Elliott's Paul Singer On How It All Will End: "Badly, We Guess"

Tyler Durden's picture

Some less than pleasant observations from the billionaire founder of Elliott Management, Paul Singer, extracted from his periodic letter to clients.


The budget deficit for the latest fiscal year (which ended on September 30) was reported to be around $700 billion. However, this figure would be many times higher if the government’s unfunded entitlement programs were included. Even before taking into account liabilities stemming from the Affordable Care Act (ACA), which cannot even be calculated yet because so many of its assumptions are either erroneous or outright fabrications, and because many of its provisions keep getting delayed by the Administration for purposes of political advantage, the present value of the future obligations of the federal government is currently around $92 trillion. These obligations have been growing by over 10% per year since 2000, during which time nominal GDP has risen just 3.8% per year. At this rate, the federal government will owe an estimated $200 trillion on the entitlement programs by 2021 (again, excluding the effects of ACA) and $300 trillion by 2025.

These numbers are not fantasies. At present, there is no acknowledgement by a large portion of the American political establishment that this insolvency even exists. Nor have the leaders of this establishment made any concrete progress toward restoring solvency by taking up serious proposals to rein in unpayable promises. Quite the contrary: Politicians and policymakers continually tell people that such entitlement obligations will be met – a claim they must know cannot possibly be true.

Recently, we had a conversation with a mainstream economist who told us that the government is not actually insolvent because the long-term entitlements are not really liabilities that need to be counted, any more than the military budget for the year 2030 needs to be counted. This assertion is incorrect. Military spending, like any other form of discretionary spending, can be cut quickly and arbitrarily, as Washington recently made clear. And such spending is in exchange for goods and services delivered at the time the money is spent. In 2030, the government can buy many more tanks, or many fewer, than it is buying today. It has not promised to buy any amount. In fact, aside from military entitlements such as veterans’ health care, there is no obligation to spend any money at all on the military in 2030. By contrast, entitlements represent concrete governmental promises that are being made today about future spending – promises on which people are being (falsely) told that they can rely. And at the time the money is scheduled to be delivered, the recipient is delivering no goods or services. Only someone who has never run a business could say with a straight face that such obligations are not really liabilities and need not be included in the accounting.

High inflation (or hyperinflation) is one way that devious or clueless policymakers attempt to deal with unpayable promises. It is devious, because without formally imposing a tax, it takes money from savers and investors and pays it to borrowers and voters. It is clueless, because the cycle of government handouts and demands for more benefits is like a game of “chase the tail” – because it dissipates the real value of promised benefits, it brings the ultimate prize no closer while destroying the value of money and dissolving societal cohesion in the process.

The U.S. is in a “warm-up” phase on this score at present. The promises made by U.S. politicians are huge. Absent reform, they will lead to societal ruin. But so far, there has been no collapse of the dollar – possibly because there is no alternative fiat currency against which it can collapse. Gold is trading at $1,300 per ounce, not $5,000 per ounce. The $100 million co-op apartment in New York and the £100 million flat in London are thought of as oddities, not “coming attractions” for the evaporation of the value of paper money. Wage inflation is small (even though labor markets for desirable skills are tighter than most people think), and the arithmetic of government statistics (jobs, growth and inflation) is distorted and dishonest almost beyond measure.

There is something missing in investors’ reasoning that leads to their current complacency, and that is an understanding of the circularity of confidence in a fragile system. Since the system is fundamentally unsound, all it would take is a loss of confidence to set off a collapse in the purchasing power of money, a major currency or the global stock and/or bond markets. “Risk off” today still means buying U.S. Treasuries, but this may not be the case at some unpredictable but abrupt future turning point in market psychology. Markets are fast and self-reinforcing today, creating facts rather than reflecting them. We believe investor confidence today is unjustified. The leaders of the Developed World have chipped away at the solidity that would ordinarily justify confidence in their leadership, markets and currencies, such that confidence can be lost at any moment. If confidence in a sound system is unfairly lost, then countertrend forces can act to stem the panic and restore stability. But a justified loss of confidence in an unsound system would generate much more damage and be, for a period of time and price, unstoppable. That result is what governments have risked by their poor policies, their lack of attention to the risks posed by the inventions of the modern financial system, and their neglect of the fiscal balance sheet. Since this combination is relatively new, particularly the enormity of Developed World debt and obligations, as well as the complexity and extraordinarily high leverage of the financial system (especially given the size of derivatives books), there is no way to tell exactly how it all will end. Badly, we guess.

