Paul Singer of Elliott Management recently had some scathing remarks for Congress, the Federal Reserve and bond investors in his investor letter.
First of all, Elliott Management sees tremendous risk in the bond market.
- People are still buying bonds despite pitifully low yields because, well, they continue to go up in price, albeit in a self-reinforcing process goosed by central bank and momentum buying. When these forces exhaust themselves, the reversal could and should be swift and large.
- A decade ago, stocks were overpriced, but institutions who owned them were generally happy... Stocks looked predictable and safe at the very moment that they were maximally unsafe. That is where long-term bonds of these four currency blocs (euro, U.S., U.K. and Japan) now stand.
Elliott Management was unusually blunt in their assertion that "long-term government debt of the U.S., U.K., Europe and Japan probably will be the worst-performing asset class over the next ten to twenty years. We make this recommendation to our friends: if you own such debt, sell it now. You’ve had a great ride, don’t press your luck. From here it is basically all risk, with very little reward."
Elliott also sees enormous leverage in the large banks.
"Including derivatives, nearly all the world’s largest Financial Institutions are levered 50-100 times (not 10-20 as reflected on their balance sheets), so the exact composition of their derivatives books is essential to an understanding of their risks and stability....no hedge fund is remotely as leveraged as the Financial Institutions, and no hedge fund actually had to be rescued during the crisis."
Eighteen months ago, Paul Singer penned a piece for the WSJ where he criticized the Federal Reserve for printing too much money.
Singer stated, “In effect they’re treating confidence in fiat money—in paper money—as inexhaustible, that it’s a tool that’s able to be used not just in the throes of crisis,” but also as “a virtually complete substitute for sound fiscal, regulatory and taxing policy.”