Singer’s Elliott Says U.S. Growth Optimism Unwarranted as Data ‘Cooked’
Paul Singer’s Elliott Management Corp. said optimism on U.S. growth is misguided as economic data understate inflation and overstate growth, and central bank policies of the past six years aren’t sustainable.
The market turmoil in the first half of October may be a “coming attractions” for the next real crash that could turn into a “deep financial crisis” if investors lose confidence in the effectiveness of monetary stimulus, Elliott wrote in a third-quarter letter to investors, a copy of which was obtained by Bloomberg News.
“Nobody can predict how long governments can get away with fake growth, fake money, fake jobs, fake financial stability, fake inflation numbers and fake income growth,” New York-based Elliott wrote. “When confidence is lost, that loss can be severe, sudden and simultaneous across a number of markets and sectors.”
Six years of near-zero interest rates and three rounds of asset purchases by the Federal Reserve have fueled economic growth and helped U.S. stocks more than triple from their 2009 low when including dividends. The stock market has rebounded 8.3 percent through yesterday from a six-month low on Oct. 15, fueled by better-than-forecast economic data and improving earnings reports.
The 70-year-old Singer, one of the biggest backers of Republican politicians, reiterated criticism that monetary policies won’t create lasting growth. While the U.S. is doing better than the rest of the world, the acceleration in the second quarter only reversed a “terrible” first quarter and has yet to be sustained in the remainder of the year, Elliott wrote.
“We do not think this optimism is warranted, and we think a lot of the data is cooked or misleading,” Elliott, which manages $25.4 billion and was founded by Singer in 1977, wrote. “A good deal of the economic and jobs growth since the crisis has been fake growth, with very little chance of being self-reinforcing and sustainable.”
Elliott said that the reported growth numbers are too high because the official inflation number is understating actual inflation by as much as 1 percent a year. That’s because economists focus on measures such as core inflation or make “hedonic adjustments” for improvements in the quality ofconsumer goods. Inflation is also distorted “by the increasing gap between the spending basket of the well-off and that of the middle class,” the firm said.
“The inflation that has infected asset prices is not to be ignored just because the middle-class spending bucket is not rising in price at the same rates as high-end real estate, stocks, bonds, art and other things that benefit from” quantitative easing, Elliott wrote.
Stephen Spruiell, a spokesman for Elliott, declined to comment on the letter.
The unemployment rate, at 5.9 percent in September, doesn’t reflect that the workforce participation rate is at a 35-year low, according to Elliott, and that full-time jobs have been replaced by part-time jobs, and high-paying jobs by relatively low-paying jobs. Real wages, the firm said, have been stagnant since the financial crisis.
The economy grew 2.3 percent in the year ended in September, compared with an average 2.9 percent advance in the four years before the past recession began, according to figures from the Commerce Department. It’s forecast to grow 2.2 percent this year and 3 percent in 2015, according to the median estimate of economists surveyed by Bloomberg last month.
Inflation, meanwhile, has been muted and government bonds rallied. Consumer prices over the past five years have grown 2.1 percent on average, and were up 1.7 percent in the 12 months through September, according to figures from the Labor Department. They are projected to rise 2 percent in 2015 and 2.2 percent in 2016, according to economists surveyed by Bloomberg last month.
Government bonds as measured by the Bank of America Merrill Lynch Treasury Index have rallied 26 percent in the past six years. The U.S. budget deficit has narrowed to the lowest level since 2008, marking the sharpest turnaround in the government’s fiscal position in at least 46 years. The shortfall of $483.4 billion in the 12 months ended Sept. 30 was 2.8 percent of the nation’s gross domestic product of $17.2 trillion over the same period, according to data compiled by Bloomberg using Commerce Department figures. The figure peaked at 10.1 percent of GDP in December 2009.
“Mortgage rates dropped, Treasury rates stayed low, and things generally improved,” said Brian Jacobsen, who helps oversee $232 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin. “Was this due to the Fed? Not entirely, but probably at least partially.”
Bill Gross, in his second investment outlook since joining Janus Capital Group Inc., said yesterday that fiscal spending may be needed to fight the “growing possibility” of deflation, because central bank policies have pushed up only asset prices and not prices in the real economy.
Elliott, whose oldest fund has delivered compounded annual returns of 13.9 percent since inception, said that while central banks have lifted asset prices, there have been no “significant structural improvements” since the financial crisis that would allow the developed economies to grow faster.
“Our belief is that the global economy and financial system are in a kind of artificial stupor in which nobody (including ourselves) has a good picture of what the next environment will look like,” the firm wrote.
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