David Einhorn of hedge fund Greenlight Capital recommends investors bet on inflation staying high despite the current high-interest rate backdrop.
Standing on the stage at the conference of finance journal Grant’s Interest Rate Observer in New York on Tuesday, Einhorn said the sticky part of inflation is evident in prices charged by gyms, dentist offices, hotels, and airlines. And now, as labor strikes drive up wages, businesses will attempt to pass on the additional cost to the customer, he added.
Given the setting, which supports the Federal Reserve’s case that rates will remain higher for longer, Einhorn said he prefers the one-year inflation swaps. They were priced at 2.8% at the end of September, according to the Federal Reserve Bank of Cleveland. Inflation swaps are agreements where investors pay a party a fixed interest rate and in return receive a floating rate payment that moves based on actual inflation. The tool is used mainly by financial institutions to hedge against risk.
“I recommend going long with that,” Einhorn said. He also likes the 10-year swap, which yields 2.21%.
For those that can’t do swaps, Einhorn recommends buying TIPS, or Treasury inflation-protected securities. “It gets you the same exposure,” he said.
TIPS are Treasuries that make adjustments to an investor’s principal based on inflation. The amount of interest TIPS pay can vary over the term, as it gets paid on adjusted principal. The 10-year TIPS were yielding 2.41% on Tuesday, its highest yield since December 2008, according to Tradeweb.
Einhorn, a well-known value investor, has been long energy and gold for years. In 2022, his hedge fund had its best year in a decade, returning 36.6%, helped by short positions in a group of highflying stocks.
Write to Karishma Vanjani at [email protected]
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