WHEN: Today, Wednesday, November 13
WHERE: CNBC Delivering Alpha conference
Following is the unofficial transcript of a CNBC interview with Greenlight Capital President David Einhorn and CNBC’s Leslie Picker live during the CNBC Delivering Alpha conference today, Wednesday, November 13th.
Mandatory credit: CNBC Delivering Alpha conference.
Realtime Transcription by www.RealtimeTranscription.com.
LESLIE PICKER: Thank you so much, David, for being here. This is going to be a great conversation. I want to start, because we haven’t heard from you since the election last week, and I want to get a sense of your view of the world, how the world order — how the market order has shifted over the course of the last week.
DAVID EINHORN: Sure. I mean, I think the election, it was certainly surprising to me, I thought it was going to be a very close election, and we would maybe still be arguing now about who won it. And I think it’s a very good break for the whole country that at least we have a decisive winner and that we can get on with things and begin to figure out where to go from here. So I think in a lot of ways this was a very good outcome, just in terms of political stability compared to kind of what I was worried about maybe a week or so ago.
LESLIE PICKER: What does it mean for your portfolio? Have you reallocated anything based on those decisive results?
DAVID EINHORN: Yeah, we have increased our bets on inflation. I think that we’re going to have another inflection up inflation. I think that what the policy mix that is being proposed, I think it is inflationary, and I think that we’ll see more of that over the next few years.
LESLIE PICKER: And this is important because I just want our audience to remember that you had this inflation call back in May of 2020 where you said — and this was, of course, in the depths of the pandemic where you said: A country that consumes much more than it produces financed by ongoing money creation will have more money choosing goods and services. Once the initial shock wears off and the recovery begins, the inflation will begin to show up. And at this time, CPI was .1 percent annually, and then of course it shot up a few months later. Do you think this administration has the policy mechanisms to deal with inflation this time around?
DAVID EINHORN: Well, I don’t think we’ll have inflation the same kind or the same amount that we did before. It felt much more open-ended than — when I say that I think there will be more inflation, like if people are expecting maybe 2.5 percent inflation next year, I think it will more likely be 3.5 to 4.5, or something like that. I don’t really see what the mechanism is right away to make it go back up to 7 or 8 or 9, such as that. But, I mean, it seems to me that we’re going to have an expansionary policy. They’re going to want to cut a lot of taxes, I think one of the speakers just before was going through the amounts. It doesn’t really matter particularly which ones, you know, it is, and I think we have a pretty strong economy on top of that. We have relatively full employment, we have wage growth, you know, I think the immigration policy that they’re going to put in place is going to be inflationary for costs and for labor and stuff like that. So I think we’ll have a bunch of inflation. What they’re able to do or choose to do about that, I don’t know. I mean, there’s argument for tolerating it, and they may prefer to just try to run the economy as hot as possible and live with the inflation. I don’t really know what they will do.
LESLIE PICKER: What do you think that means for Fed independence and the Fed’s potential to continue its rate cutting cycle?
DAVID EINHORN: I don’t know about the independence issue. I mean, the Fed is independent or they say they are independent, but, you know, their two policy prerogatives are inflation and full employment. But at the end of the day, they have one overwhelming responsibility, which is to make sure that the Treasury market functions properly. So if you have a situation where you have pretty full employment and you have pretty high inflation, you’ll have very high nominal GDP and it could become questionable, like exactly what has to happen to make sure that the Treasury market functions appropriately, so at some point that becomes the primary responsibility that the Fed has to take into account. It’s called fiscal dominance when the Fed is actually responsible for the fiscal policy. We’re probably somewhere near a transition where that actually becomes the case.
LESLIE PICKER: Do you think the bond markets are acting like that —
DAVID EINHORN: The bond markets are not acting like it’s imminent. The bond markets are acting — somewhat of a view that we’ll have higher nominal GDP than maybe thought a few months ago, but I don’t believe the bond market is even beginning to price in a difficult Treasury situation.
LESLIE PICKER: Do you think it’s pricing in the potential for skyrocketing deficits, given just the expansionary policy that you outlined?
DAVID EINHORN: Yeah, somewhat, somewhat, but not in a serious way.
LESLIE PICKER: Not enough, not enough based on —
DAVID EINHORN: I’m not saying it should. I’m not saying that that’s what needs to be priced in at this point. I don’t think we’re at that stage, and I don’t believe it’s being priced in, and I don’t know that it should be priced in.
LESLIE PICKER: Speaking of deficits, I have to ask you, because you’ve had some back-and-forth over the years with Elon Musk, who has as of today taken on this role to run the Department of Government Efficiency. I’m curious your thoughts on this appointment. Co-head I should say, co-head of DOGE.
