WHEN: Tuesday, September 13th
WHERE: CNBC's "Squawk Alley"
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Paul E. Singer, Elliott Management Founder and President, live from the CNBC Institutional Investor Delivering Alpha conference in New York City on Tuesday, September 13th.
Following is a link to the video of the interview on CNBC.com:http://video.cnbc.com/gallery/?video=3000550746
Mandatory credit: CNBC Institutional Investor Delivering Alpha conference.
TYLER MATHISEN: Here I come. Why are you so quiet? you were expecting somebody else?
Our next guest is one of the most interesting and provocative of all the folks in the hedge fund business. I heard him speak at an II event not long ago, in the early summer, and he was fascinating. He was funny. He was interesting. He did not disappoint in any sense. And I know he will raise -- live up to that standard today for you all.
Please welcome to the stage Paul Singer, the founder and president of Elliott Management, and your interrogator, Kelly Evans, co-anchor of the Closing Bell on CNBC.
KELLY EVANS: Hello. Hey, everybody.
It's a pleasure. And, Paul, thank you for joining us here at Delivering Alpha this year.
In case anybody's missed it, your latest investor note has some pretty pointed comments about your concerns about, frankly, the global financial market. You said we're looking at the biggest bond bubble that we've ever seen and that we're at something like a breaking point in market.
Could you share how deep your concerns are now, especially given that these are concerns you've had for a number of years? How serious is the situation today?
PAUL SINGER: Well, I think we're in the middle of a close to 40-year experiment in how leveraged can a system be and in how many ways. The global derivatives market today is something like $700 trillion notional amount. Although, of course, that doesn't exactly represent a proxy for risk between the fact that 75% of that is interest rate derivatives and that in 5,000-ish years of history, there have never been interest rates remotely close to where we are now, causes me to think that this long downtrend in interest rates, which now have something like 30% of developed market, fixed income, trading at zero or weirdly below, despite the fact that it hasn't worked.
And they say it has worked. And what they say about it -- "they" meaning central bankers and those who apologize and support and cheer on central bankers. They say, well, growth hasn't really picked up, but, in the absence of what we're doing, it would have been a lot worse.
I don't think that's right. I think it's possibly right as far as it goes, meaning because of the lack of the obvious low-hanging fruit of fiscal -- and I'll explain what I mean by "fiscal" -- fiscal policies that would restore levels of growth significantly higher than those described by Ray Dalio and Timothy Geithner, restore that to the developed world in the absence of fiscal policies in tax regulations, trade, education policies that would deal with the consequences of technological obsolescence.
In the absence of those pro-growth policies, sure, monetary policy is the only game in town. But eight years of ever-declining rates and ever-increasing radicalism in other monetary policies have not created a sustainable, accelerating uptick in growth. What they have done is created a tremendous increase in hidden risk, a risk that investors don't exactly know or have faced about their holdings. And I think it's a very dangerous time in the global economy and global financial markets.
KELLY EVANS: And by way of reminding people as well of 2007, as I read in Gillian Tett's account, you and Jim Chanos -- that was the finance ministers of the G7, correct? -- and told them of your concerns about the market at that point. And said, you know, we look at a lot of these exotic mortgage instruments and we look at what's happening, and we think the banks are ultimately going to have huge problems, and they're overleveraged, and we want to warn you about what we see happening with the global financial system. And Geithner and others were in the room, as I understand, and they sort of said okay.
So even for people today who might have heard your warnings before, would you say that now we're at a point like in '07, when that HSBC index was cracking, when you see bond markets cracking, is now that point? Is it bad enough to warn people today like you would have wanted to warn them back in 2007?
PAUL SINGER: Let me make a comment or two about that time and that episode. It wasn't just myself and Jimmy Chanos that were speaking like that and speaking like that to policymakers and regulators. In that particular meeting, there were a number of other financial industry folks and hedge fund folks.
I personally went to Germany to meet policymakers in Germany because we had some relationships in the finance ministry. And they were a little bit more receptive. But, to me, the most interesting part about that episode was it was practitioners, not academics and not policymakers, that had a deeper understanding of where the financial system was in terms of risks.
