Einhorn Warns Market Is Underestimating Risks Of Runaway Inflation
Despite being better known to younger investors for his bearish bets on Tesla, Greenlight Capital’s David Einhorn remains a hero to value investors, an investing theme that’s coming back into vogue following the most recent tech wreck and the twilight of the ZIRP environment. Most famous for shorting Lehman brothers just before its collapse, Einhorn shared some insights into his current market outlook during a recent RealVision interview with Larry McDonald, author of the Bear Traps report. After a decade-long bull run fueled by rock-bottom interest rates, Einhorn believes the market is already one year removed from its peak, and that investors will need to reasses the landscape of opportunities among both financial assets and hard assets.
Einhorn started off by discussing his early days working in banking, and then in the nascent hedge fund industry of the early 1990s. One attitude he says he remembers clearly from those days is that portfolio managers were seemingly always rewarded for doubling down on losing bets. It’s an attitude he tries to avoid at Greenlight. “I really want to hear why we’re wrong,” he said.
“I really want to hear why we’re wrong about stuff all the time. Even when things are going well you’re wrong a lot. It just means you need to reasses objectively.”
Moving on to his outlook for inflation, Einhorn said he wouldn’t be surprised if inflationary pressures persisted for longer than the Street presently expects. Instead of being “transitory” like the Fed expects, inflation could become “embedded”.
“I think there’s a range of outcomes…but I think there’s much more uncertainty than that. There are some prices that might come down like used car prices…but there are others that seem like they might go higher.”
The problem with inflation is that inflationary expectations feed on themselves, creating a vicious cycle.
“It’s not clear to me that inflation comes down at this point. Inflation could become embedded….I don’t know how to handicap it. Everybody agrees that inflation has to come down, but nobody agrees how far it has to come down.”
There’s no question that the fundamental factors influencing markets are shifting before our feet. Which begs the question, how does one protect their portfolio in this new era?
Einhorn had a few ideas, claiming that Greenlight’s portfolio is already “pretty well set up” for higher inflation.
“Our portfolio is pretty well set up for higher and more sustained inflation. Not necessarily each and every month, we have commodities, we have energy we have a life insurance company that will benefit from higher long rates.”
With inflation causing a re-rating of equity valuations, Einhorn was asked about one of his fund’s classic value plays: their successful bet on Microsoft. Unfortunately, the stock trades at a much higher multiple today.
“It’s certainly not the opportunity that it was eight years ago or ten years ago when we owned it.”
As we mentioned above, Einhorn believes that the “enormous bubble” in financial assets created by rock bottom interest rates has already peaked, and will continue to deflate.
“With a very easy monetary fiscal policy we had I think an enormous bubble these last few years. And the bubble itself seems to have peaked last February in terms of the most speculative stuff. Since then we have been going through a reversion…the most speculative stuff has derated.”
While Einhorn recognizes that he was wrong about the bull run’s potential longevity, “I think the stuff that we identified as speculative will ultimately be shown to be speculative.”
That’s because the US economy will struggle to grow during the years ahead due to a combination of secular factors.
“I think there’s going to be somewhat of a slowdown regardless of what the Fed does. The GDP is some combination of hours worked and productivity. And hours worked is very high now, because there are very few unemployed people.”
“But if you’re at full employment, then there’s not much room for hours worked to go up. It’s hard to see what’s going to drive rapid GDP growth…so you’re going to get a deceleration no matter what.”
The bottom line is this: as interest rates rise and growth slows, the outlook for speculative assets will darken as investors turn to hard assets and value plays once again.
Tue, 02/22/2022 – 08:45