Here are quotes from Tepper's QE money flow lecture on CNBC (transcribed by me). He also believes that stocks are cheap because the equity risk premium hit a historic high of 5.4% in December. More on that after the video.
"On the TV, on your show and others, there's been talk about tapering - worrying about tapering back the Fed. So, we're thinking about this tapering sort of thing and the market is a little worried about tapering. And we actually looked at how the numbers run, and the numbers are quite amazing...
So the Fed, as you know, is going to purchase $85 billion of treasuries and mortgages (MBS) a month. 85 x 12 is over a trillion. So over 500 in six months. What's happened, and what's really amazing, is that if you look at the numbers, over the next six months, because of tax increases, because of budget cuts, because of growth in the economy, and also because of Fannie Mae paying back money to the government, and Freddie Mac soon to pay back money to the government, the deficit over the next six months is shrinking massively. So when you get to the numbers (...), it looks like the next six months deficit is going to be well under 100. Probably closer to 85. Which means, now this is an important thing, for those people that say we've been financing the deficit - and we really have, well, the Fed will never say that and this is probably a pretty big issue - we have over $500 billion we're going to buy over the next six months, and now we only have a deficit that's less than 100 over the next six months. The net issuance of the Treasury, net issuance versus refunding, is a little over 100. That means we've got 400 billion, 400 billion that has to be made up. So, basically, think about this, so that's being taken out of the bond market, and that $400 billion is now in your hands, my hands, and other folks' hands. And there's a few choices: Either it has to go into the economy, it has to make (bills) the short end of the curve trade better, the long end of the curve trade better because there's not enough paper and we have this excess, or it has to make stocks trade higher.
Now, the problem with the long end of the curve is you might be worried that some of that money might go into the economy and, you know, that might stimulate the economy, have a little bit of surge right here. And basically afterwards we also have to cut back because the deficits in the future years are going to be less than this trillion dollars. So if we don't taper back, we're going to get into this hyper-drive market. So, it's like backwards the arguments on TV. To keep the markets from just going up at a steady pace, the Fed has to taper back. Because if you look at the numbers, these numbers are so tremendous that you can have the market in sort of a hyper-mode, potentially. Now, I don't know where the money goes. And you know who else doesn't know where the money goes? The Federal Reserve of the United States of America. They really don't know."
"In a way you'd like to have to have a smooth market not go up too fast. You'd like to have the Fed taper off. So like this worry about tapering, there is no worry about tapering."
"If there's a true taper, there better be a true taper. Or else you're back in the last half, I think, you might be in the last half of 1999."
Here's the video via CNBC.com.
Here is the second part of the interview. David Tepper also believes that the stock market is cheap relative to bonds, based on the forward P/E ratio, and based on the equity risk premium. During the CNBC interview he showed a chart (via the New York Fed's blog) of the equity risk premium since 1962. According to the post, as of December 12, 2012, the equity risk premium was at 5.4%, "about as high as it’s ever been." And since the previous two ERP peaks in November 1974 and January 2009 both sparked market rallies, Tepper thinks the market is still cheap here.
|Source: New York Fed's Liberty Street Economics Blog|
Look what happened to the S&P after November 1974. So it could happen, you never know.
|Source: Yahoo Finance|
I wish I had the NY Fed's data so I could compare the equity risk premium with the S&P. One thing you can see is that the equity risk premium was around the historic high multiple times in the 1970s, which was during a secular bear market for both stocks and Treasury bonds (higher rates + inflation). Maybe this just means that we're still in a secular bear market. The equity risk premium uses forward looking models to calculate the expected equity return and then subtracts the currently manipulated risk free rate. So I don't see why people trust this percentage anyway right now. Here's another blog post on this.
But, at the end of the day, Tepper's fat pitches (similar to Macrofugue's in 2011) have worked out quite well over the last 3 years. But you can't deny that asset price inflation and economic growth have been riding on the back of manipulated money (the monetary base has been moving up in tandem with the S&P since 2009) and interest rates (via QE) since the government/Fed bailouts in 2008/2009. And don't forget all of this EPS inflation via share buybacks!
Via NBC Business:
"Another problem is that buybacks can give investors a false sense of strength of the true earnings power of a company. Forty percent of the increase in the earnings per share of S&P 500 companies in the past 12 months came from reducing the number of shares through buybacks, estimates Barry Knapp, chief U.S. stock strategist at Barclays Capital."
So it really was a perfect environment to own large cash rich stocks since 2009 (aka the S&P 500). But you saw how the market reacted to the taper talk last week. And at some point monetary tightening will have to end the capital crack party. Former hedge fund manager Stanley Druckenmiller recently told CNBC in March that he believes all of this "will end badly." So good luck when the music stops. So when that time comes, what will support EPS to keep the S&P afloat, huge asset sales?
Previous Tepper appearances on CNBC:
1) David Tepper's Bullish Bet on the Fed's Put (CNBC Video, 9/27/2010) - Tepper Rally #1
2) David Tepper Predicting the Second "Tepper Rally" on CNBC (12/17/2012)