Elliott's Paul Singer Reveals The Thing That Scares Him Most

Tyler Durden's picture

When it comes to market experts with decades of insight, we will pick soon to be Second Admiral of his own sovereign navy (comprising of privateered Argentinian schooners, Belize catamarans, and soon, Greek Made in Germany submarines), Elliott's Paul Singer, over those of any fly by night TV talking head, or "information arbitrageur" whose only 'alpha' in the past decade was courtesy of expert networks. The same Paul Singer whose outlook on what the next crisis may look like we posted yesterday.  It is the same Paul Singer, who three weeks ago was a headline speaker at the Archstone Partnerships annual meeting, in which speech he laid out not only the biggest threat facing America - namely the arrogance of the United States "by not realizing that in today's world... you have to be attractive as a country [because] capital will go where it's welcome", but more importantly, the thing that keeps him up at night: "The thing that scares me most is significant inflation, which could destroy our society."

In other words, one of the best and brightest investors in the world, is most terrified by the one thing that every central-planning dispensing economist says will never happen: hyperinflation. Our money is certainly not on the economist theoreticians who could never foresee the second great depression their lunatic policies drove the entire developed world into.

Extracting the key parts from Singer's speech. Highlights ours

Let me make a few comments and observations on the current investment scene. I said before that every once in a while things really are “different this time,” and I thought of a metaphor earlier that might be useful to illustrate an important point. Let’s do a thought experiment: Let’s make believe we are in 1960 and sitting in Germany, and we are a group of German investors and businesspeople, about the same ages as the people here today. The group would be people who had seen the most astonishing changes in the underlying conditions of investing and growing capital—a complete evaporation of savings from 1914 to 1923; complete destruction of society; and a complete change in governance from 1943 until after the War. Keep that image in your mind when you come back to 2012 in New York City today and realize the basic terms and conditions of everybody in this room have not really changed over your entire career. There have been booms and little crashes, you’ve made money and lost money, some people were wiped out and others became wealthy, but the elections come every four years, power is transferred peacefully, and taxes go up or go down.

 

It concerns me that we might be entering a period—we have to think about this possibility—when the basic terms and conditions of owning capital, making a rate of return, and keeping the money you earned might be in the process of changing. Charles Krauthammer said some time ago that most of American political life is between the 40-yard lines and that this crowd, which has been elected for another four years, is kind of at the 30-yard line. I had thought about it at the 10-yard or 5-yard line, but Charles is more mature than I and I’ll accept what he said. But I’m very concerned about class warfare generated from the top, about the possibility of an extended period of lacking strong economic growth. I think economic growth could be easily achieved in the United States at greater levels, and I’m quite concerned that the current prospects, beyond the so-called “fiscal cliff” and a deal on taxes and spending cuts, will be an extended period of low growth and possibly a recession, the continued bashing of money and success and very large tax increases.

 

I want to call to mind a micro choice that I think is relevant. If you lived in the upper Midwest, you’d know the difference between Indiana and Illinois. You would know Indiana welcomes jobs and businesses, and finds ways to work with businesses; and Illinois is on a slide to Hades. Illinois—and I suppose Michigan, too—is doing everything possible to support unsupportable expenses, structures and make thing miserable for taxpayers.

 

By the same token, I think America—and this goes beyond President Obama’s administration—has been quite arrogant for a long time by not realizing that in today’s world, where many countries around the globe can turn out products and services more cheaply than America, and where America has lost so many industries and jobs to other countries, that you have to be attractive as a country. Capital will go where it’s welcome. It is subject to an understandable rule of law, regulation, fair and attractive taxation, and the quality of life. I’m afraid of that, because when you look at the sweep of the booms since the Internet boom and monetary policy, and the extremism that has become embedded in current monetary policy, the United States, Europe, the U.K. and Japan, you do see extreme monetary policy.

