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The Smartest Man in Global Capital Markets on QE, and What to Expect Next

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In our latest interview with TSMIGCM, we take a tour around the world and review the impact of the Fed's policies.

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Argentina

I spent some time in Argentina recently as well. The government is, as you all know, not competent and failing its people; this is a very widely held view. Many producing assets are trading at levels below replacement value. To the extent that we see a shift away from President Cristina Kirchner in the upcoming October elections, I am of the view that asset prices can improve. Well-placed private equity professionals across Latin America are circling some producing assets in that country. They view it as one of the very few opportunities to increase an initial investment fourfold or fivefold in several years, assuming the electorate wakes up. This merits watching for anyone fixated on alpha generation, notwithstanding the current emerging markets fallout we are witnessing across the globe.

Conclusions:
  • Recent comments by the Fed and pursuant deterioration in markets will very likely help prevent another 1994 market dislocation. There was abundant evidence of asset bubbles everywhere. QE cannot be deployed in perpetuity (it was/is very dangerous for any money manager or hedge fund manager to adhere to that view), and letting air out of these bubbles in a quasi-managed manner is vastly superior to February/May 1994, which is when we saw emerging markets spreads widen 500+ basis points. I feel a bit better about full-year 2014 as a result of these past few weeks.
  • I stated in my last missive that the major US brokerages had approximately 40-42% of total private banking assets invested in equity securities (versus 70% in the '80s-'90s). At mid-year 2013, some of those brokerages report aggregate equity allocations in the range of 52-58%; therefore, the "wealth effect" of higher equity prices is more prevalent now than it was six months ago. Of course, the opposite holds true as well. We need -- and we will (in my view) -- get higher equity prices by year's end.
  • Market structure will remain a problem. Fewer major banks are holding less inventories; feeling as though they are not sufficiently compensated to provide liquidity in times of market stress will only serve to exacerbate those stress points. The fact that those banks are also doing increasing amounts of their business across asset classes with the top 50 money managers/hedge fund managers does also not bode well for stability in my view.
  • FICC: The stability of China and the risks of flawed policy there is a real danger to most emerging markets, particularly the commodities-based countries that have been at the forefront of the 2010-2012 rallies. I like the Shanghai Index at 1800 or lower (we are headed there), and I like Brazil (finally) relative to emerging market alternatives long term. I do not believe nominal US Treasury rates will continue to spike; we will find equilibrium very shortly. A 3% 10-year note is still very low, relative to any historical norm. Longer duration US Treasury and credit products will come under pressure in the fourth quarter in my view as most FICC clients will assuredly look to shorten portfolio durations meaningfully given the recent volatility we have seen. I see no compelling need to rush into REITs, MLPs, et al.
  • Metals: There is no question that many of the gold producers are looking at asset sales and/or consolidation within their Industry. Any price point below $1200 per ounce will present a real challenge to an industry whose average cost of extraction essentially equates to that price point currently. We said gold could get to $1200 -- and here we are. The market can over shoot to the downside (as it invariably always does); I would not at all be surprised to see something between $850-$1,000 as a bottom; therefore, if you currently own none and fundamentally believe portfolios should have a 3% or so allocation to gold, now is not a bad time to start laddering-in positions... slowly. The miners have totally underperformed the underlying asset; that is unlikely to be the case over the next three plus years.
No positions in stocks mentioned.
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