In Epic Letter, Elliott's Singer Rages Against Everything From Passive Investing To "Safe Spaces"

Tyler Durden's picture

We've frequently warned about the myriad of potential risks arising from the massive capital flows from active to passively managed accounts which will eventually, and inevitably, wreak havoc upon the markets.  It is, in fact, this transition which is inextricably linked to the market's apparent disregard for traditional valuation metrics as it surges to all new highs with each passing day.

As we've noted before, unlike actively managed funds (the good ones at least) that actually bother themselves with parsing through K's and Q's and analyzing traditional valuation metrics for individual companies, the only metric that passive investors seem to care about are their daily returns.  Unfortunately, that metric is nothing more than a massive ponzi scheme as increasing allocations naturally drive returns which then lead to even more's a circular farce that will end very badly. 

Shiller PE


After reading Elliott's 2Q 2017 investing letter, it seems that Paul Singer shares our views on this particular topic having described passive investing as a "blob which is destructive to the growth-creating and consensus-building prospects of free-market capitalism" and one which is "in danger of devouring capitalism."

We are always amazed by decent ideas and insights which are stretched so far beyond their original version that they become caricatures of themselves and then sometimes contra-functional.


...the passive investing idea has been supercharged by the recent long period during which government manipulation of securities prices has created the illusion that simply holding stocks and bonds in their index weights and sitting back arms folded is the perfect investment strategy.


...passive investing is in danger of devouring capitalism. Active investing in public equities is declining, and passive ownership of Index Products is rising, at rates such that the lines may cross in only a few more years. The trends are self-reinforcing, because they cause the assets in the Index Products to outperform those that are not in those products, thus confirming the theory in the minds of both adherents and frustrated non-believers.


Most people believe that the "outperformance" of passive investors is the end of the story; case closed, summary judgment, passive is better, done. We do not agree. Part of the "outperformance" is due to the kernel of good ideas at the core of passive investing: lower friction costs from excessive trading, lower fees and the empirical underperformance (in aggregate) of active public equity investors. But there is more to this narrative. A good part of the outperformance is the effect of net money flowing into index-included equities and out of (relatively speaking) everything else. A handful of passive investing firms are now among the largest investors in equity and fixed income in the world.


We believe, however, that there is a fallacy of composition and that what may have been a clever idea in its infancy has grown into a blob which is destructive to the growth-creating and consensus-building prospects of free-market capitalism. This "overgrowth" is a drag on the power of capitalism to adapt, to continually strive for excellence, efficiency and creativity and to deliver goods and services for citizens in the manner in which it has done for the last couple of centuries. In effect, therefore, it is dangerous, ultimately divisive and may be an important reason the pro-freedom or pro-capitalism consensus dissipates over time.


Fortunately, for your reading pleasure, passive investing wasn't the only hot topic on Singer's mind this quarter.  Here are a couple of other highlights from the quarterly letter:

On Central Bankers: 

The combination of central banker-applied brute force (buying everything in sight) and deity-like central banker pronouncements has dampened market volatility and frisky free-lancing, but at the same time it has encouraged risk taking (in market positioning, not it business formation).  We have thought, and still think, that confidence in central banks and policymakers has been unjustified and thus could erode or collapse at any time.  Since the major financial institutions which comprise the financial system are still way overleveraged and opaque (in fact with record amounts of debt and derivatives at present), such a break in confidence could happen abruptly and without warning.


Investors should come to grips, intellectually and viscerally, with the likelihood that most fiscal and monetary policymakers' knowlege of the world is somewhere between "close to nothing" and "way less than zero," and that their pronouncements and policies usually range from "silly but harmless" to "dumb and dangerous.

On whether labor markets are tight:

Short answer: no.


Programs which foster long-term dependency are not creating social justice; rather, they are creating demeaned citizens and preventing people from experiencing the dignity and contribution to society of work.


Given record stock prices and low unemployment rates, the slow rate of increases in wages is "surprising." But it clearly demonstrates that there is something wrong with the existing prosperity-delivering mechanism. In this regard, America is catching up (but not in a good way) with Europe, which long has lived with much higher rates of unemployment and long-term dependency.

On Chinese Debt:

In response to the world economic slowdown after the GFC, China undertook a large debt-fueled stimulus. In 2008, it had a non-financial sector debt-to-GDP ratio of 141% or $6.6 trillion; by 2016 that number was 257% or $27.5 trillion.


Combined with wild real estate booms and overbuilding, plus an unhealthy dose of corruption and severe neglect in "rule of law" infrastructure, a serious economic dislocation (or crash) is the obvious (but not necessarily correct) expectation based on the numbers, the leverage, the interconnectivity and the likely quality of debt.


