Elliott's Paul Singer Warns "Something Is Wrong And Dangerous"

Tyler Durden's picture

"The recent trading environment has felt something like walking into a place and having a sense that something is wrong and dangerous but not knowing exactly what will happen or when. “QE Infinity” has so distorted the prices of stocks and bonds that nobody can possibly determine what the investing landscape would look like, or what the condition of the economy and financial system would be, in the absence of Fed bond-buying."


-Paul Singer, Elliott Management

In his latest letter to investment partners, the outspoken realist pulls the curtain on everything from loss of faith on fiat currencies to unsound policies such as Obamacare, the missing jobs recovery, and media misunderstandings of the nature of hedge funds.

On The Fed's "temporary" effects on bonds and stocks:

The volatility in fixed income markets earlier this year, occasioned by the Fed’s use of the word “tapering” (meaning a possible gradual reduction in the pace of Fed bondbuying), resulted in medium- and long-term interest rates rising back to the levels of the spring of 2009. In other words, $3.8 trillion of bond-buying since 2008 by the Fed has had only a temporary effect on medium- and long-term interest rates. It is impossible to predict the prices of bonds in the event the Fed stops buying, or actually starts to sell off its massive portfolio, although it is a decent bet that prices would be much lower than current levels.


It is also not clear whether stock prices, which are still on a tear and at all-time nominal highs, are at these levels because of optimistic economic prospects, QE, or the beginnings of a loss of confidence in paper money causing a shifting of capital out of fixed income and into purportedly “real” assets. However, the fragility of capital markets, so reliant on zero percent interest rates (ZIRP) and QE Infinity for their equilibrium, is clearer. The markets’ ability to withstand any adversity is highly questionable, and it appears to us that the Fed is basically paralyzed (though they would probably call it “focused and determined”) and afraid (perhaps they would say “prudently risk-averse”) to reduce, much less eliminate, its bond-buying. In this environment, plain-vanilla ownership of stocks or bonds represents a highly conjectural bet on government-manipulated markets.

On The Fed's lack of effects on the real economy:

The Fed is undoubtedly praying that economic growth will accelerate, giving it proper cover to tighten its ultra-loose monetary policy. However, the economy is now in its fifth year of subpar growth, with little pick-up in sight.

On Hedge Funds:

Lately we have seen a number of reports about the “disappointing” results of hedge funds. But as we have noted many times before, hedge funds that are actually hedging are unlikely to perform as well as equities during a bull run.




We understand it is not easy for investors to distinguish who is good and sustainable from who is a flash in the pan, but the task is worthwhile, and investors who do the hard work are likely to be pleased with their manager selection in the medium to long term. Unfortunately, the supply of firms that can produce (or at least have a reasonable prospect of achieving) absolute returns is far lower than the demand for such results.

On the "unsound" underlying structural issues of US Fiscal policy:

What has been happening with the U.S. federal government in its recent highly-theatrical phase, as contentious and difficult as it has been, is merely a precursor to much bigger events.




we are talking about the underlying structural issues of the federal budget deficit, economic growth, the deeply contentious Affordable Care Act, and the long-term insolvency of the country due to the government having made (and continuing to make) massively unpayable promises for the future. As we have pointed out, the current annual federal deficit, so ballyhooed to be “coming down nicely,” is actually catastrophically out of control. It is not a trillion dollars. The true figure is more like $7 trillion (and growing!) after accounting for unfunded liabilities, which are mounting at a fantastic pace. It is not an exaggeration to say that America is deeply insolvent, and for that matter, so are most of continental Europe, the U.K. and Japan. No combination of achievable growth rates and taxes can pay for the promises that have been made. The numbers are clear and inexorable.


None of the major governmental leaders in these regions is telling the truth about the present state of affairs and where it will lead, nor are they making the structural changes necessary to unlock the potential to grow their respective economies significantly faster than current rates.




As bad as the insolvency is, it would be infinitely worse if governments started to believe that just because they can print money, they can inflate their way out of these long-term obligations. That will not work and would lead the world down the road to total ruin.




