David Einhorn is the latest manager who believes the U.S. is in a recession. In fact, he deems the stock market’s current sell-off as the beginning of a new bear market.
His firm, Greenlight Capital, says in its first-quarter letter, dated April 16 and signed by the firm rather than Einhorn: “The fact that the market has declined from its record highs does not make it inexpensive or attractive.”
The hedge fund firm also warned investors not to be fooled by bear market rallies. “Bear markets do not go straight down,” it stressed. “They are punctuated by ‘rip-your-face-off” rallies based on big headlines, extreme investor sentiment, and experience that buying the dip usually pays off.”
As Institutional Investor recently reported, Greenlight gained 8.2 percent in the first quarter, compared with a 4.3 percent loss for the S&P 500. That means the firm has made back all of its underperformance since last year, when it was up just 7.2 percent — although it noted in the letter that it doesn’t believe its mission is to outperform the S&P 500 index each quarter. It also boasts that for the past three years, the fund had zero daily correlation to the S&P 500 index.
“While we didn’t know exactly why things would change, we viewed the overall risk-reward of the market as being unattractive and we didn’t think it was a good time to accept a lot of equity risk,” Greenlight stated.
In the first quarter, Greenlight lost 1.3 percent in its long portfolio but made 5.3 percent from shorts and 5.3 percent from its macro book.
The macro book was driven by a 19 percent increase in the price of gold — “by far the biggest winner.” Greenlight holds position in gold bars and call options. It also made money on inflation swaps and secured overnight financing rates. It is generally used to hedge U.S. dollar short-term interest rates.
Greenlight has been concerned about valuations and conservatively positioned for some time. At year-end, it was just 90 percent long and 54 percent short, for a net long exposure of 36 percent, according to its fourth-quarter 2024 letter, which cited concerns over the market’s overall valuation.
In late February, Greenlight said it had “pivoted from conservative but not bearish, to bearish.” At the end of the first quarter, the fund’s net long exposure was cut sharply, to just 19 percent — 86 percent long and 67 percent short.
Greenlight reminds investors that its fourth-quarter letter highlighted the uncertainty created by the Trump administration. “We are now only 5 percent into President Trump’s second term,” it notes. “It is like being at the gym attempting a set of 20 push-ups and already feeling exhausted after completing just one.”
Greenlight ticks off a number of concerns, noting that the administration is disruptive and is upsetting all the apple carts at the same time — a high-risk strategy that creates a lot of chaos. “It may turn out going fast and breaking things is not the greatest idea when it comes to geopolitics and the global economy,” the firm says.
Greenlight also states that the America First foreign relations strategy means that the priority is rectifying unfairness rather than “promoting democracy and supporting capitalism, economic development, and freedom around the world.” The firm is also concerned that the administration’s leading economic policy is protectionism, “a traditionally left-wing position.”
Greenlight asserts that a trade deficit does not necessarily mean we are being ripped off and that restoring manufacturing in the U.S. of things such as socks and other low-price commodities is not necessarily a good thing.
“We have migrated to a service economy and have nearly full employment,” it says, noting that as manufacturing jobs were lost, other types of jobs increased. “There is a large lag between introducing tariffs now and when factories could even be built domestically. In the meantime, we will suffer the immediate harm of the tariffs without the benefit of the new manufacturing.”
The firm also worries that tariff concerns will erode trust in the U.S. dollar as the world’s reserve currency.
The upshot: Greenlight says that even before the tariff announcements, it believed the economy was slowing down. The DOGE cuts had a much bigger impact on sentiment relative to the savings achieved, it points out, and a wide array of jobs are now in jeopardy, including in civil service, scientific research, federally funded universities, government consultancies and contractors, and climate change.
“Regardless of where trade policy eventually settles, it is contributing to the growth slowdown,” Greenlight says, calling tariffs a regressive tax.
“Less consumption and job cuts create a slowdown, and quite likely a recession,” the firm warns. “We may already be in one now. It is not uncommon for economists to backdate recessions. What follows from that, of course, is lower corporate earnings and likely lower stock prices.”