In his Q1 2023 Letter, David Einhorn explained why the economic outlook is unusually difficult to project. Here’s an excerpt from the letter:
Einhorn: Macro was a small detractor for the quarter, with positive contribution from our gold and inflation positions, which were slightly more than offset by negative-performing interest rate and credit default swaps positions. Gold advanced 8% in the quarter and was our third largest winner.
The gain occurred after the Silicon Valley Bank (SIVB) failure, as the market expectations for further rate hikes reversed into expectations of rate cuts, starting as soon as this summer.
One concern is that the problems with the banks may force the Federal Reserve to prioritize preserving financial stability over defeating inflation, causing the next leg up for inflation. The higher gold price appears to be taking some of that risk into account.
In response to the SIVB problem, we decided that the likely change in Federal Reserve policy might be incrementally bullish for both inflation and stocks. While we think the market is wrong about rate cuts this year, we doubt that there will be many further hikes from here.
As a result, we shifted our equity positioning from bearish to neutral, by covering our index shorts, the remainder of our 2021 and 2022 bubble baskets and several other shorts. We also covered our housing hedge basket, added to several existing longs and bought a few new things detailed below.
The economic outlook is unusually difficult to project. On the one hand, employment, wages and household balance sheets look quite strong. We also believe that both monetary and fiscal policies remain stimulative.
On the other hand, there is a genuine concern that tightening lending standards will constrain the economy and create a substantial slowdown.
Our net long exposure is now back in line with its long-term average. We are equally open minded to becoming even more net long, or pivoting back to bearish, as economic events unfold.
It is our view that rate cuts are not going to happen this year, while the market is expecting them in the back half of the year. As such, we added to our interest rate positions via Fed Funds futures.
Expressing this thesis directly means that we are only subject to the central bank’s decisions for the balance of the year, rather than being subject to the market’s expectations.
You can read the entire letter here:
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