The situation is deeply unstable. It is so sad that after the major developed countries recovered from World War II, they gradually morphed from soundly-financed global engines of growth and prosperity into massively over-indebted countries whose currencies will likely collapse well before your grandchildren start looking for their Social Security checks.

On The Global financial system's fragility:

The global financial system is not much healthier. In the last five years, laws and regulations have been passed, bankers have been pilloried, financiers have been vilified, “living wills” have been prepared and carefully and beautifully wrapped for presentation, regulatory entities have been formed and fresh-faced regulators, eager to save the world, have been hired and placed at new desks in front of new computers. But through it all, one thing has not changed: The major banking and other financial institutions remain opaque and overleveraged.




The really bad news is that the “hair-trigger” aspect of modern global trading markets is just getting more intense. Market action from earlier this year is a harbinger of how modern markets will react to a real change in perceptions. In this past spring’s episode, a sign from the Fed that it might gently begin scaling back the pace of its bond-buying caused medium- and long-term bonds to be abruptly repriced, which removed just about all of the price elevation caused by four years of Fed purchases. The lesson of the crash of 2008 was that it is essential to act immediately to save your assets from an uncertain counterparty or clearing firm.

On Yellen and The Fed admitting its wrong:

it is unlikely that her reign will be characterized by any more courage or deep understanding than that of her predecessor, “Helicopter Ben” Bernanke.


The problem is that they all, including Yellen, are looking in the wrong direction. Similar to Bernanke (and arguably more so), Yellen places a heavy reliance on the Fed’s data-driven financial models to draw conclusions and make predictions. Sadly, she also seems to share Bernanke’s lack of humility regarding the inescapable fact that the Fed’s models and predictions were catastrophically wrong about the financial system, financial institutions and risks in the period leading up to and during the financial crisis.

For the Fed’s governors to admit that they got it profoundly and tragically (for the millions of people who are unemployed, underemployed or now deeply steeped in the brine of dependency) wrong, and that their role needs to be more modest than holding up the entire world on their shoulders, would also take courage.

On ZIRP and QE's lack of societal benefit:

In the absence of that courage, which could only be exhibited by the Fed (or perhaps by Congress if it legislated an end to the “dual mandate”), it is not easy to see where current Fed policy leads the country. We believe that continued QE will not accelerate the economic recovery. We also believe that the recovery and the economy are distorted and unfair to ordinary citizens who do not own stocks or high-end real estate, which are priced at their highs. ZIRP and QE, therefore, are placing the economy at severe risk of another financial crisis and possibly a spike in inflation for no societal benefit.

On timing the collapse:

Although the risks are clear, the probabilities and timing are not.


We do know that the transmission mechanism would be a loss of confidence – in the government, in its ability to pay its obligations, in its ability to provide the conditions for acceptable levels of economic growth and job creation in a competitive world beset by the glories and challenges of job-crushing technological change, and in paper money itself.

On the idiocy of the counter-factual:

To those who maintain that things would have been even worse if the government hadn’t initiated QE2 (and beyond), our response is that this is the wrong test. The only justifiable reason to have done QE was to provide liquidity during the immediate emergency period. After that, a full range of policy tools – including tax, regulation, labor, trade, education, energy and innovation – should have been brought to bear to overcome the mess, get the economy growing as fast as it reasonably could and counteract the job-suppressive aspects of the march of otherwise-wonderful technology. If and only if those growth-enhancing policies failed would it have made sense to declare a further emergency and do something as distortionary and risky as further rounds of QE.


Frustratingly, in no part of the developed world were those “pro-growth” policies pursued. Instead, central bankers went right ahead after stepping back from the precipice and pursued QE in unprecedented size, from then until this day. In effect, this has provided cover for the leaders of the developed countries to continue buying votes with dependency-enhancing policies, avoiding difficult decisions and eschewing effective but contentious pro-growth policies. This is a bad mix, and it will lead to bad outcomes.

