We’ve always been impressed by David Einhorn, the young manager of Greenlight Capital. Einhorn made our Ten To Watch list this past August for his prescient shorting and outspokenness about the shenanigans going on at Lehman. (His fund had been up by more than 20 percent in the first half of this year, fueled by his bearish bets; he had almost no long positions. Wonder how he is faring these days.)
In a speech to the Value Investing Congress yesterday (the speech was called, “Liquor Before Beer, in the Clear”), he paints a dim view of our financial system and the government’s role of enabler. Einhorn didn’t use the word bankruptcy, but he thinks the stimulus package is a “black hole” that, in the long run, will not produce long-term economic value. It’s all short-termism, so that elected officials can say they are doing something—and seek reelection.
He thinks the big banks should be broken up, so that the too-big-too-fail theory can be finally put to rest. He accuses the government of being weak and bowing to “concentrated benefit versus diffuse harm” pressure, otherwise known as special interests.
“Like teenagers with their parents away, financial institutions threw a wild party that eventually tore-up the neighborhood.” The kids were arrested, Einhorn said, “But then the question becomes, once you bail them out, what do you do to discipline the misbehavior? Our authorities have taken the response tht kids will be kids. ‘What you drank beer and then vodka? Are you kidding? Didn’t I teach you, beer before liquor, never sicker, liquor befor beer, in the clear! Now, get back out there and have a good time.’”
The economic crisis taught him that “it isn’t reasonable to be agnostic about the big picture. For years I had believed that I didn’t need to take a view on the market or the economy because I considered myself to be a ‘bottom up’ investor. Having my eyes open to the big picture doesn’t mean abandoning stock picking, but it does mean managing the long-short exposure ratio more actively.” (It’s true, market timing, once considered a fool’s errand, is now being reassessed by retail financial advisors, who have realized that long-short exposure—or building cash reserves when the market looks over-valued—is important. Some advisors are rethinking asset allocation itself.)
“When I watch Chairman Bernanke, Secretary Geithner and Mr Summers on TV, read speeches written by the Fed Governors, observe the ‘stimulus’ black hole and think about short-termism and lack of fiscal discipline and political will, my instinct is to want to short the dollar. But then I look at the other major currencies. The euro, the yen and the British pound might be worse.” He said he thinks holding gold is better than holding cash.
So, deficit spending will not shift the costs to “our grandchildren,” Einhorn said, “the consequences will be seen during the lifetime of the leaders who have pursued short-term popularity over our solvency.” He noted that the government’s unfunded future promises (Medicare, Social Security and the like) already amounts to about $60 trillion.
Einhorn said, “We have bought long-dated options on much higher U.S. and Japanese interest rates. The options in Japan are particularly cheap because the historical volatility is so low. I prefer option to simply shorting government bonds, because there remains a possibility of a further government bond rally . . . With options I can clearly limit how much I am willing to lose, while creating a lot of leverage to a possible rate spiral.” (He believes that governments won’t be able to refinance debt at such low rates in the future.)
In other news, today we learned that even as financial firms were collapsing, some executives were receiving increased perks and compensation, according to a study by the Corporate Library and excerpted in today’s Washington Post.
“The firms, accounting for more $350 billion in federal bailout funds, increased these perks and benefits 4 percent on average last year, according to an analysis of corporate disclosures filed in recent months,” the paper said.
“You would have thought that this would be the moment when everyone said, ‘Okay, the perks have got to stop—at least while we’re indebted to the government,’” said Paul Hodgson, senior research associate at the Corporate Library. “But that didn't happen.”