 

They say this is not massive money printing, but first they are wrong; and second, monetary authorities in the United States did not see the crash coming and the unsoundness of the financial system. In fact, right up until the crash they were saying that nothing like what happened could ever happen. So money printing and zero-percent interest rates, which have distorted the economic recovery and the landscape in the United States and Europe, have become a substitute for sound, pro-growth, fiscal regulatory tax policy. As a result, they say they are not concerned about inflation. This monetary policy, $3 trillion of bond buying in the United States, $3 trillion in Europe and another $2.5 trillion to $3 trillion in Japan, is unprecedented. It is not the case that they know the ultimate inflationary potential when this low-velocity money gets back into the system and acquires some velocity. If and when people lose confidence in paper money because of repeated bouts of quantitative easing and zero-percent interest rates—it could happen suddenly and in a ferocious manner in the commodity markets, in gold, possibly in real estate—interest rates could go up at the long end by hundreds of basis points in a very short time.

 

I’m quite concerned as a money manager that we have to manage money, not just for the boundaries of what’s in front of our faces—maybe we’ll have a little tax increase or not, the fiscal cliff, or the stock market might go up or down 10% or 15%—but for a basic shift. The thing that scares me most is significant inflation, which could destroy our society. Frankly, in my view the recent election has diminished the probability of a strong resurgence of growth, and I’m quite concerned. Others are concerned about the course of the next 12 to 24 months in terms of growth, taxation, regulation and social unrest, a resurgence or larger version of bashing anyone who has made money or makes money and not paying their fair share.

Or, perhaps, the developments over the past several months were geared with precisely this outcome in mind: because there is nothing quite like "social unrest" to resolve decades of untenable economic and monetary imbalance build up...

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Seer's picture

That could be turned around- if the market thought that there WAS inflation then wouldn't it be producing MORE?

We have a MAJOR change in our values going on.  People are realizing that most of the TARGET stuff, like HUGE homes and HUGE vehicles and HUGE TVs, can no longer be afforded.  The draw-back on these things is capital/money flowing into other things, things that, we'd hope, are more closely based in reality/sanity.  Metals are being seen as more valuable than fiat: yeah, it's taken a while for people to realize this (to stop playing Russian Roulette, playing with fiat money).  Oil is "higher" because it has been woefully under-priced vis a vis its scarcity: the problem has been that it's SO important that allowing it to jump to a measure more closely approximating this would hammer the shit out of everything else- a sure way to just throw the breaker and say good night.  It has ALL been about slowly correcting the price of this all-important resource, push up, have the engine stumble, some tweaks made (jobs cut- people forced to figure out that they're going to have to fend for themselves outside of a corporate structure), throttle up the price a bit more, more stumble, more tweaks...  I don't, however, see any pull back, as the reversal of economies of scale will shut down the factories for MANY things, permanently: where are people going to find wealth to pay off their debts AND put toward the purchase of non-essentials (again)?

trav777's picture

This is why you don't know anything, and you should have followed my previous advice.

DEMAND and SUPPLY set ALL PRICES of EVERYTHING.  Read that again, stupid.

Yes, even credit.  Inflation or perceived inflation DO NOT SET the prevailing interest rate; they merely affect DEMAND AND SUPPLY.

The market doesn't "think" anything...there is NO demand for credit.  You can see this all across the economy.

Oil isn't high because of inflation or rates or any of this; it's high because we're running freaking AT production capacity.  Gold production peaked 10 years ago.

The Fed can OBVIOUSLY set ITS price for credit.  But it CANNOT make people borrow.  Anymore than a THEATER can dictate the price of movies by raising its prices...if there is no demand for the ticket, there isn't going to be more revenue from raising prices.

The Fed has lowered the cost of credit hoping that people will use more of it at this price point.  THAT is how interest rates work.  They are merely a COST of credit.

