Tuesday, May 6, 2014

Einhorn Finds Dinner Chat With Bernanke ‘Frightening’

David Einhorn, manager of the $10 billion Greenlight Capital Inc., said he found a recent dinner conversation with former Federal Reserve Chairman Ben S. Bernanke scary.

“I got to ask him all these questions that had been on my mind for a long time,” Einhorn said in an interview today with Erik Schatzker and Stephanie Ruhle on Bloomberg Television, referring to a March 26 dinner with Bernanke. “It was sort of frightening because the answers were not better than I thought they would be.”

In describing the dinner conversation at New York’s Le Bernardin, Einhorn criticized Bernanke for saying he was 100 percent certain there would be no hyperinflation and that it generally occurs after a war.

“Not that I think there will be hyperinflation, but how do you get to 100 percent certainty about anything?” Einhorn said. “Why can’t you be 99 percent certain?”

Bernanke responded “you are wrong” to a question about the diminishing returns of having interest rates at zero, according to the hedge-fund manager. The ex-Fed chief’s explanation, Einhorn said, was that raising interest rates to benefit savers wouldn’t be the right move for the economy because it would require borrowers to pay more for capital.


  1. I doubt he would understand, but someone should explain to that pinhead Bernanke that:
    1) money ain't wealth 2) credit ain't capital
    3) liquidity ain't solvency

  2. Hey Ben, maybe the market should set interest rates, you central-planning tool.

  3. Low interest rates suggest that there is a low demand for capital in the economy. High amounts of cash on corporate balance sheets also indicate that companies are no longer finding profitable opportunities to deploy cash. Do we need to see a higher demand for capital in order to see higher inflation and rising interest rates?

    Well, yes, companies are finding it hard to re-deploy capital – and for good reason. There are just not enough credit-worthy borrowers or investment-worthy opportunities to exploit. This happens because the economy is so weak. I don’t believe it for a minute that the economy is as strong as people suggest. As the economy continues to weaken, inflation becomes a currency event.

    It’s not inflation like in the 70s’, where a higher demand for things led to prices going up. This time, it’s the currency that is being severely debased and that is what will lead to – I believe – hyperinflation before this is over.

    In a weak economy, where there is nowhere for companies or banks to deploy capital, could cash continue to accumulate in banks and corporate balance sheets, preventing this cash from causing inflation?

    Well, I guess that could happen. But the question becomes: Why would you want cash, when it generates no return?


  4. Hathaway: “No, and I’m not surprised. I would ask the same questions and I would get the same answers. Look at what Paul Singer wrote recently -- it was probably the best two page summation of where we stand. Anybody who reads what Singer wrote, if they don’t think about gold they are brain dead.

    I have a couple of billion dollars which I oversee, but when you talk about David Einhorn, he’s a luminary, and so is Paul Singer. Seth Klarman is another one. These guys have a lot of clout. They definitely have the ability to influence a lot of thinking. These are also guys who are not just interested in gold -- they have all kinds of investments and investment strategies.

    All of these guys have been extremely successful at investing and investment management, and yet they are all saying the same things regarding the dangers of the systemic risks. What these guys are pointing out, to me, is the ultimate rationale for owning gold.”


  5. Wolf Richter: Hidden Leverage Threatens To Blow Up the Markets

    We don’t know what hedge fund manager Steven Cohen will do with the money he’s borrowing from Goldman Sachs’s GS Private Bank. We don’t even know how much he’s borrowing. But it’s a lot, given that the personal loan is backed by his collection of impressionist, modern, and contemporary art estimated to be worth $1 billion. The only reason we know about the loan at all is because Bloomberg dug up a notice Goldman filed with the Connecticut Secretary of the State, claiming he’d pledged “certain items of fine art” as part of a security agreement.

    Goldman and Cohen go back a long ways. It provided prime brokerage services to his hedge fund, SAC Capital Advisors that pleaded guilty last year to insider trading charges and agreed to pay $1.8 billion in penalties and stop managing money for outsiders, which will reduce the fund to a family office managing $9 billion to $11 billion of Cohen’s personal fortune.

    Cohen made $2.4 billion in 2013, according to Institutional Investor’s Alpha List of hedge fund managers, in second place, behind David Tepper ($3.5 billion) and ahead of John Paulson ($2.3 billion). Wouldn’t that be enough without having to borrow more? And what might he be doing with all this borrowed moolah? He won’t need that much to make ends meet when his electricity bill comes due.

    In the rarefied air where these art loans take place, they have unique advantages: clients get to keep their art on the wall, and interest rates are about 2.5% – thanks to the Fed’s indefatigable efforts to come up with policies that enrich this very class of success stories. This is where the Fed’s otherwise illusory “wealth effect” is actually effective.

    So why borrow money?

    “A number of hedge fund guys who manage their money wisely, they look to put their art collections to work,” explained Michael Plummer, co-founder of New York-based consultant Artvest Partners and former COO at Christie’s Financial Services. “If you can get liquidity out of your collection and pay only 250 basis points,” he said, “it just makes sense.”

    So Cohen will invest it. Cheap leverage, the holy grail these days. It’s the driver behind the asset bubbles all around. It’ll goose otherwise minuscule returns. He might invest this borrowed money in his fund, which might for example buy Collateralized Loan Obligations. Banks that carry them on their books have to dump them to satisfy new regulations. But prices have dropped, and so banks are lending hedge funds cheap money so that they buy these CLOs. Some banks are offering to lend as much as nine times the amount that the hedge fund itself would invest. More massive and cheap leverage.