* * *


For those who did not recognize the above formula, you are in good company. It is the equation showing that kinetic energy is a function of mass and velocity, but that the relationship is not linear: A doubling of velocity causes a quadrupling of kinetic energy.

What is the relevance to financial markets and trading? We believe some of the same elements are present when financial leverage rises beyond certain levels. Any complex portfolio contains expectations about maximum expected price movements and possible losses, together with assumptions about the dispersion of returns and correlation. Obviously when markets turn adverse, if those assumptions turn out to be overly optimistic, then losses ensue. Capital represents a cushion against losses, a cushion that is very important to the investor, but even more important to the system as a whole. When leverage goes up, it takes smaller and smaller perturbations in prices, correlations and volatility to generate serious losses requiring palliative action. But as leverage increases among key market players, the possibility of large losses and involuntary liquidation behavior creates contagion from one player to another, a kind of chain-reaction effect as losses occur too quickly for reflection and sellers become price-insensitive, causing larger losses – and even failure – to spread from one firm to another. Extreme leverage removes the cushion and the robustness of structure, and it is the proximate cause of disequilibrium. As with kinetic energy, excessive leverage is nonlinear, subject to tipping points, and can cause (and did cause in 2008) massive and abrupt systemic failure.

This nonlinearity of leverage is a function of similar positioning and contagion. We do not believe that the system today is any safer than it was when it failed in 2007 and 2008. Global leverage is up, not down, contrary to the popular misconception. Private debt is unchanged from 2007 levels, but public debt has risen globally from $70 trillion to $100 trillion. It appears that a number of major American financial institutions have de-risked  themselves somewhat, although this is impossible to discern from publicly available filings (which is why rumor and conjecture will govern the way markets perceive large financial institutions in the next market crisis). European financial institutions still maintain more leverage and bigger derivatives books than their American counterparts, as well as large holdings of sovereign debt that they were coerced into buying as part of the “save-the-euro” panic.

In fact, the global financial system is arguably less safe than it was in 2008. The unquestioned creditworthiness of the Developed World governments ended the most intense phase of the 2008 crisis, as the financial system was ultimately all but guaranteed by governments. A catalyzing force for the next crisis might be a failure of confidence in one or more of those major governments or in China. Such a failure alone could cause major stress in markets, as either currencies or bond markets could experience sudden collapses. Also potentially impactful is one of the major lessons of 2008: It is wise to move assets and sell claims and securities immediately if a debtor or counterparty is perceived to be in trouble. This maxim could make the next market crisis play out on a hair-trigger, with a stressful lead-in and then a simultaneous rush to the exits.

Those who think the scenario above is an exaggeration should ask themselves the following question: After decades of advancements in human knowledge and purported innovations in the global financial system, why did 2008 turn into the worst financial crisis since the Great Depression? The answer is that the system was unsound, largely due to excessive leverage and the complexity of financial instruments. In the 80-plus years since the 1929 crash and the subsequent Depression, there clearly have been a large number of geopolitical and financial events, yet none of them caused financial collapse until 2008. Of course, we understand that a combination of public and private errors and misconceptions led to the financial crisis, but it was the unfettered use of leverage that made the episode pass over the line into systemic collapse.

We do not think policymakers have learned anything much from the financial crisis, but that fact can truly be demonstrated only as time passes. In our view, monetary policy extremism has papered over (no pun intended) the lack of fundamental reforms that would enable the Developed World to grow faster and more sustainably with financial institutions that are solid and robust enough to withstand the next periods of economic and financial stress. We believe the world’s financial institutions are still essentially dependent on governments, but the Developed World governments themselves are hopelessly insolvent. The insolvency may not be manifested in a market reaction tomorrow or even next year, but the numbers are obvious and compelling, not conjectural or  fanciful. Markets focus on something when they want to, not when “visionaries” think they should.

It is important to note that mass human behavior cannot be modeled or predicted with any degree of precision. When forces are brought to bear that suggest a possible shift in direction of mass human behavior (examples include oppression, tyranny, economic underperformance, inflation, incentives and disincentives), there is no way of telling if, how or when such forces will actually result in a change of vector.

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Rican's picture

Then their guess is as good as mine.

0b1knob's picture

< ...in tears.

< With a wimper not a bang.

How this ends.   Bonus points if you recognize the source of the first choice.

aVileRat's picture

Paul Singer, are you a closet Brony.


China or BOJ are going to prob. start the suck. One is inflating to hell, the other is in a zero-policy vortex kickstarted by that tax killing consumption.

Edit: Hmm.... looks like Hong Kong is just getting the party started at the open.



smlbizman's picture

i still have checks left in my book....so i still am good, right?

