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- Billionaire Paul Singer’s latest letter to investors predicted an even steeper drop in stocks due to the effects of the novel coronavirus pandemic, but also warned about doomsday scenarios unrelated to the virus.
- Singer warns about the damage a solar flare would do to the world’s electrical grid and how hackers could have “unimaginably negative consequences.”
- The manager is known for his pessimism, and he scolds the overall market for missing “the slowest moving black swan in history.”
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Billionaire Paul Singer, founder of $35 billion Elliott Management and known pessimist, believes stocks still have a long way to fall, as reported by Reuters earlier.
But Singer also tells his investors in a 14-page letter that there are worries and concerns related to the stock market and current pandemic as well as not. He’s worried about the structure of the global economy once business re-opens, international relations with China, solar flares, and hackers.
“The global economy is currently experiencing the deepest and quickest downturn in history (including the 1930s). Among the most surprising aspects of this situation is that most investors, Wall Street economists and strategists, business executives and governments were exceedingly slow in identifying that a deep recession and vast economic shutdown was underway,” he wrote in a letter dated April 16.
Singer, a former lawyer famous for using the courts to get his way as an investor, such as when he impounded an Argentina naval ship over a bond payment, believes investors currently are “too influenced” by 2008’s economic crash, and warns that “there does not yet appear to be serious undervaluation” despite the stock market’s plunge.
Elliott declined to comment beyond the letter.
Here are some of the worries Singer details for investors:
Restarting the economy
As protests to reopen businesses spread across state capitols, Singer writes that “the path to restarting the global economy will be a labyrinth.”
He is worried about the enormous balance sheets of central banks and low interest rates prior to the pandemic, especially compared to the relative cleanness central banks had before 2008. He believes the economic restart will create a new line of cronyism for politicians to “mine” for their backers.
Singer’s fund has been railing against central banks’ policies for nearly a decade, pushing them to “normalize” rates and balance sheets after the market recovered following 2008.
“One can only imagine what is going to happen to central bank balance sheets and global interest rates now, given that the global economy is screeching to a halt. Is the $20 trillion of central bank securities holdings going to rise to $30 trillion? Almost assuredly yes. How about $40 trillion? $50 trillion? Who knows? Are short-term policy rates going to be negative everywhere? Is all this going to matter? Will there be a serious deflationary period that will cause governments to pour even more fuel on the fire? Following a brief deflationary period, is the even-more-radical monetary flood going to create a tipping point following after which fiat money is rejected and hyperinflation begins, a process which could be self-reinforcing and serve to wipe out the real value of global savings and send consumer prices, commodity prices and real estate prices to the moon?” Singer asked in his letter.
There is one thing “for sure,” he said.
“The global economy coming out of the virus situation will be more indebted and more dependent than ever before upon ‘free money,’ QE/MMT (Quantitative Easing and Modern Monetary Theory, meaning massive asset-buying by central banks and unlimited fiscal spending financed by central banks in their own currencies, respectively) and higher deficits in order to function.”
An attack on the electrical grid
Among Singer’s non-pandemic concerns are the consequences of the “interconnectivity of the world.” Already, advances in travel and international trade agreements allowed the virus to travel faster than any other pandemic.
But the world’s current reliance on the electrical grid, Singer warns is “highly vulnerable,” an electromagnetic event that short circuits it would be “extremely painful.”
“In 1859, an EMP episode (called the Carrington Event) caused by a solar flare caused disruptions to the global electric grid, but that grid was very rudimentary at the time, so there was not much disruption to global life. “
An internet shutdown
Similar to the world’s reliance on the electrical grid, any kind of disruption of the internet “would have unimaginably negative consequences,” Singer writes.
Hackers or an accidental shutdown of the internet could stymie markets and swing elections, history has shown. Singer warns that “complexity and interconnectivity cause brittleness and people have short memories.”
“Long-term vision is rare, and decades of smooth functioning encourage people to reduce cushion, eliminate spare capacity, increase leverage, rely on unsound and fragile structures. (both physical and organizational), and neglect preparation for real adversity and volatility.”
China and the global supply chain
As Singer writes, China went, “in a breathtakingly short period of time,” from a threat because of IP theft and unfair trade practices to something much more serious. Now, doubts about China’s handling of the virus and transparency around what happened in the country will shape the relationship the world’s most populous country will have with the rest of the world.
For companies in the US and elsewhere that rely on Chinese manufacturers for cheap production of goods, the questions they now must ask are “should we go back to China, build plants in China, depend on China as a primary or sole supplier?”
“The virus and the questions about doing business with China could do to international trade what tariffs could only have dreamed of doing,” Singer writes.
The pandemic has taught governments a lesson in supply chains, Singer writes, since “many items necessary for our national military or health security have become concentrated and risky,” naming the pharmaceutical industry’s reliance on China.
“These factors will lead to significant re-thinking by many businesses and governments about their supply chains when the current crisis ends.”
Inflation when ‘money is going to hell’
In tandem with his concerns about the rising debt that the economy will be under once it reopens, Singer sounds the alarm on the risk of inflation even to “real” assets like corporate real estate.
“It looks real because kicking it can break your toes, but it is generally highly leveraged and depends upon the relationship between rents and costs. If there are rent controls or moratoria, formal or forced by circumstances, and no controls on costs, commercial real estate can produce rapid insolvencies,” he writes.
He believes “massive monetary expansion” is needed in the current pandemic so people can feed themselves, but “politicians love markets going up, and if there are no countervailing considerations, like rapid consumer price inflation, then they will try to keep markets high and rising and interest rates low forever.” Eventually, Singer believes it will catch up to the world’s economies.
“‘Paying for things with ‘real’ money is now a quaint, outdated concept. Money is going to hell,” he wrote.