Mr Lennon Hendrix's picture

Incestuous demand for bonds from the Fed does not actualize real demand, it just hides the paper after paper has been printed (digitally or really).  So in your absurd supply/demand arguement obviously demand has dropped for bonds while the supply of paper has increased.  This means the value of the underlying collateral, the dollar, has dropped, and a dropping price in the dollar raises all assets, which causes inflation.

orangedrinkandchips's picture

Massive is the key word...a rise in rates means jack since they are so manipulatingly low....I would love to see it in my lifetime....but doubt it

 

why pick up an "economics" book when all bets are off now that the fed controls everything....

orangedrinkandchips's picture

Massive is the key word...a rise in rates means jack since they are so manipulatingly low....I would love to see it in my lifetime....but doubt it

 

why pick up an "economics" book when all bets are off now that the fed controls everything....

Seer's picture

As a Realist I'm NOT going to pick up an "economics" book.  But all these commentators base their discussions (and lives) on their "knowledge" of economics: and generally it's one of two main "camps" (both, however, that I see major flaws with).

The Fed "controls" a crashing airplane.  Do YOU want to take over those controls?  They'll end up with what they have- a bunch of shit.  Why would they feel all giddy with this?  MANY a corporate rat (and economist) has jumped ship.  Meanwhile folks like Bernanke stay on... at some point one has to either admire his capacity to endure with a low IQ, or admire his capacity to endure as a captain going down with the ship.  If the airplane really is out of fuel and is heading for a crash (no glider plain this is) then it is what it is- futile; BUT, pretending as though They have any ability to defy gravity is just a back-door way of hoping that the impossible happens.

I tend to look at it as buying time.  Based on the fact that the majority of arm-chair quarterbacks, the self-prescribed "intelligent" people, don't comprehend something as simple as the exponential function I'm not thinking that having crashed earlier would haver made ANY difference (time MIGHT allow people to acquire more understanding).

slaughterer's picture

OT: short squeeze du jour: MCP.

Yes, the "rare earths" craze is back. 

33million short float.  

Waiting for the VW moment.  

chrisd's picture

Keep hitting on hyperinflation Tyler, maybe you can make some more through Gold ads backed by theblaze.com. Anyone quoting Charles Krauthammer needs to be put down.

 

When there is a credible alternative to the USD in petro exchanges, I might make some side bets, until then you are both full of it.

Yen Cross's picture

xau has a massive support level  just under 1700/

Tuco Benedicto Pacifico Juan Maria Ramirez's picture

Also very strong support at "$522"!  Check the charts!

 

Tuco

Yen Cross's picture

The Armageddon trade/ Scorched Earth trading... I like it ;-)

Mr Lennon Hendrix's picture

The dollar is dead internationaly.  China, Russia, Japan, India, Brasil, they are using their own currencies to trade now.  You have been left in the dust.  Good luck chrisd.

trav777's picture

no, they aren't.  They are using some relatively trivial volumes compared to their USD reserves exposure, nevermind petrodollars.

The USD is 75% of world debt...wtf does it matter if Brazil and China arrange to use CNY/BRL (one of which is PEGGED TO THE DOLLAR) in modest amounts in bilaterial trade when the very MONEY they owe all across their economies is denominated in DOLLARS?

Dead?  Do you pay any attention to the POG in BRL or the USDBRL pair lately buddy?  I almost had to change my luxury vacation plans to head back to brazil bc the BRL has blown out to 2.1 per.  Dead?  LOL.

Mr Lennon Hendrix's picture

China abandened the strict dollar peg a year ago. 

And I wasn't pointing to FX pairs, I was pointing to the fact that these Nation-States are no longer using dollars as their defacto trading currency.

Yen Cross's picture

PBoC widened the "trading band" earlier this year/ It's generally around 2%...

trav777's picture

Excuse me, but did I not already ADDRESS THAT?!?!

I said it DOESN'T MATTER, these pitifully little bilaterial trading measures!

I told you that 75% of world debt, plus a higher percentage in emerging economies, which is sprayed ALL OVER brazil and China, are dollar-denominated.