Chief KnocAHoma's picture

Please!!! I've been hearing this end of the world bs for over 10 years now. If I had anymore pm I wouldn't be able to carry it in a semi.

Bottom line ... No one knows the day or hour. It will end ... But for the time being enjoy yourself, your family, friends, life. There is not one damn things we can do to change the course, so toga party bitches and do the best you can.

Worry not, for that emotion draws from your heart. Fuck tptb and live your life!

Cheers mate! See you on the other side.

Hulk's picture

Thanks fir that fonz, I watched a couple hours of alan last time you posted the link. Interesting guy and I had never heard of him !!!

chumbawamba's picture

Your Hulkness,

Also check out Robert Anton Wilson.

And call me!


ThirdWorldDude's picture

Thanks for the heads-up, Chumba!

Just the other day I watched a profound 1987 Libertarian Party Q&A session with RAW and Karl Hess. Highly recommended to all my far-out friends: Subversion for fun and profit.

Also, check out Manly P. Hall. He's in the same ranks as Alan Watts, albeit a tad more metaphysical and cryptical... kinda like the Carl Jung of esoteric thought.


[Edit:] Hail Discordia!

tip e. canoe's picture

it's a wonderful day when you wake up to RAW & Watts in the hedgerow.

youboob back at ya:

RAW - Everything Is Under Control

A History of Tinfoil in 26 Minutes

BringOnTheAsteroid's picture

Call me ignorant Fonz, but I didn't have a clue what he guy was talking about.

Never waking up after you go to sleep is the same as waking up before never going to sleep. WHAT THE FUCK ????????? The financial system is easier to understand than statements like that.

That one statement may have invented a completely new term - "non-transitive non-equality" 

Can't we just die and cease to exist for eternity. Is that really too hard to grasp, is it really too much to ask. Imagine having to talk to your fucking family for the rest of eternity, jeezaloo, I'd rather go to hell, hang on, that would be hell.

chumbawamba's picture

There is no such thing as death, there is no such thing as beginning or end.  Once you get to the "end" you are merely back at the beginning again.

What I interpret Watts as saying here, at least on the surface, is that "death" is simply "birth" into a new existence.  You don't die, you just transition.

At least some people believe this.

I am Chumbawamba.

Bemused Observer's picture

The light at the end of the long tunnel at death DOES sound sort of 'birthlike'...

GubbermintWorker's picture

Or that light at the end of a tunnel could be a train.

agstacks's picture

The Bhagavad Gita says, 

"Never the spirit was born; the spirit shall cease to be never;

 Never was time it was not; End and Beginning are dreams!

Birthless and deathless and changeless remaineth the spirit forever;
Death hath not touched it at all, dead though the house of it seems"

Some other good quotes from Yogananda-

"Our real self, the soul, is immortal. We may sleep for a little while in that change called death, but we can never be destroyed. We exist, and that existence is eternal. The wave comes to the shore, and then goes back to the sea; it is not lost. It becomes one with the ocean, or returns again in the form of another wave. This body has come, and it will vanish; but the soul essence within it will never cease to exist. Nothing can terminate that eternal consciousness."

"When you reflect that this world is filled with death, and that your body, too, has to be relinquished, God’s plan seems very cruel. You can’t imagine that He is merciful.

But when you look at the process of death with the eye of wisdom, you see that after all it is merely a thought of God passing through a nightmare of change into blissful freedom in Him again. Saint and sinner alike are given freedom at death, to a greater or lesser degree according to merit. In the Lord’s dream astral world — the land to which souls go at death — they enjoy a freedom such as they never knew during their earthly life.

So don’t pity the person who is passing through the delusion of death, for in a little while he will be free. Once he gets out of that delusion, he sees that death was not so bad after all. He realizes his mortality was only a dream and rejoices that now no fire can burn him, no water can drown him; he is free and safe."

"The word “death” is a great misnomer, for there is no death; when you are tired of life, you simply take off the overcoat of flesh and go back to the astral world."

“The ocean of Spirit has become the little bubble of my soul. Whether floating in birth, or disappearing in death, in the ocean of cosmic awareness the bubble of my life cannot die. I am indestructible consciousness, protected in the bosom of Spirit’s immortality.”

tip e. canoe's picture

The Houseboat Summit: February, 1967, Sausalito, Calif.
Featuring Timothy Leary, Gary Snyder, Alan Watts and Allen Ginsberg


Watts: The thing is this: what we are facing, what's going to happen is this...if we do not encounter the final political catastrophe of atomic war, biological warfare and wipe the whole thing out, we're going to have a huge leisure society--where they're going to reverse taxation and PAY people for the work that the machines do for them. Because there's no other solution to it.

