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.
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.