Einhorn on the markets
David Einhorn, highly respected hedge fund manager of Greenlight Capital and author of “Fooling some of the people all of the time” yesterday delivered the keynote address at the Value Investing Congress. His full speech can be accessed here, but Rolfe Winkler of Reuters has very handily published the highlights, as posted below.
On Bernanke and Geithner:
On too big to fail and the true lesson of Lehman:
The lesson of Lehman should not be that the government should have prevented its failure. The lesson of Lehman should be that Lehman should not have existed at a scale that allowed it to jeopardize the financial system. And the same logic applies to AIG, Fannie, Freddie, Bear Stearns, Citigroup and a couple dozen others.
The administration talks tough about TBTF, but has made very clear they aren’t willing to make policy choices to do anything to proactively break them up. It was very telling when, in a keynote at the Economist’s Buttonwood Gathering, Larry Summers said too-big-to-fail means too-big-not-to-be-regulated. The correct thing to have said, the correct policy that needs to be worked out so that we avoid a re-run of last year’s crisis is “too big to fail is too big to exist.” But don’t take my word for it, take Alan Greenspan’s.
On arguments that the lesson of 1937-8 is not to withdraw stimulus too soon:
Channeling Stephen “There-is-no-exit” Roach:
There is a basic rule of liquidity. It isn’t the same for everyone. If you own 10,000 shares of Greenlight Re, you have a liquid investment. However, if I own 5 million shares it is not liquid to me, because of both the size of the position and the signal my selling would send to the market. For this reason, the Fed cannot sell its Treasuries or Agencies without destroying the market. This means that it will be challenged to shrink the monetary base if inflation actually turns up….
…. The Fed could reach the point where it perceives doing whatever it takes requires it to become the buyer of Treasuries of first and last resort.
On his gold thesis:
….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 our 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. So, I conclude that picking one these currencies is like choosing my favorite dental procedure. And I decide holding gold is better than holding cash, especially now, where both earn no yield.
He’s also buying long-dated options on interest rates using derivatives:
Click here for Einhorn’s full speech.
Source: Rolfe Winkler, Reuters, October 19, 2009.
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