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Elliott's Paul Singer On How It All Will End: "Badly, We Guess"
Some less than pleasant observations from the billionaire founder of Elliott Management, Paul Singer, extracted from his periodic letter to clients.
AMERICA’S LIABILITIES
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.
* * *
KE=1/2*M*V2
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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Taking a loan is considered rational when the future expense does not exceed the liabilty. High inflation means take the loan. Why everyone are taking loans when the Fed tells them inflation is at 2% should be evidence the banks know the Fed is lying and inflation is higher.
that statement may very well be correct, but fly that pink unicorn about 1,000 feet up and observe from where the strings are pulled and where they reach and then contemplate how fucked up the entire scenario is.
there is also a cultural aspect to it. some cultures prefer a high homeownership rate and a high rate of graduate studies and are willing to accept high debt because of that
just compare the UK, where "my home is my castle" makes nearly every Briton talking incessantly about houses, their prices and their financing with Germany, where 60% of the population live quite happily in rent or southern european countries where mortgages are a quite new phenomenon at all - btw all countries where student debt is not even possible. or even legal
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in the article: "European financial institutions still maintain more leverage...than their US counterparts..."
yes. and... no. on the continent / in the eurozone, businesses are generally speaking financed differently than in the US. stock exchanges and corporate bonds play a lesser role, and direct loans from banks a much greater role. this makes a comparison between the "typical" euro-bank and their US counterparts nearly impossible, including leverage levels. btw, this makes banking loans to businesses not only a relatively safer thing, it increases also it's political relevance
Ghordius, you have returned, your logic, history examples and written words are once again top notch, thanks..
G, serious question, does the alternative financing structure make the businesses in Europe any less wasteful of resources than Ang-Am ones?
one more, are those loans callable or not, more or less?
tip e. canoe, that's a damn good question
in my experience, european stock-listed and bond-issuing companies are... rapacious, quarterly-results driven beasts with a management that is only interested in their bonuses
in my view, what saves europe is that the economy is still more based on often family-owned middle-sized companies, what in German speaking countries are called Mittelstand, but are common throughout the eurozone
yet of course they come in all kinds, humans being humans. but they do often have a genuine drive to waste less resources, something that is anyway common on a continent where energy and resource prices are often higher than elsewhere
often the loans are not callable, though with a schedule of when they have to be reviewed or rebargained, and there is a political component: no bank wants to be caught calling them without reason. newspapers, unions and political parties can be very, very unkind to such a bank, which in many cases are anyway highly political, being often owned by regions
as a group, small and medium business owners have a lot of political clout and are well organized on the whole continent. after all, they are the economy in many regions. note how the ECB is trying to find alternative financing models for the SMEs, something I'm still quite suspicious of
but I don't know the American SME situation (only some statistics) enough to make a serious comparison
thanks gordy, that's a damn good answer.
maybe the ECB can looking for inspiration in the Basque country? imho, the Mondragon is quite interesting in its resilience, innovation & blend of "left and right".
The Mondragon Cooperative Group is one of the largest cooperatives in the world. It was founded in 1956 to support entrepreneurial ventures by graduates from a technical school in the Basque region of Spain. Three years later, they established the Caja Laboral credit union to help its members finance further cooperative efforts. It has grown relatively steadily from its founding, surviving successive waves of globalization that bankrupted many weaker Spanish companies. It has done this by developing a rigorous entrepreneurial approach while focusing on sustainable jobs, education and training to support society more generally.(ch. 8)
https://en.wikipedia.org/wiki/Capital_and_the_Debt_Trap
as far as AM SME's, don't know much more than what we both read here, but it seems most are being forced kicking & screaming to operate more efficiently due to margins being compressed by the Big Boyz. and unless one considers Kickstarter to be an alternative financing source, it's all debt, all the time.
never understood why binary economics wasn't practiced by more SME's here (probably b/c all those pesky SEC regs):
https://en.wikipedia.org/wiki/The_Capitalist_Manifesto
it's similar to the Mondragon model with an American twist. Kelso is definitely a severely underrated economist, methinks.
And... you know the future?
Sometimes you guess right, hopefully more than 50%.
However, you ignore another HUGE part of this issue, which I forgot to mention before.
