David Tepper’s 20% stock pull-back view is based on an escalating US-China trade war. Tepper has been underweight US stocks since he predicted back in April that the “highs are in.”
David Tepper has joined the raft of top investors who have been growling about a pending bear market since last February stock sell-off early this year.
David Tepper’s cautious view on markets and the geopolitical situation (and perhaps it is the latter which could start to dominate the headlines going forward) was posted back in May.
“David Tepper has joined the raft of top investors who have been growling about a pending bear market since last February stock sell-off early this year”
For those of you who missed it the juiciest bit was when David Tepper acknowledged China ripping off intellectual property, particularly from American technology companies.
“Trump has a point about China’s theft” said David Tepper.
Indeed, US-European companies setting up shop in China enticed by a plentiful supply of rare earth metals and cheap labor resulted in the least talked about industrial espionage (western technology transferred) of the century.
Nevertheless, at the same time, David Tepper quickly jumped on board the political acceptable Trump bashing bandwagon when the billionaire investor reminded his audience (students of a business school which he owns) that he recalled referring to Trump as a “demented narcissistic scumbag”.
Trump the hero, the villain it is all so perplexing.
“Trump has a point about China’s theft”
But back to the theme, David Tepper’s 20% stock pull-back view is based on an escalating US-China trade war
That could potentially lead the two major industrial nuclear powers facing each other on either side of a cannon barrel.
“You probably don’t want to take things too far with China because I can tell you the steps that it will go to and you get to the fourth step, it’s a war – it’s a real war.
If you look at the history of tariffs, they’ve resulted in – a lot of times – real wars. So I get a little nervous every time you start down that path,” said David Tepper.
“I think if they (Treasury 10 year yields) only go to 3.25% for the rest of the year then stocks might be up” – David Tepper
David Tepper’s 20% stock pull-back view could also be interpreted as a buying opportunity.
David Tepper’s view is subject to the Treasury 10 year yields staying below 3.25%
“I think if they (Treasury 10 year yields) only go to 3.25% for the rest of the year then stocks might be up”, said David Tepper in his last interview.
So then David Tepper’s 20% stock pull-back view could be more serious, in other words, a new secular bear market cycle could emerge (lower lows and lower highs) if the Treasury 10 year yields shoot above 3.25 %.
The US Treasury 10 year yields matter for investors because as yield rise it raises the opportunity cost for stock investors. So if investors rotate out of stock into treasuries to exploit the higher yields and relatively low-risk safe-haven of treasuries then that would be a negative signal for stocks.
Conversely, some investors interpret higher bond yields as investor confidence about the economy and appetite for risk. This school of thought argues that demand for treasuries is low, hence the low treasury price and high corresponding treasury yield (bearing in mind the inverse relationship between treasury price as its yield) means investors are weighted towards stocks.
But contrarian investors would interpret rising bond yields as negative for stocks, bearing in mind that the consensus trade nearly always loses money.
David Tepper’s 20% stock pull-back view is not out on a limb. Indeed, David Tepper is not the only hedge fund manager that has decided to reduce his exposure to stocks.
Since February’s whiplash volatility (which some chartist see the similarities to 1929 when stocks also fell in the winter, then rallied throughout the summer only to crash in October) many hedge funds have decided to dial back their exposure to risk.
“surprised by investors unflinching optimism in the face of a conflict that could potentially disrupt the global free-trade order – particularly after Trump’s declaration that he’s ready to slap tariffs on another $267 billion worth of Chinese goods” – David Tepper
A growing number of hedge fund managers now see an echo of past crashes
Billionaire George Soros in May has warned of a looming financial crisis.
Warren Buffett warns to beware of critical stock market indicators which could be signaling huge losses ahead.
Crispin Odey has for years expected a market crash (and lost money betting on it). Moreover, Lord Jacob Rothchild’s words of caution would be ignored at one’s own peril.
So David Tepper’s 20% stock pull-back view is echoing the opinions of the grandmasters of the game. These heavyweight investors collectively make the market and they would not be all publicly going on the record to warn investors of a pending sell-off, after all their reputations are worth too much.
David Tepper’s 20% stock pull-back view is gaining momentum
David Tepper recently said that he is “surprised by investors unflinching optimism in the face of a conflict that could potentially disrupt the global free-trade order – particularly after Trump’s declaration that he’s ready to slap tariffs on another $267 billion worth of Chinese goods”
David Tepper reckons that Trump will probably slap tariffs on most, if not all, of the Chinese goods streaming into the US. “And when that happens, stocks could experience a pullback in the range of 5% to 20%,” said David Tepper.
But perhaps David Tepper’s 20% stock pull-back view is too optimistic
The Fed now has their fall guy on the stage and can unwind its 4.2 trillion dollar balance sheet. Put another way, the Fed can pull the quantitative tightening trigger, engineer the next great stock market crash, blame it all on Trump’s inspired trade war and wash their hands of a botched monetary policy.