Wednesday, September 29, 2010

David Tepper - High on Hopium or Embracing a Ponzi?

David Tepper is a famed value investor who manages and is the founder of Appaloosa Management. An incredible fund who has had an incredible record. He is semi close to legendary status. He has been in the news lately for his comments last Friday on CNBC when he basically said the markets are a two headed coin. If the economy recovers the market is going to continue to boom. If the economy continues to falter the Fed will step in and perform some additional quantitative easing and the market will rise. These thoughts have been repeated numerous times in various market circles.

There is much ridiculous with Tepper's comments and to be fair I do not know in what context everything was said. On the surface it sounds absurd. Besides having a misunderstanding of what QE really is, he is basically admitting the entire system is a ponzi. All ponzi's initially implode. Last time the market was here heading up (back late last year) the chatter was about how this was going to be a V shaped recovery. WHEN WAS THE LAST TIME YOU HEARD THAT FROM A BULL? No longer is the argument that the economy is in great shape and going to be a great V shape recovery. Now the argument has shifted to the Fed will save us and won't let the market go down. How well did that work in 2008? In fact it is the same exact argument that emerged after the initial argument in 2007 failed. The initial argument in 2007 was that it was going to be a very shallow recession. After that argument failed than it became the Fed was ahead of the curve and going to save everything. After that it was the Treasury and John Paulson was going to save everything (remember the Paulson bazooka?) After that is was we are all going to die.

So now the prospects of a V shaped recovery are off the table but if you listen to Tepper there is no risk. The market will only go up. Ponzi 101 until the entire thing collapses.

A friend of mine sent me something else by Tepper which I actually really liked. However, the premise is completely wrong in the context of how he uses it.

“In 1898, the first international urban-planning conference convened in New York,” he said. “It was abandoned after three days because none of the delegates could see any solution to the growing crisis caused by urban horses and their output. In the Times of London, one reporter estimated that in 50 years, every street in London would be buried under nine feet of manure.”

He paused, allowing people in the crowd to snicker to themselves, then went on to recommend a handful of investments most would consider highly risky, among them debt in AIG and equity in financial companies like Bank of America and even some banks in teetering Europe. “I know, everyone hates the financials,” he said. “But the PIIGS”—Portugal, Ireland, Italy, Greece, and Spain, considered to be the most troubled European economies—“every single one has a deficit-reduction plan! The ECB—the Bundesbank—bought back government bonds!” He paused for dramatic effect. “Holy Christ. It’s like the chastity belt is off, and the girl is starting to play.”

The crowd tittered nervously. “On the way to work this morning, I got a headache because I was listening to one guy talking about how there’s gonna be hyperinflation. And then after him there was some guy telling me there’s going to be a depression and deflation. Neither—neither—is most likely going to happen,” he said. “The point is, markets adapt, people adapt. Don’t listen to all the crap out there.” - David Tepper

Like I said - I really like what he said above. It embraces capitalism. The market will solve the problems. HOWEVER, the market right now is not allowed to work. Furthermore, unlike other "problems" debt is inherently different. It is the millstone that holds you down. It cannot disappear unless it is paid off or defaulted on. Once you have to much debt the market is handicapped until that is resolved. If the problem was to much housing, I wouldn't worry about it. The market would fix it. If the problem was China wasn't consuming enough, wouldn't worry about it, the market would fix it. If the problem is to much debt, the market would fix it, it would be really painful, but if it isn't allowed to fix it, it can be catastrophic. Tepper is comparing not apples to oranges, but apples to asparagus.

He may be right though in one respect. It may be alot more ponzish than anyone would care to admit. In a ponzi it doesn't go down gradually. You wake up one morning and you lost 100% from the day before. It is possible that the government can keep everything together until over a very short time period - they can't.


Travis said...

We've just gone through a V-shaped recovery. Economic numbers and output all at nominal all time highs. We're way past the point of recovery. We've been expanding, at just about the same pace as when we've come out of the last four recessions including the S&L crisis. Any growth now will be considered "expansion" and not "recovery." Wake up and smell the corporate profits! :-)

Market Seer said...

Good grief what have you been smoking. The audicity to make such a claim.

This has been the weakest recovery post WWII.

Real GDP growth of 3% is far less than half of what one would orginally expect to see coming out of this sort of downturn.

-From the lows in employment in DEc/09, 9% of the recession losses have been recouped.
-From the lows in household net worth in 2009Q1, 9% of the recession losses have been recouped.
-From the lowes in wages & salaries in Morch 2009, 36% of the recession losses have been recouped.
-From the lows in housing starts in April 2009, 7% of the recession losses have been recouped.
-From the lows in home prices in April 2009, 13% of the recession losses have been recouped
- New and existing home sales are at all time lows - they have never recovered.

You have no context of history if you have the slightest belief that this is a V shaped recovery. This is the Great Disapointment not a V.

Why in the world would we be talking about QE2 if we had a surging recovery.

There is a huka bar down the street if you want to join Tepper

Travis said...

Think globally. 78% of countries at new highs in GDP. Housing starts in the US don't drive the global economy, sorry!

Travis said...

Here is the first four quarters of the last three economic expansions.

•Q2 1991-Q1 1992: 2.7%, 1.7%, 1.6%, 4.5%.
•Q4 2001-Q3 2002: 1.4%, 3.5%, 2.1%, 2.0%.
•Q3 2009-Q2 2010: 1.6%, 5.0%, 3.7%, 1.6%

The previous two were both weaker.

Market Seer said...

I can't believe we having the bone headed argument that has been a V shaped recovery. I know of no one delusional enough, including the biggest bulls in the world, to make this argument.

Your 78% number is in nominal terms not real. Furthermore 67% of world GDP is in developed economies. Almost 100% of developed economies or almost 67% of world GDP is not at peak levels.

As far as your quarterly comparisons you just compared the two smallest recessions since WWII to the largest depression/recession since WWII. The bounce should be massively larger. More importantly is that your comparing apples to oranges. Between 50 and 70% of that GDP in those quarters was government spending and not private rebound which you and I our children will be paying for for decades to come. It isn't true wealth developed which GDP should track but additional borrowing from our future.

There are plenty of legitmate things to argue about but arguing this is a V shaped recovery has to be one of the dumbest things. Probably arguing the sun is purple would be more intelligent.

Travis said...

The 78% of countries I cited account for 73% of global GDP. In aggregate they're less than 1% below peak globally in real terms.


Anonymous said...

I’m just picky, but you might want to check your usage of “to”!


too (not comparable)

1.(focus) Likewise
2.(conjunctive) also; in addition.
3.(degree) To an excessive degree; over; more than enough.
4.(affirmation) used to contradict a negative assertion.

Market Seer said...

lol - well I am fully aware I get to and too wrong ALL the time. Believe me your not the first one to tell me. In the end I don't really care. I try to get my letters correct but the blog is casual and more for my own purpose to get my thoughts out. If people like reading them great but don't really care if anyone reads them. I have tried to concentrate and get to and too correct but I will probably always interchange them. Just not of high enough importance though it probably should be.

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