Singer: Expect More Turbulence in Emerging Markets | Davos World Economic Forum

It looks like what's happening to Argentina in particular is self-imposed or imposed by horrendous governmental policy in a number of areas: labor, tax, not paying creditors, getting into fights with global corporations, discouraging foreign investment in that manner. So in recent weeks, as you know, there have been riots by police, looting by citizens. So things may or may not be coming to a head in that sense, but it's a sad thing because it's self-imposed by the government. Do you expect currency to decline much further? Market equity markets? It's not clear to me, but it would be great if this was some kind of wakeup call to encourage the government to take a number of steps including settling with its creditors. We've been willing, as you know, for quite a while to sit down with Argentina; we could settle this thing in an afternoon. But in the absence of settling with the holdouts, and there are thousands of holdouts, not just Elliot and a couple of large hedge funds, in the absence of settling with holdouts — the people to whom it owes a lot of money — access to global capital markets is truncated or prevented. They're paying hundreds of basis points extra in interest costs. It's literally billions of dollars per year. There have been independent estimates that over the course of 10 years this gap between being perceived as complying with the rule of law, solvent, able to attract investors and keep investors costs 70, 80, 90 billion.

There are individual idiosyncratic stories contained within it. But let's not forget that the actions, the extreme actions, the unprecedented actions of global major central banks have been such a distorting force and such a force elevating the prices of stocks and bonds around the globe. And as we saw in, what was it, May, June, the mere mention of the possibility or possible intention of reducing the overcaffeinated global monetary system was enough to send markets into a tizzy and remove, at least in the United States, virtually all of the interest rate improvement since the spring of 2009. And so markets anticipate market action. So when markets perceive that at some point there will be a normalization, whatever that means, of monetary policy and the unwinding of quantitative easing globally, or at least starting in the United States, the timing of when markets start to price in the reversal of that overcaffeination is completely unpredictable. So those that get there first, but not too early, may get better prices for their securities. So my gut, as a trader for close to 40 years, is that that's an important part of what's been happening.

The way you get to trade in a firm like mine and survive for 37 years — our 37th anniversary is next week — is by not having too precise an answer to a question like that. Having said that, the distortions of monetary policy are combined with the fact that the right price for stocks and bonds is nowhere to be seen in the current landscape. But if you combine that with the fact that the global financial system is still as opaque as ever and still highly leveraged, particularly in the derivatives books and trading books, the path by which losses and pain and real market and internal portfolio flows combine to cascade losses is completely uncertain. So as to whether this painful few days in a lot of markets and a lot of positions turns into something bigger or really big, it's very difficult to say. What would be good to see, but there's no near-term prospect of seeing, is a reversal or normalization, I think even in the near term, of monetary policy and movement among the developed countries toward policies that would unlock the growth they are able to achieve. There has been a tremendous distortion in this.

My view is that you are right about the view of Davos. That's what I have seen in the last couple of days. But I also feel that the view of Davos is generally a consensus view that largely is backward-looking. Everyone that owns stocks has done well to very very well, so why shouldn't they feel good? Bonds haven't collapsed. Short-term interest rates are low. Funding is available for a lot of projects and many companies. People have been able to improve their balance sheets. So it really has nothing to do with what's going to happen in the future. What is going to happen in the future? I think there has been a front-loading of stability post-crisis by the wrong mix of policies and therefore a back-loading of potential pain, and that pain may include bouts of severe inflation if the large central banks find it too painful to normalize and they keep printing. There is disagreement as to whether it has been printing or just duration switching, but I think it is the effective equivalent of printing. And unless Americans and Europeans go past this monetary fake stability toward structural reforms to unleash growth and get their real unemployment rates down — I am not predicting social unrest, but what I am saying is the patience of the people is not infinite in the absence of growth and poor employment prospects. People do not want to be on the dole forever. So I am not optimistic. I must tell you, though, I am rarely optimistic, and it is also part of the reason why a trading firm trades, hedges, is humble about what is going to happen in the world.