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Greenlight’s Einhorn Urges Fed to Raise Interest Rates Now to 3%

Tuesday, 10 Jul 2012 09:41 AM

Federal Reserve Chairman Ben Bernanke should focus on raising interest rates to stabilize the economy going forward and not stimulating it, which is counterproductive, says Greenlight Capital hedge fund manager David Einhorn.

Since the downturn, the Federal Reserve under Ben Bernanke has slashed interest rates to near zero and has rolled out unorthodox policy tools such as quantitative easing measures, which are large-scale asset purchases from banks that pump liquidity into the financial system to foster conditions for investing via capital increases and hiring.

The problem with such policies is they don't encourage saving.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible

"I think it's actually counterproductive. I think having the very, very low-zero rates is just depressing to people," Einhorn tells CNBC.

"I think it deprives savers of reasonable incomes and the ability to forecast a reasonable income and therefore actually cuts down on consumption."

Meanwhile, excess liquidity from loose monetary policies often ends up in commodities markets, as hard assets like oil and agricultural goods become attractively priced in dollar-denominated exchanges as loose monetary policies weaken the dollar.

"I think all of the stimulus drives up food prices, it drives up oil prices and it lowers standards of living."

So what would Einhorn tell Bernanke to do?

"I'd tell him to raise the interest rates up to a reasonable level, to 3 percent or something like that."

Turning to stocks, Einhorn says Apple continues to be a good call.

While the company's stock has fluctuated recently, long-term, the company will pay off.

"We are not into Apple for a quarter. We're two to three years into the Apple investment and the way it seems headed, it's likely we'll be there for a good while longer."

Apple is currently trading just under $614 a share, down from $644 earlier this year.

"I think the stock is very, very substantially undervalued," Einhorn says, adding Apple will likely become a $1 trillion company in the future.

"I think it's the best big-growth company we have."

On analyst says Apple will be valued at $1 trillion by 2014, when its stock will be trading around $1,000 a share.

Gene Munster, managing director and senior research analyst at Piper Jaffray, says Apple will grow on mobile device demand, based on the assumption that out of 1.6 billion total units expected to hit the market within two years, Apple will account for at least 400 million.

"I know that when you look at the $1,000 price tag, it looks like a big number. But when you look back and do the math … it’s not that hard to get there," Munster tells CNBC, pointing out share prices have doubled within a year.

A Piper Jaffray survey finds that up to 94 percent of iPhone users across the U.S. claim they will buy another version of the popular handheld.

That translates to 45 percent of sales stemming from upgrades every year.

Other analysts are coming out with bullish calls on the stock.

Topeka Capital Markets analyst Brian White says Apple is poised to be the most profitable company in history.

"In CY12, we believe Apple is poised to generate the highest annual net income of any publicly traded company ever,” White writes in a note to clients, according to Fox Business Network.

White bases his optimism on predicted strong sales of the new iPhone with a 4-inch display launching in the third quarter, an "iPad mini" due for release in September and an upcoming Apple HDTV, Fox Business Network adds.

Editor's Note: Economist Warns: 50% Unemployment, 100% Inflation Possible



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