I just came across a great essay by David Einhorn (the successful head of Greenlight Capital) in which he outlines his thoughts regarding public debt and inflation.
The New York Times op-ed article can be found here: Easy Money, Hard Truths
Unlike many other market observers, Einhorn does not only offer well-founded opinion, he has also shown amazing performance in the past which might lead us to believe that acting on his market observations will pay off well in the future.
What I found quite interesting is Einhorn’s comment on the risk transfer ?from the weak to the strong?:
“As we saw first in Dubai and now in Greece, it appears that governments? response to the failure of Lehman Brothers is to use any means necessary to avoid another Lehman-like event. This policy transfers risk from the weak to the strong ? or at least the less weak ? setting up the possibility of the crisis ultimately spreading from the ?too small to fails,? like Greece, to ?too big to bails,? like members of the Group of 7 industrialized nations.”
Indeed, the G7 are “too big to bail?- a fact that should alarm everyone who has great exposure in apparently low-risk sovereign debt. Moreover, Einhorn clearly lays out why he thinks a significantly higher inflation is on the horizon.
The next logical question is how Einhorn positions his fund in the current macro environment. As I am not an investor in his fund, I can only draw conclusions from his quarterly letters (some can be found online).
Over the last few quarters he has explained that he sees great potential in gold and high-quality, low-cyclical stocks. This sounds somewhat similar to what I wrote two weeks ago in How to invest for inflation.