David Einhorn sheds light on how best to invest in an inflationary environment in his latest July letter to investors.

David Einhorn is the founder and President of Greenlight Capital Hedge fund, a “long-short value-oriented hedge fund.

David Einhorn’s Greenlight investment strategy has yet to yield results as the fund underperformed the S&P index in the second quarter of 2021 returning -2.9% in the second quarter of 2021 compared to 8.5% for the S&P 500 index. Longs contributed 5.3% in the quarter while shorts detracted 4.6% and macro detracted 3.3%.

The short trade is a hard play in an environment where central banks are scooping up distressed assets.

“David Einhorn’s Greenlight investment strategy has yet to yield results as the fund underperformed the S&P index in the second quarter of 2021”

RAY DALIO

David Einhorn sheds light on inflation in the context of supply bottlenecks as the economy fully opens up in the wake of the pandemic lockdowns 

David Einhorn cites supply bottlenecks as the reason why some aspects of inflation could be transitory. The transitory inflation, which is also being touted by the Fed, is out of tune with a string of titan investors, the likes of macro legend Paul Tudor Jones who rejects the transitory inflation view.

David Einhorn’s Greenlight then focuses investors’ attention on the recent bout of volatility in lumber prices, which is an example of how David Einhorn sheds light on inflation being transitory

“To be sure, some of the inflation has been caused by genuine bottlenecks associated with the economic re-opening. One example is lumber. Pre-COVID, lumber had spent the last decade between about $200 and $650 per contract on the Chicago Mercantile Exchange. Just before COVID started, it was around $460. When COVID hit, the price collapsed to $260 before beginning a sharp recovery” wrote David Einhorn. 

“To be sure, some of the inflation has been caused by genuine bottlenecks associated with the economic re-opening”

DAVID EINHORN

“Initially, the lumber mills, fearing the worst, shut down. But then surprisingly, COVID prompted a huge demand for home remodeling and new construction. This sent lumber prices to all-time highs. With prices high, distributors feared a sell-off and did not want to get caught with too much inventory, so they allowed channel inventories to fall” he wrote. 

“But despite record prices, demand further accelerated. With channel inventories already drawn down, it was difficult to get lumber at any price. In May, lumber traded over $1,600, about 5x the price from the prior May and about 2.5x the prior all-time high” he added

David Einhorn sheds light on inflation being transitory by then asking a loaded question

“Was the inflation of lumber prices caused by Fed policy? Of course not” he wrote. “When an individual price goes parabolic while most other things don’t, it has to do with the individual item. We don’t have 500% inflation. Fortunately, in the case of lumber, there was no structural shortage and the cure for high prices was high prices. The market functioned to correct the imbalance. There are plenty of logs and there is plenty of sawmill capacity. Additional supply took just a few weeks to come online and work through the system, which caused prices to normalize back to $634 as of July 23. There are bottlenecks in other areas and they, too, will likely prove to be “transitory” , added David Einhorn.

“David Einhorn believed that traditional industrial companies are underinvested and represent value” – Wealth Training Company

David Einhorn sheds light further on inflation by acknowledging other inflationary factors playing out in the economy

David Einhorn acknowledges that macroeconomic policies could be causing more than temporary or transitory inflation. 

That said, we believe that the bottlenecks are isolated and broader inflationary pressures extend beyond bottlenecks into areas where we now have structural shortages. 

Certainly, public policy (both fiscal and monetary) is inflationary by design

For years, central bankers have complained that it was difficult to achieve enough inflation to hit their targets and adopted emergency and unconventional policies to try to create inflation. Large fiscal stimulus, combined with the wealth effect of rising stock prices and home values, has made household incomes and balance sheets stronger than at any time in recent memory. The improvement has been so rapid that consumers have been slow to consume all the gains, and the savings rate has expanded dramatically. Those savings represent substantial dry powder for future consumption.

David Einhorn sheds light on some of his fund’s stock picks, in other words how to play a not-so-transitory inflation environment

David Einhorn believed that traditional industrial companies are underinvested and represent value.

David Einhorn remains bullish on residential construction.

“We haven’t even begun the process of higher home prices begetting additional demand as homeowners commence cash-out refinancing and use the appreciation from existing homes to move into more expensive homes. Rising prices will also attract current renters, who come around again to the notion that owning a home is an attractive lifetime investment. Further, we expect the Biden Administration to possibly turbocharge an already tight market by attempting to expand homeownership opportunities” wrote David Einhorn. 

“Seaborne thermal coal prices are up 140% year-over-year and at the highest levels since 2011” – Wealth Training Company

With the economy in transition lenders are only granting loans to low-risk customers

Demand for housing is there but the ability to finance purchases at these prices for average and first-time buyers is absent due to a lack of available finance. 

David Einhorn sheds light on ESG investing, arguing that green energy is inflationary

Moreover, he notes that fossil fuel companies are finding it increasingly challenging to raise finance on favorable terms. Monetary and economic policymakers are intentionally diverting the economy away from burning fossil fuels for energy. “Hydrocarbon energy companies are starved for capital and are being told to change their ways” he wrote.

As we wrote previously, this feels more like a Soviet-style planned economy where producers are dictated what to produce, prices are set, and people movements restricted, under mass surveillance.

Consequently, coal mining and oil drilling projects are drying up, and as supply is cut, prices are spiraling for what used to be affordable fuels.

From 2011 to 2020, U.S. coal production declined by 51%.

Seaborne thermal coal prices are up 140% year-over-year and at the highest levels since 2011

“We own CONSOL Energy (CEIX), the lowest cost, most efficient miner in Appalachia” he wrote.

David Einhorn is bullish on copper also. 

See David Einhorn’s Greenlight letter to investors here.