And I told you to check the fkin BRL cross if you thought that this move by Brazil (who is desperately trying to CHEAPEN their currency against the USD as we speak) meant that the dollar was dead.

I guess, to sum up what I am getting at is: STFU moron, you are wrong.

Mr Lennon Hendrix's picture

My point is that many other States have decided to trade outside of the dollar for the first time since the dollar became the reserve currency.  I didn't say that the dollar would be dumped overnight, in fact, I have said the oppostie would happen.  Nobody wants to be seen at fault for causing a panic while they heard the sheep to slaughter.

Yet the dollar will be slowly abandoned for the next couple of years.

Urban Redneck's picture

Who cares about CNY/BRL when there's CNY/RUB which is being to pump non-petro dollar settled oil through the ESPO pipeline and could spread to the Yakutia–Khabarovsk–Vladivostok, Sakhalin–Khabarovsk–Vladivostok, Turkmenistan–China, 
and Kazakhstan–China pipelines?

 

Seer's picture

Could you provide an instance in which a fiat currency that has flirted with hyperinflation managed to escape it.

Also, if you could find an instance of a fiat currency that was also the world's reserve currency, That would really be appreciated!

Hyperinflation means the total (near total?) loss of confidence in a currency.  Lost confidence in government... check!  Lost confidence in the Fed... check!  Lost confidence in corporations (which help circulate the currency)... check.  The tide doesn't appear to be coming in...

ekm's picture

I was the first one to use the word "theoretician" and still use it over and over and over. Thx for the recognition.

akak's picture

And I invented the question mark.

Yen Cross's picture

I invented the interNet/ and Algorithms/

smart girl's picture

Stop the War in Syria! Interview with Assad http://www.youtube.com/watch?v=pdH4JKjVRyA

 

Mr Lennon Hendrix's picture

I was debating Syria with someone who believes the MSM yesterday.  The conviction was that Assad has chemical weapons.  What is the truth to this?  WHat evidence is there to prove it and what evidence is their to the contrary?

pods's picture

Well the West does not have to prove he has them, he has to prove he got rid of them.

And he has to do that to the Western Media.

And try to do it while the West tries to remove him.

pods

NotApplicable's picture

Likely the same evidence they had on Saddam, the "Made in the USA" sales receipts.

A Lunatic's picture

Society in it's present configuration needs to be destroyed. It is only the weak, stupid, and those hooked on Hopium that will fall by the wayside anyhow, so bring it the fuck on, bitchez..............

Seer's picture

I won't pass judgment, but... it WILL happen- anything that cannot continue forever won't.  Nothing even remotely resembling sustainability in society.

I'm not counting on more time, but I'll take whatever time I can...

max2205's picture

Stfu up scardy cat.

MsCreant's picture

People have to understand what is going on to get pissed. First you have to get their attention. Then they need a target for their anger. They may not have the ability to understand what the target should be. I teach at a state university. I am stunned and floored by how unprepared these students are. I could say more but that is another topic. Inflation will happen. If it happens slowly enough, THEY WON'T UNDERSTAND. Hyperinflation is a loss of faith in the currency. THE REST OF THE WORLD CAN DO THAT TO US, but we won't wake up until the cash comes flooding home because no one wants it and everyone is dumping it. We will keep going on until they won't let us any more.

Legitimation crisis, my fellow bitchex.

Bastiat's picture

 

"THE REST OF THE WORLD CAN DO THAT TO US"

Exactly.

NotApplicable's picture

Thanks for the coherent, on-topic comment. I was beginning to doubt there was one in this whole thread, with all the diversions it's filled with.

Dr. Sandi's picture

Maybe that's the real reason the 2013 edition of US Bogus Bux are being printed in the same colors as Monopoly money. Even when there's a glut of the things, we can still use them with everybody's favorite board game.

