Einhorn: "None Of The Problems From The Financial Crisis Have Been Solved"

A month ago, a downbeat David Einhorn exclaimed "will this market cycle never turn?"

Despite solid Q3 performance, Einhorn admitted that "the market remains very challenging for value investing strategies, as growth stocks have continued to outperform value stocks. The persistence of this dynamic leads to questions regarding whether value investing is a viable strategy. The knee-jerk instinct is to respond that when a proven strategy is so exceedingly out of favor that its viability is questioned, the cycle must be about to turn around. Unfortunately, we lack such clarity. After years of running into the wind, we are left with no sense stronger than, 'it will turn when it turns'."

Such an open-ended answer, however, is a problem for a fund which famously opened a basket of "internet shorts" several years prior, and which have continued to rip ever higher, detracting from Greenlight's overall performance.

This, in turn, has prompted Einhorn to consider the unthinkable alternative: "Might the cycle never turn?" In other words, is the market now permanently broken.

While the Greenlight founder did not explicitly answer the question, in a speech yesterday at The Oxford Union in England, Einhorn made it extremely clear just how farcical he believes this market, and world, has become, pointing out that the problems that caused the global financial crisis a decade ago still haven’t been resolved.

“Have we learned our lesson? It depends what the lesson was,” Einhorn, the co-founder of New York-based Greenlight Capital, said at the Oxford Union in England on Wednesday.

Infamous for his value investing style and bet against Lehman Brothers that paid off in the crisis, Bloomberg reports that Einhorn said he identified several issues at the time of the crisis, including the fact that institutions that could have gone under were deemed too big to fail.

The scarcity of major credit-rating agencies was and remains a factor, Einhorn said, while problems in the derivatives market “could have been dealt with differently," and in the “so-called structured-credit market, risk was transferred, but not really being transferred, and not properly valued.”

“If you took all of the obvious problems from the financial crisis, we kind of solved none of them,” Einhorn said to a packed room at Oxford University’s 194-year-old debating society.


Instead, the world “went the bailout route.”


“We sweep as much under the rug as we can and move on as quickly as we can,” he said.

Einhorn didn’t avoid discussing his underperformance, citing several failed bets that companies’ stocks would decline. He didn’t name the stocks he was shorting, but insisted that none of the companies are “viable businesses.”

Value investing has worked over time, but “it’s not working at all right now,” and in fact “the opposite seems to be working,” he said.

Greenlight remains focused on developed markets, and has no plans to change that, he said.

Which reminds us of his exasperated conclusions from the latest Greenlight letter to investors:

Given the performance of certain stocks, we wonder if the market has adopted an alternative paradigm for calculating equity value. What if equity value has nothing to do with current or future profits and instead is derived from a company’s ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in current and future economic loss?


It’s clear that a number of companies provide products and services to customers that come with a subsidy from equity holders. And yet, on a mark-to-market basis, the equity holders are doing just fine.

Ah yes, the Fed-funded "deflation trade" which lowers prices for goods and services courtesy of ravenous investors who will throw money at any "growth" idea, without considerations for return or profit, because - well - more such investors will emerge tomorrow.  After all, in this day and age of ZIRP, what else will they do with their money.


Chupacabra-322 GoldHermit Thu, 11/16/2017 - 17:03 Permalink

No shit, nothing has been solved.

If anything, they have exacerbated them.

All done by Design, all done by Agenda.

They’ve Criminally hijacked the entire Economic & Monetary Systems.

The cult (Tribe) did this by virtue of a very simple scam. It interjected itself between the state and its people by creating the medium of exchange (money) as an interest-bearing debt to itself. Money creation is something the State is perfectly capable of doing itself, without incurring any debt nor paying any interest.

This fundamental fraud is the explanation for almost everything that has gone wrong with the world.

In order to distract society from the real enemy gnawing at its heart, the central bankers have always created a series of phony enemies and unnecessary wars.

In reply to by GoldHermit

Chupacabra-322 GreatUncle Thu, 11/16/2017 - 19:30 Permalink

It's because in times of trouble, the circle of trust contracts.
Smaller and smaller down to localities, and families. Local.

Trust in the federal government is collapsing/contracting along with other large institutions.

Smaller circle of trust = decentralization.

Long Agorism.

AGORISM:The ideology which asserts that the Libertarian philosophical position occurs in the real world in practice as Counter-Economics (see below).

AGORIST:Conscious practitioner of Counter-Economics; older terms include Left Libertarian and New Libertarian.

