Taking a lesson from the recession of 2008, when he could not tap into falling markets as much as he wanted, the legendary multi-billionaire hedge fund investor Paul Singer of Elliott Management has readied a war chest by raising $5 billion in 24 hours to lap up potentially great opportunities arising from an imminent crash, which he has characterised as “all hell breaking loose”.
Although the hedge fund, which managed about $33 billion as of 1 April 2017, has been warning about the impending financial doomsday for some time, in its most recent letter to investors explained that the time is right to build great buying capacity, since it expects the market to nosedive when it will become indifferent to the endless government support.
“We think that it is a good time to build a significant amount of dry powder,” Elliott Management wrote to investors, in a first-quarter update, as reported by various media organisations.
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“Given groupthink and the determination of policymakers 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,” the fund said in the letter, adding, “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 letter further said.
Elliott Management highlighted a chapter during the financial crisis to explain its decision to raise more money ahead of investment opportunities. The hedge fund said that in 2008, it invested all of the remaining capital investors had committed to it shortly after Lehman Brothers failed, and also raised an additional $800 million, but added that it “could have deployed ten times as much in what turned out to be amazing (and fleeting) opportunities.”
On Friday, the S&P 500 index and the Nasdaq Composite Index registered record levels on the same day for the second consecutive trading session, while the Dow Jones Industrial Average closed just 35 points short of its own all-time high. Skeptics of Wall Street’s recent rally, which has continued on the hope that pro-growth promises by President Donald Trump will be fulfilled soon, predict an inevitable failure of the President in fulfilling his policy promises and markets falling drastically when that happens. 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 ultra-low levels, the Federal Reserve won’t be able to provide sufficient Quantitative Easing (QE) support, as it did during the 2008-2009 financial crisis.
However, Singer’s doomsday predictions haven’t always been accurate, nor have they been very early. The hedge-fund investor in 2008 said that the Fed’s monetary policies and QE programs would cause inflation to rise quickly and damage the U.S. economy. So far, inflation has been relatively mild and the US economy seems to be stable and growing at a slow pace.