When the people in a nation (or on a planet) can borrow like drunken sailors, the price of goods SOARS. Everyone gets MUCH less for their money than in a "cash and carry" economy (or one that is primarily so).
This is OBVIOUS. For examples, just look at the biggest ticket items... homes and college. People pay about 5x to 10x more for homes than they would in a pure cash economy (with no loans at all). Yes, a significant part of the reason is because they don't pay interest on their loan, but people are paying more than TWICE for homes than they would pay in a cash economy. The price of college would also be a small fraction.
The same (or similar) dynamic presents itself in less obvious ways too, for example "health insurance". People pay SEVERAL TIMES as much for health care when they get their health care via "health insurance". In a world where no health insurance exists (except catastrophic care health insurance), health care costs would be about 10% of current spending.
The one case where a loan actually MIGHT make sense is... when you have an operating business, the demand for your product is more than you can meet, you have a good idea how much more you could sell if you could meet demand, and so you take out a loan to buy the machinery you need to increase production. This can be rational because you pretty much understand that you will make far more profit on the goods you sell than the interest on the loan.
One other unrelated comment. I have found in so many cases that when I put off buying something I eventually realize the spending would have been wasteful... OR... a vastly better product appears. This is part of the "opportunistic" way of living that I mentioned, where you don't satisfy every desire as it arises, but often "wait and watch" until you recognize a "sweet spot" of some kind, and take advantage of it.
compound interest is a bitch, especially at the point when the planet requires a movement to a steady-state equilibrium.
OT ann : know you're dead set on space to escape the predators, but what if they were already there ahead of you?
perhaps worth a listen if only for a discussion on the "mythical" Breakaway Civilization.
http://theunexplained.tv/paranormal-podcasts/edition-154-catherine-austi...
Asian equity has crashed mid trading. There is no GDP. There is no growth. The policies brought forth by an unelected clique of bankers and economists - if there is even a distinction anymore - have wrecked havoc on the monetary system.
Starting in 1913 the system began to unravel with insedious therious of power. Then came World War after World War. Oil was taken from earth like a sick woman was bled by doctors back during the beginiing of western medicine. Now growth has stagnated yet the same policy upends reality with convention and makes a demand of growth by fiat force.
Yet the earth is tired and has been bled dry. She mourns the days when she could live with us and not be used. Oil is not only the lifeblood of the economy but the blood of the earth. Lest we not forget we reside on her, and not her on us. Be ready for when she gives, for her gift will be a dark one. But please remember, she is only a force and it is nothing personal. Unless your name ends with Bush. Or Gore. Or Kerry. Or Rodham....
This post elicited some of the best, most clear comments I've seen in awhile.
I have always thought it would be Japan that eventually gets the ball rolling. They're the ones that had the massive bubble in the 80s that they never recovered from. They are the first ones to have tried ZIRP. Now they are going all in on a crazy scale and we will see what happens.
It is also very clear that the debts cannot be paid under any circumstances. The student debt fiasco is a perfect example of politicians trying to convince people that there is a free lunch. Financial aid over the last 25 years has allowed college costs to skyrocket well beyond wages. While one could argue that the car or healthcare or house you get today is much better in quality than the car of 25 years ago and worth a higher price, the college education is probably exactly the same. And since 2011 the Obama debt forgiveness of student debt plan has been quietly in effect and looks ready to turn into a complete disaster of further entitlement debt piled on the back of a taxpayer that can't actually pay it.
The game is over. Default is inevitable. This last pile on of credit and debt to "save the system" has actually moved the end game forward.
also agree that Japan is the template. hell, they may have been the beta test, all the way back since (and including) the Bombs.
Denial it seems is a river with headwaters on Mt. Fuji and a mouth everywhere on the planet.
Upper level education is not about education: it's delaying action for millions who couldn't ever find a job in the real world, and the jobs that would have been available in the past for newly Commenced, are no longer there.
It's about getting money into the hands of teachers who don't teach, tenured Professors salaries for doing nothing, lucrative pensions for the same and the admenstruators at the top of the chain, unions who base everything in life on 'seniority'.
The education is not the same as 40 yrs ago at all.
There is no choice really but to forgive debt since what was gotten by going into debt was never realized, an empty promise. Makes sense since the debt purchased worthless services.
