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Elliott Management: "The World Is On The Path To Hyperinflation, Which Is The Direct Route To Global Societal Collapse"
Back on March 18, 2009, when this website was still just 2 months ago and moments after the Fed announced the full extent of its first QE program, we concluded that "maybe one should really start buying stocks ahead of the uber-hyperinflation that will imminently ensue... This is textbook back against the wall." Just a few days earlier, the S&P had hit its generational low of 666... and everyone knows what happened then as the index proceeded to hit an all time high just shy of 5,000 some 13 years later. To be sure, many voices including numerous so-called experts mocked us over the years for our "hyperinflation" forecast - both in stocks and the broader economy - but in retrospect, we merely said what some of the most erudite and respected voices are openly daring to finally say now, some 13 years later, and none more so than one the world's biggest, most influential and best performing hedge funds, Elliott Management.
In a mind-blowing, 12,000+ word, 28-page magnum opus that everyone - and certainly all those working in financial services - should read, Elliott Management's Paul Singer admits what, for over a decade, only a handful of others - certainly this site included - were unafraid to declare, namely that the world is on the road to “hyperinflation” and could be heading towards its worst financial crisis since the second world war, according to Elliott Management.
The Florida-based firm, founded by billionaire Paul Singer and which manages about $56BN in assets, warned its clients of an “extremely challenging” situation for the global economy and for financial markets where investors will find it difficult to make money.
An “extraordinary” set of financial extremes that come as the era of cheap money draws to a close “[has] made possible a set of outcomes that would be at or beyond the boundaries of the entire post-WWII period”, it wrote in the letter, warning that "there is no way to predict when the recession will bite and when global stock markets will bottom out."
The author clearly realizes the bleakness of the firm's latest messsage, noting that "while the observations in this report are even bleaker than our normally dyspeptic view of things, this is one of those times when a more pessimistic view than usual is helpful, if only to limit our jumping early into a dangerous situation with too much enthusiasm or conviction."
And a pessimistic view it is indeed: "Investors should not assume that they have “seen everything” on account of experiencing the 1973 to 1974 bear market and oil embargo, the 1987 crash, the dot-com crash, or the 2007 to 2008 GFC" the letter warns before making its shocking forecast on how the monetary fiat experiment ends (for regular readers of this website, it won't come as a surprise):
Consumer and producer inflation, in a long declining trend since the early 1980s, kept bumping along at low levels (under 2% annually) post-GFC despite the extraordinary amount of continuous monetary and fiscal stimulus, which lasted all through the 2010s. This, along with new monetary theories, must have convinced policymakers that inflation was dead for all time, and that the tool of Zero-Interest-Rate Policy (ZIRP) and unlimited money printing (QE and the lot) would be a fabulous all-purpose, all-the-time cure-all, devoid of negative consequences. The post-GFC policy became even more supercharged during the pandemic, as central banks and treasury officials doubled down (“in for a penny, in for trillions”). As a result and along with other factors, inflation simply erupted in a vertical burst. Consumer and producer prices, led by energy prices and habitation costs, have gone wild. Consumers (as opposed to the PhDs at the Fed and the reality-challenged folks who run the world) understand that inflation as experienced may actually be in the teens, not 5% or 6%. Consumers understand that their wages are falling increasingly behind the cost of living. Now the smug and absurdly confident smiles have been wiped off the faces of the policymakers. Their attempts at self-reinforcing messaging (Transitory! Supply Chains! Putin! Tapering! Inflation can be killed in 15 minutes!) have been followed by the current tough-guy rhetoric (“We will do whatever it takes…”). We don’t understand why investors and citizens have not completely lost confidence in policymakers and the gobs of money that they print willy-nilly, but maybe it is just a matter of time. What is true is that (i) these policymakers do not know much about the nature and causes of inflation, (ii) they will likely not have the staying power to crush it, (iii) it is likely to come down sharply only in a recession, and (iv) during the recession central bankers and treasury officials are likely to go right back to their ZIRP/NIRP/QE playbook, together with massive over-spending. We think central bankers will keep raising interest rates for the time being, because they have read something about Paul Volcker and realize that they need to do something about the cost of living. But is it really possible that simply raising short-term rates to 4% or 5% is, by itself, going to suppress inflation? In a world where inflation is running at 8% to 12%? The world in which policymakers have printed additional trillions of dollars to avoid showing voters the actual magnitude of their mistakes? The big question — and the one politicians should be asking — is: What level of interest rates will suppress inflation? We do not know what that rate may be, nor the timing or impact on growth, employment and asset prices. Given the melee of factors discussed in this section, it is very unlikely that inflation will just “obey” the determination and passion of global central bankers and agreeably drift down to central bank “target” levels. Moreover, the Fed has never raised rates into a struggling economy, as it is now doing. What level of rates will occasion a crash? Or will it be some combination of a melee factor and rates? We can’t know. A crash would certainly put a strong damper on consumer and producer prices. Will they just keep raising rates until the economy does crash? Central bankers actually say that they are aiming for a soft landing. But they are not puppeteers. They do not have the control that they profess to have. Whether there is a soft landing or a “hard” landing (crash) is completely unknown at present. As one final example, policymakers state their determination to tame inflation, but QE has not truly reversed. Mortgages on central-bank balance sheets are not being sold. They are raising interest rates like crazy, and the natural way for inflation to go from 10% to 2% is through a serious recession. There is still $30 trillion on central banks’ balance sheets. So what happens when the recession is in full force? Do the central bank balance sheets go to $50 trillion? The world is on the path to hyperinflation, which is the direct route to global societal collapse and civil or international strife. It is not baked, but that is the path that we are treading. Uplifting, right
Believe it or not, it only gets more pessimistic from there.
