Paul Singer, founder of Elliott Management and well-known for predicting the financial crisis of 2008, calls the current environment “an extraordinarily dangerous and confusing period,” in an interview with The Wall Street Journal. And much like the investors and analysts who didn’t heed his warnings in 2008 or in the years since regarding the Dodd-Frank Act of 2010 and loose monetary policy, he doesn’t expect many to listen to him now.
With valuations still high, the threat of a recession still looms over the economy, ushering in a prolonged period of low returns across the market, from stocks and real estate to corporate profits, as well as elevated inflation and unemployment rates. While many central banks around the world answered every financial emergency by pouring more money into the economy, that enabled federal governments to incur massive deficits and go deeper into debt. It also drove the popularity of cryptocurrency as an “alternative for people to express a kind of libertarian impulse,” though it’s “completely lacking in any value,” Singer told The Journal.
At the start of the pandemic in 2020, Singer wrote to his investors that he didn’t expect the Fed “to normalize monetary policy after the…emergency” and predicted the rise of inflation, which of course came to pass the following year. But the Fed didn’t begin tightening until 2022, and Singer believes that when the next downturn happens, the Fed will slash rates and start pouring money back into the economy. But short-term declines will likely have policymakers believing they’ve tamed the inflation tiger, only to see it come roaring back. For the Fed and the European Central Bank to “get out of this one with no substantial pain, it would be extraordinary,” Singer says.
While Singer built his firm on skillfully investing in distressed debt, now Elliott is known for its activist investing in publicly-held corporations like Salesforce and Toshiba, though his “activism” isn’t fueled by political inclinations but rather the desire to hold corporate management accountable and bolster underperforming companies. Singer has never had much confidence in financial regulators; in 2011 he told The Journal that the Dodd-Frank law allowed the government too much leeway in determining and handling risks in the financial system, something that he sees rearing its head once again in the banking collapses in March. Giving the government that kind of power to step in encourages bad behavior and a lack of discipline in the banking industry. Singer fears this recent episode is the start of something worse, likely a long stretch of volatility where people “come to grips with the excesses in the financial system.”
The “key” to handling this volatile landscape is to stay “out of trouble,” Singer contends, perhaps opting for the safer bet of short-term U.S. government debt which now has a solid return thanks to the inverted yield curve. He also pointed to gold, which many have added to their portfolios as a stable asset. But for long-term prosperity in the U.S. economy, Singer rattled off a long wish list to The Journal, from “pro-growth reforms across the board” to the hiring of “sound monetary officials” in order to make “unlimited money-printing and minuscule and risk-provoking interest rates…merely unpleasant memories from the past.”