DAVID EINHORN: Look, I think changing stuff in the government is very hard. I think it’s more difficult than going into a company and saying you work for me and now you no longer work for me. There’s a lot of protections that civil servants have, and closing agencies is not just something that somebody outside the government can do on advice. So I’m sure he will do his thing. He tends to promise a lot of things, he delivers some of those things, and that will probably be the case here, too.
LESLIE PICKER: So you think, in terms of deficits, this will not necessarily be the solution?
DAVID EINHORN: Well, I don’t see how that can be the solution. I know he’s talked about 2 trillion of cuts, but if you actually look at the federal spending, right, if you take out the mandatory spending, you know, the Social Security and the Medicare and things like that, you only have a trillion 7 of discretionary spending, about half of that is defense, so you have about 900 billion left over. So how you get 2 trillion out of that, you know, I don’t know.
LESLIE PICKER: That’s quite the math problem. We’ll leave that to the experts, perhaps. In terms of just the overall macro picture, it sounds like you believe that despite some reemergence of inflation, growth won’t be a problem, so you’re not concerned about stagflation.
DAVID EINHORN: No, I think the economy is pretty good, and I think they’re going to run it pretty hot. And yeah, I see — the stock market is good, right, and asset prices are high. Christmas should be good. Employment is good. Wages are up. Unit labor costs are up 3.5 percent, and I think there’s 2 percent of productivity on top of that, which means that wages must be at 5.6 percent. So, you know, obviously not each person is in a great spot, but collectively this should be pretty strong economy.
LESLIE PICKER: In your latest letter you wrote that by most measures it is the most expensive stock market that we have seen since the founding of Greenlight. But it sounds like you’re not outright bearish, so what does that mean for your gross exposure?
DAVID EINHORN: Yeah, we’re not outright bearish and it is the most expensive market of all time, as far as I can see, at least since I’ve been managing. There’s plenty of businesses that are pretty ordinary. You know, they grow GDP or GDP+1 or 2, and they’re trading at, you know, 45 times earnings and stuff like this. And then there’s other businesses that have a little more excitement than that, and they’re trading at, you know, 45 times revenues, and things like that.
This is a really, really, really pricey environment, but it doesn’t necessarily make me bearish. Asset prices can trade at the wrong price and they can trade at the wrong price for a long period of time. You know, a few years ago we had trillions and trillions of debt around the world that was trading at negative interest rates, which of course made no sense. It didn’t make sense then, but just because it began trading at negative rates didn’t mean it couldn’t persist for several years. Now there’s very little debt that trades at negative interest rates. So if you bought and you held all the way through, then you probably have a bad outcome. But you didn’t know if this was going to be, you know, three years of negative interest rates, ten years of negative interest rates, so an overvalued stock market, that’s not necessarily a bear market and it doesn’t necessarily mean it has to go down anytime soon. And so I’m not particularly bearish. I can’t really see what’s going to break the market at this point. Not that you always can. But there doesn’t seem to be anything obvious to me. So I just observe that it’s a really expensive market that if you buy and hold for a very long period of time, I doubt that this is a great — you’ll look back and say this was a great entry point of all of the entry points that you could have. But that being said, there’s no reason why the market can’t continue to do fine for a long period of time.
LESLIE PICKER: What does that mean for your appetite to hedge?
DAVID EINHORN: Well, I try to manage most of the portfolio from the bottom up, so we find a few things that still make sense. I think the market has companies that are literally, you know, hated and forgotten about and stuff like that, and they trade actually at reasonable values. They’re just not exciting and you probably don’t want to talk about them very much on CNBC and stuff like that, and they’re not necessarily going to go up in the next day or month or something like that. But there are things that are truly despised and hated and cheap on an absolute basis that I think make sense to own. And on the other side of that I think there’s plenty of things that are probably overvalued and deteriorating that we can use to be a bit more cautious.
LESLIE PICKER: I think we do want to talk about this on CNBC in fact. I know in your latest letter you said you were building three long positions, one of which was Peloton. We’ve covered that a lot on CNBC. That one was a good one. And for those who haven’t seen it, you pitched that one at another conference, but on a Peloton bike, which was quite the task of multitasking.
DAVID EINHORN: It was harder than I expected it to be.
LESLIE PICKER: Yeah, new appreciation for the instructors?
DAVID EINHORN: Yeah, they’re really fit. Yeah.
LESLIE PICKER: But you have two other long positions that you’ve been building. Care to share what one of those, both of those are?
DAVID EINHORN: I’ll share one, but I’m not going to do it while driving an agricultural combine.
LESLIE PICKER: That was a huge disappointment because — no, we do not have one here.
DAVID EINHORN: You don’t have one for me?
LESLIE PICKER: No, we do not.
DAVID EINHORN: And I didn’t wear a farmer costume.
