David Einhorn talks macro and monetary policy in his latest podcast.
Back in 2012, David Einhorn wrote a piece entitled, “The Fed’s Jelly Donut Policy”. David Einhorn forecasted correctly that the extended periods of quantitative easing QE and ultra-low interest rates would be a headwind on the real economy.
David Einhorn talks macro and monetary policy making a humble referenced to his above-mentioned piece, which was published in The Huffington Post.
“Well honestly, I think the best feedback I got from the article is somebody’s naming their podcast after it” said the founder of Greenlight Capital.
“I’m an equity Market investor, and I think I have a few observations on some of these things from time to time, but I don’t profess to be a technical expert in all the mechanics of everything” said David Einhorn.
“Well honestly, I think the best feedback I got from the article is somebody’s naming their podcast after it”
David Einhorn talks macro and monetary policy explaining that the crux of the jelly donut thesis is that the low-interest rate policy eventually is subject to the laws of diminishing returns.
“At some point, you have a diminishing return from lower rates and eventually ultimately a marginally negative return from low rates” said David Einhorn.
David Einhorn talks macro and monetary policy in terms of the FED’s ability to manipulate assets through its unhindered creation of fiat currency which enables it to buy whatever it wants
“The Fed ultimately can control whatever it chooses to control within certainly within rates or whatever markets it’s willing to intervene in because it has unlimited firepower to enforce whatever policies that it wants” said David Einhorn.
“The Fed can set any rate that wants almost anywhere on the curve by, you know directly intervening in the market with unlimited firepower” added David Einhorn.
“The Fed can set any rate that wants almost anywhere on the curve by, you know directly intervening in the market with unlimited firepower”
Regarding the Fed’s balance sheet expansion, David Einhorn talks macro and monetary policy saying that the Fed is playing with semantics when it says it is not doing QE
“They want to tell us that it’s not quantitative easing. I don’t know what the difference between all of these things is except for semantics and messaging in an attempt to, kind of control things,” said David Einhorn.
“When the Fed buys Treasuries, they’re increasing the balance sheet. They’re increasing the monetary base and effectively its debt monetization” he added.
David Einhorn also noted that QE is inflationary, even though it may not show in the CPI data.
“So as price levels, in general, go up it may or may not be prices that are measured within the CPI basket, which is a subset of possible places where new money can go” he said.
“Japan and Europe and so forth, there’s huge amounts of intervention at the long-end of the curve and those banks have effectively cornered and controlled those rates as well” – David Einhorn
David Einhorn talks macro and monetary policy concerning the Fed losing control as far as the market loses faith in the central bank’s ability to tinker and micromanage
“I don’t know that you’ll have a crisis of confidence. But when you think about what just happened in the repo Market essentially, there wasn’t a huge amount of active intervention in the exact moment that it spiked” he said.
“It spiked and the Feds saw what was happening relatively quickly after and announced new programs with extraordinary firepower to make sure that the problem doesn’t persist,” added David Einhorn “that’s what I mean by their having the ability to control the rate.”
David Einhorn also noted that other central banks around the world are targeting the long end of the yield curve.
“Japan and Europe and so forth, there’s huge amounts of intervention at the long-end of the curve and those banks have effectively cornered and controlled those rates as well” he said.
High leverage in the financial system was also flagged in David Einhorn’s talks macro and monetary policy podcast
“We’re certainly in a situation that there’s a lot more leverage in the financial system than 20 or 30 years ago, which means that the debt that’s in the system can’t support nominal rates that are higher than a certain amount, you know if you think about what the deficit looked like when Volcker raised the short rates into the teens, the debt to GDP was nowhere near what it is today,” said David Einhorn.
All that debt means that it is much more sensitive to interest rate hikes then it was several decades ago noted David Einhorn.
David Einhorn also pointed out that the debt leverage is in a different place than that in 2008.
“I believe (in 2008) that the leading part of the leverage was in the real estate market both commercial and residential and I think today it’s more in the public market, meaning sovereign debt, municipal debt, and also corporate debt,” he said.
The chart, Exhibit 21 provides us with a breakdown of how highly leveraged the world is today.
“our theory relating to gold is that monetary and fiscal policies combined are very aggressive” – David Einhorn
Then the topic of precious metals and real-estate is also discussed in David Einhorn’s talks macro and monetary policy podcast
David Einhorn isn’t sure that real-estate is a hedge against inflation.
“But, our theory relating to gold is that monetary and fiscal policies combined are very aggressive” he said.
“So, what you have is a deficit right now that is very high and then you combine that with an accumulation of debt. You have a situation where the debt to GDP is much higher going into whatever the next down cycle is, and where we’ve had before similarly you have of monetary policy, which has been very aggressive” said David Einhorn.
David Einhorn is forecasting turmoil in the currency market
“The balance sheet is much larger than it used to be and the rates going into the down cycle are much lower than they used to be. There will be enormous pressure on the central bank to be very aggressive. And, so when you combine aggressive fiscal policy with aggressive monetary policy, historically that can lead to a problem with the currency” he said.