EDITOR NOTE: What you’re about to read is a letter from Greenlight Capital’s founder David Einhorn addressed to the hedge fund’s clients. It’s a forecast, rationale, and a program to execute a hedge. The hedge is in two parts--the first being an “inflation swap,” where one party pays a fixed rate of interest to another party that’s an inflation beneficiary (like a utility company) who, in turn, pays a floating rate; the second being gold. One benefits from inflation’s short-term fluctuations while the other benefits from inflation’s longer-term erosion of purchasing power. Moves by major financial institutions like Greenlight demonstrate confidence that inflation is going to be a persistent phenomenon, contrary to Fed chief Powell’s “transitory” forecast. Other banks and businesses are positioning themselves in their own way. There is very little trust in the Fed’s optimistic inflation outlook, save the Biden administration and perhaps a large majority of mainstream investors.
Greenlight Capital’s David Einhorn sees things much differently.
“Chairman Powell,” he says in his quarterly client letter released Monday, “is committed to remaining very accommodative for a long time and then only gradually tightening. We believe he will find whatever excuse he needs to do so, no matter what the data shows. The result, we believe, is that inflation won’t be aggressively addressed. 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.”