Paul Singer (Trades, Portfolio) of Elliott Management and David Rubenstein of the Carlyle Group sat on stage together at an Aspen Ideas Festival. I’m always very interested to find out what these billionaire gurus think about the state of the economy and what’s happening in markets. The event ends on June 29, and that’s also the date the video of this panel was released online. You can find the full clip below. For your convenience I’ve summarized the opinions on markets and the economy by both panelists:
David Rubenstein
Although Rubenstein and Singer seem to agree quite often that’s also very boring. Therefore Rubenstein spend most of his time talking about why the economy and markets will be fine for one to two years while Singer takes a more bearish view. This is also in line with what they actually believe but they clearly enjoy turning it into something of a debate.
Views on the economy
Rubenstein does acknowledge we are in a period of ten years of prosperity which has only happened one or two times before. At the same time he has been predicting a recession for four years. He doesn’t know when one will occur. It will at some point but nobody knows when.
He does believe the Fed will lower rates later this year and thinks it is likely we will go through the next election with an economy not in recession. The economy won’t be perfect but it won’t be in recession.
In the near future of one to two years, Congress can’t cut taxes. If anything taxes may be increased if Democrats grab both houses. The only game in town to keep the cycle going is the Fed. The Fed will lower rates 2-3x times this year. That will stimulate the economy enough to keep the President feeling ok about the Fed. If the GDP is growing and income is rising Presidents tend to get re-elected
There is going to be a slowdown. Trade tensions are already slowing down the Chinese economy a bit. In turn that’s slowing the asian economy. It is going to slow the U.S. economy a bit (especially the latter half of the year). Normally we have recessions every seven years but this time we are 10 years in. That’s coming out of an especially severe one. The market isn’t going to drop 50% soon. If it is, market downturns aren’t all bad, companies can buy back stock, buy back debt, etc.
The heaviest burden on U.S. economy is the trade tension. Rubenstein believes this will get worked out. Both parties are incentivized to work this out in a timely fashion. There will be three parts of the deal; 1) China needs to buy more stuff 2) China needs to open the market 3) They can’t do certain things in 5G and AI.
Part 3) will be the toughest for China to concede on. On all three points China will give a little. It will be enough to be the “greatest trade deal of all time.” Managing the PR will be challenging. Neither side can cry victory in overt fashion.
Bottom line: He expects rate cuts and an attempt to put a recession down the road.
Paul Singer (Trades, Portfolio)
This is not a Goldilocks economy. Class warfare is on the march. The developed world is facing the challenge of the rest of the world performing at very high levels. Globalization is the spread of economic freedom and prosperity. This has been very beneficial to the developed and undeveloped world. But it is a double-edged sword and it has had an impact on jobs in the developed world.
Banks are unsound as we’ve seen in 2007 and 2008. Singer implies they still are. The response to the last crash was unsound. The response has unsound because it has been virtually all monetary (Singer means there has been little structural reform). The Central Banks have said they think their policies have been successful. But they also created a great amount of distortion
There is a great increase in inequality as a side-effect. It is not the fault of investors but asset prices are pretty much fake.
This asset price appreciation has caused growing inequality. Six months ago we got an important data point about the fragility of the system. The rise in the U.S. policy rate immediately caused a major sell-off.
The U.S. was the only country, after 10 years of low interest rates, that moved towards normalization. Once at 2.5% interest rates, this triggered a 20% sell-off. Forces were marshaled to pound on the Fed to go back to easing. Bond and money markets have subtracted 150bps from the normalization.
This time monetary support for the global economy could cause a different mix of market forces.
The last round of monetary easing did not cause a rise in consumer inflation.
Central bankers have been thinking wow this is great, this is for free, we get rates to zero and there is no inflation. Gold is the money that stood the test of time. Gold is trading up and that may be a sign that investors are focusing on monetary debasement.
The global financial system is on the riskier end of the spectrum. Global debt is very high. Derivatives are at an all-time high. We are at the high end of the risk spectrum.
Singer has been expecting a significant market downturn. Crises are never predicted because they are caused by mass human behavior. Risk levels today are above the levels they were at in 2007. David Rubenstein agrees we have shifted debt from personal to government.
In forest management, if you suppress all fires you are building up the potential for a very large fire. If you paper over growing risks by monetary ease you are possibly building up the ultimate downturn. Stock market downturns of 20-30% and sometimes 50% have historically come along much more often. Now these “small forest fires” have been suppressed.
The parameters what a downturn might be may have shifted.
People are not orienting their portfolios towards a great increase in inflation. But another round of monetary easing may cause inflation. Commodities could go up. Most investors feel they know the shape of adversity. They feel that they can survive it. Singer seems to imply this is a false sense of control.
On Fed policy
The Fed is trapped. December 2018 (a 20% sell-off that caused the Powell pivot) supported that notion. The 10 year is at 2.5% with Europe under zero and Japan way under zero.
A European 30-year swap is 0.75%. Austria just issued a 100-year bond at 1.75%.
The Fed should try to restore the soundness of money.
They should be calling on the congresses and parliaments to take steps to deal with the economic slowdown in growth that seems to be in the data (i.e., take structural measures)
Thought experiment
Fed cuts rates 0.5 basis points next month. But the China-U.S. trade tensions muddle on.
China has generated billions of dollars of wealth but also bad debt. What if China turns from the swing generator of growth into a negative for the global economy. What do central banks do at that point?
A lively and interesting debate between two top financiers with tremendous insight into the U.S. and the global economy don’t agree on everything. But they agree on a few important issues. Both underwrite demographic problems around entitlements. Both seem worried about the level of government debt and don’t believe it can be increased forever without consequence. Finally, neither sees an imminent recession but Singer is more adamant these sneak up on even the top experts.
Disclosure: Author has no positions.
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