On The Endgame:

Chairman Bernanke has been administering painkillers and artificial respiration instead of telling the President and Congress to take intelligent action to improve economic growth. As we have said over and over: Leadership is wanting; leadership is needed.


If QE loses effectiveness now and the plug is pulled, the economic consequences could be disastrous, because the Fed didn’t force the President and Congress to adopt progrowth policies when it had the chance. At the same time, if the current course is maintained, the ultimate results are likely to be much worse.

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AldoHux_IV's picture

because we live more in a derivative economy than an actual one

Supernova Born's picture

Try to come up with a numbered list of what is genuinely "right" with the world.

Better to light a candle than to fix the powerplant.

Dapper Dan's picture

  We could not fix the brakes,   so we made the horn louder.


Bindar Dundat's picture

I am more concerned about losing the  purchasing power of cash than the loss of QE, or tapering.

Count me in as a bull.

I am investing more in solid companies  80% and gold. 

Zer0head's picture

a reprise - substitute Syria with anything current


Rock On Roger's picture

Hey TSP $ will mean nothing. The real value of gold will be measured in energy, as in how many grams of gold/ bushel of wheat or how many grams per barrel of crude oil etc.

I think these charts will spike to all time highs. http://pricedingold.com/


Stack On

markmotive's picture
I'd be worried about more than the current trading environment... Dr. Doom: “A Lot Of Problems Are Coming… Revolution… Social Strife…”


TwoShortPlanks's picture

Hey ROR. I've always said my call is measured in today's currency terms...so, a 100 bagger on today's Gold Price.

And, most Real Estate will take a 30-50% Swan Dive.


RafterManFMJ's picture

I'd chastise you for pimping your blog TSP, but I find it a great read.

TwoShortPlanks's picture

Guilty as charged...and my blog looks like a crack ho...but you gotta get her out there.

In time we'll see how I fair.

formadesika3's picture


That is funny. Thanks.

SafelyGraze's picture

"prices rise the fastest where the hot money gets spent first"

-Candee, who I recently 'interviewed' at the Happy Pony Club

and knows a thing or two about what price to charge if you have the hot money

CheapBastard's picture

Is this where I catch the bus to Astoria?

bubblemania's picture

You better go to the Lemon Ice King of Corona

max2205's picture

Temporary?  5 years plus at least 2 moar....get real

cougar_w's picture

By the pricking of my thumbs, something wicked this way comes.

Buck Johnson's picture

Exactly, our economy isn't a real one anymore and it's based on leverage and derivatives to the point that we can't pay for all that debt.

ceilidh_trail's picture

Breaking News out of Cincinnati! TYLERS DEER ATTACKS CINCINNATI BRANCH OF FEDERAL RESERVE!!!  (WCPO, 6pm broadcast) Deer goes beserk in garden of fed building, charges at woman and crashes through plate glass windows! (I think that I heard it yelling,"END THE FED!".)

Harrison's picture

You are in a maze of twisty passages, all alike. It is dark. You will probably be eaten by a grue.

Wahooo's picture

The sky falls slowly. BTFD.

Jumbotron's picture


This guy is JUST now figuring out something is wrong?

Pardon me sir......there is this thing called the internet.....and on the internet there is this website called ZeroHedge.com.

You get there by typing www.zerohedge.com


Hedgetard55's picture


A day late and a trillion dollars short.


"Welcome to the party, pal".

Save_America1st's picture


+1000....that was exactly was I was thinking as soon as I started reading this.  Not trying to or at all even needing to blow smoke up "the Tyler's" asses...but really...where has this guy been for the last few years while ZH has been blowing the doors off of everyone else on the interwebs hands down across the board non-fucking-stop nearly 24/7/365??????

His little fucking write-up, while accurate, but also fairly weak, should/could be piled high with a hundred links to ZeroHedge write-ups as proof of what his "theories" are based off of.

Gee, welcome to the game Neo...glad you finally took the Red Pill and joined us outside the Matrix.

