Billionaire investor Paul Singer has a bleak outlook for Wall Street, and he has built a $5 billion rainy-day fund in preparation for what he describes as “all hell” to break out.
Singer, who runs $33 billion hedge fund Elliot Management, wrote in a recent letter to investors that a bout of protracted low volatility and a tendency of stocks to levitate higher is likely to lead to near-term carnage in financial markets:
Here’s how Singer puts it:
|Given groupthink and the determination of policy makers to do ‘whatever it takes’ to prevent the next market ‘crash,’ we think that the low-volatility levitation magic act of stocks and bonds will exist until the disenchanting moment when it does not. And then all hell will break loose (don’t ask us what hell looks like …), a lamentable scenario that will nevertheless present opportunities that are likely to be both extraordinary and ephemeral. The only way to take advantage of those opportunities is to have ready access to capital.|
The hedge-fund manager has raised some $5 billion in recent weeks, according to Reuters, that he says will be put to work when investor confidence finally gets brought to its knees. He raised the sum in about 24 hours, the report indicated.
Lately, the stock market has been stubbornly buoyant.
After buckling under mounting worries about President Donald Trump’s White House and alarming allegations about Russia’s connection to members of the president’s administration, resulting in the worst single-session drop in 2017, equity-index gauges have rebounded higher.
On Friday, the S&P 500 index SPX, +0.03% and the Nasdaq Composite Index COMP, +0.08% registered records on the same day for the second consecutive session, while the Dow Jones Industrial Average DJIA, -0.01% closed out the week just 35 points short of its own all-time high. This equity action came as the CBOE Volatility Index VIX, -1.80% otherwise known as Wall Street’s “fear gauge,” finished in single-digit territory for only the 13th time in its history, booking its fifth lowest close ever. That is way below the VIX’s long-term average of 20 and comes after the index—used to bet on market swings a month in the future—closed at 15.59 on May 17, the same day appetite for risk went on hiatus.
Skeptics of Wall Street’s recent rally, which has been borne on the hope of pro-growth promises from Trump coming to into full view sooner than later, predict that an inevitable failure of the president to make good on his policy promises could jolt markets violently lower.
Singer is among those fearing that very scenario. He is betting that an economic recession may be on the horizon and believes that, with interest rates already near ultralow levels, the Federal Reserve won’t be able to provide a sufficient quantitative-easing cushion, as it did during the 2008-’09 financial crisis.
It is worth noting that Singer, who had been a prominent Trump critic, has met face-to-face with the president in the White House and, according to reports, donated money to his Jan. 20 inauguration.
To be sure, Singer’s doomsday radar hasn’t always been accurate, nor it has been very early. The hedge-fund investor in 2008 said Fed monetary policies and QE programs would supercharge inflation, or rising prices, and damage the U.S. economy.
So far, inflation has been relatively benign and the economy seems to be on a steady footing, albeit muted, growth footing.
But understanding how so-called smart-money investors, like Singer, may be positioning themselves during a period in which investors are incessantly on edge about ever-rising stock valuations and less-than stellar economic reports can be useful.