Billionaire investor David Tepper, who is one of the few remaining hedge fund icons who moves markets with a single word, took some time out from browbeating the owners of the Carolina Panthers to participate in a Q&A Thursday evening with students from Carnegie Mellon's Tepper School of Business (yes, you too can give a speech in a business school named after you if you donate $125 million).
During the wide-ranging discussion, the former Goldman trader turned distressed investing billionaire shared his views on a range of topical issues - from the potentially catastrophic fallout from a US-China trade war to his take on what's in store for interest rates and equities for the balance of this year - while also providing the type of career-management advice that box-checking b-school students crave.
The early part of the the discussion included several amusing anecdotes from Tepper's early-career days - most notably his time as a trader at Goldman Sachs, where he was mentored by Bob Rubin (whose arb desk spawned countless hedge funds and then went on to serve as Treasury Secretary under President Bill Clinton), and his feud with Jon Corzine (profiled extensively by NY Mag).
At the start of the Q&A, one student asked Tepper how he managed to retain his integrity and commitment to ethics during his early career on Wall Street (and especially working at Goldman). Tepper responded with a lengthy story about an incident during his time at Goldman when a senior manager ordered him to buy a bond that had been on Goldman's restricted list.
"When I was at Goldman Sachs, they set up this bankruptcy fund and the person who set up this fund. The person who set up the fund was the head of M&A - and this was back after Drexel Burnham went under. So the guy who was in charge was in charge of this fund that was buying assets. He wanted to buy this one company's bonds and he gave an order and I refused his order because the company was on the restricted list because we had information inside the firm and he had it taken off then told me to buy it the next day. So I told him 'I'm not buying it'. So it was a big thing - we went to legal. And legal said to me 'it's okay'. But I refused to buy anything for this guy. Now, this hurt me next time I was up for partner. But it hasn't really hurt me in my career. So next time somebody tells you to do something that you think isn't right - don't do it."
The conversation drifted to Tepper's feelings about President Trump and the potential fallout from a full-blown trade war with China. The hedge-fund manager made light of an incident where he called Trump a "demented narcissistic scumbag", but also admitted that, though he doesn't agree with everything Trump has done (the feud with Amazon was "insane" Tepper alleged), the Trump tax cuts as well as his push for deregulation have largely benefited the economy.
"Although I did call him a demented narcissistic scumbag - but that's beside the point - from a policy standpoint some of the regulation stuff was probably good for the economy...some of those things had to happen and I think it was holding back the economy. And the tax policies, I don't think they were all good, but I think something needed to be done. I don't know if they needed to cut some stuff for higher income people.
And while threatening to impose tariffs on effectively all Chinese goods entering the US might've been "nuts", particularly considering that Trump didn't consult his cabinet before threatening to impose tariffs on another $100 billion of Chinese imports, Trump has a point about China's theft of intellectual property.
"The tariffs - I think tariffs in general isn't the best way to go about it. Steel companies support so few jobs in the economy that I'm not sure that was the best place to start. On the other hand, if you talk to tech companies, they believe - and there has been proof - that China has taken intellectual property. The first $50 billion in tariffs I don't know if I agree with it but it was a shot across the bow and I guess that's okay - but the $100 billion in tariffs he didn't tell anybody in his cabinet so that's just nuts...they probably will get a NAFTA agreement.
That said, Tepper is sufficiently worried that Trump may take his trade war with Beijing far enough that it eventually transforms into a real, shooting war with Beijing.
...You probably don't want to take things too far with China because I can tell you the steps that it will go to and you get to the fourth step, it's a war - it's a real war. If you look at the history of tariffs, they've resulted in - a lot of times - real wars. So I get a little nervous every time you start down that path."
Asked about the importance of mentorship early in his career, Tepper offered an amusing anecdote about how
scumbags mentors can sometimes let you down - even when they go on to become the Secretary of the Treasury, especially dealing with other scumbags mentors end up blowing up MF Global.
"So I had a mentor at Goldman Sachs, his name was Bob Rubin who became co-chair of the firm and eventually became Secretary of the Treasury. But there's the third time, when I didn't become a partner, it was kind of Bob Rubin's fault. He was a mentor and he liked being on the floor and he liked talking to me. At some point Bob had the role of head of fixed income before he became chairman and vice chairman. So I would talk to Bob and I was the head trader and I would go talk to him. Eventually, this guy named Jon Corzin, who eventually became the governor of New Jersey, became the head of fixed income. Now, when Corzin became the head of fixed income he came from the government side Bob Rubin came from merger arbitrage - so I was in junk bonds. Bob Rubin knew about junk bonds because they had an equity component so I would talk to him still and I wouldn't go to Corzine's office. But Bob Rubin should've said "go to Corzine's office". Because when my third shot at partner came, Corzine killed me - or so I heard. So even if you have a mentor who becomes Secretary of the Treasury, you still got to think for yourself. That was the reason I didn't get it - he didn't think I was one of his people."
But what was certainly the highlight of the Q&A (at least as far as Tepper's views on capital markets are concerned) one student asked Tepper where he anticipates bond and stock markets finishing 2018. The answer, suggesting that Tepper was reading a bit too much Morgan Stanley recently, won't please the bulls (5:20 into Part 2)
"Listen, it's tough right now. Because historically yields have been fairly low. Actually tonight I'm trying to figure out what the BOJ's doing because either this meeting or next meeting they might change their policy which would affect our Treasurys and will effect the stock market. So I think as far as the stock market is concerned I think they're okay. I don't think it's great. I think we might've reached the highs for the year.
Why the uncharacteristic (for Tepper) pessimism? Why rates, of course: here is Tepper's two cents on the topic du jour (and d'annee): where will the yield on the 10Y break equities:
And a lot of it has to do with interest rates. We're right on the cusp of breaking out on interest rates at this level around 3%. I think they closed at around 2.98% on the 10-year - actually I know because I just looked. But a lot of people don't think they're going to break higher - most people are only saying they're only going to 3.25%. And I think if they only go to 3.25% for the rest of the year then stocks might be up. But too many people are saying that. And when too many people are saying one thing that's when I start to get worried. So if we break above that, then stocks might have a problem."
Finally, another student - who we imagine is tenuously exploring the likelihood that one will be able to make a sustainable living as a sell-side or buy-side trader - asked Tepper whether he believes algorithms will soon take over Wall Street. Tepper responded that machines and trading algos - whose performance is sucking this year - are only as good as the traders writing them, which to Tepper is a great advantage in an environment such as this one where rates are rising and yet the machine programming remains the same...
"Machines are doing shitty this year. Really bad. Not good. I'm kicking their ass. When I went to Goldman Sachs, they had a trading model on the desk and it was just wrong. That was one of the great things about being here I just knew the option prices were wrong - they were just wrong. But now when people talk about machines taking over, the machines are only as good as the people who are programing the machines. But now, when people talk about machines taking over, the people are only as good as the people programming the machines. And when you have times that are changing - like when interest rates are rising as we come out of this QE environment, sometimes you have people programming the same thing. When times change, the programs don't change unless the people programming them make them change. And when the times are changing fast."
We couldn't have put it better ourselves. Watch Parts 1 and 2 of the Tepper Q&A below, and check back tomorrow for Tepper's thoughts on Bitcoin.