Tepper explained that while the Fed will be reducing its stimulus, the size of the fiscal deficit is shrinking even faster. The fiscal deficit has fallen from about a peak of $1.4 trillion in 2009 to $1 trillion in 2012. Next year was previously projected to fall slightly to $850 billion but the latest estimates put it at closer to $600 billion. This $400 billion reduction in the deficit from 2012 to 2013 comes primarily from an increase in taxes from higher personal income and corporate profitability.
After predicting the stock crash in early 2008, my track record in forecasting the broad equity market over the next 4 years was awful, so I'm going to avoid any broad equity predictions. I'll note that from a basic value investing perspective, the market appears roughly fairly valued. I think the greatest risk to equity performance is currently Japan. Japan is the world's third largest economy and if it faces a crisis, the contagion effect will be drastic.
Bill Gross is the founder of PIMCO, the word's largest bond fund with $2 trillion in assets under management. Gross recently said that he thinks the 30 year treasury bull market finally ended this April. Over the last month we've seen a sharp increase in treasury shields, but they're still quite low in any sort of historical context. Over the last 50 years, 10-year yields have averaged about 6.6% and they're currently 2.2%. That 6.6% number is probably a bad anchor since it included the severe inflation of the late 70s and represents the period with the highest consistent GDP growth that humanity has ever seen. Still, 2.2% 10-year yields are unsustainably low in any sort of growth environment.
Gross predicts that while the Bull market ended this April, the Bear market won't start for another 3 to 4 years. He suggests a generally range bound market in treasuries in the mean time, albeit with higher volatility. I think Gross is likely right.