Mike Segar/Reuters
- David Einhorn expects stubborn inflation and the Fed to only cut interest rates next year.
- The Greenlight Capital boss says he's concerned about stocks and has bought index hedges.
- If inflation sees a resurgence and rates go higher, that could threaten the current bull market, he says.
Stocks have soared in recent months, as investors wager the inflation threat is over, the Federal Reserve will soon reverse its hikes to interest rates, and the US economy will escape a recession.
They may be celebrating too soon, hedge fund boss David Einhorn warned in his quarterly letter to investors this week.
"We believe inflation is stickier and more entrenched than the market is currently appraising," the Greenlight Capital boss wrote, according to a copy of the letter published by ValueWalk.
"We continue to believe that the market is over-anticipating rate cuts and we have extended that view through March of 2024," he added.
Inflation spiked to a 40-year high of 9.1% last summer, but has dropped sharply to about 3% in each of the last two months. A key reason for the decline is that the Federal Reserve has raised its benchmark interest rate from almost zero to over 5% since last year.
Higher rates deter spending, hiring, and investing, which can slow the pace of price increases. However, they can also sap growth, pull down asset prices, and drag the economy into a recession.
In his letter this week, Einhorn highlighted the US government's decision this spring to guarantee deposits in two failed banks, Silicon Valley Bank and Signature Bank, beyond the typical $250,000 limit. He viewed the move as bullish for stocks and likely to fuel inflation at the time.
The hedge fund manager also suggested the strength of the US economy, and a potential supply-demand imbalance in the Treasury market, could drive up long-term interest rates and lead investors to rethink their portfolios.
"We think a reacceleration of inflation and higher rates could disrupt the bull narrative, which has now obtained consensus support," Einhorn said, meaning the recent run up in stocks might not last. He revealed that his fund purchased index hedges last quarter to protect its portfolio from a market downturn.
"If we were 'bearish' until March and 'neutral' through June, we would now characterize
ourselves as 'worried,'" the veteran investor said.
Einhorn also touched on an undisclosed position that Greenlight held in the period. He described it as "an individual short with bubble-like characteristics" that his team considers a "future bankruptcy candidate."