David Einhorn predicts inflation will cause a recession, adds new positions

Published Wed, Jan 26 202212:21 PM ESTUpdated Wed, Jan 26 20221:18 PM EST

Greenlight Capital's David Einhorn said persistently high inflation is eventually going to tip the U.S. economy into another recession, regardless of what the Federal Reserve will do to combat surging prices. The star hedge fund manager revealed Wednesday in an investor letter that his firm has already started hedging against this scenario. "Eventually, we believe inflation will cause a recession, regardless of what the Fed chooses to do," Einhorn said in the letter obtained by CNBC. "The higher prices of necessities will ultimately cause low-income consumers to cut back on other things. There are signs this is already happening." Inflation plowed ahead at its fastest 12-month pace in nearly 40 years in December as the country entered the third year of the pandemic. The consumer price index jumped 7% last month, the fastest increase since June 1982. "We have begun to position for that scenario," he said. "We believe that the inflation problem is so embedded that to successfully fight it the Fed would have to sacrifice the primacy of the financial markets." The Fed is expected to tee up a rate hike coming in March at the conclusion of its policy meeting Wednesday. If that happens, it will be the first increase in the central bank's benchmark rate since December 2018. The Fed has also signaled that it is winding down its monthly bond-buying program . Greenlight has been betting on inflation since the rebound from the pandemic-induced sell-off, investing in companies that would benefit from higher prices in industries from real estate to financials to commodities. Einhorn's hedge fund gained 11.9% in total returns in 2021, compared to 28.7% for the S & P 500. While its full-year performance significantly lagged the broader market, the fund enjoyed a banner fourth quarter with an 18.6% gain, versus an 11% return for the S & P 500. Inflation plays The biggest winners for Greenlight in the last quarter include a couple of inflation plays. Brighthouse Financial , which rallied 14.5% in the fourth quarter, was one of Greenlight's biggest holdings. Einhorn previously said the financial firm is a bet to capitalize on equity markets' rebound and higher long-term interest rates. Another big gainer for Greenlight is its longtime holding Green Brick Partners . Einhorn said last year that it makes a good bet on rising housing prices as the economy recovers from the pandemic. The stock surged nearly 48% in the fourth quarter. Canadian mining company Teck Resources is also a lucrative bet for Greenlight, with the stock up 16% in the fourth quarter. Einhorn said the management is weighing splitting the metallurgical coal business from the "green metals" business, which "would likely unlock substantial shareholder value as certain investors are sensitive to exposure to coal." Other big drivers for Greenlight's outstanding performance is an early investment in electric vehicle company Rivian , as well as its short position against a basket of "bubble stocks," Einhorn said. New positions The manager also revealed that he added a new large long position in Global Payments during the fourth quarter. "GPN benefits from ongoing consumer preference shifts to electronic payments ... [the company] benefits from inflation since it generally charges a percentage of merchant dollar volume," Einhorn said. The stock dropped 46% between April and December on investor worry about fintech disruption. However, Einhorn said he believes the market is overstating the threat. Greenlight also added new positions in Germany-based Rheinmetall AG, a producer of land-based military vehicles and automotive components, as well as Dutch biotech company Galapagos NV. — CNBC's Michael Bloom contributed reporting.

David Einhorn

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The star hedge fund manager revealed Wednesday in an investor letter that his firm has already started hedging against this scenario.