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.”
Better-than-forecast economic data and improving earnings reports have helped the Standard & Poor’s 500 Index rebound 8 percent from a six-month low on Oct. 15. U.S. stocks have more than tripled from their 2009 low when including dividends, and government bonds as measured by the Bank of America Merrill Lynch Treasury Index have rallied 26 percent in the past six years.
The 70-year-old Singer, one of the biggest backers of Republican politicians, reiterated criticism that quantitative easing policies of the Federal Reserve and central banks globally that helped power economies over the past six years 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 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.”
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.
Robust economic growth has helped push the U.S. budget deficit down 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.
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.
Reported growth numbers are too high because the official inflation number is “simply too low” as economists accept “adjustments and tricks” that are part of understating and distorting the measure, Elliott wrote.
Elliott also said an “incompetent global response” to the Ebola epidemic may be a precursor to a “severe” global economic slump.
Singer founded the $25.4 billion investment firm in 1977. Its oldest fund has delivered compounded annual returns of 13.9 percent since inception.
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