If banks ultimately hold all the money or debt that is worthless, declaring it "unable to be paid back" and defaulting looks like a zero sum game, only to be started once again as the previous debt is written off.
We were given ample warning where the market was heading but nobody heeded the message.
http://www.ratical.org/many_worlds/6Nations/6nations1.html#part1a
Those who represent an ideal beyond the comprehension of the masses must face the persecution of the unthinking multitude who are without the divine idealism which inspires progress and those rational faculties which unerringly sift truth from falsehood.
The only good is knowledge and the only evil is ignorance.....Socrates
There is no such thing as freedom in a Bastille of lies
Socrates had a very limited vision to think that only ignorance is evil.
Immorality
Sadism
Lord Blankfein
Joe Cassano
Hllary rodman
Chuckie Schumer
Newt Gingrich
the list of other evils besides ignorance in this world, is endless.
What a dumbass. You don't include future payouts for entitlements in this year's budget. Just as you don't include future tax revenues in the current budget. Conservatives always throw out the unfunded liabilities phrase whenever they talk about programs they don't like or want to pay for. We could easily balance the budget by cutting the gross defense and intel budgets, increasing taxes on corporations, and closing offshore tax loopholes. But The Powers That Be might lose a penny or two so there's no fucking chance of that happening.
Simple math tell you that inflation needs to run at a level of 7.5 % based on an unsustainable, growth trajectory of 3.8% over the next 11 years , and that is to stand still.
However due to messaged numbers, false and distorted employment numbers, real GDP and real inflation, and taking best guesses into account and the likelihood of virtually zero or less than 1 % world GDP growth over the next decade, that inflation figure would in likelihood have to exceed 11 % per annum over the next decade and assume that no benefits are increased in monetary terms.
Clearly impossible, the screams of pain at 11 % inflation and zero inflation on benefits would cause mass and immediate panic.
Therefore any increase in inflation would need a consequent increase on cost of living raise and lower, distorted by lies and spin about the true rate of inflation.
However, and increase would add a compounding effect to each year to still stand still and the math is easy to do for that too.
Foe every one % increase in benefits index linked would increase the real rate of inflation needed to stand still by a factor of 1.12, therefore if index linking raised benefits by 8% in a real inflationary environment of 11.5% then the true rat of inflation needed to stand still would increase by a factor of (11.5 + 8 *1.12) / 8 or 2.56.
meaning inflation rate would have to more than double again to stand still by 2025.
It is as described, game over, check mate, end of story, pack your bags, and get the fuck out of there or face starvation and or civil war.
Or get whatever cash you have offshore as fast as you can to a country like SG HK Malaysia or the Philippines or Switzerland.
Exactly the same gees for anyone in europe.
Or be prepared to lose at a minimum 35% of what you have or think you have now if you wait too long, and by too long I mean one day.
Read Victor Klemperer's WWII diaries of life in Nazi, croney, fiat/coupon Germany.
People adjust to the new normal. Even prisoners make money ( cigarettes/tuna envelopes/sardine cans ).
We'll have a dictatorship. We are already well and heavily dictated too already by administrative state organs. But it is self fueling, politically necessary now. Citizens are well conditioned to passively give remaining liberties for temporary material or even future promises.
heard it before
Frighteningly metaphorical
http://www.people.com/people/article/0,,20811288,00.html
Woman Dies in Car Crash While Posting to Facebook About Pharrell's Song 'Happy'Good riddance. That's one less idiot on the road to possibly take me out one day.
Yes, it will end badly; very, very badly. But that is not to say that it is a random event that could not have been timed or foreseen.
I think the only errors the banks "believe" they made last time was that they did not have absolute computer control of price and that they did not have infinite free fiat money backing them. I am pretty sure they now believe that with those two tools, they can direct any situation.
That is not to say that 2008 was not planned. It reeked of banker planning from day 1 and it would have been perfect if they did not have to publicly tell people what they had done. Those who had a clue realized it for what it was ... a "real" wealth transfer event... and so will be the next one. They cannot help themselves. They are very, very bad "animals".