In agreement with this website, Paul Singer laid virtually all of the blame for the looming crisis on central bank policymakers, which it said had been “dishonest” about the causes of high inflation by blaming it on supply chain bottlenecks in the wake of the pandemic, rather than on ultra-loose monetary policy put in place at the height of the coronavirus crisis in 2020.
Elliott's warnings come as investors have lost $28 trillion in equity value (as well as tens of trillions in bond value) and are trying to assess the economic damage likely to be felt from a rapid series of large interest rate increases in the US and elsewhere, as central bankers race to try to curb soaring inflation.
While all stock markets are in a deep bear market, with the Nasdaq down by one-third since its high a year ago and roughly half the way to its dot-com crash lows, Elliott said markets had not fallen far enough, given the many risks present, and warned of a further reversal of the so-called “everything rally” seen near the top of the bull market of recent years, as sky-high investor exuberance lifted all manner of risky assets.
There are so many “frightening and seriously negative possibilities” that it is hard not to think that “a seriously adverse unwind of the everything bubble” is coming, it said. The hedge fund also estimates a 50% fall from peak to trough would be “normal”, suggesting further large falls to come in major equity markets, although it added it was impossible to know whether or when that would happen.
Here is how Elliott framed its response to the question of whether there will be a pivot:
Elliott offers an emphatic: MAYBE. If it does not work out that way and if the end of the bear market is not now or nigh, there is a lot of pain ahead for the jumpers and the pivot-seekers. Let us put it this way: Real bear markets (ones that feature 40% to 50% declines from the top) tend to crush a generation of speculators. That has not remotely happened yet. When the crazy monetary and fiscal policies (and the continuous moral-hazard-creating bailouts) were only raising stock, bond and real estate prices, they looked like they could be part of a permanent playbook. But when inflation burst on the scene (as a delayed but natural response to the same crazy policies), policymakers lost a good deal of their unfettered ability to practice unconstrained, experimental and dumb policies. Now billions of people around the world are suffering from a cost-of-living crisis. The ability of their earnings and savings to purchase what they need, much less what they want, has suffered a significant erosion. Most of them do not really know how much they are going to dislike the new regime (rising prices of things that they need) and how resentful they will be toward investors and speculators who skate blithely through the upheavals
But while Elliott is in the "maybe" camp, it's only for the short-term. Over the long-term, the hedge fund fully agrees with us that the next recession will merely spark even more of the same monetary firehose, to wit:
Our biggest concern is that the developed countries’ central banks and their mostly incompetent political leaders (who, again, specialize in kicking the can down the road) have set the table for the inevitable, crazy policy response to the apparently-impending recession. That response may well launch a truly devastating inflationary economic crisis.The QE balances simply cannot be unwound, and the policy response to the recession will take the $30 trillion balance to what? $50 trillion? $75 trillion? $100 trillion? What force is going to stop this mad expansion other than a global credit collapse? These look like wild assertions, but they sure look like irresistible conclusions to us. Just don’t forget that markets can ignore irresistible conclusions for a very long time, so we do not recommend holding your breath.
Conveniently, the hedge fund with nearly 50 years of capital markets experience also lays out a potential list of triggers that could lead to the next market crash including:
Banks and other lenders are starting to be forced to recognize large losses on bridge financings and loans;
leveraged holders of mortgage-backed securities, and structured-debt products and CLOs, may be facing substantial markdowns;
liquidity in rates and credit markets has been dramatically reduced;
leveraged private equity will be under severe stress in the event of a meaningful recession; and
housing unaffordability has taken the largest and quickest jump in history (the combination of the 45% rise in home prices from 2019 through 2022 and the extraordinary and rapid rise in interest rates).
There is so much more in what is arguably the most important hedge fund letter of 2022 including the fund's thoughts on home prices, QT, the impossibility of "normalization", political leadership (or lack thereof), high frequency trading, less-than-one-day to expiration options, liability-driven investing, derivatives ("there is a broader point here: Complicated structures, leverage, unfunded promises, and derivatives represent a serious uptick in risk and uncertainty in the economies and financial systems of the developed world"), the contradictions in ESG, the future of crypto ("if sovereigns ultimately “approve” cryptos as a form of currency, it would represent one of the quickest and largest money-printing episodes in monetary history"), gold ("If you distrust fiat money, then why not buy gold! It is the only medium of exchange that has stood the test of millennia"), the fate of labor, corporate profit margins and global risk, China, the hiking cycle, the dollar, globalization, energy, war, and much more. |
