The stock market isn't exempt from the current economic turmoil, it is one of the worst hits as stock prices tank. The S&P 500 year to date(YTD) is -19% while the Dow Jones Ind. Average is -12%. It's a tough time for investors and companies alike. As we weather through the storm, hedge fund manager and president of Greenlight Capital, David Einhorn, gives his opinion and predictions for the stock market. We look at his third-quarter letter to the client and his thoughts on government policy.
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The bear market isn't ending anytime soon, according to David Einhorn, chairman of Greenlight Capital. His bearish stance has helped his company to return 17.7% in the first nine months of 2022, compared to the S&P 500 which declined by 23.9% in the same period.
He expects stock prices to fall further, and as the feds work to crush inflation, he believes they would also lower stock prices with their policies; "Whether we are in a recession or not, it’s clear that the Fed wants to deflate the stock market, " he said in the letter.
He thinks that the higher rates are discouraging investments. When interest rates are increased, it makes saving more lucrative and borrowing more expensive.
As inflation persists, he worries about a market disaster in the future. There might be a currency/sovereign debt crisis if the issue of rising inflation isn't solved quickly. The rising interest rates and inflation make it harder for poorer countries with debts in dollars to pay up.
The interest rate hike, according to him, isn't going to solve the problem of inflation. The constant hikes instead have the opposite effect. The relationship between inflation and interest rates is non-linear in his books. So, the increase in Interest rates is not affecting inflation.
Government spending, he believes government spending is undermining the effort of the central bank to reduce price increases. Some of the major triggers for the record high inflation are near-zero interest rates, growing money supply, and carefree government spending, in his books. Government spending increased in the years after the pandemic, alongside monetary policy was the major trigger of inflation. The easy money era as he calls it.
So a combination of monetary and fiscal policy was responsible and should be employed in fighting the crisis.
He wants the government to employ fiscal policies also and not just monetary policies.
To give a quick recap, fiscal policy is the use of government spending and taxation to regulate economic conditions. Unlike the monetary policy that stems from the central bank, fiscal policy stems from the government. He hopes that government spending would reduce as this would help mop up the money in circulation. It isn't easy and usually takes time for the policy to achieve its aim but it's necessary for this.
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