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A legendary hedge fund that raised $5 billion in 24 hours expects ‘all hell to break loose’

Billionaire Paul Singer’s Elliot Management, which raised $5 billion in less than 24 hours earlier this month, said it’s building up its cash reserve to deploy during upcoming market turmoil.

The hedge fund has been sounding the alarm for some time. However, the most recent letter set out why the fund had decided to raise additional funds.

“We think that it is a good time to build a significant amount of dry powder,” Elliott wrote to investors in a first-quarter update, a copy of which was reviewed by Business Insider.

It added:

“Given groupthink and the determination of policymakers to do ‘whatever it takes’ to prevent the next market ‘crash,’ we think that the low-volatility levitation magic act of stocks and bonds will exist until the disenchanting moment when it does not. And then all hell will break loose (don’t ask us what hell looks like…), a lamentable scenario that will nevertheless present opportunities that are likely to be both extraordinary and ephemeral. The only way to take advantage of those opportunities is to have ready access to capital.”

Elliott highlighted a chapter during the financial crisis to explain its choice to raise more money ahead of investment opportunities.

In 2008, the hedge fund said it invested all of the remaining capital investors had committed to it shortly after Lehman Brothers failed, and also raised an additional $800 million. The hedge fund said it “could have deployed ten times as much in what turned out to be amazing (and fleeting) opportunities.”

The firm managed about $33 billion as of April 1, the letter said.

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U.S. inflation path since 2012 is worrisome

The current level of U.S. prices is noticeably lower than what it would be if the Federal Reserve had delivered on its 2-percent inflation target, St. Louis Federal Reserve President James Bullard said, calling the trend “worrisome.”

In slides prepared for delivery in Tokyo on Friday, the U.S. central banker said U.S. prices are now 4.6 percent below the price level path established from 1995 to 2012, when inflation was growing near the Fed’s target of 2 percent each year.

“This is not as severe as the 1990s Japanese experience, but it is worrisome,” said Bullard, who does not vote on U.S. monetary policy this year.

Too-low inflation has kept the Fed from raising rates more than three times since the Great Recession, but since late last year most Fed policymakers have seen faster rate increases ahead, citing improvements in the labor market.

Bullard also said he sees minimal impact on long-term bond yields from reductions in the Fed’s balance sheet, which he hopes will start in the second half of this year.

Bullard, speaking to reporters after the speech, said it was good to cap the amount of mortgage-backed securities and Treasuries that are allowed to run off the Fed’s balance sheet. However, he was indifferent to what the size of the caps should be.

The Fed is monitoring subprime auto and student loans but they are not near danger levels, he added.

U.S unemployment registered 4.4 percent in April, below what Fed officials believe is a sustainable level. Most Fed officials expect to raise the target interest rate three times this year, including the increase they made after their March policy meeting

But Bullard said that a surge in inflation is unlikely even if unemployment falls further.

With inflation still below 2 percent and inflation expectations and Treasury yields falling since the Fed raised rates in March, the Fed’s plans for rate increases may be “overly aggressive” he said.

The Fed is expected to raise rates at its June policy-setting meeting, and will release fresh economic projections at that time.

Bullard, who regards the economy as mired in a low-inflation, low-growth rut, has said he feels the central bank needs to raise rates only one more time and should then pause until it is clear the economy has shifted to a higher gear.

MARKET COMMUNICATION

Bullard also told reporters the Bank of Japan must communicate carefully with markets if it decides to taper its purchases of Japanese government bonds, and that it would be prudent for the central bank to lay out an exit strategy.

“It’s very important to get the communication right,” Bullard said. “Otherwise there will be outsize reaction and cause a lot of global dislocation.”

Japan’s inflation is nowhere near the BOJ’s 2 percent target, but analysts are growing concerned because the bank’s balance sheet has swelled to 90 percent of the nation’s nominal gross domestic product – triple the ratio for the European Central Bank and nearly four times that of the Fed.

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U.S. only grew 1.2% to start 2017

America got a slow start to 2017

The US economy only grew 1.2% at an annual pace during the first three months of the year, according to a new estimate by the Commerce Department.

That’s a hair better than the initial estimate of 0.7% published a month ago, which had been the worst quarter of growth in 3 years.

“This was a solid upward revision…but it still definitely was a sluggish start to the year,” says Scott Anderson, chief economist at Bank of the West.

Still, Friday’s figure doesn’t change the narrative: the US economy is growing slowly, albeit steadily. It’s been growing at this rate since the Great Recession ended in June 2009, making it the third longest expansion in history.

However, the Federal Reserve forecasts that growth is on pace for 2% this year. During the late 1990s, the US posted 4% growth multiple times.

President Trump is seeking 3% annual growth, though he promised higher — 4% — on the campaign trail. Many economists say Trump’s administration will be challenged to boost growth that much with an aging workforce.

American consumers were the main culprit of the sluggish growth in the first quarter. Consumer spending declined in February and March on a monthly basis. Government spending was down too.

Growth is poised to rebound this spring. The Atlanta Federal Reserve forecasts growth in the second quarter to be a strong 4.1%, backed by a pick up in consumer spending in April.

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Europe joins race for cheaper batteries with new gigafactory

Everybody is making batteries these days, it seems. The EV revolution is coming, and as none other than Glencore’s Ivan Glasenberg said last week, it’s coming faster than we had expected.

