- David Einhorn rang the alarm on stocks, inflation, and the Fed's interest-rate hikes.
- The Greenlight Capital boss said government largesse is undermining the Fed's inflation fight.
David Einhorn expects stocks to fall further, fears the Federal Reserve's interest-rate hikes will backfire, and worries stubborn inflation will morph into a market disaster.
The Greenlight Capital boss laid out his concerns in a third-quarter letter to clients obtained by ValueWalk. He said the Fed seems intent on lowering stock prices as it works to crush inflation, which surged to a 40-year high of 9.1% in June, and remained above 8% in September.
As a result, he sees the current bear market lasting a while. He plans to stockpile cash, then pounce once bargains emerge.
Einhorn cautioned that the US central bank might fail to curb price increases, given its efforts are being undermined by carefree government spending.
"We question whether the Fed will succeed," he said. "Actually, so does the Fed."
The hedge fund manager's concerns have made him pessimistic about the market outlook.
"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," he said.
Einhorn noted that higher rates discourage investment, as they raise borrowing costs and make saving more appealing. Continued hikes could exacerbate shortages in the housing market and other sectors, driving prices higher, he warned.
"All told, this policy might make inflation worse rather than better," he said.
The veteran investor added that unchecked price increases could cause wider market disruptions.
"We remain concerned that the current inflation problem could evolve into a currency and/or sovereign debt crisis," Einhorn said.
Greenlight's bearish stance helped it return a net 17.7% in the first nine months of 2022. The benchmark S&P 500 declined by 23.9% over the same period.
The fund benefited from a timely investment in Twitter, as Einhorn and his team felt confident that Elon Musk would ultimately acquire the company despite his attempts to walk away.
Einhorn has previously said US investors face an economic downturn, stubborn inflation, and the growing risk of a global financial meltdown.