Friday, October 8, 2010

Nothing Else Matters

I have had this old Metallica song, with slightly different lyrics, in my head for the past month…

Yeah, trust I seek and I find in you

Every day for us more QE2

Close your mind to a different view

Because nothing else matters

So is it really that easy? Our friends at TEAMThink posted a video from David Tepper in which he argues that it is just that easy. David Tepper is one of the best hedge fund managers of the past decade. According to Mr. Tepper, in scenario 1 you have strong growth and equities rally due to better underlying fundamentals. In scenario 2, you have weak growth but a Federal Reserve “put” will be in play in which everything, including equities, will go up, at least in the short term, because Quantitative Easing 2 (QE2) will be instituted. It is “a slam dunk trade due to the policies of the Federal Reserve.” I believe the other quote ringing in my ears is “Don’t Fight the Fed!”

But are those the only possible scenarios? Well, it seems that the market’s been using that playbook since July 1st when the S&P 500 bottomed at 1040. The S&P 500 is up 11% from that date while high beta assets have surged even more. After that run, it is natural to start questioning your underlying thesis that we should remain cautiously invested as the underlying fundamentals have remained soft. So what if the jobs market is still soft, it will get better or it will get worse but equities will rise. These are questions we have been asking ourselves.

Then again, there are other questions to ask. What if the market has already priced in a $1.5 trillion quantitative easing program but the Federal Reserve only gives us $750 million (or less)? What if Republicans gain Congressional seats and want to conduct a full audit of the Federal Reserve? What if QE2 destroys the dollar and equities rise only in nominal terms? What if currency wars erupt? What if High Frequency Signing manifests into a bigger problem as the real estate market shuts down? Bernanke? Anyone?