Investing

Leon Cooperman has had a long career as a money manager. In a May 5, 2021 Bloomberg Surveillance interview, Cooperman gave a perspective of the stock market that was both timely and timeless, a rare commodity in the investment world.

Bloomberg has archived the video online in three segments: “Leon Cooperman on Fed, Economy and Current State of Markets;” “Billionaire Leon Cooperman Says the Fed Is Too Accommodative,” and “Billionaire Leon Cooper Says Bond Market Is in a Bubble.” I’ve adapted Cooperman’s words below, eliminating repetitions and putting them in paragraph form. So, with gratitude (and apologies) to both Cooperman and Bloomberg:

Potential Real Growth

If you asked 100 economists what is the potential real growth of the US economy over time, their answers would center around 2 percent, through 1 ½ percent productivity growth and ½ percent labor force growth, for a total of 2%. A bear would say our potential is 1 ½ percent. A bull might say our potential is 2 ½ percent. But the responses would center around 2 percent.

Government Intervention

We’re in a very strange environment. A lot of crazy things are going on. I think the market structure has been destroyed by a number of moves made by government, and we’ll have to just work through it. This year, the economy in real terms will grow three or four times potential, but the Federal Reserve persists in trying to hold interest rates to zero. It makes no sense to me. With an economy growing at 6-8% real, interest rates shouldn’t be this low.

We shouldn’t inject so much fiscal stimulus into the economy when the economy is growing off the charts. Prior to the $1.9 trillion package, prior to the $2 trillion package, prior to the $4 trillion infrastructure spending, we’ve already injected into the economy $1 trillion more of transfer payments than income lost.

Prior to the virus, we had about 5 1/2 million people unemployed. That ballooned to 23 million people. It’s now down to about 9 ½ million people. Monetary and fiscal policy can be conducted and managed to get unemployment back down to the 5 ½ million pre-COVID.

Low Rates Impact Investor Decisions

The Fed’s efforts to keep interest rates low have pushed everyone to choose greater risks. The short-term T-bill investor can’t survive on zero and says, “I’ll take some duration and inflation risk and buy T-bonds.” The T-bond investor says, “I can’t get by on 1.6%, so I’ll buy industrial credits.” The industrial credit investor says, “I can’t get by on 3%, so I’ll buy high yield.” The high yield investor says, “I can’t get by on five or six percent, so I’ll buy structured credit, CLOs” (collateralized loan obligations) and things like that, which tend to have a higher yield because they’re more opaque. The CLO investor says, “The market is high, so I’ll put 25% of my money in equities.” The equity investor says, “I’ll put 2% of my money in Bitcoin.” So, everybody has been taking on more risk.

Cooperman’s Position

I’m a reasonably fully invested bear. I believe in the long term outlook for stocks I own. The stock market has been very disciplined in its action. Apple and Amazon are not expensive if interest rates stay here. Nothing is expensive if interest rates stay here. I looked at the “Nifty Fifty” stock price multiples in 1972. In that year, Avon was 65 times earnings. Polaroid, 90 times earnings. Sears Roebuck. 35 times earnings. The 10-year US government bond was 6 ½ percent. The 10-year government bond is now 1.6%. Google is 33 times earnings. It’s not an expensive stock.

I own no Bitcoin. I have very little gold. I’m a stock investor. Stocks make more sense than anything else because of Fed policy. But when the Fed policy changes, I think the market will have a negative response. I expect very little growth in the S&P 500. Everything I look at suggests to me caution for the intermediate and longer term.

In a bear market the winner is the one who loses the least. When the market goes down, I will lose money. I’ll be worth less. I understand that every asset has been inflated by monetary policy—whether it’s real estate, stocks, bonds etc. I think the current bubble is not so much the stock market but rather the bond market. I’ve had a negative view of bonds for quite a long time.

Typical Bear Market Catalysts Are Not Present

I’m “reasonably fully invested” because the typical conditions that cause bear markets are not present, largely because of government intervention.

Bear markets come about because of certain fundamental factors, such as accelerating inflation (which we do not have); a hostile Fed (which we do not have–in fact I’d say the Fed is too accommodative); the market smells an oncoming recession (in fact we’re coming out of a recession–corporate profits are terrific).

So, the normal conditions that cause a bear market are not present. Another way a bear market comes about is a significant geopolitical event which you can’t forecast. We have plenty to worry about: China, Iran, etc., but I think the biggest plus out there is the Fed has created an environment where there’s an absence of alternatives to the stock market.

Danger Signs

We are borrowing from the future. We have a massive growth in debt that must be serviced. I voted for Mr. Biden because I thought we needed a change. I voted my values, not my pocketbook. But, the government is shifting to the left. The people in charge now are going for higher taxes. In the next twelve months, I think we will have higher inflation and higher interest rates, which will be a straining influence on stock price multiples.

The Biden administration is less concerned about the long term issues or damage that might be created. The debt that we’re racking up must be paid unless you’re into MMT (modern monetary theory), which I’m not. This debt will create a long term issue.

The Fed is extremely friendly to the stock market. They tell us they will keep interest rates low not only this year, but also next year. I believe Jerome Powell is doing us a disservice. Companies and business owners I talk to say, “The economy is coming back but I can’t find labor.” I think the Fed will be surprised by inflation that will be more intractable. The market will be surprised because rising inflation will force the Fed to raise rates sometime in 2022. That’s my view.

The traditional market structure has lost some safety features. The brokerage system no longer stabilizes the market. At one time, 80% of the market’s volume was on the New York Stock Exchange. Now, 80% of the volume is done off-board in dark pools. The specialist system doesn’t stabilize the markets. The Securities and Exchange Commission has changed the uptick rule, which was enacted in 1938 because of the market abuses in 1929. The uptick rule worked well for 70 years, but in 2007, the SEC eliminated it. This gave rise to many quantitative trading systems, which know nothing about value but everything about price. These computerized trading systems buy strength and sell weakness. When the market goes down, it will go down so fast your head is going to spin.

What Cooperman is Looking For

The stock market normally peaks in line with the peak rate of change in corporate profits. In the second quarter (ending in June, 2021), profits are expected to be up 50%. Profits are expected to be up by much smaller percentages in the third and fourth quarters. This is one of a host of indicators I’m watching.

I’m looking for change in “Fed speak.” I’m looking for change in the posture of the Fed. I’m looking for rising inflation. I’m looking at gold, at economic activity. I’m looking at the stock market, which has been very disciplined in its action. I’m looking at the price of gold (which has been undermined by Bitcoin). I’m looking at economic growth.