The second thing that struck me about that is the amazing arrogance of the policymakers. They didn't listen. They treated us as if we were ignorant children. And, of course, they didn't do anything. Neither did the German policymakers, parenthetically.
But after the crash, it's all been one way. The emergency action following the crash, despite the fact that central bankers -- including, of course, the Fed -- had no idea of the risks that were building, had no idea of the vulnerability of the financial institutions to the confluence of these risks and the consequences of the leverage, the derivatives, the structured products, the real estate boom, all in a sort of self-reinforcing dance, they had no idea about that.
And so, to me, the credibility of the Fed -- and the Treasury -- but the Fed going forward was severely challenged. But the immediate aftermath of the crash, policy was appropriate. Reduce interest rates sharply. Stand ready to supply liquidity in the midst of a crash.
Well, the crash period, you know, occurred over a period of -- in its most intense phase, in a period of weeks or months. By the middle of 2009, it was time for a pivot. And no country in the developed world -- and I'm talking about Japan, Europe, the UK, United States -- no country actually made the pivot to the other policies that could make the economy -- that could restore growth, that could cure the structural impediments to growth and bring growth back to something close to the previously experienced levels of growth.
I strongly believe that it's just not the case that the developed world -- let's talk about the United States -- is limited to an assumption of 1 1/2 or 2% per year real growth going forward. And I certainly don't believe that if it is limited, it's because of demographics --
KELLY EVANS: So you think we could grow at 4 or 5% again?
PAUL SINGER: No. But something significantly north of this 2% that America is stuck in or 1, 1 1/2 that Europe is stuck in is possible.
KELLY EVANS: Are we possibly at that pivot point in the U.S. now? Fiscally speaking, should Donald Trump be elected president?
PAUL SINGER: Well, I don't want to speak about politics at this juncture. In two months or so, we'll know the answer to the -- which envelope, or if both of these people are still on the stage at that time.
PAUL SINGER: But what I do believe is that pro-growth policies are policies that could and would increase growth. For example, I believe it would have been vastly different for the growth rate of the American economy and the problem of underemployment and unemployment and the reduction in the labor force participation rate, which is every bit as important, perhaps more important than the headline employment rate, had Mitt Romney been elected president. There would have been a number of policies in tax regulation and the things that I talked about a couple of minutes ago that would have generated a higher rate of growth as distinguished from the continuation of growth-suppressive policies.
And, by the way, it turns out, I believe, that, aside from the policies that the President and Congress could engage in to promote growth and to make the economy work better, I also believe that the monetary extremism -- this zero percent interest rates, this quantitative easing, this QQE in Japan, this talk about funding infrastructure spending by helicopter money or printing money to fund infrastructure spending, the entire constellation of monetary policies post '08 I believe has been strongly growth-suppressive.
Bank margins have been --
Postings are weighed and strongly suppressive bank margins have been suppressed and insensitive for banks to do normal lending versus financial engineering, buying bonds and being guaranteed to earn a positive return by financing them short term. I think the incentives have been against normal lending, against entrepreneurship growth, and towards financial suppression. I also think that, you know, you talked about what's happening in the last few days. We've had an extended period where risk off means bonds go up. And with bonds at zero percent interest rates.
KELLY EVANS: Bond prices go up or?
PAUL SINGER: I'm sorry. Bond prices go up and bond yields go down, and with the rates that currently exist in the bond markets, the term "safe haven," applied to G7 bonds, is just wrong. These are not safe havens. In fact, there's a tremendous amount of risk in owning 10- and 20- and 30-year bonds at these rates.
And then in the last few days, there have only been hints that stocks and bonds going up together, for a long period of time, could have some kind of symmetry and be matched at some point by stocks and bonds going down simultaneously. That not only would put quite a dent in a number of institutional portfolios, but there are strategies out there, as we all know, like risk parody that actually make the case that leveraged longs in bonds, hedge long positions in equities. And you should match the volatility of your holdings, not just dollars in 50-50 or 60-40.
>> So what happens if bond prices and stock prices start to fall further together? They might. Is it because they would collapse under their own weight or would it be a catalyst, like the Fed, if that gets taken off the table, that scenario gets taken away as well as.
