the absence of any discipline in the numbers, because there is no discipline in the printing of the American dollar, that impression of sobriety—it's all that is actually standing between the holders of dollars and long-term claims in dollars or any currency and the oblivion of their—

—of their purchasing power, their wealth. And so the slippery slope has been this interest rate policy after the '01 period: 1% Fed funds rate for, what, two and a half years, lit up the structured products, the real estate boom, the debt bubble, things got crazier and crazier leading to the crash. And also in that period, the heads of our major financial institutions kind of losing their minds in terms of their own balance sheets. And then now we have 0% interest rates for over four years. And that's why I say the conditions for a loss of confidence are here and now.

So the destination, what you're saying, the destination is clear. The ultimate destination is clear, which is a loss of confidence. But the timing is far from clear. And you seem to sort of agree that the Fed can go on doing this for a while. I mean, so where do you—and ultimately, I assume you want to be positioned for that loss of confidence.

Point of order. Go on, go ahead. The destination is not clear. If somebody comes in who can exert the kind of discipline and sobriety that, for example, Paul Volcker in his youth did.

You don't think Janet Yellen is that person, I suspect?

No.

But you mean someone—so it takes a Fed, either a big, major political change or a new Fed regime, Fed authority, yeah.

The Fed has been getting itself in deeper and deeper. The country has been getting itself in deeper and deeper. You don't need me to tell you that the developed countries—the United States, Europe, Japan—are insolvent because of the long-term obligations. And so that insolvency itself, in the absence of any signs that political leaders are willing to face this problem and address and restructure these obligations, they're the effective equivalent of debt.

But assuming it is Janet Yellen and not Paul Volcker redivivus who takes over the Fed on January 31st, the destination then, you think, is pretty clear because you think these policies are going to continue. You think then the right thing to do is to be positioned in hard assets, I guess—commodities, gold, you talked about that. But again, the timing is very hard to figure out. I mean, as the old saying has it, what I can be, I can make money as long as the stock market, much longer than the stock market can take its time to be rational.

Those questions are really good, but I want to make it very clear that I don't want to paint, and nobody should paint, a picture of clarity about the workout of this thing. Because once a society, a financial system, gets in the position of the central bank being trapped and being unwilling or frightened of stopping this merry-go-round, or whatever metaphor you want to use, things get very dicey. They may move to stopping the money printing, markets collapse; they may panic, go the other way. So the reaction of stock markets, bond markets, interest rates, the economy, once you get to a place where the gears are grinding, is very, very uncertain. If you go back and look at the history of truly big inflations, it's surprising because you look at the big numbers and you smoosh them on a little chart, it looks like, oh, all you had to do was own whatever.

And you just hide under the bed for four years or 12 years and you're OK. It's not true. Even in Germany in the period 1918 to 1923, tremendous swings in real asset prices of different kinds. So I would just say we're in a period where confidence should be jostled, and it could be lost at any time for a variety of reasons, and poor leadership is at the core of it. And how this works out, nobody knows.

So what is the right thing to do? You've mentioned a kind of a Volcker figure. Again, you say they've got a tiger by the tail. You saw what happened when they even hinted at tapering, which, as we say, is far from even an unwinding of the balance sheet. Yields shot up 100 basis points. Everybody gets scared. The economy, the housing market tanks again. What should they do? Should they just say, grab that tiger by the tail and just get on with it?

I think there is one right thing to do right now. After five years of 0% interest rates, after $3.5 trillion here and several trillion sprinkled around the globe, this Fed chairman, the next Fed chairman or chairwoman, needs to say and should say, "We've done enough." It is up to the President and Congress to provide, to remove the impediments for growth and to provide catalysts for growth and to help this country and the developed world grow. The country is capable, I strongly believe, of growing at a far faster rate than it has been. And I think that... the Fed, which is the only of the central banks I've mentioned that has this dual mandate. So it's not just the dual mandate, but the Fed has embraced, sort of bear-hugged, in my view, this dual mandate in a very harmful way.

Because they actually, I believe, revel in the role of being Atlas, holding up the world by themselves, and they are.

Thank you, Paul. That was absolutely fascinating.