 

The latest news confirming this came from Germany. At the start of this week, Daimler broke ground on a $559 million (€500-million) battery factory in Kamenz, Germany, claiming it will be one of the largest and most modern battery factories in Europe.

The carmaking giant has made clear its intentions for superfast growth in the EV segment. In March this year, at the annual shareholders’ meeting, Daimler announced plans to speed up its EV expansion and have a lineup of 10 all-electric models by 2022.

The acceleration of the program probably had something to do with the fact that the carmaker could not hit its own emission reduction targets for 2016, in spite of fitting its fleet with more energy-efficient engines. Yet more than that, it’s a clear acknowledgement of the revolution that Glasenberg was talking about.

Now, the EV business will require investments of $11 billion. Another $1 billion is slated to be used for batteries—the new gigafactory and the existing battery-making division, ACCUmotive. But the aim is not to just have enough batteries to fit on all new electric cars, the aim is to make them affordable.

Bloomberg’s Caroline Hyde reported earlier this week that Daimler’s gigafactory is the first step in a direction that Europe has been slow to explore. The continent only accounts for 2.5 percent of the battery-making market, and this has to change in order for Europeans to be able to take advantage of not just e-cars, but new energy storage systems.

Energy storage systems are big in Europe, as they are elsewhere, with gigafactories reducing battery costs and ultimately the prices of the entire system, allowing utilities to store energy produced from renewable sources, making them much more commercially viable.

The implications of these cost reductions are essential for cars as well: if the cost of a battery for an electric car falls by 40 percent, which gigafactories could achieve by 2021, according to Bloomberg New Energy Finance, then e-cars will become much more affordable since the battery cost represents a large chunk of the price tag. In fact, electric cars could become more affordable than the ones powered by internal combustion engines.

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Billionaire Ex-Oilman Plans 1st Nonstop Round-World Solar Flight

After building up a $15 billion fortune pumping oil, Viktor Vekselberg is turning to solar for his attempt to win a place in history.

The Russian tycoon and his Renova Group plan a record-breaking effort to send a plane around the world nonstop using only the power of the sun. If all goes well, a single pilot will fly for five days straight at altitudes of up to 10 miles, about a third higher than commercial airliners.

The project isn’t just a stunt. The glider-style airplane with a 36-meter (120-foot) wingspan will be a test of technologies that are set to be used to build new generations of autonomous craft for the military and business, say aerospace experts. They will fly continuously, have far greater reach and control than satellites and expand broadcast, communication and spying capabilities around the globe.

Previous attempts have used multiple flights. Switzerland’s Solar Impulse, with partners including Google, Dassault Aviation SA and ABB Ltd., made 17 stops to complete its globetrotting trip last year.

“Our flight should prove that it’s possible to make long-distance flights using solar energy,” said Mikhail Lifshitz, Renova’s director of high-tech asset development and a qualified pilot-instructor. A “flying laboratory” test-plane will be ready by year-end, Lifshitz said in an interview.

Putin Vow

That gives his team two years before the record flight, which will be piloted by Fyodor Konyukhov, 65, an adventurer and ex-special forces soldier known in Russia for sailing around the globe multiple times, traveling to the North and South Poles and twice scaling Everest. In April, Vekselberg vowed to Russian President Vladimir Putin to get the job done.

Renova’s plane will use so-called supercapacitors, effectively extremely efficient batteries, to drive its propellers and store power generated from solar panels mounted on the top and underside of the craft. The panels will draw on both direct and diffuse light, allowing them to suck in energy straight from the sun and from rays reflected back up from the clouds.

 

 

At night, the airplane will conserve power by gliding down from high altitudes before climbing again when the sun is up.

“This particular proposal is very timely because the technology is there,” said David Baker, a 25-year veteran of NASA who now edits the British Interplanetary Society’s Spaceflight magazine. “It just needs the investment and money to put it all together.”

Elon Musk

Zeal for aerospace is growing among investors like Richard Branson, with his Virgin Galactica Ltd., and fellow billionaire Elon Musk’s Space Exploration Technologies Corp. as scientific advances turn flights of fancy into commercial propositions. Branson is himself famous for well-publicized stunts including attempts to span the globe in a balloon.

Vekselberg, who became Russia’s fourth-richest man though oil and metals, has expanded into tech since selling out of crude in 2012, with investments including a joint venture solar maker and power producer.

Self-powered and unmanned craft that can stay airborne for long periods are of great interest for business, allowing mobile communications to go far beyond the reach of satellites at a lower cost, BIS’s Baker said.

“The military of course are interested in this for long-duration eavesdropping and telecommunications,” he said. “There’s a lot of Hollywood myth about what satellites can do. You can’t immediately grab a satellite and steer it in to focus down for about six days to listen in to potential terrorists.”

Spies Like Us

While Renova isn’t disclosing its investment in the flight, its Hevel Solar joint venture spent about 20 billion rubles ($355 million) on panel production, with an upgrade at the end of 2016 adding 3.8 billion rubles.

It has invested about $30 million in its Khimki supercapacitor plant to make an annual 200,000 cells used to store power for diverse purposes, Lifshitz said. It aims to expand to 6 million cells with a new plant.

 

The effort to send a pilot around the world by 2019 will provide a test bed for such technologies and a target to encourage further innovation, as well as developing enthusiasm from the public and potential investors.

“People are interested in things involving people,” Baker said. “If this was some weird gizmo that was unmanned, it wouldn’t quite attract the attention. It’s the Branson factor.”

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