COUNTER-ECONOMICS:The study and/or practice of all human action which is forbidden by the State, including violation or non-compliance with regulations; sale and delivery of controlled or forbidden substances; ignoring of all borders and internal state boundaries, customs, tariffs, duties and taxes; evasion of taxes, tributes, levies and assizes; non-compliance with personal regulation such.

James Corbett:The Most Dangerous Philosophy the Oligarchs Do Not Want You To Know.


In reply to by GreatUncle

Endgame Napoleon Chupacabra-322 Thu, 11/16/2017 - 18:28 Permalink

It is NOT the fault of Jewish people that some religions, namely Christianity, banned lending with interest for centuries, hypocritically, sinning gleefully and in far greater numbers just because of demographics after the moral ban was lifted. Come on. [[[[They]]]] are only 1% of the population, and though it is true that bankers used to be rich when operating on 1% interest, a ton of those bankers, just like a ton of the bankers in this lender’s market, are not Jewish. They are Christians, especially in my part of the country.

In reply to by Chupacabra-322

pods Thu, 11/16/2017 - 15:57 Permalink

Wow, where do you sign up to get paid for talk like this?Of course they didn't solve the problem (too much debt) because if they did, then the whole system would have imploded in a deflationary black hole.The problem is the bullshit they spew to the proles to keep them confused.  If they merely came out and said to fix the problem they were going to take all the shitty private debt and transfer it to the public balance sheet.  That would allow the system to function for a while longer.  But people might be a bit ticked off at that, so they have to throw out a bunch of gobbledygook to keep us from putting their heads on spikes.pods

VideoEng_NC Thu, 11/16/2017 - 15:59 Permalink

Didn't some guy in 2008 make campaign harumph noises about how investment banking had to be separated from traditional banking to insure that these types of boondoggles wouldn't happen again?  Oh, and how these bad guys had to be responsible for their actions...yeah, that's it.  Where is that guy anyway?

Angelo Misterioso Thu, 11/16/2017 - 16:19 Permalink

sounds similar to when Julian Robertson shut down Tiger in January of 2000. He was lagging badly as the "original' tech bubble was expanding. The bubble blew almost immediately after that announcment and lasted for 2 solid years - Cisco was considered a "solid" tech company with real earnings and it still dropped 90%....

"Patience, young grasshopper"

Clowns on Acid Thu, 11/16/2017 - 17:15 Permalink

Yeh...ya see David there was this thing in 2010 called QE...it was supposed to be a "temporary" thing for the Fedferal Reserve, but then the ECB decided that it was a good idea, then the BOJ said..."Hey ! We are way ahead of that game...lets do MOAR" ....then the Chinese Central Planning Committee (which is still Communist) said..."China will never be left behind, we are smarter than everybody else"......and wait a min...We need to print MOAR !"So now in 2017/18....the Fed has said ..."no worries we will sell all those stinking MBS and UST back into the market ....'cause QE is only tempoarary" .... and they have not sold them back....they have just let some mature.So.... you have made a fortune off of 7/8 years of printing begat and began by Ben Bernanke (a true Hero to the middle class and working man), you are now complaining that stock picking is no longer any alpha....its all Beta money printing...and ETF's are the way to go.“If you took all of the obvious problems from the financial crisis, we kind of solved none of them,”.... of course QE solved none of them...that was not the objective. The objective was to bail out then enrich the Banks and non profitable High Tech (Hi Jeff Bezos ....look ... Jeff is waving at you) , and as such it has been a huge success.So what was your question again ?

