David Einhorn’s Greenlight Capital has made some big changes in Fannie Mae holdings. In his Q2 2021 letter to investors (full copy of Greenlight’s investor letter can be found here), Einhorn states:
Q2 2021 hedge fund letters, conferences and more
During the quarter, we had a loss in the preferred stocks of Fannie Mae and Freddie Mac (“GSE preferreds”). We had bought them in 2014, partially hedged by shorting common stock. Our thesis was that we could do well if the companies were recapitalized and released from conservatorship, and that shareholders had valuable claims against the U.S. government, which had unilaterally changed the deal and essentially nationalized the companies right as they were about to recover. We believed that under the Trump administration, there was substantial interest in settling the lawsuits and releasing the companies.
In January, the GSE preferreds fell when it became clear that the Trump administration had left without putting the GSEs on a clear path to being released. Nevertheless, we remained optimistic about the legal case, which had reached the U.S. Supreme Court. In the lower courts, Democratic-appointed judges had tended to support the government and Republican- appointed judges had tended to support the shareholders; so we were surprised in June when the Supreme Court ruled in the government’s favor in all the important aspects of the case. This caused the GSE preferreds to collapse. In the earlier years, the position had been quite profitable and we reduced it at favorable prices. While we achieved a low double-digit IRR over the life of the position, it was a loser in 2021.
David is also betting on some commodities, such as single family detached housing, air freight, copper, titanium dioxide, cement, thermal coal and natural gas, paperboard, Einhorn states:
We know what the President wants – if you are having trouble finding enough labor, “pay them more.” Sounds like a wage inflation policy to us.
As for the Fed policy response, the market seems to think that by simply noticing inflation and, perhaps, making modest changes to monetary policy, inflation will be brought under control. But what if what’s needed isn’t merely tinkering? Reported inflation last month annualized at a double-digit rate. What if the need is an immediate end of quantitative easing and a rapid increase in rates? The so-called Taylor rule4 says the correct Fed funds rate today would be about 5%.
We think the answer is, if that is what is needed, it won’t be done. Chairman Powell is committed to remaining very accommodative for a long time and then only gradually tightening. We believe he will find whatever excuse he needs to do so, no matter what the data shows.
The result, we believe, is that inflation won’t be aggressively addressed. So, the risk is to the upside. In our macro book, we hold inflation swaps and gold. The former will benefit from reported inflation being higher than the market expects. The latter should benefit as the market realizes the Fed is behind the curve and has no plans to catch up.
See the full Greenlight investor letter here.