LESLIE PICKER: That would have been real preparation.
DAVID EINHORN: That would have been advanced. One of the new ones we just actually finished buying is a company called CNH, which stands for Case and New Holland, and they make tractors and combines, and it’s exactly the kind of situation that absolutely nobody cares about right now because it’s cheap, and the news over the next period of time probably isn’t going to be very good. Agriculture prices are low, and AG equipment is in a down cycle that will probably continue to worsen, which means the stock is not interesting for anybody who cares about what’s going to happen in the next few weeks or what is the next data point and so on and so forth. Last week they announced earnings, and unsurprisingly, they missed and they lowered and who wants a stock like that in this market? But when you think about and take a bigger picture — someone once told me you pay a high multiple for trough earnings and a lower multiple for peak earnings. So I think here the trough earnings are a little bit north of a dollar per share and the stock is about 10, so we’re about 10 times trough earnings. And in a market where the PE on average is about 23, that seems — you know, really pretty good to me. So earnings have gone from $1.70 at the peak and now they are going to be $1, $1.10, something like that. It pays a 3 or 4 percent dividend. They’re buying back 5 or 6 percent of the stock. There’s very little financial leverage, and sometime next year, maybe even in early 2026 we will come around to a more up part of the cycle and people will begin envisioning a couple dollars of earnings on the next upcycle and maybe you’ll get 10 or 11 times that, in which case the stock could double over the next couple years.
LESLIE PICKER: Is that upcycle driven by inflation or something else?
DAVID EINHORN: No, it’s just supply and demand. You know, you had a period where you had a bit of a boom in agricultural equipment purchases, and now that’s turned into a cyclical bust. AG prices are lower than they were, so farmers are cutting back a little bit on a global basis. And these things come and they go, and the equipment eventually ages and the equipment needs to be replaced. So this year the AG equipment universe is probably 20 percent below its average demand over a cycle, and sometime three or four years from now, it will probably be 20 percent above. That’s just the nature of how these businesses work.
LESLIE PICKER: How big is your position in this one?
DAVID EINHORN: I would say medium-sized position.
LESLIE PICKER: Medium-sized position. Going back to Peloton. So in addition to pitching that one while riding a bike, which, you know, you can sit and talk about it here, where do you see the biggest bull case for Peloton, given it has been so unloved for the last few years now? Got a bit of a boost when you disclosed the pick, but what do you think the market is really misunderstanding about this one?
DAVID EINHORN: Yes, we don’t have to underwrite this to the biggest bull case. The stock, I think, peaked at 160, and today it’s at 8 and before — a few months ago, it was at 4. So it had fallen 97 percent, and now it’s only down 95 percent. So the old high was probably the wrong price, I think we can say that safely. But if you look at the company and you say, look, they have 3 million subscribers who pay them 40-something dollars a month, they use the equipment an average of 13 times a month, so they are engaged, they have less attrition on a monthly basis than say Netflix or something like that. You have a nice subscription model and a steady stream of cash flows. Now the company historically has not been run to operate at a positive margin because this is one of those priced-to-sell things, and all we want to do is grow the sales and not worry about the expenses, but eventually that catches up to you, as it does to most companies, and now they have to find religion and find some cost cuts. For Peloton, cost cuts, the easy ones are there. They used to be paying young kids right out of school a lot of money to go stand at marathons and hand out T-shirts and stuff like this. Maybe it’s not cost effective, but it was good for building and branding. I’m sure everybody had fun. They had a corporate policy of paying everybody at the 90th percentile for the jobs they were doing. So they can just fix that and bring the margins to maybe more of a normal level and you can look at other subscription type of businesses. And if you do that, the profits on the current gross profit stream could easily be twice what they’re forecasting for next year, so maybe it takes them a couple years. The bull case for Peloton actually requires them to go find more customers, so they have to figure out how to have more engagement, sell more products and add the subscriptions. And if you do that, then you’ll get a higher multiple than if they’re unable to do that. It’s been growing at a slow peace because they have some attrition and some new sales. At some point, they need to pick that up if they really want to get to maybe the upcycles.
LESLIE PICKER: Do you think it’s possible to do that if they’re cutting salaries?
DAVID EINHORN: Well, look, I don’t know if the kids handing out T-shirts were selling any bikes at all, so maybe they can just be more efficient in how they go about finding customers.
LESLIE PICKER: The people they pay? Not necessarily pay cuts, but the people they pay.
DAVID EINHORN: Yes.
LESLIE PICKER: And the third position, are we ready to talk about it?
DAVID EINHORN: Not today.
LESLIE PICKER: Next time. Had to try. In terms of just the overall market structure, something you’ve been focused on is value investing and the value investing industry versus value investing professionals such as yourself.
DAVID EINHORN: Yes.