That means Merican Money will always have SOME value above that of the cotton it's printed on.

tickhound's picture

Regarding "symptoms" there is merit in this article....

But what AMAZES ME STILL, is how so few actually understand the SYSTEMIC problem our scheme is facing.  The problem is in the scheme, not the reactions to the scheme.  The reactions are predictable.

Let's take Singer's first line: 

Let me make a few comments and observations on the current investment "scene."  Scene should be replaced by "scheme."

The "SCHEME" is in HOW MONEY IS CREATED... the "SCENE" is how to react to the ponzi "SCHEME" as it reaches post-climax.

In our system, money is debt.  Money only comes into existence through loans, which must be paid back at interest.  Since the PRINCIPAL of the loan is all that is created, the INTEREST does not actually exist.  Since the interest payment must be scalped from the principal in circulation, default is in effect built into the system. 

To keep default to a "respectable" societal level, new loans are always needed to create "new money" to pay down the interest that didn't exist in the money supply.  The SCHEME starts to fold when NEW LOANS or demand for new loans, weakens.

This is why our "FIXES" are always the same... and are simply different ways to produce the same thing, GROWTH.  Growth is what every ponzi scheme needs.

These FIXES are predictable, and sadly, these fixes are what even we here at ZH often argue about amongst one another.

1)  Lower the standards for qualification of new loans.

2)  Lower the interest rate to entice borrowing to create new money to pay down interest that doesn't exist in the money supply. 

3)  Higher taxes - pulls growth forward to meet interest payments that the government can't meet due to lack of new loan demand needed to cover interest payments that don't exist in the money supply.

4)  Lower taxes - creates "growth" or investment to eventually expand the money supply and create a "healthy" evvirnoment to produce new loans to meet interest payments that don't exist in the money supply.

5)  Or find a new planet, find a new bridge to build, find a new country to exploit, find a new technology... to produce new loans to meet interest payments that don't exist in the money supply.

THE FIX is always GROWTH, like every ponzi scheme.  New loans are always needed to expand the money supply (create new money) so that the interest due on previous loans (which doesn't exist in the current money supply) can be paid.

RINSE AND FUCKING REPEAT.

Every ponzi scheme ends when new money creation stalls.  And since new money is only created by loan demand... YOU ARE HERE.

SO new money formation diminishes (loan demand vanishes)... the FED's answer will always be to entice you to borrow.  If it can't create this demand through lower interest rates, the Central Bank becomes the borrower of last resort... YOU ARE HERE.

Worse yet, for our system... is that there is little REAL DEMAND for loans at near zero %.

And if you personally DIDN'T LIKE a $100k loan offer at 3%, you're gonna fucking HATE IT at 4%.

There is no real fix now.  Like all ponzi schemes, the shocks are SHOCKING as it nears end... YOU ARE HERE.

SO, remember... The casino never cares how 'knowledgeable' its players are... ONLY that they keep playing.

Markets are meant to be confusing and retail investors should be confused... ITS THE POINT.  Lack of knowledge isn't a 'problem' in our system, its a vital cog.

Knowledge of the inherent theft built into the system, would only bring its demise forward... WE ARE NOT HERE YET.

Hi MOM!

trav777's picture

a new planet?  Lol.  Would only get us one more doubling interval.  Instead of midnight, the bottles fill at 1 past.

We could find 1k earths and have only 10 more doublings...this is an easy geometric growth problem to measure.

If we look at energy production growth, what's that been running, like 3%?  5%?  So we manage all of 24 years to max the new earth's production rate, best case?  At 5%, we could swallow the 1024 earths in a century and a half.  Red Queen, checkmate.

tickhound's picture

Hehe, well it was an all inclusive post and I didn't want to alienate the Krugman contigent with something like math.

centerline's picture

lol - I thought Malthus was ruled an idiot by those who suggested technology and redistribution are the keys to perpetual growth.

Aurora Ex Machina's picture

Criticisms of Malthus are usually ignorant: he postulated as best he could, given the information he had.

