Closely-followed hedge fund manager David Einhorn, the founder of Greenlight Capital, is telling his investors to brace for a fresh batch of “Jelly Donuts” — a.k.a. more monetary easing.
“For the last couple centuries populations have celebrated the phrase ‘The British Are Leaving!’ In our view, Brexit by itself will not be a significant economic event. Sure, there will be a handful of companies that suffer idiosyncratic issues, but the U.K. economy is simply not big enough for even a devalued British pound to have a large direct impact on global trade,” Einhorn wrote in a letter to investors seen by Yahoo Finance.
He continued: “However, the mere pretense of an event is likely sufficient to entice the global monetary authorities into serving up a fresh course of Jelly Donuts. The Federal Reserve put itself on hold ahead of the vote, so it shouldn’t be a surprise if the ‘leave’ vote takes tightening off the table for some time. Other central banks have made various promises to double down on their failing policies as they deem appropriate. Government bond prices have soared, as the market senses that a global monetization of large amounts or even all government debt may be in our future.”
Einhorn’s “Jelly Donut” thesis, which he first introduced in a Huffington Post blog in 2012, essentially has to do with something being “too much of a good thing.” In other words, lower rates and quantitative easing were fine at first just like that initial donut tastes really, really good. But if you keep eating donut after donut after donut, or continuing to keep rates at or near zero for a long time, you’ll see a diminishing return.
In the letter, Einhorn added that the “scent of more Jelly Donuts” has sent gold prices up from $1,231 to $1,324 an ounce, making gold and gold stocks his fund’s largest winners during the quarter. Gold, which he has previously called a “Jelly Donut antidote,” also remains one of Greenlight’s largest disclosed positions.
Greenlight fell 2.6% in the second quarter, bringing the fund’s year-to-date returns to 0.4%. Meanwhile, the S&P 500 rose 2.5% in the second quarter, bringing its year-to-date returns to 3.8%.
Julia La Roche is a finance reporter at Yahoo Finance.