David Einhorn Lays Out The Blindingly Simple Reason Why Soaring Inflation Cannot Be Transitory
The comments below are an edited and abridged synopsis of an article by Tyler Durden
It looked like 2021 would be David Einhorn’s year: Greenlight Capital, heavily invested in the reflation trade while still shorting the infamous bubble basket, was rising by single digits every month and seeking to put an end to the fund’s recent dismal performance. Everything reversed when, during the second quarter, value stocks stumbled and growth/tech names surged amid a broad-based backup in the reflation trade, hammering the fund’s P&L so much so that in his latest letter to clients, Einhorn wrote that his fund dropped 2.9% in Q2 (vs 8.5% for the S&P).
So what happened, and does Einhorn agree with the prevailing central banker consensus that inflation is transitory?
Naturally, for a fund that in the past decade has been pressing its reflationary bets the answer is no and, as Einhorn explains, there are still “too many dollars chasing too few good and services.”
Up for discussion: Single family detached housing; air freight; copper (and other basic materials); titanium dioxide; cement; thermal coal and natural gas; and paperboard.
“The result, we believe, is that inflation won’t be aggressively addressed,” said Einhorn. “So, the risk is to the upside. In our macro book, we hold inflation swaps and gold. The former will benefit from reported inflation being higher than the market expects. The latter should benefit as the market realizes the Fed is behind the curve and has no plans to catch up.”
Einhorn concluded, “The recent change in market narrative away from inflation and away from the companies we own has interrupted what was otherwise a favourable environment for us. We suspect that this is a hiccup. It is hard after 40 years of generally falling inflation and a decade of rewarding bets on deflation for the market to change its view. If we are correct, the data will refute the consensus view.”