Billionaire investor David Einhorn says the speculative market bubble peaked last year — and warns the Fed may struggle to curb inflation

• David Einhorn said the speculative bubble in financial markets peaked a year ago.
• The Greenlight Capital boss warned the Fed's rate hikes might not curb inflation.

Billionaire investor David Einhorn asserted that the speculative bubble in markets peaked last February, and warned the Federal Reserve might struggle to rein in inflation, speaking in a recent two-part RealVision interview.

The Greenlight Capital boss also predicted a US economic slowdown, explained why he's bullish on copper, and sounded the alarm on passive investing.

Einhorn blamed loose monetary and fiscal policies for an "enormous bubble" in recent years, but said the market mania peaked last year.

"The speculative stuff that I thought was truly insane a year ago — it's derated very, very substantially," he said.

"The top for that thing really popped last February," he added, drawing a comparison to the dot-com bubble bursting in March 2000.

Einhorn predicted that some goods and services would continue to rise in price, and said some inflation isn't being reflected in official estimates. As a result, the Fed trimming its balance sheet and gradually hiking interest rates might not be a sufficient response to inflation.

"It's not clear to me that that will be enough to get it under control," he said.

Einhorn suggested US gross domestic product would suffer this year from a combination of stimulus being reduced, consumers spending less as higher rates hit their portfolios, and fewer people returning to work, compared with last year.

"There's going to be somewhat of a slowdown, regardless of what the Fed does," he said, cautioning that the downturn could morph into a recession.

The Greenlight boss, who revealed a short bet against Tesla last quarter, touted copper as a shrewd play on the transition to electric transportation. He noted the metal is widely used in both electric vehicles and charging infrastructure.

"It doesn't really matter which electric-vehicle company wins the battle," he said. "You don't have to pick a winner, you just have to understand that change is happening in a broader way. And unlike electric-vehicle companies, you're not paying a very high multiple or a high price to participate."

Finally, the Greenlight boss flagged several problems with the massive scale of passive investing today. Passive funds own so much of the market that they don't care how a particular stock performs, making it harder for activist investors to secure their support when pushing for changes at a specific company, Einhorn said.

Some passive investors are also less concerned about effective capital allocation than they are about checking the boxes on their environmental and diversity agendas, Einhorn continued. As a result, company executives are focusing more on social initiatives than on product quality, costs, sales, and other business imperatives, he said.

Moreover, when passive funds invest in market-capitalization weighted indices, they put the most money in the biggest companies, driving the prices of overvalued companies even higher, Einhorn said.

They also account for so much of the money in markets that they've become price makers instead of price takers, and can no longer trust the market to value companies fairly, he said.

"You wind up, very likely, with a substantial misvaluation and misallocation of capital," Einhorn said. "Investors in these passive funds ultimately bear the burden of that."

Legendary stock-picker Peter Lynch and Michael Burry, the investor of "The Big Short" fame, have expressed similar concerns about passive investing.

Lynch cautioned investors they're missing out on market-beating returns. Burry warned index funds and exchange-traded funds were driving stocks to dangerous heights, stifling shareholder activism, and sapping interest in smaller, undervalued securities around the world.