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The Smartest Man in Global Capital Markets on When the Music Will Stop

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A secret top source provides his outlook on equities, credit markets, Asia, and how long the current market trend will last.

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The Smartest Man in Global Capital Markets; Commentary From July 2012:

Blackstone (NYSE:BX) has its 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 over the past decade. Unfortunately, after much digging, our only profile of Wien's source is that he is 90 years old, owns a Bentley and a private jet, and lives in one of the Cote d'Azur's three Caps, which would pinpoint him in either Cap d'Antibes, Cap d'Ail, or Saint-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, only substantive macro insights.

Here are the takeaways 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 US Treasury leveraging the Fed to effectuate the greatest liability management transaction in history by buying high-coupon, long-duration US debt in lieu of issuing low-coupon, short-duration risk and thereby optimizing the capital structure of the USA. One of the world's largest private banking networks in the world ($2.3 trillion) has 40% of assets in equities versus 70% in the period from 1980 through 1997. In other words, the asset class is massively underowned.

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/perpetual bonds being planned everywhere. Equities are vastly underowned 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 (PINK:CIHHF), 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 (NYSE:VALE) and Petrobras (NYSE:PBR), are starting to plan for China to "hit a wall" in 2015-2018. Essentially, China will look OK through 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 firewall versus Europe, 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 CEOs, it became obvious that every single company is not standing still. Meetings were to advise on many multiple cross-border acquisitions. There's lots of capital formation among the Italian small/mid-cap corporations and this all translates into good stuff.

In conclusion, The Smartest Man in Global Capital Markets said the following: "I hate nominal yields; be careful of commodities despite QE3; gold could go higher, but briefly; I love the USA; sell Brazil; China will be OK but only through 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 Global Capital Markets: Not all but most of the talking heads on TV have no idea what the hell they're talking about. And that's no BS.
No positions in stocks mentioned.
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