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The Smartest Man in Global Capital Markets on the Fed, China, and What's Next for World Markets

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In our latest interview with TSMIGCM, we take a tour around the world and review the impact of QE.

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He's back…

When he speaks, the Fed minutes are revised.

When they're planning Davos, they check his schedule.

Bernanke has him proofread his remarks.

Apple (NASDAQ:AAPL) changed the color of the iPhone because he did not like it.

He is "The Smartest Man in Global Capital Markets." Or, "TSMIGCM." And he is our anonymous guide to the markets ahead. (See also: The Smartest Man in Global Capital Markets on When the Music Will Stop.)

Among the salient events TSMIGCM has predicted for us:
  • Last July, he predicted a massive run in equities on the heels of QE3, and his timing was perfect.
  • He predicted the emerging markets slowdown in China to the month, basically (April 2013).
  • He told us in March 2013 that the banks would raise equity exposure from 40% to 50-60%.
  • And many, many other things. Our only access to him is through Mischler's Global Head of Syndicate, Ronald Quigley. So foremost, again, I offer special thanks to Ron for providing this color.
I am very happy to bring you all Ron's latest exclusive interview with TSMIGCM, who has been hard at work for us and for you from his humble abode in the municipality of Saanen in the canton of Bern, Switzerland. He's freshly back from whirlwind tours across the globe with finance ministers, the heads of global think-tanks, the CEOs/CFOs of the world's largest pension funds, corporations, supra nationals, agencies and sovereigns. His views are respected by them all, and his "views" are based on relationships that dwarf the mere North American-European focus of the Bilderberg Meetings. TSMIGCM is an international banker/billionaire, high-net worth client of the firm, and one of the world's most sought-after seers.

Part I – The Fed (as told to Ron Quigley)

Well now, it has been several months since I told all of you what would happen… and it happened!

It's quite amusing to listen to all the bantering on American television; I suspect people there just need to live perpetually in fear of something. They particularly love market carnage. They must have nothing better to do with their time.

Let us now try and set the record straight, and provide some reason.

The Fed has lived in fear of essentially three things: 1) deflation, 2) a "redux" of 1994, and 3) severe and unrelenting policy "backlash" from abroad as it regards the impacts of quantitative easing (QE).

Deflation

Deflation, not unemployment, has been at the core of what all the central banks are doing. They fear deflation with good reason: It is immensely difficult to solve for in a short to intermediate timeframe. Witness Japan. The banks are all trying to "reflate." They have been nervous since all the reflationary mechanisms have just about been exhausted, and most reliable gauges of future pricing pressures are not registering a heartbeat. Commodity prices across the board, precious metals, industrial metals -- everything that is supposed to move up has been moving down. The inflation numbers are more important than the employment numbers. As I have said before, "structural unemployment" in the US is arguably at 6% (this versus the 4% to 4.5% level Alan Greenspan quoted more than 15 years ago).

A "Redux" of 1994

I was writing about 1994 way before the madding crowds. When pressed on this topic, Greenspan and his NY Fed President William McDonough always suggested it was their singularly largest disappointment at the central bank. They were convinced they had winked and nodded enough times to sufficiently "suggest" to markets that a rate hike was coming. But in February 1994, after a 1993 credit cycle that remains the most superior analogy to 2012 through April 2013, upon raising rates, emerging markets spreads gapped 500+ basis points, Mexico imploded under the weight of massive capital flight, and the financial markets seized up. Let there be no mistake about it -- current Fed Chairman Ben Bernanke, much more an advocate of an efficient, transparent, and consistent FED communications strategy than Greenspan, knew this and knows this.

Augustin Carstens, Governor of the Bank of Mexico, has been warning the Fed that he has been seeing significant speculative capital flows into his country, which is reminiscent of 1994. Asset bubbles were manifesting themselves everywhere, including in Japanese commercial real estate and J-REITs, Southeast Asian banking centers, emerging markets local currency funds/assets, emerging markets FX rates, MLPs, and REITs in the US.

Six plus weeks ago, Bernanke did nothing wrong in his Congressional testimony. He hesitated one or two times and suggested that QE would, by definition, have some unintended consequences if prolonged in perpetuity. This was enough. We should be thankful he did that. Money supply was going up, however, given the new and confused regulatory environment, and the financial system was unable to act as an efficient transmission mechanism to augment the velocity of money; henceforth, the likely legacy of QE could be the harmful long-term consequences it would have on savers (of all kinds), pension funds, retirees, and insurance companies. Therefore, what Bernanke was in fact doing was intentionally letting some air out of the bubble.

All of this near term repricing of many asset classes has been overdue and necessary, and it will likely assist in full-year 2014 being a rather constructive one as opposed to another 1994, 20 years later.
No positions in stocks mentioned.
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