Paul Singer, a billionaire investor, has created a $5 billion rainy day fund to protect himself from a disaster awaiting Wall Street, according to Marketwatch. Singer runs Elliot Management, a $33 billion hedge fund. He recently advised investors in a letter that low volatility is ahead for stocks, which will see values move higher for a period, then suffer a major fallout.
Singer said policy makers’ are intent on doing whatever is necessary to prevent a market crash, causing many to believe the “low-volatility levitation magic act” of bonds and stocks will continue until some unforeseen “disenchanting moment,” a scenario that he can’t describe.
At that point, “all hell will break loose,” he wrote, which will present extraordinary and ephemeral opportunities. The only way to capitalize the opportunities will be to have easy access to capital.
Singer has raised about $5 billion in a 24-hour period some time in the last few weeks, Reuters reported. He said he will put the funds to work when investor confidence crumbles.
The stock market has remained buoyant in the meantime.
Equity indexes recently rebounded after experiencing the worst fall in a single session for the year on account of concerns over President Trump’s connections to Russia.
The S&P 500 Index SPX on Friday edged up 0.03% while the Nasdaq Composite Index rose 0.08%, marking records for the second straight session. The Dow Jones Industrial Average lost 0.01%, ending the week 35 points below its all-time high.
At the same time, the CBOE Volatility Index lost 1.80% and ended in single-digit territory for the 13th time ever, marking its fifth lowest record close. The volatility index ended well under its long-term average of 20, coming after the index closed at 15.59 May 17, the day investor appetite for risk took a holiday.
Those who are skeptical of the recent stock rally, driven by expectations of Trump’s pro-growth agenda, expect ultimate failure from Trump to make good on his promises, a scenario that could push markets significantly lower.
Singer is betting a recession could be on the way. With interest rates approaching record lows, the Federal Reserve will not be able to offer enough quantitative easing like it did in the 2008/2009 financial crisis.
Singer, a Trump critic, has met the President at the White House and contributed to his inauguration on Jan. 20.
Singer has not always been correct. In 2008, he said quantitative easing and Fed monetary policies would boost inflation or raise prices, damaging the economy.
But inflation to date has been fairly benign and the economy remains on a steady foundation, despite less than stellar growth.
Nevertheless, it could pay to understand how smart money investors are positioning themselves at a time when investors are edgy about continually rising stock valuations and weak economic reports.
Now the question is, should you increase your cash holdings? Are we facing a new recession? Add your comment below.