In other words, if the manufacturer is going to be able to sell his products, the people gotta have money to pay for the products. All those people have been put out of work by the machines the manufacturer is using. Therefore, the people have got to be paid by the government--CREDIT of some kind, so they can buy what the machines produces--then the thing will go on.

So this means that thousands and thousands of people are going to be loafing around, with nothing at all to do. A few people who are maniacs for work will go on...

Leary: I think what you're defining, Alan, is...

Watts: But that's the kind of situation we're moving into. IF we survive at all.


pretty prescient, yes?

Okienomics's picture

"Wouldn't be able to carry in a semi"

I can help with that, send your address.

Chief KnocAHoma's picture

251 Fuckoff Street
AR15, LA 69696

Canoe Driver's picture

"There is not one damn things (sic) we can do to change the course."

In a sense, the cause of the whole ongoing collapse, or at least the single greatest cause, is this pernicious attitude that nothing can be done. Of course each person can change the course of history. When many band together, more can be changed, and it can often be changed faster. It is the blind concentration on going forward with one's original "life plan," graduate, get married, buy a house, have kids, etc., which, in the face of rapidly changing realities, is, by definition, psychopathic, and therefore destructive.

Pounder's picture

Like tears in rain. Time to die.

Four chan's picture

androids dreaming of electric sheep?

N57Mike's picture

"I've seen things you people wouldn't believe .... attack ships on fire off the shoulder of Orion..... Sea beams glitter near the Tannerhauser Gates, now all these things will be lost in time, like tears in the rain" (ending scene of Blade Runner, Philip Dick).

Snidley Whipsnae's picture

Blade Runner... Best sci fi film ever, imho.

lordbyroniv's picture

4th Turning..........bitchez !!

booboo's picture

"It is important to note that mass human behavior cannot be modeled or predicted with any degree of precision. When forces are brought to bear that suggest a possible shift in direction of mass human behavior"

I do not hold out much hope that when it all begins to unravel that humanity will rise to the occation. We left Mayberry on a rocket sled trying to shed the smell of pies on the window sills and main street and ended up in a rented room on the corner of Crack and Broke street with a chinese landlord. Fuck you fucking fuckstick politicains and the K Street whores you ride home on at night, I hope your children get cornholed by gongjo infected gorillas.

Hulk's picture

very well put booboo...

Snidley Whipsnae's picture

Unfortunately, we're not in Mayberry any longer. Instead of Barney having 1 bullet he is now carrying an assult rifle with hi cap mag... And there are a lot more Barneys than Andys.



813kml's picture

My ass still hurts from the 3rd Turning, go long lube.

NoDebt's picture

Funny, I was just having a very similar discussion with another board member in the thread about the 3-tiered Treasury market.  I stand by what I said there, because it's pretty similar to what I'd say in response to this article.

Grande Tetons's picture

Did the words pompous, shitbag or obvious enter the discourse? 

NoDebt's picture

No, no, of course not.  I would never call Fonz any of those things.  Not to his face, anyway.  ;)

Paul Singer.... eh, I wish I got paid as much as him to to explain in technical detail which way the wind blows.  Strangely, I live in a world where more is demanded from me than just my opinion.

1stepcloser's picture

I miss my old doomer porn prior to 08.

Reaper's picture

You can fool most of the people for a time. You can't fool all of the people for all of the time. The prodigal bank and its government always run out of the people's trust.

CrimsonAvenger's picture

The trick is to fool them long enough for them to drop their guard. Then you kick them in the nuts and run.

Seasmoke's picture


That's all I say to people now. I know in 3 seconds , if they are awake or most likely not.

Grande Tetons's picture

I always ask...hey..anyone around here know what culling the heard means? 

Fuckers end up going back to chewing their collective cuds. 

Dr. Engali's picture

9/11 answers that question for me.

813kml's picture

Ask someone at 7-11 about 9/11 and you might have to call 911.

Grande Tetons's picture


Nice post! That is a keeper. 

I got that Ozzy tune in my head because of your earlier post. Thanks! 

Dr. Engali's picture

We all know it will end badly, I just wish it would end.

fonzannoon's picture

This guy manages money, and he sends this stuff to his clients? 

Does he at least put a P.S. "anyway until the financial system completely implodes we like bristol myers, chevron and cheesecake factory, and of course GM.

Oldwood's picture

Anyone who manages money for a living has partitioned their minds, like so many sales people do. Work is work, sell, sell, sell. We have always been pretty good at rationalizing what we do for a living as being somewhat outside of our moral boundaries.