Renowned hedge fund manager David Einhorn is confidently urging investors to dive into the world of inflation, even in the face of the current high-interest rate climate. Speaking on the stage at the Grant’s Interest Rate Observer conference in New York, Einhorn highlighted the persistently soaring prices in various sectors like gyms, dentist offices, hotels, and airlines, underscoring the stickiness of inflation. Furthermore, with escalating labor strikes driving up wages, businesses are bound to pass on these additional costs to consumers, he added.
Given the environment that supports the Federal Reserve’s view of prolonged higher rates, Einhorn favors one-year inflation swaps as a viable option. These swaps were valued at 2.8% at the close of September, as reported by the Federal Reserve Bank of Cleveland. Inflation swaps involve investors paying a fixed interest rate to a counterparty and receiving a floating rate payment based on real-time inflation, providing critical risk hedging for financial institutions.
Einhorn boldly advocates for taking a long position in these swaps, while also expressing his affinity for the 10-year swap, currently yielding 2.21%.
For those unable to engage in swaps, Einhorn proposes an alternative solution—investing in TIPS (Treasury inflation-protected securities). Emphasizing that TIPS yield the same exposure, they protect investor principal by making adjustments based on inflation. The interest paid on TIPS can fluctuate over time due to adjustments made to the principal. As of Tuesday, the 10-year TIPS boasted a yield of 2.41%, its highest since December 2008 according to Tradeweb.
Einhorn enjoys a reputation as a value investor and has remained steadfast in his energy and gold holdings for years. In 2022, his hedge fund experienced its most successful year in a decade, delivering a remarkable return of 36.6%, partly due to short positions in a selection of high-performing stocks.