A Chinese financial market collapse would likely push the global economy into a deep recession.


Whether they will succeed or fail is completely unknown as this letter is written. A reasonable conclusion about China is that it is foolish to ignore the signs of developing storm but also ill-advised to put a "clock" on it or deem it to be inevitable.  Our instinct is that close to perfection will be required to avoid a very painful sequence of events in the global financial system and hence the world economy.

Finally, on our favorite topic of "Safe Spaces":

Fifty or so years ago, campuses across America raged in support of free speech. Fast forward to the present, and we rub our eyes to see a 180-degree turnabout in rage-worthiness. Currently, many students on a variety of campuses are rallying against free speech. The "diversity" that almost all American colleges and universities claim to covet does not really exist, at least with respect to viewpoints, due to the ideologically extreme tilt (to the left) on virtually every "elite" campus. This bias is unfortunate, because intellectual and ideological diversity would be an effective tool in the creation of new generations of citizens and leaders who think for themselves, not just march in lockstep with the orthodoxy of the day.


But alas, intellectual and ideological diversity does not seem to have a high priority on many campuses. Philosophical and political imbalance is so extreme at a number of such institutions that a growing movement seeks to create "safe spaces" (both geographically and in terms of acceptable speech) so that the apparently fragile-as-eggshells students are not "assaulted" by opinions or thoughts that differ from those in their "Little Red Books." At many colleges today, the enforcement of the 2017 version of Mao's Little Red Book is by peer pressure, shouting down, and, on the vanguard of the "Free Speech If You Dare" movement, actual violence.


This fragility, an intellectual fetal position of sorts, apparently extends to the vast community of global investors. We make that assertion on the evidence that almost nine full years after the GFC, central bankers and policymakers are treating every single hiccup and little twitch in global stock markets as worthy of calming words and the promise of action "as needed." This treatment of markets as being perpetually an inch away from a fatal attack of the vapors is remarkable at a time which is so long after the actual emergency period.

Couldn't have said it better ourselves...

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wisehiney's picture

Rich niggers and poor niggers.

The well is dry for all of you parasites.

Now shut the fuck up.

Handful of Dust's picture

I almost had to hold my therapy puppy while reading this article.

Cognitive Dissonance's picture

Don't hold on too tight or your gonna kill.......

Oh well, plenty more where that one came from.

<You might want to talk to someone about all that pent up anger. Just sayin'>


Kayman's picture

Central Banks have said capital is free.  To their friends.

The cost is in jobs and real savings.  Of course you can't see it in the cost of spritzers.

Arturo's picture

Much easier to lie and steal from investors in individual socks than from investors in huge index funds.

Arnold's picture

I cannot believe that CNBC would allow this kind of trash to be broadcast.
I'm sending them a nasty gram.

Lumberjack's picture

I'm with Gov. LePage on this....

Gov. Paul LePage shot back at former U.S. Sen. George Mitchell on Friday for Mitchell’s defense of recent votes on the Affordable Care Act by U.S. Sens. Susan Collins and Angus King.

In a written statement, LePage accused all three of being “sadly out of touch” and “three peas in a pod, preaching to struggling Maine citizens from the polished corridors of Washington, D.C., while they enjoy luxurious health care benefits lavished on them as members of the world’s most exclusive club.”


Michell can go fuck himself...dirty rent seeking politician.

Handful of Dust's picture

Hussein was careful NOT to include forcing his buddies in DC on Obamacare. In fact, zero government employees are on it.


That told me alot right there.

Peak Finance's picture

The problems

All assets are mispriced across the board due manipulation of credit markets and bond markets, including huge markets like oil.

Fraud and no confidence in the rule of law makes it hard to pick "up and comers" and be a VC / Angel and still have your rights protected

Materials are either vastly underpriced or vastly overpriced with no connection to any kind of market. Productions slowing, yet raw iron / industrial metals still so high? Worldwide monetary mayhem and yet gold / silver so low?

Pick stocks? While the algos Intentionally target bears?   

Really the only investment strategy is,

simply holding stocks and bonds in their index weights and sitting back arms folded is the perfect investment strategy. 

DjangoCat's picture

Absolutely right, until....

Peak Finance's picture

Well, my theory is until forever, Hyperinflation all the way. If we are not already past the point of no return we will be there soon. 

Arturo's picture

The printed money goes straight to the stock market. We are witnessing hyperinflation in the stock market, not in the grocery store.

rp2016's picture

The point that is missing is, ZH, have you ever thought why the Left is so mad at the Right? Don't you know why, given that you are now in the company of Hannitys and Linbaughs??? seriously? Do I have to tell you even that? 

