Talk of the Fed tapering isn't something to fear; it's a sign of better economic conditions.
And, even with less stimulus there are good times ahead for stocks, Appaloosa's hedge fund manager David Tepper told CNBC.
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Investors have been wallowing in liquidity pumped out by the Federal Reserve. The bank's balance sheet has now swollen to over $3.4 trillion and asset prices have been inflated with it.
Easy money policies have created an environment where good news is bad, and bad news is good because it means the easy money will keep flowing.
The Fed is still cranking out $85 billion per month to stimulate the economy. But Wednesday, after Fed Chairman Ben Bernanke announced the money flow may slow down later this year, the markets plummeted, or “freaked out” as the Washington Post's Wonkblog put it.
U.S. markets fell 1.4 percent Wednesday before declining another 2.5 percent on Thursday. And Wonkblog said these were moderate when compared to a measure of the fear on trading floors as far as London and Tokyo.
“All the concern in the market is because the Fed sees the economy stronger in the future,” Tepper said.
“The economy is getting better, autos are better, housing's better, it continues to improve. They can't find enough people to work in housing. That's the only thing holding it back right now," Tepper explained in an earlier CNBC interview.
If the investors truly want on-going strength in the markets, they need to recognize that is only possible if the Fed pulls back, said Tepper.
"If the Fed doesn't taper back, we're going to get into this hyper-drive market," he explained on Squawk Box. "It's a backwards argument. To keep the markets going up at a steady pace, the Fed has to taper back."
The markets have been so captured by fear that many have missed a key point in all of the taper talk.
If market swings undermine U.S. growth, then Bernanke has offered reassurance that the Fed will reverse course and remove the stimulus more gingerly. It's America's saving grace, says Wonkblog.
Tepper believes the outlook is so bullish that he's scared to be short anything. He says there is an estimated $400 billion in unallocated cash looking for a place to go, and stocks are a likely home.
He warned those that do dare to short this market to “have a shovel to get themselves out of the grave.”
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The selloff prompted by Bernanke's comments also hit the bond market. Yields on Treasurys hit the highest level since October 2011, according to Wonkblog.
“The bond (market) is concerned about strength,” Tepper told CNBC. “A 10 (year) bond at 2.4 or even at 3 (percent) if it's because of strength is ultimately healthy. I obviously thought they should taper. Bottom line, when the dust settled only one place to be: stocks.”
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