David Rosenberg Throws Up All Over Tepper’s Optimism

The kind of people who like to attribute movements of stock indexes to causal events were busy attributing Friday’s rally to the remarks of David Tepper on Squawk Box.

“Call it the Tepper rally,” Mark DeCambre of the New York Post wrote.


Tepper’s bullishness was based on his prediction that we’re facing two possible economic outcomes—either the economy recovers on its own or the Fed will step in to inject more money through quantitative easing.

If the economy recovers on its own, stocks will rise, bonds won’t do as well, and gold won’t do as well, Tepper told CNBC. If the economy double-dips, the Fed will renew its quantitative easing.

“Then what’s going to do well?” Tepper said. “Everything.”

So the Fed is about to start a rally in everything? Break out the bubbly!

But perhaps before you pop the cork, you should sit down with David Rosenberg's latest note (via Clusterstock) arguing that Tepper has overlooked a third possibility: a failed attempt at QE.

Too bad we weren’t invited as a guest on CNBC last Friday to engage in a friendly debate with this portfolio manager because he didn’t outline the third scenario, either because he doesn’t believe it or he just plain didn’t contemplate it or he’s simply not positioned for it. That third scenario is that the economy weakens to such an extent that the Fed does indeed re-engage in QE, but that it does not work. So the “E” goes down and the P/E multiple does not expand. 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.

Is it possible that QE2 won’t work? The answer is yes. How do we know?

Well, because the first round of QE didn’t work. After all, if it had worked, the Fed obviously would not be openly contemplating the second round of balance sheet expansion. If the objective was narrow in terms of bringing mortgage spreads in from sky-high levels, well, on that basis, it did help.

But it did not revive the housing market any more than the litany of other government programs, and the fact that the economy has slowed so sharply to near stall-speed in recent quarters is all anyone needs to know about the true success, or lack thereof, from the first round of QE...

Folks, we are in a period of extreme economic uncertainty. The Fed is being forced to be doing something that they don’t even know is going to work. It does not leave us with a very warm and fuzzy feeling.

So which side are you on: Tepper or Rosenberg?

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