Seer's picture

Criticisms are based on programming, programming by TPTB.  TPTB live OFF of growth.  Malthus' view pretty much undercuts their very existence.

If anything, Malthus said WAY more than was necessary. "Perpetual growth on a finite planet" is sufficient.  BIG = FAIL!

Aurora Ex Machina's picture

Ahh, despite the flaws, at least someone understands the Red Queen. At the moment, the major competitors are tinsey, winsey. Or we could just mix some CRE's with MRSA's and watch the fun.

The 20th Century was one long path of upwards fecundity, man conquering nature and all.

 

Note ~ I don't agree with your stance, Trav, but at least you're thinking about it in the right manner.

tip e. canoe's picture

"Although host manipulation is likely to be costly for parasites, we still have a poor understanding of the energetic aspects underlying this strategy. It is traditionally assumed that physiological costs are inevitably associated with mechanisms evolved by parasites to induce the required changes in host behaviours. While most energetic expenditures of parasites relate primarily to bringing about the altered behaviours, manipulative parasites also have to consider the condition of their host during the manipulation. Here, we suggest that because of this trade-off, the energy required to accomplish parasite-induced behaviours may represent a key energetic constraint for parasites. Depending on the energetic expenditures specific to each type of manipulation, parasites should undergo selection to secure resources for their host to allow them to perform manipulated behaviours"

voila

Aurora Ex Machina's picture

Retro-Horror in the model of the 1980's

HGT is an ancient method for bacteria from different lineages to acquire and share useful genetic information they didn't inherit from their parents. Scientists have long known about HGT and known that when a transferred gene confers a desirable trait, such as antibiotic resistance or pathogenicity, that gene may undergo positive selection and be passed on to a bacterium's own progeny, sometimes to the detriment of humans.[source]

 

Can she alone feel the music of the air trembling between the wings of the angels, and make or remake a body from it?                                   
—Luce Irigaray, Marine Lover: Of Friedrich Nietzsche, 176

grid-b-gone's picture

I started buying PMs a little late, so ixnay on the exponential athmay, please.

Sweet Chicken's picture

+1 Dude, great fucking post! :thumbsup

Seer's picture

I think "scheme" sounds too contrived.  That is, I think that it somehow conveys an alteration of some existing method- a defrauding of the existing.

I like the word "premise."  I think that, if one were feeling as though it would make any difference, that you could actually get out into the debate stream.

As I've been saying, operating under a bad premise allows for a LOT of abuse.  It provides a big disconnect between reality and make-believe (the more people buy in to it).

That said, it's easy enough to bash something existing.  Much harder to come up with some "alternative."  All I need to kinow is that I have NO plans on being responsible for coming up with some universal alternative: I believe that diversity, which is how nature manages to continue, is necessary.

tickhound's picture

I agree.  Choice of words is critical depending the audience.

But understanding the flaws in the existing system is vital for any real alternative solutions/systems to develop or be accepted.

I am unsure of how to create awareness.  I am unsure of the "economic" solution.  But I am glad to see these discussions have finally reached this forum in greater frequency.  It's been a while comin'

Tired of debating the "best horse in the glue factory" - seer

Urban Redneck's picture

Start with where Singer left off:

Capital will go where it’s welcome. It is subject to an understandable rule of law, regulation, fair and attractive taxation, and the quality of life.

This isn't a new phenomenon.  It is happening and has been happening for a couple decades.  Dubai doesn't have any oil, Ireland is plagued by the Irish, but they made themselves attractive to capital.  On the other side of the spectrum RSA decided that they would rather buy US companies than US government debt, and relocate them to the sandbox, where domestic industry now consumes almost 2 million barrels of oil a day (that is no longer fueling US GDP).  The opportunity cost just of the DPW fiasco being presumed to result from Arab capital no longer being welcome in the US could easily be quantified above a trillion dollars.