November 5, 2010

QE2’s Main Effect Is Weakening the Dollar; Bank Execs Speak

The Fed announced Wednesday $600 billion in additional purchases as part of phase II of the quantitative easing (QE) program

In our view, these large scale asset purchases will not move the needle in terms of economic growth; the real benefit here is a further weakening of the U.S. dollar relative to other currencies.

Back in 1994, China revalued its currency 50% in a single day.  The result was a manufacturing boom, as the price of their goods relative to other currencies became much more attractive.  The undervalued RMB has resulted in a significant U.S. trade deficit with that country, and cost our country nearly 2.5 million manufacturing jobs over the last decade (around 1.6% of the current unemployment rate).  According to Zack’s, third quarter GDP was reduced by 50% (to 2% growth from 4%) due to the trade deficit. 

I’m sure the Fed has these facts in mind as they buy more outstanding debt by printing dollars.  The greenback is almost certain to continue its slide, making foreign equity and fixed income markets relatively attractive. The easy money environment will allow corporations to continue borrowing in the open market. 

The most obvious danger to the economy from QE is the threat of future inflation, but in my view the potential benefits far outweigh any disadvantages.  I expect equities to continue moving higher in the fourth quarter.

Speaking of the markets, I spent some time with Thomas H. Lee Capital last week, and they provided me with the following remarks from some of the largest bank CEOs.  The comments were

aggregated by American Banker magazine (registration required) following the 3Q earnings calls and are interesting when you read them all at once and in succession. Based solely on the CEO color provided, things may not be as bad as the press would have everyone believe.

  • Brian Moynihan, CEO, Bank of America
    "If you think about people who come back and say, 'I bought a Chevy Vega but I want it to be a Mercedes with a 12 cylinder,' we're not putting up with that. ... We're protecting the shareholders' money and we're going to make sure that we'll pay [to repurchase a mortgage] when due but not just do a settlement to move the matter behind us."
  • Jamie Dimon, chairman and CEO, JPMorgan Chase 
    “The runoff of bad loans "leads to negative revenues. But it does not necessarily lead to negative profits."
  • Vikram Pandit, CEO, Citigroup
    "As we have been saying, we believe that 2011 will be a year of rulemaking in the U.S. and model calibration across the industry. As a result, we anticipate that we should be in a position to return capital to our shareholders in 2012, subject to our regulators' providing additional guidance to the industry."
  • Kelly King, chairman and CEO, BB&T
    "So I'm pretty optimistic as we head into next year and the next few quarters, we'll be in a position to consider a small dividend increase that will keep our yield at probably a very attractive level relative to others. And we just have to take it a quarter at a time. I don't want to mislead anybody. Truth is, today we just don't know. There's still uncertainty, but it's a lot more certain today than it was six months ago."
  • Richard Davis, chairman and CEO, US Bancorp
    "We're seeing [commercial loan growth] across the board, slowly and just a little bit, and just about everywhere."
  • James Rohr, chairman and CEO, PNC
    "We're not seeing a lot of [loan] growth yet, but the interesting thing is we're seeing a lot more activity in the M&A space, the capital market space. Our customers are much more active than they were a year ago. So that's a good sign as it portends to perhaps loan growth in the future."
  • Kevin Kabat, CEO, Fifth Third
    "We marketed $1 billion in nonperforming loans for sale, earned through it, and expect the majority of those loans to be off our books by the end of next quarter."
  • James Wells 3rd, chairman and CEO, SunTrust
    "I think the results of all this [foreclosure] furor will be variable based on institutions and how many loans they've been working on and how they've done it. We're just trying to be very clear and very cautious, making sure we comply with everything we need to comply with, but the effects so far have been limited. Now, what happens to others, honestly I don't know and I find reading the press not particularly helpful about that."
  • Richard Fairbank, chairman and CEO, Capital One
    "I would say just about every meeting that I have with the card business I can feel more traction than the meeting before. And we have a lot of tests that have been laid deep in the great recession that are starting to show insights about good business opportunities even in the context of frankly scared consumers and pretty dark times."
  • JohnStumpf, chairman and CEO, Wells Fargo
    "When you talk to businesses, when they talk about their issues, it's not that they can't get a loan. That's a bit of an urban myth."
  • Stephen Steinour, chairman and CEO, Huntington Bancshares
    "We're growing loans as fast as we can. We'd love to grow them faster so we don't have to invest them in securities. If we could make more loans we'd prefer to do that."
  • Ralph Babb Jr., chairman and CEO, Comerica
    "Until there is a confidence-factor build out there along with the economy showing a steady improvement, I don't think you're going to see loans consistently pick up in the industry
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