David Tepper, founder and president of Appaloosa Management.
David Orrell CNBC
Appaloosa Management David Tepper said investors should believe the Federal Reserve when it said it will lower interest rates because the central bank now has to maintain credibility.
“You just read what these people are saying,” Tepper said on CNBC’s “Squawk Box.” “Powell told you something …. He told you some kind of recalibration. He should follow it as it were. I’m not very smart. I just read what he said and he has conviction. They usually do what he says. especially when they have a level of conviction this.”
The Fed last week cut half a percent from its benchmark rate, kicking off its first easing campaign in four years with aggressive moves despite a relatively stable economy. In addition to this reduction, the central bank showed through a “plot point” that is equal to 50 basis points more than the cut at the end of the year.
Fed Chairman Jerome Powell said the cuts were a “recalibration” for the central bank and not to make the same move at each upcoming meeting.
“Maybe two or three interest rate hikes, 25 basis points, will have to be done, or they will lose credibility,” Tepper said. “They’ll do anything but 50. You know, the other 25, 25, 25 seems to be the way to go.” (1 basis point equals 0.01%)
‘I don’t like the US market’
However, Tepper said the macro setup for U.S. stocks made him nervous as the Fed eased monetary policy in an economy that was relatively solid as it was in the 1990s. Last week’s super-sized rate cut came despite most economic indicators looking pretty solid.
“It was around the ’90s in a market where the Fed was cutting rates going into Y2K with a good economy,” he said. “Rich in ’97 …. rich after long term credit, and bubble mania in ’99 early 2000 so I don’t love this. I am a man of value.”
Gross domestic product has continued to rise, and the Atlanta Fed is tracking 3% growth in the third quarter based on resilience in consumer spending. Meanwhile, most gauges show inflation is still ahead of the Fed’s 2% target. However, there is a slowdown in the labor market, which is partly responsible for the large drop in rates.
‘Yes it certainly won’t be short’
Hedge fund managers who are widely followed say that while the central bank’s move has them skeptical, they are certainly not betting against U.S. equities because of the immediate benefits of easy policy.
“I don’t like the US market from a price point of view, but I’m sure it won’t be short, because I’m nervous about the setup with easy money everywhere, a relatively good economy,” Tepper said. “It’s going to make me nervous, it won’t last long in the US”
Tepper, who is also the owner of the National Football League’s Carolina Panthers team, announced that he would join China in reducing tariffs and the flood of aid the government recently announced to stimulate the economy.
He added that he prefers Asian equities and European equities over US stocks.