LESLIE PICKER: How would you characterize the current juncture? I know this was a key topic of yours at Sohn back in April. Do you think anything has changed? Has it gotten even worse?
DAVID EINHORN: Oh, it’s continuing to get worse. It’s continuing to get worse. We are in a secular destruction of the professional asset management community, particularly those who have longer duration philosophies towards value in companies. I mean, when I came into the business you had all these people running around with discounted cash flows and looking at having investment committees, and you had all these long-only funds. And what they would want to do is say: Find me something that I think is worth 30 percent more than it’s trading for, and I’ll own it for some indeterminate period of time. And I’ll earn the S&P plus the 30 percent. If it’s over three years great, if it’s over ten years, that’s still fine, right. Those people have been fired, and there is nobody there committing significant amounts of capital on that kind of a philosophy anymore. And so that valuation work isn’t even being performed. The shorter term fundamental people, they care about this data point and the next data point. What are the next two things going to be? Is it going to be a beep and a raise, that’s good enough for me. Is there going to be one other intermediate thing. And so what happens is you have these companies and all they do is they manage these expectations, right? And they beat and they raise, and they beat and they raise, and they beat and they raise. And they’re pretty good companies and the next thing you know, they’re trading at, you know, 55 times earnings even though they’re growing GDP+2 and something like that. And that’s kind of the gamification of the way that the market structure has changed, right? And the amount of money that’s being committed to saying, hey, what about the price of this, what about the value of that? We are such marginal players in terms of the amount of trading that’s going on, so the price discovery from professional people who have a valuation framework, not as the dominant part of their process, but as any part of their process, is much, much smaller than it used to be. And so effectively instead of the valuation becoming the signal, the valuation people were just noise and everybody else is sort of the signal. And this is why I think we have a structurally dysfunctional market, a bit of a broken market, and essentially a perpetual erosion of value as a strategy, as you would.
LESLIE PICKER: So why do you keep doing it, then?
DAVID EINHORN: Because — because it’s created an extraordinary circumstance for me, which is I’m like the Maytag repairman. I’m like the last guy doing it, and so I don’t have to pay 12 times earnings anymore for stuff that I think might be a bit better. I can buy what I just told you ten times bottom of the cycle earnings. Those kind of opportunities used to exist at the bottom of a bear market because normally you would have to pay 18 times bottom of the cycle earnings for an’s obviously cyclical business. But because nobody is paying attention, I can get half of that. And I don’t need other investors to figure it out because I’ve got a 3 percent dividend yield and I’ve got a 7 percent buyback, which means the company is basically giving me 10 percent of investment every year, which doesn’t sound exciting when the market wants to go up 30 percent a year or something like that. But a 10 percent return in a 4 percent interest rate environment is a pretty nice outcome. And I could do better if for some reason the market does choose to re-rate it. Which won’t be because value investors all got around and said buy the stock. It will be because, you know, some other factor machine kind of thing says, oh, now it’s time to go buy the ag stocks or something like this.
LESLIE PICKER: Which would benefit you?
DAVID EINHORN: That would be a benefit.
LESLIE PICKER: That would be great.
DAVID EINHORN: But that’s not the underwritten case. That’s just noise that could happen.
LESLIE PICKER: But given these secular distortions, I mean, the hedge fund industry has AUM of 4.6 trillion dollars right now. I know it’s not a monolith and there’s a diversity in there in terms of strategy. But people keep buying despite the fact that there are other elements of the markets. In other words, people are still paying up for active management despite some of these other forces.
DAVID EINHORN: Sure. Look, the passive people, they don’t care what the value is, right? And then the active people, it depends if your strategy has to do with the value. And where the big money has gone into hedge funds, right, has been either into very growthy, techy type of situations or into market-neutral, beta-neutral, factor-neutral, sector-neutral funds which are running with relatively decent amounts of leverage and very, very small risk tolerances on their subportfolios that these managers have. Which means that those managers can’t absorb any volatility to take any real risk. So they have to be right on the next data point. They have to get the quarter right. They’ve got this quarter right and the guidance right, and they’re not really thinking out much further than that. And so they’re not contributing towards efficiency. The question is, is how much money is value oriented contributing towards efficiency? And I don’t mean value versus growth. Growth can be undervalued also. But I’m saying where I’m buying this thing because I think it’s worth more than what it’s trading for and I’m going to hold it for some indeterminate period of time until it converges to that value. And when you think about all of the trading that is going on right now, it is such a rounding error towards zero that that type of thing, it’s we’re not having convergence towards value.
LESLIE PICKER: Scarcity, the Maytag repairman, everybody?
DAVID EINHORN: There you go.
LESLIE PICKER: David Einhorn. Thank you so much.
DAVID EINHORN: Thank you.
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