David Rosenberg says hedge fund manager David Tepper's assertion we should all be bullish because the Fed is standing buy to save us is so much claptrap.
In a note to investors, Rosenberg points out that Tepper's two scenarios on why he believes the equity market is now going straight up — first, that the Fed would use more QE if needed and second, that If the economy chugs along, then there will be no need for more Fed balance sheet expansion — are shortsighted.
A third scenario, Rosenberg posits, is that the economy weakens to such an extent that the Fed does provide more easing, which doesn’t work.
“So the "E" goes down and the P/E multiple does not expand,” Rosenberg says. “Maybe it even contracts since it already has spent the past number of years reverting to the mean as are so many other market and macro variables (for example, the dividend yield, savings rate, homeownership rate and debt ratios).”
“In this scenario, the stock market does not go up; it goes down.”
“After all, if (the first round of easing) had worked, the Fed obviously would not be openly contemplating the second round,” Rosenberg points out.
The stock market has been on a tear this month and is up a few percentage points for the year, notes former hedge fund manager Andy Kessler. But the stocks of most Wall Street firms are actually down close to 15 percent for the year.
“It wasn't supposed to be this way,” Kessler writes in The Wall Street Journal.
“The Federal Reserve's near-zero interest rate policy makes it almost impossible for Wall Street not to make money by borrowing at next to nothing and buying anything, especially Treasury bonds.”
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