PAUL SINGER: My day job is running a hedge fund that we'll celebrate 40th anniversary next February and our mandate is to try to make money all the time, as close as possible to all the time. And we have a multi-strategy approach. So my day job is not predicting. But in doing my day job, I have to think about exactly what you just asked. And as hard as I try to figure out for our own purposes, for purposes of tending and protecting the portfolio, the answer to that exact question, it's impossible to say. There's a consensus around safe haven. There's a consensus around the acceptance of monetary policy.
I think Andrew Sorkin asked a fantastic question on one of the earlier panels this morning, that isn't it time for the central banks to hand over the job to others, Congress or policymakers? And I think that's exactly the right question, because I think it's unsustainable to have central bankers do the only job, job of supporting the global economy and certainly the developed world economy.
And it's not clear what would cause a change in direction. One of the several reasons that it's not clear is because central bankers and policymakers do not want stock prices and bond prices to go down. And so all of this buying, all of this threats that we will do whatever it takes, these insipient signs of perhaps global recession or perhaps just muzzling along or data that's not as strong as hoped or expected must be scaring policymakers, but they seem paralyzed. And, certainly, through ideology and other political considerations, presidents, prime ministers, and treasury officials around the globe are not picking up the ball.
A further result of all of this -- and I think some people have the politics backwards. A further result of all of this is to exacerbate inequality and to create the conditions for this social restiveness, let's just call it, that turns into political restiveness.
And why is that? Because, through no fault of their own, people who own stocks and bonds, high-end real estate, other things that go -- well-off people own or can buy or service them, those things are doing great. Well-off people are doing great. Inequality is being exacerbated by this mix of policies.
KELLY EVANS: So this is an interesting question too, going back to inflation, when the argument then was, do you raise interest rates, creating some unemployment but stopping the inflation? What do you do today?
Now, you mentioned last time we spoke that maybe you would write yourself in for president. If you were president come November, what would you do? Or is this something that only the Fed can -- and, really, my question is this: Would raising interest rates or kind of what you're talking about have the same kind of ultimately beneficial impact as it would if you were fighting inflation as it would if you're, in effect, fighting asset prices? I mean, is that something that they should be doing, or does it just mean that those prices will collapse arguably for no good reason?
PAUL SINGER: Okay. Let's -- there's a context here. And, to me, the metaphor is that central bankers and policymakers have gotten themselves in deeper and deeper.
What I mean by that is the global financial system and economy is obviously so fragile because of debt, so fragile that all of this conversation about the next 25 or 50 basis points of interest rate hikes in the United States, the possibility that the Japanese and the European policymakers won't make policy rates deeply -- more deeply negative that these kinds of portents cause a ruckus, or the beginnings of a ruckus, or a pre-ruckus in global financial markets.
So I think with $15 trillion roughly on the major central bank balance sheets, with all of these rates at zero or, even crazily, below zero, you have a very delicate situation which cannot be solved by a sledgehammer. You need some finesse.
And one of the main elements of finesse is you can't just -- in my view, whoever is the next president or central bank officials around the world -- you can't just raise interest rates without doing something else.
And the something else is, if interest rates to be raised and the holdings of bonds and stocks and mortgage-backed securities -- and many people in the room may not know that the Bank of Japan is a top 10 shareholder in 90% of Japanese public companies. This is insane. This is crazy. This is not working, but they keep going.
So you want to raise interest rates, you want to start bleeding out this $15 trillion to give yourself some room to do something in the next crash, fine. Do it simultaneous with tax, regulatory, and other --
KELLY EVANS: So not acting independently?
PAUL SINGER: That's exactly right. And I think -- and somebody else wrote about this recently with a different slant. I think central bank independence is overrated. It actually, in my view, doesn't really exist. But it's not something that seems currently useful to me. I'm not saying immediately start legislation to put central banks under the thumb of governments, because we know the danger of that. But we know the danger of that, but that's what they're planning to do anyway, meaning, printing money, debasing the currency.
