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Refuting The (Consensus) Bull Case
Excerpted from Elliott Management's Paul Singer letter to investors,
The consensus (bull) case:
The power of psychology is overwhelming, and investor sentiment indicates that the Fed can be trusted, that asset prices are being driven higher by QE and ZIRP, and that we should not worry too much about the unintended consequences, because the Fed will be able to follow a path to normalization and a soft landing. America, in any event, is the safe haven and always will be.
Moreover, goes the case, we may be at the sweet spot of the economic cycle. It has taken a long time to get here, but finally we are getting sustainable growth, and we can expect more of the same.
Interest rates are completely under control – in fact, long-term rates are in a secular decline, which is not nearly at its bottom.
Inflation is virtually impossible, and we really ought to be worrying about deflation instead. We need to focus on getting inflation higher, and growth will follow.
The currency is also under control. In fact, what could the dollar fall against? The competition is in much worse shape.
Banks are in far better financial condition than in 2008 and will gradually bleed off any remaining toxic assets that they own.
If anything starts to go wrong, the government will step in to fix it.
Pushing investors out on the risk curve in search of yield is a good idea and a clever way to encourage them to do what they should be doing on their own (i.e., taking risks to help the economy grow). We should not worry, because things will be okay.
We can even trust the representative branches of government, because elected officials will not have to do much that is unpalatable or challenging – the central bankers have it all covered.
Above all, trust the Fed.
The opposite case is basically a refutation of every element above and compels us to look to history for clues about the next market, financial and economic environment.
Six years of stability after the financial crisis, with policies that we believe to be unsound and solutions that have not really solved anything, are concerning to those who want better policies and are afraid of when the next shoe will drop... However, sometimes unsound trends go far past where you think they should go, in both time and price.
Consequently, we at Elliott are always hedged.
So does it matter whether we are right or wrong about the risks? Yes, because when stocks started falling apart in 2000 and 2008, we knew it could be for real. People who had no comprehension of what a crash could do, or the possible boundaries of price movement, had their careers and/or capital destroyed by one or both of those episodes.
An understanding of history, context, the incentives of policymakers and the fundamentals of the economy is very useful, even essential, for survival, in order to develop a sense of humility and an appreciation for how broad the range of outcomes can be. To start with, we believe that any period of real deflation (however unlikely to occur in the first place) cannot continue for long, because of the alertness of policymakers to such an event and their oft-repeated determination to throw monetary policies at any hint of declining prices. Conversely, regardless of whether serious inflation is possible or on the horizon, a bond market collapse is always possible in a system that is not sound.
* * *
We cannot possibly make the following statement any more clearly or strongly:
Policymakers and pundits, with rare and courageous exceptions, are marching (and looking) in precisely the wrong direction.
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I wonder which intern at ZH is tasked with posting non-election stories tonight on this investment themed website? I hope you have some booze handy. No one will notice.
Listen.
The staff is out at the poles voting for their favorite Dems.
Yeah, they're out at the poles like every night.
BE,
If you are going to frequent this site, you should spell "polls" correctly.
"Poles" are for dancing!
Or pretty young women who after 30 become bulbous, sweaty and moustachioed, yell a lot and can out arm wrestle their men.
If you are a zero hedge reader, you should know that the election is meaningless because nothing will ever change ... until the revolution!
I'm glad somebody thinks they know what the 'bull case' even is. The last year all I've heard basically boils down to "where else you gonna put your money?"
Paul Singer is a man who plays both sides of the street, favors big government and the big bankers’ plan for open borders.
Here are astounding revelations (never mind his financial rape of Argentina): Singer not only was Mitt Romney’s top 2012 campaign donor but he also funds George Soros’s National Immigration Forum (NIF) which lobbies for amnesty for illegal immigrants.. The NIF “has advocated for changes in immigration law to help legal and undocumented immigrants for three decades.”
How can a man like this be trusted for his critique of the economy when he’s clearly a manipulative insider?
He's a banker as in hedgie, private equity, venture capital, one miniscule professional step removed from the Squids of the world, slogging about doing the menial tasks of Pope's work as Goldilocks already has God amongst their muppets.
We may be in the gutter but we're looking up at the stars. That diatribe above has left me feeling a whole lot more positive. s/
Insanity always peaks just before the correction. An economic/political full moon is coming, it is only a matter of time.
What cannot be sustained will not and we all know this is true. The rising insanity springs from the growing denial of the coming storm. Always remember that 'denial' is not always expressed as a negative emotion. Those who (wish to) believe the the recovery is here are expressing a 'positive' emotion.
Emotions allow some assets to continually increase in value relative to other things? Will emotion cause the producers to continually give more and more of their production to the printers of money and their beneficiaries? When will the producers begin to pretend to produce for the pretend value of the dollars offered?
Hustles end when the marks understand the game.
"Hustles end when the marks understand the game."
Agreed. But what if the hustled is dependent upon the game?
The markets are thinking one thing: this is a roller coaster ride and as long as the Fed is supplying the party we need to stay with it but at some point when the sky darkens we need to get the heck out of it.
The bulls are riding on the coattails of the Fed money and the reason you know it is that when there’s some little hint the Fed might reverse, they go crazy.
Maybe they are out at the poles and not at the polls.
Me thinks it will now require a material event to break this market. A major war, civil unrest, Europe break-up, Japan bankruptcy – any event which cannot just be printed over. Otherwise the bull case is really strong – Fed has spoken that it does care about the market and it is certainly capable of controlling the market to at least some degree, so the common knowledge is just to do what Fed says. Today the Fed can just talk the market higher or lower at will.
I have been buying 6 months forward OTM Puts on major indexes for the last 2 years. They have all expired worthless. My last lot will expire in May’15. If there is no correction by then, it will be my last one. This shit can indeed go for a long time.
I guess the (our?) message we are sending these folks in finance and on Wall Street is just one they refuse to acknowledge. Let me try and articulate this as clearly and succinctly as I can; It goes something like this and pay attention now, here I go:
We don't want to be victims of or enable your corrupt, thieving and venal money-skimming operation and you should all go to Hell and without delay!
WISDOM!
Peter Tosh: The day the dollar die.
https://www.youtube.com/watch?v=EtwmjcsQi1E
Wake me up when S&P is 666. The rest is noise.