Peak Finance's picture

The "Right" was the party of Bankers, War, and full of corrupt Neo-Cohens., The Left pretended to be against those things. 

Then the last 8 years the Dems said 'Here hold my beer and watch this!"   War, Crony capitalist, crime sprees you name it. Most corrupt administration since Nero. 

The left does not have a single, valid criticism of the right what-so-ever. 


Two Theives and a Liar's picture


No difference. 

Money/Power rules.

We don't.

It's now to the point where it's blatant, in your face fascism and "they" are basically saying to "us": "Yeah, we're criminals...WTF are you going to do about it? Look! Over There! A Russian Kardashian! The Game's On! Doritos on Sale!"

We. Are.So. Fucked.

Good weekend ZH peeps! 

DjangoCat's picture

When the Republican neocons in congress came out for Hillary, and the CIA chiefs and ex-chiefs did the same, any pretense of difference between the two parties vanished.

opport.knocks's picture

They wanted Hillary because she was already house trained. Like Obama she could be trusted to show up and read their script off a teleprompter (as long as the booze was hidden and the right mix of pills was provided).

Training Trump and keeping him on a short leash was clearly going to be a challenge that they would rather not have to deal with. But after 6 months of being beaten with a wet rolled up WaPo with RussiaGate in the headline, it appears Trump is now a good house trained puppy.

Batman11's picture

People need to build new companies for him to ransack.

He's looted everything else in existence. 


FlKeysFisherman's picture

NOW he comes forward after nearly a decade of "sitting with his arms folded" making billions from the FED's printing.

Fuck Singer.

agNau's picture

Congratulations Singer.
Now you understand the plan.
You are witnessing the destruction of everything you have known.

brushhog's picture

I love when guys complain about an investment strategy that is "killing the free market and capitalism".  What we need are government controls to limit and manipulate the ways we can invest in order to protect the free market?

Jimbeau's picture

I'm probably missing something here, but isn't this guy just lamenting the loss of those lucrative commisions from the day traders?

two hoots's picture

Volume, we need volume.  Passively letting money set in the market, tying up shares is sinful.....says who?

How can we make money off of stupid people if they don't actively trade and just "invest'?

Since when does investing require trading?

Singer and company need a new cow to milk, look out people of emerging countries.  The vultures are circling.


Arnold's picture

Because they buy high and will be liquidating low?

ETFs aren't building themselves, you know.

It's automated work.

fattail's picture

In 2002, I saw a chart of the index and of a chunk of the active investers.  It was, more or less, everyone went up together in the dotcom bubble and their performance crashed when the bubble popped.  For average people it is better to be a passive investor, becuase they don't have access to the inside information that allows the "outperformance" of all the masters of the universe on wall street.  

Let this last bubble pop, and he won't have to worry about any passive investors for another couple generations.


DjangoCat's picture

As the central banks and the passive funds hoover up all the assets, the markets become irrelevant.  Who needs em when most of the assets are controlled by a very few.  

They can crash it at their leisure, while you're not looking, then loot the store while the prices are rock bottom.  It happens again and again, and we keep climbing back on the tumbril as it lurches forward to the next massacre.

WillyGroper's picture

"in danger of devouring capitalism."

so he's got a problem with the A21 goal of a switch to an energy based economy with your daily allotment?

or simply run out of people to steal from?

Cutter's picture

"An intellectual fetal postion of sorts," in reference to colleges, markets, central bank policy, in effect the world.  An excellent description of where we find ourselves.  

Well said, Mr. Singer.

ds's picture

Deformed markets in their own orbits under deperate CBs directions are delinked from the flows in real economies. Those active fund managers with their yesterday analytical tools are spining voodoo. They are still in their deluded 'safe space' that free market capitalism exists or can be restored for the past greed and fear to survive.

Singer is disingenuous. He is right on most things except that He defends active fund management (his feed) and use free market capitalism as the criterion for existing markets. The criterion is just a hope and a prayer.

Move on folks to trade under the new normals of deformed markets and real productive unleveraged real assets. The new wealth definition is where you have NO DEBTS. 


opport.knocks's picture

The current Capital Markets are not by any stretch of imagination capitalism.

Venture Capital is still capitalism, but very few have the patience, stomach and brains for it. Plus there are too few new big ideas these days.

The real problem now is too much money just seeking rent in the capital markets and too little in venture capital. That and demographics.

Hunker down for a long Kondratiev Winter folks.