David Tepper, founder and president of Appaloosa Management.
David Orrell | CNBC
David Tepper of Appaloosa Management said investors should trust the Fed when it says it will lower interest rates because the Fed now has to maintain credibility.
“You just have to read what these people are saying,” Tepper said Thursday on CNBC’s “Squawk Box.” “Powell tells you something… He tells you some kind of realignment. He has to follow through on some level. I’m not that smart. I just read what they say and whether they have conviction. They usually do. Do what they say, especially if they have this level of belief.
Despite a fairly stable economy, the Fed last week cut its benchmark interest rate by half a percentage point, embarking on its first easing move in four years. In addition to this interest rate cut, the central bank also indicated through a “dot plot” that it will cut interest rates by another 50 basis points by the end of the year.
Federal Reserve Chairman Jerome Powell said the rate cut was a “recalibration” by the central bank and did not commit to taking similar measures at every upcoming meeting.
“They have to cut rates two to three basis points, 25 basis points, or they lose credibility,” Tepper said. “They’re going to do something in addition to the 50. You know, another 25, 25, 25 items appear to have to be completed” (1 basis point equals 0.01%).
“I don’t like the American market”
However, Tepper said the macro environment for U.S. stocks makes him nervous as the Federal Reserve eases monetary policy in a relatively solid economy as it did in the 1990s. The sharp rate cut last week came despite most economic indicators looking quite solid.
“Around the 1990s, when the economy was doing well, the Fed was cutting interest rates by 2000,” he said. “Rich in ’97… got even richer after long-term credit and the bubble mania of early ’99 in 2000, so I don’t like this. I’m a value guy.”
Gross domestic product has been growing steadily, and the Atlanta Fed expects it to grow 3% in the third quarter based on the resilience of consumer spending. Meanwhile, most indicators show inflation remains well above the Fed’s 2% target. However, a slowdown in the labor market partly prompted the rate cut to go too far.
“Of course not too short”
The widely followed hedge fund manager said that although the central bank’s move makes him hesitant, he certainly will not bet against U.S. stocks because of the direct benefits of easing policy.
“I don’t like the U.S. market from a value perspective, but I certainly wouldn’t go short because I would be nervous about an environment where it’s easy to make money everywhere and the economy is relatively good,” Tepper said. “If you don’t go long the U.S., I would feel nervous”
Tepper, who is also the owner of the NFL’s Carolina Panthers, revealed that he is fully invested in China due to the government’s recently announced interest rate cuts and massive support measures to boost the ailing economy.
He added that he prefers Asian and European stocks to U.S. stocks.
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