As regular readers know, I enjoy lampooning industry “legends” in these pages.
Actually, “lampooning” isn’t always accurate, as that carries a negative connotation. In most cases, I’m just having fun at the expense of people whose reputations (and certainly wallets) can afford it.
Most of them are easy targets because, whether they realize it or not, they have a publicity hound streak which the media is more than happy to indulge. I have a formidable (some would say unrivaled) knack for biting satire, and I wield it when I think it can provide some value for market participants vis-à-vis the proclamations of various “hall of famers,” as it were.
Now, to Paul Singer. He’s a “legend,” yes. But, as some readers will likely attest, he’s a bit of a different animal. I’m not sure I would describe Paul as “an easy target,” and even if he were, the comments I wanted to highlight are, I think, worthwhile and thereby not amenable to satire in the first place.
Singer, appearing on Grant Williams’s podcast Friday, spoke at length about inflation.
The original question posed to Singer was this: “[The] era of central bank money-printing — how does it end and is there a specific catalyst?’
Singer proceeded to deliver a 25-minute assessment that, even if you don’t agree (because you think, for example, that the world is simply doomed to persist in a deflationary spiral in perpetuity), was nevertheless worth a listen.
Right from the outset, Singer refused to make any predictions about the specific date that central banks’ reign over markets might come to an end.
“There’s a lot of path-dependency here. Over a long period of time, central bank control of the global economy and financial system and the deference with which fiscal authorities and investors have given to central bankers, has just step by step gotten more pervasive,” he said. After noting that emergency policies (namely, rate cuts and QE) were “certainly needed in the aftermath of the [financial] crisis,” Singer said that,
….what happened after that — nine years of crisis techniques long after the crisis was finished — was extremely dangerous and I think the central banks came to enjoy their role. They weren’t punished by consumer price inflation. They didn’t understand that asset price inflation is a form of inflation. They didn’t at all take into account that they were exacerbating inequality, which became a populist political theme.
None of that is “new,” per se, but it can’t be emphasized enough. It echoes, for example, the characterization of the post-GFC era as expounded by Deutsche Bank’s Aleksandar Kocic, who, over the years, described a “permanent state of exception” engineered by policymakers.
The following passages (from a 2017 note) are always worth a reread. From Kocic:
In its core, policy response to crises was an extension of what in a political context is known as the state of exception: Market laws had to be suspended to restore normal functioning of the markets. The intrinsic contradiction of this maneuver is resolved only by understanding that suspension is temporary. Stimulus will have to be unwound. However, the accommodation has been in place for a very long time, during which traditional transmission mechanisms have atrophied and investors’ mindset has changed in a way that has altered irreversibly their behavior, the market functioning and its dynamics.
Engineering a state of exception comes with considerable risk. The Fed (and central banks in general) carries an implicit responsibility for orderly reemancipation of the markets, which makes stimulus unwind especially tricky. This highlights the deep dichotomy of power: While a state of exception is an exercise of power, there is a clear tendency to disown that power. And the only way to avoid facing the underlying dilemma is to never give up the power. This creates a new status quo — a permanent state of exception.
Singer went on to say that the 2018 experience — when the Fed attempted to normalize policy only to watch risk assets careen into a fairly painful correction — was evidence that the Fed is “trapped.”
As to inflation, Singer cautioned that economists and central banks are no more likely now than in the past to be adept at identifying turning points.
“If you look at the inflation of the 1960s and 70s, [it] came from very low levels — they didn’t see it coming, and when it came they thought it was temporary and one thing leads to another,” he said.
Crucially, Singer talked about the possibility that in the post-COVID world, supply chain orthodoxy could be challenged, as just-in-time is called into question and, perhaps, subjugated to national security concerns and generally scrutinized for the vulnerabilities laid bare in 2020. Obviously, that could be inflationary.
“I think there’s a really good chance given the determination to spend trillions more on stimulus… of a tremendous surprise,” Singer went on to remark. The prospect of CPI inflation moving higher and “keeping on going” would be a “stunning development for central bankers,” he said, noting that in addition to the supply chain issues mentioned above, labor could see power gains going forward given the Democratic shift in Washington.
In that context, it’s worth mentioning that Alexandria Ocasio-Cortez spent part of inauguration day wielding a bullhorn on a picket line with the Teamsters.
Ultimately, the best soundbite from Singer is probably the following bit about bonds:
It’s been senseless for people to continue to own long-term bonds at these crazy yields. It doesn’t make sense even with current inflation to hold those instruments. No institution can meet their goals by owning those bonds. They’re no longer a hedge against equity portfolios. When you buy something with no yield, where you can only make money if the yield goes from zero to [negative five or negative 10 basis points], you’re engaged in speculation, you’re not engaged in investing.
I’ll just leave that there.