Einhorn: Issues That Caused the Crisis Are Not Solved… Richard Duncan: When Stocks Fall, Expect A Recession

Greenlight’s Einhorn Says Issues That Caused the Crisis Are Not Solved

  • Greenlight founder cites too-big-to-fail, few rating agencies
  • At Oxford Union, Einhorn stands behind struggling short bets

Hedge-fund manager David Einhorn said the problems that caused the global financial crisis a decade ago still haven’t been resolved.

“Have we learned our lesson? It depends what the lesson was,” Einhorn, the co-founder of New York-based Greenlight Capital, said at the Oxford Union in England on Wednesday.

Einhorn said he identified several issues at the time of the crisis, including the fact that institutions that could have gone under were deemed too big to fail. The scarcity of major credit-rating agencies was and remains a factor, Einhorn said, while problems in the derivatives market “could have been dealt with differently.” And in the “so-called structured-credit market, risk was transferred, but not really being transferred, and not properly valued.”

“If you took all of the obvious problems from the financial crisis, we kind of solved none of them,” Einhorn said to a packed room at Oxford University’s 194-year-old debating society. Instead, the world “went the bailout route.”

“We sweep as much under the rug as we can and move on as quickly as we can,” he said.
Famed for his value investing style and bet against Lehman Brothers Holdings Inc. that paid off in the crisis, Einhorn has struggled in 2017 amid a broad market surge on a wave of cheap central-bank cash. His main hedge fund lost 0.8 percent in October, trimming its gains for the year to 2.6 percent, according to a letter to clients seen by Bloomberg News.
The average hedge fund returned 7.2 percent this year through October, while the S&P 500 Index has handed investors about 17 percent in 2017, with dividends reinvested.
Einhorn didn’t avoid discussing his underperformance, citing several failed bets that companies’ stocks would decline. He didn’t name the stocks he was shorting, but insisted that none of the companies are “viable businesses.”

When Stocks Fall, Expect A Recession

As a rule, Credit Growth drives Economic Growth. But that is not the case now. Credit growth is very weak, but the economy grew by 3% during each of the last two quarters.
Q: What then is driving the economy?
A: Asset price inflation.
Household Sector Net Worth jumped by $8.2 trillion between mid-2016 and mid-2017 – to $96 trillion. And it has risen by an astonishing $41 trillion (75%) since the first quarter of 2009.
Quantitative Easing and ultra-low interest rates have pushed up the stock market and property prices, creating “Wealth” that has fueled economic growth.
But asset price inflation is a very unreliable source of economic growth; particularly when asset prices are as stretched as they are now. The Wealth to Income ratio has never been higher.  Moreover, the Saving Rate, at 3.1%, has only fallen this low during the peak of the NASDAQ Bubble and during the 2007 Property Bubble. Both these indicators are flashing warning signals that asset prices are overdue for a sharp correction.
That does not mean a crash is imminent. In fact, it is possible that asset prices will continue rising sharply. They often do spike higher near the peak of a bubble.
However, with Quantitative Tightening now beginning to drain money out of the markets, the risks of a selloff are clearly increasing.
Deutsche: The Swings In The Market Are About To Get Bigger And Bigger…(They Should Know!!)
One week ago, on November 9 something snapped in the Nikkei, which in the span of just over an one hour (from 13:20 to 14:30) crashed more than 800 points (before closing almost unchanged) at the same time as it was revealed that foreigners had just bought a record amount of Japanese stocks the previous month.
As expected, numerous theories emerged shortly after the wild plunge, with explanation from the mundane, i.e., foreigners dumping as the upward momentum abruptly ended, to the “Greek”, as gamma and vega stops were hit by various vol-targeting (CTAs, systemic, variable annutities and risk parity) funds. One such explanation came from Deutsche Bank, which attributed the move to a volatility shock, as “heightened volatility appears to have triggered program trades to reduce risk”, and catalyzed by a rare swoon in both stocks and bonds, which led to a surge in Nikkei volatility…
Consumers Are Both Confident And Broke – The Last Time This Happened…
Elliott Wave International recently put together a chart (click here to watch the accompanying video) that illustrates a recurring theme of financial bubbles:

When good times have gone on for a sufficiently long time, people forget that it can be any other way and start behaving as if they’re bulletproof.
They stop saving, for instance, because they’ll always have their job and their stocks will always go up.

Then comes the inevitable bust.
On the following chart, this delusion and its aftermath are represented by the gap between consumer confidence (our sense of how good the next year is likely to be) and the saving rate (the portion of each paycheck we keep for a rainy day).
The bigger the gap the less realistic we are and the more likely to pay dearly for our hubris.