Tags: Novogratz | Fed | QE | stocks

Fortress' Novogratz: Correction in Stocks Coming When Fed Stops QE

Thursday, 16 May 2013 07:53 AM

By Michael Kling

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Stocks will drop substantially as soon as the Federal Reserve stops its bond-buying, warns hedge fund strategist Michael Novogratz.

The good news is that the Fed is not about to stop, leaving stocks with room to run, Novogratz, told CNBC.

"As long as the inflation indicators keep pointing down, the Fed is sitting there with a cigar in their one hand and bourbon in their other," said Novogratz, a principal and director at Fortress Investment Group. "They'll talk about tapering, and they'd like to, but it's not in any rush."

Video:
Economist Predicts 'Unthinkable' for 2013

Investors will continue piling into stocks, driving up prices. But the moment when the Fed stops buying bonds and Treasury yields rise, everyone will sell, prompting a substantial correction, he explained, estimating the fall at 10 to 15 percent.

"It's been a wall-of-worry market. People have not bought in yet. That's why the market doesn't go down," Novogratz stated.

Earnings are higher as compared with 2007, and there are no alternatives where investors can put their money, he noted, saying stocks are not expensive.

When and how the Fed will wind down its massive bond-buying program, known as quantitative easing (QE), is a matter a much speculation.

The Fed, now buying $85 billion of Treasury and mortgage-backed securities a month, plans to reduce its purchases gradually, The Wall Street Journal reported.

Fed officials have not yet decided when they will begin reducing those purchases.

Unlike previous QE efforts, the current program will not have a set ending schedule, according to The Journal. Instead, the Fed will be flexible and ready to adjust purchase amounts in response to the market.

"I don't want to go from wild turkey to cold turkey," Richard Fisher, president of the Federal Reserve Bank of Dallas, told The Journal. "I think we ought to dial it back."

Part of its challenge will be managing market expectations.

In a statement after its meeting earlier this month, the Fed said it is "prepared to increase or reduce the pace of its purchases" in response to economic conditions.

Unemployment has decreased from 8.1 percent in August to 7.5 percent, indicating that the recovery is on track, although some of the decrease is due to people leaving the workforce. Still, many Fed officials are leery about ending QE too early, The Journal reported, and inflation is below their 2 percent target.

Video: Economist Predicts 'Unthinkable' for 2013

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