What is a "real" wealth transfer event? Example:
a. A bank that has no claim on a property creates money out of thin air to loan to someone to purchase the property. The bank sacrificed nothing and takes no risk in creating fiat from vapor. When the new owner and debtee defaults on load as a result of a banker induced financial crisis, the bank forecloses on the property, claiming it as its own. The fiat that never existed before the loan was created by the bank is somewhere else in the market, but the bank receives title to the property from a default on something they created at no cost. What a racket! If all the banks care about is onership of the equity/property and care nothing for the value of the fiat chits, they can create as much as they want and bid prices beyond what others can pay.
b. Another example might be banks creating phantom fiat and using it to buy equity shares in a company. It cost them nothing to create the money and in trade they get a slice of company ownership ... Once again trading nothing for something.
Is this a sufficient lack of trust and belief in the financial system. It is literally a bunch of crooks stealing real and productive assets by trading fiat vapor for the properties. The fiat vapor has been given monopoly power by the government and enforced at the point of a gun. How could anyone trust that kind of system or the people who run the racket?
Of course it will end badly. But to avoid making similar mistakes in the next system, we must understand what went wrong. It's not poor decisions or judgement errors on the part of policy makers. They are merely prescribing the correct measures at the end of the timeline of a poorly designed / evolved system. The debt of a single nation cannot be held as a global wealth reserve asset. And only a free market in gold can effectively govern fiat. Let's hope the Eurasian Union will reject paper gold and incubate a truly competitive and equitable alternative system.
www.roacheforque.blogspot.com
Right. With gold, instead of being blown up we can die of suffication.
Making the ugly math simple to understand is no easy task, but lets have a go at it. Not lying about the numbers to arrive at a clear picture of reality is important. Below is an article that breaks down the cost to each of us when the government over spends. Sadly it is the massive deficit that is propelling the economy forward, and it is not sustainable
http://brucewilds.blogspot.com/2013/01/ugly-math-made-simple.html
For a long time I have been trying to develop a scenario for a market "super crash" and a reasonable map that would arrive at such a situation. Most investors think that even if things go downhill fast that they will be smart enough to get out of the markets. But what if it hits like the flash crash on steroids?
We know that can't happen because circuit breakers have been put in place to arrest panic style moves, but imagine a market that falls, trade is halted, and the market simply does not reopen for days, or even weeks. We have set up a house of cards based on debt and contagion is the cancer eating at the foundation. the article Flash Crash On Steroids can be found below.
http://brucewilds.blogspot.com/2013/01/flash-crash-on-steroids.html
of course it will end badly but when
Singer: Hey, America, get off the cliff!
America: What?
S: I said, stay off the cliff!
A: What?
S: Get ... away ... from ... the ... cliff !
A: W
h
aaaaaa
aaaaaaaa
<splat>
Singer is the King of Crony Capitalism. He and his ilk are one of the prime reasons we have the economic problems we have. Jumping on the bandwagon at this late date, by pointing out that the economy has problems, is sort of like the rapist revisiting his victim.
a justified loss of confidence in an unsound system
Rip Van Winkle speaks. Moronic fuck.
KE=1/2*M*V2
A better analogy would be a microphone in front of a speaker connected to an amplifier (gain), whose input is the microphone.
At low volume level (low gain ... low leverage), the microphone can't hear the speaker. But turn up the volume and there is a point where the microphone does hear the speaker ... which is itself ... and it feeds a larger version of itself back into the amplifier ... and comes out with a still larger version of itself from the speaker.
This is that feedback that everyone has heard at one time or another with their favorite rock band. It comes on expectedly, but unpredictably. One moment all is fine. The next moment there is a huge squeal.
Sometimes you can kill the squeal by pointing the microphone away from the speaker (distracting the public) or muffling it (covering up what would normally be fed back ... faking the numbers).
Ultimately, with the gain high enough you cannot stop the squealing without pulling the plug (bank holiday), or blowing the amplifier and/or the speaker (war or revolution).
The gain is leverage. We all know what will soon happen if we don't turn down the gain. We just don't know when it will happen.
But we do know what won't happen. They won't turn down the gain. They'll blame it on the weather.
mon, jah Jamicians made a whole genre of music (DUB) from ridin da feedback
then again they smoked a ton of ganja to make it smooth...wise or no?
PRINCE FAR I - THROW AWAY YOUR GUNhttp://www.youtube.com/watch?v=pru2CqLXWoI&list=PL717381CCB1755989