It's like you just kinda wanna say, "No duuuuuuuhhhhhhh"....






Wahooo's picture

The only thing going wrong is using Elliott Wave Theory to explain anything. I love how these Elliotts and Dows and other theorists just can't figure out the fucking game and they are not making any money on trading, just books, newsletters and speaking engagements. BTFD.

Rock On Roger's picture

Fuck Waves, BTFATH ;-)


Stack On

rivoniaboy's picture

I owned my own Futures Broking Company and let me tell you something right here and now - those clients who called themselves Elliot Wave practitioners were by far the worst traders that I ever encountered in 20 years.

Consequently when I see the words Elliot Wave I know that it is going to be a pile of horseshit.


Sufiy's picture


Few years ago the best performing market was  in ... Zimbabwe - maybe this is what is so wrong and dangerous here as well?

Jim Sinclair: Debt, US Dollar and Gold 


 Cyprus bail-in was the grand experiment of money confiscation and coincided with the great smash of Gold. A lot of people have forgotten about this blue print for action and Gold manipulation has helped to disguise the real connections. Jim Sinclair reminds us about all these interconnections and the main factors in the chain of Debt, US Dollar and Gold. 


tvdog's picture

What is the price of gold in Cyprus these days?

sockratte's picture


more and more experts going nuts on fed policy. they better get away asap, because once fed tapers, it will become really chaotic...

Singelguy's picture

There will be NO taper! Keep repeating that until you understand it. QE will never stop until the dollar crashes.

KTV Escort's picture

Once per year all crime will be legal for 12 hours
~ the Purge

NoWayJose's picture

No one can determine the condition of the financial system in absence of QE???  Well, I can.  And it ain't pretty.  Also, I bet the Fed governors can too...

RockyRacoon's picture

Seems to be the case, as in this quote from the article:

The only justifiable reason to have done QE was to provide liquidity during the immediate emergency period. After that, a full range of policy tools – including tax, regulation, labor, trade, education, energy and innovation – should have been brought to bear to overcome the mess...

You realize, of course, that the "policy tools" would have required that Congress act, and that is something that they are not capable of lest they step on some contributors' toes.  It was easier to just have the Fed dollar-whip the problem instead of taking some serious and concrete moves to ameliorate the pain.

Professorlocknload's picture



...and as there isn't a single Statesman left in Congress, of course they all stepped aside to let the Fed take the ultimate fall. I think we'll get the end signal when Con-gress is, in bipartisan unison, calling to end the Fed.

El Vaquero's picture

Congress won't even think about calling to end the Fed until either there is a demand at literal gunpoint, or until after the carcass of the Fed is so gone that the stench of decomposition noticeable miles away.  Since I don't see any armies lining up to point rifles at congress to demand the end of the Fed, you had better pay attention to your nose. 

Poor Grogman's picture

Something is wrong and people know it.

Even non investing types are at least talking about conserving cash, they have a hunch that they might be needing it down the track.

forwardho's picture

My lawn guy felt he had to tell me of the disaster that is coming. A high school drop out, who has made good by hard work and has no knowledge of financial matters is now certain we are screwed.

As to the post; massively over-indebted countries whose currencies will likely collapse well before your grandchildren start looking for their Social Security checks.

Jesus, is that optomistic.

Squid-puppets a-go-go's picture

the sense of foreboding has become significantly palpable, however ephemeral it is to quantify

Professorlocknload's picture

Yup, and this is the stuff of collapses in confidence. Starts from the ground up.  Lady working at the contental breakfast in the motel the other day remarked "There's trouble coming, big trouble. I'm stocking up." 

20834A's picture

Something is wrong, and even the most somnolent are starting to sense it. I hear people talking about how dissatisfied they are with America lately. Even whispers of revolution in the grocery aisle. Do I think they'll act? Not without a big catalyst, and a leader.

booboo's picture

Sum Ting Wong say's his friend at the Fed, Foo Tu Hi say Soon Time Tu Duc

Things that go bump's picture

Leaders get a bullet in the head.