David Einhorn, whose hedge fund is up 18% this year, is bearish on the market
Greenlight Capital’s David Einhorn, who is crushing the market with double-digit returns this year, urged investors to flee equities as the Federal Reserve continues to deflate the market with aggressive rate hikes. “As long as official policy is to make the stock market go down, so that people are less wealthy, so that they buy fewer things, so that prices stop going up, all while doing nothing about fiscal policy, we believe the correct posture is to be bearish on stocks and bullish on inflation,” Einhorn said in an investor letter obtained by CNBC. The star hedge fund manager said the Fed has opted to combat inflation by decreasing demand instead of increasing supply, resulting in lower income and wealth. However, higher interest rates also discourage investments and in turn crunch supply, which is most evident in the housing market. “The most glaring area might be in housing, where higher rates lead to reduced supply despite widespread shortage,” Einhorn said. “All told, this policy might make inflation worse rather than better.” The Fed is tightening monetary policy at its most aggressive pace since the 1980s. The central bank has raised rates by three-quarters of a percentage point for a third straight time, vowing more hikes to come. In light of Einhorn’s bearish view on the markets, he has reduced his gross long exposure substantially this year and he expects to have additional dry powder after exiting his short-term Twitter investment, Einhorn said in the letter. Einhorn is in the middle of a stellar year with his hedge fund returning 4% in the third quarter of 2022, bringing its performance for the first nine months to 17.7%, according to the letter. That compares to a 23.9% decline for the S & P 500 during the same period as the benchmark tumbled into a bear market. The manager revealed that he exited a slew of long positions last quarter — Atlas Air Worldwide Holdings , Change Healthcare, Chemours , International Seaways , the Playboy Group and Warner Brothers Discovery — in some cases at a loss. Additionally, Einhorn kept his bet in gold despite the risk for more weakness in the near term. “Sometimes in a bear market, investors simply want cash. Further, high short-term interest rates provide competition for gold,” Einhorn said. “Nonetheless, we remain concerned that the current inflation problem could evolve into a currency and/or sovereign debt crisis.” — CNBC’s Michael Bloom contributed reporting.