From Art Cashin at UBS:
Tempering Tepper – Back on the last Friday in September, David Tepper came on CNBC and said that the Fed’s commitments and actions made the stock market a near lock-in buy. The market listened carefully and a powerful rally ensued.
Yesterday, Kyle Bass of Hayman Capital came onto CNBC and headed down a different road. Courtesy of CNBC, here are a few of the points he made:
“You can’t get lost in whether I should own stocks or bonds, you should expand your horizons.”
“I actually own some stocks. I do, I own a few. But you’re asking me if I would buy stocks here in general, I wouldn’t. There are much better things for you to own. I think productive assets are better.”
He suggested commodities, especially the precious metals.
For example, Bass cited the performance of metals. Although equities have been up within the last few weeks, the metal complex of commodities during the same time period—Gold, Silver, Platinum, Palladium—”as a group if you were to equally weight them are up about 75 percent,” he said.
Aside from stocks, one of Bass’ biggest concerns is the Federal Reserve’s effort to boost the economy.
“I also think with what we’ve been hearing from the Fed and what we’ve started to hear the Fed wants to print another trillion bucks. We have a monetary base of $2 trillion today and we’re gonna print another trillion— what if that doesn’t work?”
“When you start printing money—as such a huge percentage of the monetary base—and the Fed itself has admitted in the last couple days in speeches that they don’t know what they’re doing. They just hope what they’re doing works.”
When you are experimenting with such a fragile system and fragile thought, according to Bass, there are two important variables:
“Nominal amount of currency in the system versus the goods and services approaches. If you have $100 dollars in the system and you print 10, you didn’t devalue the currency by 10 percent, you devalued it by 15. And you go print another 10, and you don’t devalue that by like say nine percent, it devalues it by 20 more. So there is a nonlinearity between the amount of money in the system—the quantitative side of things and the qualitative aspect of people’s belief in the underlying currency.”
Bass turned to the connection between Fed action and the stock market. “So when you talk about what’s going on, yes they are trying to ignite equities, they are also trying to change expectations in people,” Bass said, adding, “you don’t have the confidence to go spend. You still have 25 million people out of work.”
“I personally don’t know how you’re going to create sustained growth if there is no certainty on taxes and you are literally printing a trillion dollars,” he concluded.
Bass also pointed to the risk of hyper-inflation if the Fed’s attempts to expand the money supply suddenly go awry.
While Bass’s sober assessments didn’t have the same instant impact on the market that Tepper’s had, nevertheless, they inspired a good deal of buzz on the floor. It puzzled some that two such brilliant men saw the probabilities so differently.