Market commentary (excerpt of July 25 desk notes distributed to institutional fund managers) courtesy of Ron Quigley, Managing Director/Head of Fixed Income Syndicate for Mischler Financial Group. While not ETF-centric per se, its a good read!
Tonight we’re taking a bit of a reprieve from the standard dire EU news by delivering quite a different opinion of where the world’s headed. It’s great intelligence from one of my very senior source relationships on the street. It’s sure to get your attention whether you are Treasury/Funding, Syndicate, buy-side accounts, public service commissions or senior bank administrators……
Blackstone has it’s prognosticator in Byron Wien. You’ll recall his recent blog in which his trusted source forecast an end-of Europe.
The “seer” was referred to only as “the smartest man in Europe”. Generally speaking Wien has often quoted his brilliant, worldly and wealthy oracle for the past decade. Unfortunately after much digging, our only profile of Wien’s “source” is that he is 90 years old, owns a Bentley, a private jet and lives in one of the Cote d’Azur’s three “Caps” which would pin-point him in either Cap d’Antibes, Cap d’Ail or St. Jean Cap Ferrat.
One would think that should pretty much be a giveaway but if you know anything about the French Riviera there are many wealthy old people who would fit-the-bill. Today, our intelligence comes from a very respected international banker at one of the world’s largest financial institutions. We could also characterize the person as “brilliant”, “worldly” and “wealthy” but we prefer to pitch the person as much more down-to-earth….as he would want. There is certainly no hot-air here and substantive macro insights.
Here are the take-away’s straight from our “source’s” mouth. We hope it’s revealing and helpful:
On QE3:
QE3 is a “certainty.” It will happen in August. It will be $500 to 800 billion in US Treasuries and Mortgage-related securities. Effectively QE3 is the U.S. Treasury leveraging the FED to effectuate the greatest liability management transaction in history by buying high coupon long duration U.S. debt in lieu of issuing low coupon short duration risk and thereby optimizing the “capital structure of the U.S.A.” One of the world’s largest private banking network’s in the world ($2.3 trillion) has 40% of assets in equities versus 70% in the period from 1980 thru 1997. In other words, the asset class is “MASSIVELY” under-owned.
QE3 will lower UST 2-year 0-10 bps; T5-year 50 bps and the T30 down to 1.25%. Furthermore “EVERY” client with half a brain will be SELLING into this. Expect to see a “massive” increase in issuance of hybrid securities/PERPS being planned everywhere. Equities are vastly under-owned and they will, as a result go up……WAY UP!! The market always frustrates the majority. Everyone is currently off-sides on equities.
On China:
China has access to more policy levers to insure 8% GDP growth in Q3 and Q4 2012. The People’s Republic’s big issues will start in fiscal years 2013-2014. China Merchants Bank, for example, is already seeing a bigger rise in bad loan provisioning and lower good loan growth than Western equity analysts think. The CEOs of two large Brazilian companies, Vale and Petrobras, are starting to plan for China to “hit a wall” in 2015-2018. Essentially, China will look “okay” thru April 2013 then big problems will hit the country.
On the EU:
Europe will NOT implode. The IMF, in particular, is “VERY” well advanced regarding the Spanish Banking System……almost loan by loan! The IMF has more than a $1 trillion USD-equivalent fire wall versus Emerging Markets, Middle East and Africa (EMEA). Europe will not fail. The biggest concern is the arrogance and reluctance of France to distance itself from its postwar culture of entitlement. It is developing into a huge issue at the highest levels of government. Despite that, however, the realities of “globalization” indicate that a transparent public barrage of verbal attacks between Paris and Berlin are, a pre-condition, to Europe righting itself. Recently on a high level trip with the Italian Finance Ministry and the country’s largest companies including intensive meetings with over a dozen CEO’s, every single company is NOT standing still. Meetings were to advise on many multiple cross-border acquisitions. There is lots of capital formation amongst the Italian Small-Mid Cap Corporations and this all translates into “good stuff.”
In conclusion, the “source” said the following: “I HATE nominal yields; be careful of commodities even despite QE3; gold could go higher…..but briefly; I LOVE THE U.S.A.; Sell Brazil; China will be okay but only thru April 2013. In terms of Asia, I am negative on India and Indonesia. I like Vietnam, Myanmar, Sri Lanka and the Philippines.
One added sound-bite from my interview with “the smartest person in the global capital markets” – “most…….not all………but most of the talking heads on TV have no idea what the hell they’re talking about”
……and that’s no B.S.
Have a great evening!
Ron Quigley