How David Einhorn Is Betting on Higher Inflation

Inflation? What inflation? Hedge fund operator David Einhorn, who famously goes against the grain, is betting that the Consumer Price Index (CPI) will tick up in the US. Not a lot, mind you, but enough to give him a good result.

Right now, inflation is muted. In the 12 months through mid-year, the CPI rose 0.6% after dipping 0.1% in May.

To exploit what Einhorn sees as a more robust CPI ahead, his Greenlight Capital (assets: $7 billion) is taking positions in inflation swaps, which are derivatives based on Treasury inflation-protected securities (TIPS). His positions are in two-, five-, and 10-year swaps. In May, he wrote in a second-quarter letter to clients, those instruments implied annual CPI increases of just 0.1%, 0.8%, and 1.3%.

“As annual inflation has averaged 1.7% over the past 10 years,” he wrote, “we recognized that we could make a substantial return if actual inflation merely reaches the long-term average.” At the end of the second quarter, he went on, the trend was moving in Greenlight’s direction: Inflation expectations have bounced up to 1.3%, 1.4%, and 1.6%.

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While he noted that higher inflation, even if limited, would harm Treasury prices, Einhorn said he didn’t want to short federal government bonds. The intervention of the Federal Reserve in the credit markets make that too iffy, he reasoned.

Meanwhile, Greenlight also has bought stocks in areas that should benefit from a little higher inflation. A long-time believer in gold, the firm has increased its holdings in the VanEck Vectors Gold Miners exchange-traded fund (ETF). Gold is rapidly rising in price, more out of recession fears than inflation ones. Yet inflation would help the rise.

Another Greenlight position is in Atlas Air Worldwide Holdings, which he thinks should be helped by a shortage of air-freight capabilities, owing to the sidelining of many passenger jetliners. These commercial planes are used to ferry cargo in their holds, meaning there is an inflationary shortage of this transportation.

Other stock holdings are homebuilder Green Brick Partners, which should benefit from elevating home prices, and CNX Resources, a natural gas producer—whose product is hurting pricewise. Greenlight clearly expects low-lying natural gas prices to ascend.

Two large Greenlight short sales are not in the area of consumer inflation, but share price inflation. One is against Wirecard, the German digital payments company that Einhorn for years has labeled a fraud. Now that Wirecard is in legal trouble, its stock has tumbled. The other short is Tesla, the electric vehicle maker, whose stock has surged more than sixfold over the past year. Einhorn contends that Elon Musk’s auto company is playing accounting games that eventually will come to light.

These strategies have yet to bear fruit overall. Greenlight has suffered losses this year of 17.5%, although that was eased by a good July showing, up 4.1%. Einhorn first came to public notice when he presciently, and lucratively, shorted Lehman Brothers in 2007, just before it collapsed. Another good short call was in Green Mountain Coffee Roasters, whose stock later tanked (another company bought it cheap).

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Tags: David Einhorn, Elon Musk, gold, Greenlight Capital, Inflation, Lehman Brothers, Tesla, TIPS, Wirecard

Institutional assets tracked by the Wilshire Trust Universe Comparison Service (TUCS) earned an all-plan median return of 11.07% for the second quarter and 3.36% for the fiscal year ending June 30. It was the best quarter for the TUCS plans since the first quarter of 1987—but, of course, the fourth quarter of that year is an entirely different story.

Quarterly median gains across all plan types ranged from 7.90% for public funds with assets above $5 billion to 12.43% for foundations and endowments. And one-year median returns spanned from 2.37% for public funds with assets over $1 billion to 6.63% for corporate funds with assets over $1 billion.

Large and small plan types underperformed the 12.52% return achieved during the second quarter by a portfolio comprised of 60% stocks and 40% bonds. Meanwhile, small plans outperformed large plans across all types during the quarter, as well as over the fiscal year for most plan types, due to greater US equity exposure. Wilshire TUCs said allocation trends show that large foundations and endowments continue to be heavily weighted in alternatives, with a median allocation of 54.12% during the quarter.

Plans with assets above $1 billion overall rose 8.85% for the quarter and 3.78% for the fiscal year, while plans with assets under $1 billion outperformed large plans for the quarter, but not the fiscal year, with 12.04% and 3.27% gains respectively. For the fiscal year, all plan types except large corporate plans underperformed the 60/40 portfolio return of 5.29%.

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US equities, as tracked by the Wilshire 5000 Total Market Index, increased 21.94% during the quarter and 6.78% for the fiscal year, while international equities, as measured by the MSCI AC World ex U.S., climbed 16.12% during the quarter, but fell 4.8% for the year. US bonds, represented by the Wilshire Bond Index, rose 4.54% during the quarter and 7.63% for the fiscal year.

“While most asset classes delivered positive returns during the second quarter, sizable allocations to US equities was the primary driver of returns,” Jason Schwarz, Wilshire Associates’ chief operating officer, said in statement. “Large plans underperformed small plans, likely due to their larger allocation to alternative investments, which should be expected to participate to a lesser degree in rapidly rising equity markets.”