Batman11 Thu, 11/16/2017 - 17:26 Permalink

The problems lie in the economics.The half-baked neo-liberal ideology was rolled out globally and there is a price to pay.The housing boom features all the unknowns in today’s thinking, which is why they are global.This simple equation is unknown.Disposable income = wages – (taxes + the cost of living)You can immediately see how high housing costs have to be covered by wages; business pays the high housing costs for expensive housing adding to costs and reducing profits. The real estate boom raises costs to business and makes your nation uncompetitive in a globalised world.The unproductive lending involved that leads to financial crises.The UK:https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.53.09.pngThe economy gets loaded up with unproductive lending as future spending power has been taken to inflate the value of the nation’s housing stock. Housing is more expensive and the future has been impoverished.US:https://cdn.opendemocracy.net/neweconomics/wp-content/uploads/sites/5/2017/04/Screen-Shot-2017-04-21-at-13.52.41.pngUnproductive lending is not good for the economy and led directly to 1929 and 2008.Neoliberalism’s underlying economics, neoclassical economics, doesn’t look at private debt and so no one really knew what they were doing.The housing boom feels good for a reason that is not known to today’s thinkers.Monetary theory has been regressing since 1856, when someone worked out how the system really worked.Credit creation theory -> fractional reserve theory -> financial intermediation theory“A lost century in economics: Three theories of banking and the conclusive evidence” Richard A. Wernerhttp://www.sciencedirect.com/science/article/pii/S1057521915001477Economics is the opposite of a science, it regresses over time.“…banks make their profits by taking in deposits and lending the funds out at a higher rate of interest” Paul Krugman, 2015. He wouldn’t know.Bank lending creates money, which pours into the economy fuelling the boom; it is this money creation that makes the housing boom feel so good in the general economy. It feels like there is lots of money about because there is.The housing bust feels so bad because the opposite takes place, and money gets sucked out of the economy as the repayments overtake new lending. It feels like there isn’t much money about because there isn’t.They were known unknowns, the people that knew weren’t the policymakers to whom these things were unknown. 

Batman11 Batman11 Thu, 11/16/2017 - 17:29 Permalink

The problems with the real estate boom became apparent at the end of the 1980s when many nations experience real estate busts including the UK. Japan was a whopper and someone there got to work finding out what went wrong.The UK waited till that bust was over and started again (see graph), we don’t learn from our mistakes.Richard Werner was in Japan at the time of their real estate boom and worked it all out.Productive lending goes into business and industry and gives a good return in GDP.Unproductive lending goes into real estate and financial speculation and it shows up in the graphs above as it doesn’t give a good return in GDP.Excessive unproductive lending leads to financial crises (1929, Japan 1989, 2008).No one has taken any notice.Pay attention now for heaven’s sake – learn all you need to know in 15 mins.https://www.youtube.com/watch?v=EC0G7pY4wRE&t=3sJust heard the cracks are showing in Sweden's housing bubble - too late for you.http://www.zerohedge.com/sites/default/files/images/user235761/imageroot/2017/11/04/DLSnvqJX0AAP82b.jpgOh dear, Swedish policymakers were caught by the known unknowns, they weren't known to them.

In reply to by Batman11

Batman11 Batman11 Thu, 11/16/2017 - 17:42 Permalink

The known unknownDisposable income = wages – (taxes + the cost of living)When Bill Clinton passed NAFTA millions of US jobs went to Mexico.What happened?Labour is cheaper in Mexico and you can make more profit there, when there are no tariffs and you have the free movement of capital it is better to move jobs out of the US to Mexico.Why is labour cheaper in Mexico?Wages have to cover the cost of living and the cost of living is much lower in Mexico.

In reply to by Batman11

Batman11 GreatUncle Thu, 11/16/2017 - 18:37 Permalink

When you put your faith in free markets, don’t forget about mode 2.“Stocks have reached what looks like a permanently high plateau.” Irving Fisher 1929. He put his faith in free markets, but forgot about mode 2, his credibility will soon lie in tatters.  Markets have two modes of operation:1) Price discovery2) Bigger fool mode where everyone rides the bubble for capital gainsYou may remember hearing about mode two in Tulip Mania; it’s as old as the hills.Everyone knows about mode two and it’s what the real estate market thrives on. Everyone likes mode two because you can earn money doing nothing with mode two. You just sit on your behind and the asset goes up in price. You must make sure you are not the biggest fool that gets caught carrying the can at the end.Making money doing nothing is the best part of capitalism; you can’t get rid of it as the other alternative is that rather unpleasant hard work stuff.You just need to believe you are far too smart to be the biggest fool who gets caught carrying the can at the end and everyone is far too smart to be the biggest fool who gets left carrying the can at the end.Wall Street’s investment banks did turn out to be the biggest fools in 2008, but they wouldn’t let a little think like experience stand in the way of doing it again.Things haven’t been the same since 2008.We forgot mode 2.Is the Central Bankers “wealth effect” mode one or mode two?Price discovery, mode 1, is based on fundamentals and the central bankers would have needed to put their QE into the real economy to drive the markets up through fundamentals.Unfortunately, it’s a lot closer to mode 2, instead of lots of speculators pumping money into the markets to create excess liquidity, driving markets higher and away from fundamentals, they have done it with QE.Oh dear. 

In reply to by GreatUncle