David Tepper appeared on CNBC this morning and while he was more cautious than in his last appearance he was optimistic. He said the New York Post misrepresented his views yesterday. The main cause of his optimism was the health of the US economy and US corporations.
It is impossible to claim that economic activity in the US has not improved but that does not make the US economy healthy. Current levels of economic activity are dependent on a trillion dollar deficit, artificially low rates and money printing. What would the US economy and corporate profits look like without all this?
The US depends on the rest of the World to finance its deficits and accept US Dollars. The rest of the World has shown willingness to do this for decades and is likely still willing to do so. However, we are starting to see the side effects of this in emerging market economies. Inflation is becoming a serious issue over there and as long as central banks keep their currencies artificially low against the dollar it is unlikely they will win the war against inflation.
A star running back that is injured can play like a star in a game if he is drugged up. But when assessing the long term value of that running back one needs to take into consideration the injury. US investors are focused on current economic activity but are ignoring the artificial forces that helped create this activity and the potential side effects. Investors made the same mistake between 2004 and 2007 when they failed to appreciate the artificial effect that the housing and debt bubble was having on the economy.
Even if I am correct in my assessment this does not mean that the stock market will not continue higher before this all plays out. However, with sentiment and the market stretched I don't see a good risk/reward in the near term even if this bull market lasts a little longer. There are corrections within bull markets.