Elliott Management Sees Hyperinflation Coming, And The Worst Crisis Since World War II

Elliott Management Sees Hyperinflation Coming, And The Worst Crisis Since World War II
Russell Burns

over 1 year ago4 mins

  • In a note to clients, Elliott Management warned about the risks of global hyperinflation, created by central bank policy.

  • The hedge fund says it’s “absurd” to think anyone knows the path of inflation now – including the Fed.

  • To protect your portfolio from the risks that inflation continues to linger, you could consider investing in the iMGP DBi Managed Futures Strategy ETF.

In a note to clients, Elliott Management warned about the risks of global hyperinflation, created by central bank policy.

The hedge fund says it’s “absurd” to think anyone knows the path of inflation now – including the Fed.

To protect your portfolio from the risks that inflation continues to linger, you could consider investing in the iMGP DBi Managed Futures Strategy ETF.

Elliott Management is by no means sugar-coating things: in its most recent letter to clients, it warns that the world is hurtling toward debilitating hyperinflation that could lead to the worst financial crisis since World War II and a “global societal collapse”. The view is abundantly dire. But the activist hedge fund founded in the 1970s by billionaire investor Paul Singer has a way of seeing things coming. So it’s worth considering its latest warnings and how you might protect your portfolio, just in case they’re right…

What’s Elliott’s view of where we are now?

Elliott, which has about $56 billion in assets under management, sees the world’s economies very much on the brink and sees the current financial conditions at risk of sending many of them into a crippling state of hyperinflation – an often spiraling crisis marked by accelerating inflation of 50% or more.

It sees today’s global financial conditions – with a broad economic slowdown and higher-than-usual inflation in many places (still a far cry from hyperinflation levels) – as a direct result of central bank policy mistakes that ramped up in 2009 during the global financial crisis, when central banks, including the US Federal Reserve, began embarking on bond-buying campaigns in huge proportions. These massive “quantitative easing” programs, which are often referred to as “printing money”, essentially drive up the prices of government bonds and drive down the yields (because prices and yields move in opposite directions), which makes money cheap to borrow for consumers and companies – and tends to be deliriously good for stocks and other assets. With such an extended era of cheap borrowing, consumers went on a spending spree, driving up asset prices (stocks, for example, and houses) and contributing to the inflation we now see.

What happens next, Elliott says, is where the risks are. Like many central banks around the world, the Fed is now aggressively hiking interest rates to try to slow the economy in hopes of bringing down the country’s high inflation. But rate hikes are a blunt tool and the impact tends to be felt with a delay of several months.

How does Elliott see this all going wrong?

The Fed is in uncharted territory: it’s never hiked rates this aggressively before and has never raised rates during an economic downturn. The question now, the hedge fund says, is how high interest rates will need to go to bring inflation back down toward the central bank’s long-term 2% target (it was recently around 8%). Elliott says it’s “absurd” to think anyone knows the path of inflation now – including the Fed.

But what really worries Elliott is the enormous financial leverage (i.e. the amount of money borrowed) that exists in the financial system – on both central bank balance sheets (in the form of bonds) and in the private sector (in loans, mortgages, and other debt). It’s not only that the era of “easy money” has likely driven inequalities and led to bubble-like conditions in certain asset classes (though that’s part of the concern). It’s also that as interest rates now rise and an era of “quantitative tightening” begins (essentially: central banks embark on programs to sell off those stacks of government bonds), this may lead to unforeseen consequences.

The firm says the resulting financial stress could lead to a much sharper selloff in stocks, corporate bonds, and real estate – wiping out wealth and sparking a new global financial crisis that makes the 2008-09 recession look mild. Central banks will likely respond to the next crisis as they did before – with stimulative bond buying (that so-called money printing) and by slashing interest rates to near zero. It’s the strategy that’s worked before, and one of the few it’s got. But that’s the path that may lead to hyperinflation and a global societal collapse, Elliott says.

What’s the opportunity?

Look, this crisis isn’t going to unfold overnight if it happens at all. But with higher-than-usual inflation still a worry in the US and elsewhere, it’s worth considering allocating a portion of your portfolio to the iMGP DBi Managed Futures Strategy ETF (ticker: DBMF US; expense ratio: 0.85%). It mimics the returns of the 20 biggest commodity-trading advisor (CTA) hedge funds – and it’s up 32% this year. How this ETF invests is explained here.

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