David Tepper’s cautious view on the financial markets and the current geopolitical situation last week (April 26) captivated a group of MBA students at the Carnegie Mellon’s Tepper School of Business. The School is named after the billionaire hedge fund icon following his $125 million donations to the institution.

So David Tepper’s cautious view found an outlet at the very business school named after him and it might be worth taking notes, bearing in mind that he is among a handful of people that with just words can still move markets.

“The wealth of the top one-tenth of 1% of the population is about equal to that of the bottom 90% of the population, which is the same sort of wealth gap that existed during the 1935-40 period”


David Tepper’s cautious view was expressed on various issues relating to the aging stock bull market, rising bond yields and of course US President Trump in the context of protectionism and trade wars.

It is currently avant-garde for the rich and famous crowd to publicly slur Trump and David Tepper was no exception to the phenomenon of rubbing Trump up the wrong way in the hope of boosting his own popularity.

David Tepper’s cautious view on Trump began with what appeared to be an off the cuff slur.

The billionaire hedge fund investor recalled an incident where he called Trump a “demented narcissistic scumbag”. Trump’s feud with Amazon was “insane,” said Tepper. Moreover, threatening to impose tariffs on all Chinese goods entering the US (which amounts to another $100 billion of Chinese imports) is in Tepper’s words is “nuts”. But in the same breath, David Tepper applauded Trump’s tax cuts as well as the administration push for deregulation which he claimed have “largely benefited the economy”.

“Trump has a point about China’s theft”


David Tepper also acknowledges the problem of China ripping off intellectual property, particularly from American technology companies. “Trump has a point about China’s theft” said David Tepper.

Nevertheless, the crux of Tepper’s cautious view with respect to Trump’s protectionist stance towards China was that a trade war could easily escalate out of control.

Tit for tat US-China trade sanctions could weaken bilateral agreements thereby damage diplomatic relations between the two (former) trading partners. So the unintended consequence of a trade war with China could be a kinetic war.
From history, we have learned that trade wars often lead nations down the path to a shooting war.

“When goods don’t cross borders, Soldiers will”. Related Links: Frédéric Bastiat (1801-1850).

So Tepper’s cautious view is based on a realistic possibility that Trump might take tariffs with China too far.
“I think tariffs, in general, isn’t the best way to go about it. Steel companies support so few jobs in the economy that I’m not sure that was the best place to start. On the other hand, if you talk to tech companies, they believe – and there has been proof – that China has taken intellectual property. The first $50 billion in tariffs I don’t know if I agree with it but it was a shot across the bow and I guess that’s okay – but the $100 billion in tariffs he didn’t tell anybody in his cabinet so that’s just nuts…they probably will get a NAFTA agreement,” said Trepper.

“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.”

“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

What about David Tepper’s cautious view regarding the rising 10Y yield?

“I think if they (Treasury 10 year yields) only go to 3.25% for the rest of the year then stocks might be up. But too many people are saying that. And when too many people are saying one thing that’s when I start to get worried. David Tepper’s cautious view is to avoid crowded trades and the herd mentality which makes him a contrarian investor.

If T10 yields break above 3.25%, “then stocks might have a problem.”

So reading between the lines David Tepper’s cautious view on rising T10 bond yields is that when the 3.25% yield is breached the opportunity cost of holding stocks would be so great that investors would rotate from stocks into bonds so as to profit from the higher yields. But such a scenario would be bearish for stocks and bear in mind all that liquidity, “maybe the worse in our lifetime”.

“Machines are doing shitty this year. Really bad. Not good. I’m kicking their ass” – David Tepper

Bond yields are sensitive to changes in interest rates. “A lot of it has to do with interest rates. We’re right on the cusp of breaking out on interest rates at this level around 3%. I think they closed at around 2.98% on the 10-year,” said David Tepper.

But David Tepper’s cautious view was somewhat in check with regards to the US economy. In short, the billionaire investor was optimistic about the US economic prospects, subject to the Fed not raising rates too fast and war not breaking out.

David Tepper’s cautious view on the rise of algorithmic trading which has been under performing human traders was insightful.

The machines are only as good as the people who are programming the machines. But now, when people talk about machines taking over, the people are only as good as the people programming the machines. And when you have times that are changing – like when interest rates are rising as we come out of this QE environment, sometimes you have people programming the same thing. When times change, the programs don’t change unless the people programming them make them change. And when the times are changing fast.”

So then how is David Tepper performing against the bots?

“Machines are doing shitty this year. Really bad. Not good. I’m kicking their ass.”

For those of you who wish to listen to David Tepper’s cautious view and wide-ranging discussion click here for part one and click here for part two.