And I just want to say one more thing about debasing the currency. In answer to your question about predicting what's going to be happening and is this the beginning of a reshaping of the relationship between stocks, bonds, and the other side of the mountain, the problem we have is that it's been so long in the making that the bond prices are so high, interest rates are so low that it's impossible to ascertain what change in thinking will generate a groupthink with a different vector, thinking that bonds are not the safe haven, that both stocks and bonds can go down. I think go down together.
If that is triggered, I think central banks are in a tough place. And I think governments are in a tough place. The spending on infrastructure, obviously, there's an infrastructure gap in the developed world. But there are budgetary considerations too. I think it's very easy historically for central banks and governments to debase money.
It's seen currently to be very, very hard. And they have these targets, 2 percent here and 1 percent there, and they seem to be struggling to generate monetary debasement. But I don't think that's a natural condition. And I think at some point, perhaps soon, there will be a time when inflation, despite the growth-suppressive policies that have been placed in the developed world, that inflation may blow through these targets and surprise everyone, because it's actually not hard to debase a currency.
KELLY EVANS: But it also sounds like, because that inflation has yet to materialize, which is why there's plenty of skeptics about this point of view, but it also sounds like what you're saying is that perhaps the system can collapse under its own weight if some of those factors change, even if there's no inflation in the 3 to 4 to 5-plus percent category.
PAUL SINGER: I'm not going to talk about collapse of the system. I think the one thing that every policymaker in the developed world is on the lookout for -- and they have the tools to do this -- is to ward off credit collapse. There will be no credit collapse, in my view.
But they are very sanguine and, I believe, careless and heedless about the risk of inflation. And it's not possible for any of us, really, to gauge when in basically a social process people change their mind about currency, about policymakers' confidence in paper money or any particular currency.
In the sands of time, it's easy to see where confidence is lost. But there's no way to tell. But policymakers are very -- just one more point on this.
Policymakers are very certain, and I think they are wrong to be so confident, that they can deal with any explosion of inflation. And, obviously, today, growth is at -- is a lack in the developed world and around the world. And so they may think that this difficulty in getting inflation is a permanent condition. But there are plenty of historical episodes where inflation, serious inflation, coexists with poor economic conditions.
KELLY EVANS: I was going to ask, since we're almost out of time, so a family member or somebody in the audience comes up to you and says, "Great. What do I do? What do I hold? What do I tell my clients?"
I know you are a fan of gold. Are there any other investments in the portfolio that kind of specifically -- or do they all -- speak to this world view, ways that you can make money, Deliver Alpha, if you will, in an environment like the one that you're laying out?
PAUL SINGER: I think that gold as a directional asset -- I mean, what we actually do for a living is mostly situational investing. It's buying a bond in a company and being in a multiyear struggle, where we say our bonds are senior to yours. And they say, no, you're not. And we go back and forth, yelling about that for a few years.
PAUL SINGER: But in terms of directional assets, I think gold is underrepresented in portfolios as the only money and store of value that has stood the test of time that is, in my view, undervalued and underpriced in today's world and sort of is the opposite of confidence in central banks.
But aside from gold, I think sometimes there are easy answers to that question. But it's only every once in a while. And one easy answer for many of the people in this audience, I believe, many of whom are constrained either by their size, their large size, or their mandates from their trustees or the institution or whatever, constrained in the types of assets. And many people are mostly in plain vanilla assets.
And so the answer to your question today for that crowd is that I think owning medium- to long-term G7 fixed income is a really bad idea. And by removing from your portfolio things that are really bad ideas, that's a helpful thing. So it's not just, hey, go buy this, go buy that; it's sell your 30-year bonds. The 1 into 30 Japanese swap, about three weeks ago, was just a tiny bit north of zero. It was, like, 5 basis points. And today it's 55 or 60 basis points, which is a heck of a small yield for a 30-year instrument in a goodness-knows-what world. So sell long-term bonds is my outright recommendation of an asset class.
And the reason I called it the biggest bubble in the world is because the bond market is $60 trillion, roughly. And it's at prices and yields never before seen and containing a tremendous never-before-seen asymmetry between potential further reward and risk.
KELLY EVANS: Paul, thank you. Thank you so much.
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