November 9, 2010 / 9:29 PM / in 9 years

Greenlight Capital's Einhorn says Fed's QE 'perverse'

*Einhorn: Fed more likely to create inflation, not jobs

*Greenlight holds gold, which topped $1,400/ounce

*Einhorn says QE scheme forming ‘yet another asset bubble’

By Jennifer Ablan

NEW YORK, Nov 9 (Reuters) - Hedge-fund manager David Einhorn said he continues to hold gold as he lambasted the Federal Reserve’s unconventional monetary easing as “perverse” and inflationary.

In his latest investment letter to clients, obtained by Reuters on Tuesday, Einhorn reiterated his views from one year ago that the U.S. government’s financial chiefs are adopting short-sighted policy decisions.

“Quantitative Easing or QE is a euphemism for monetization of government debt or simply the electronic equivalent of ‘printing money,’” Einhorn wrote. “We have been expecting that eventually the Fed would be forced to monetize the debt (either during the next recession or if the Treasury ceased to be able to find buyers of its debt at acceptable rates) with dire consequences.”

Last week, the Fed said it expects to engage in a new round of bond purchases, announcing that it will buy $850 billion in Treasuries by the middle of 2011. That’s more than half of the roughly $1.3 trillion in debt the U.S. government is expected to issue next year.

Einhorn said the second round of quantitative easing, or what traders call QE2, is “much more likely to be successful in creating inflation and speculation in financial instruments.” He said another round won’t significantly lower unemployment.

Einhorn, the president of Greenlight Capital, which had $6.8 billion of assets as of Jan. 1, 2010, first rose to prominence for making a prescient call on Lehman Brothers’ accounting troubles before the firm’s collapse.

More than a year ago, Einhorn harshly criticized Fed Chairman Ben Bernanke and Treasury Secretary Timothy Geithner, saying “they explicitly do whatever it takes to solve one problem at a time and deal with the unintended consequences later.”

Einhorn, who held gold at the time at around $1,070 an ounce, said he continues to hold the yellow metal. Tuesday, spot gold XAU= hit a record $1,424.10 before slipping to about $1,389.

Last year, Einhorn advocated buying both physical gold and gold stocks “if monetary and fiscal policies go awry.” He noted, “Gold does well when monetary and fiscal policies are poor and does poorly when they are sensible.”

In his letter, Einhorn said, “It is perverse that on the heels of suffering the after-effects of the collapse of the Internet bubble and then the real estate bubble (both of which the Fed disclaims responsibility for creating or supporting), the Fed would like to encourage the formation of yet another asset bubble.”

Einhorn’s investment letter showed that in the third quarter Einhorn’s Greenlight Capital funds posted returns of 4.6 percent, 4.4 percent and 4.2 percent net of fees and expenses, respectively, bringing the respective year-to-date net returns to 6.9 percent, 6.1 percent and 5.0 percent. (Reporting by Jennifer Ablan; Editing by Kenneth Barry)

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