Plus a Major Real Estate Adjustment in Vancouver, Toronto, Sydney, San Francisco and New York
By JC Collins
Since June 23 there has been $20 billion of capital inflows to emerging markets. After three years of capital outflows the majority of emerging nations are now experiencing capital inflows and an increase in market capitalization, with a 4% jump in July alone. This reversal has been thoroughly predicted here on POM along with a few other important trend changes.
The importance of what is happening in the global monetary system cannot be understated. One of the fundamental reasons why I have not supported a large collapse of the monetary and financial systems of the world, as others have repeatedly done, is because the progression of monetary and financial reform has been an objective of all interested nations and institutions.
As such, much of the policy changes and methodology of this transformation has been taking place behind the lights and scripts of both the mainstream and alternative media. Some of these changes involve a re-balancing of the global monetary system through the shifting of foreign exchange reserves and the reduction of reserve accumulations down the road.
Understanding the complex nature and structure of the existing international monetary system is a daunting task to begin with. But to understand and trend the transformation of that global system is another thing entirely. Which is why so many have not been able to see the obvious nature of the monetary reform which has been taking place.
The reality of SDR bonds being issued from China and global institutions, such as the World Bank and the China Development Bank, has been confirmed this week. This longstanding POM prediction follows previous confirmations, such as the implementation of the IMF 2010 Quota and Governance Reforms and the renminbi being added to the SDR composition.
The stage is now set for further changes to take place. This is happening through the increase of capital flows into emerging markets which we have discussed in previous posts. These inflows are the natural response to investment gain opportunities and reduced risk. The inclusion of the RMB in the SDR, which becomes effective on October 1, 2016, has already established a stronger level of support and interest in the Chinese currency and the broader use of the SDR.
This re-balance between USD denominated securities and RMB/SDR securities will not happen overnight. The upcoming September 4th G20 meeting and the October 1st SDR date will come and go with little fanfare. Those who follow such information, which would include all reading this, will have a much better understanding of what will happen on those dates and how those changes will be applied to the real world financial and monetary systems.
But make no mistake about it, the upcoming G20 meeting will be a fundamental turning point in the transformation, even if it isn’t covered by the mainstream and alternative media. Like the changes which have already taken place, the results of those dates will be noticed by the adjustments which take place after the fact. Just like the SDR bonds and increased capital flows into emerging markets represent the manifestation of previous policy changes and monetary reform.
As China further opens its financial markets and internationalization of the renminbi (yuan) continues, the opportunity to widen the trading band it shares with the USD will exist. As international USD liquidity is replaced with SDR and RMB liquidity, the risk on China exposing the yuan’s exchange rate lessons. At some point after October 1st China will implement the first widening of its trading band against the USD.
This will allow the currency to appreciate moderately while maintaining a safety net against targeted depreciation by foreign interests. Think of it as a financial chess match between two parties who have the same goal in mind – completing the game of monetary reform with the greatest advantage over the other.
USD denominated interests have to be reduced to make room for RMB and SDR denominated interests. Each movement will allow for additional liberalization by the Chinese monetary authorities. As a testament to this back and forth process, the yuan experienced its largest single day appreciation since 2010 last week, at the same time that capital inflows to emerging markets are increasing.
With some varying ups and downs, expect this process of re-balancing to continue into 2017 and beyond. It is now being accepted by most international banks and institutions that the renminbi will experience a long-term trend of appreciation. This is supported by the larger monetary and financial reforms which are taking place.
As more institutions begin to issue both RMB and SDR denominated bonds, such as the BRICS Development Bank, and perhaps even the Federal Reserve itself, we can expect that the capital inflows into emerging markets will experience additional increases. This will further enhance the market capitalization and lead to massive infrastructure development projects throughout the emerging world.
As we have reviewed several times before, this increase in infrastructure funding will be the primary cause of a new commodities boom. Some commodities have begun to turn, with a few having a false turn, but the trend towards commodity appreciation will continue. Even Scotia Bank has been predicting the same:
“2016 should be a transition year for commodity prices, with the current slowdown in global capital spending in oil and gas and mining setting the stage for a strong rebound going into the next decade.”
It is extremely rewarding and exciting to see so much of the POM thesis being confirmed in the real world. Researching and writing for all of you has been one the greatest experiences of my life to date. All of you reading this post will be subscribers, so I hope you all have found value in the work provided. We are only a small drop in a very large ocean, as most continue to use the open accessibility of the mainstream and alternative media as their source of information. As with all analysis and data trending – garbage in will produce garbage out.
This is my last day of a much needed vacation. Marianne and I spent a few weeks on the Pacific coast in Vancouver, BC. My obsession and constant talking about the Cascadia Subduction Zone drove her bonkers as we sat on the beach or drove through seismically interesting areas. But she’s a trooper and appreciates that I have a weird process of digesting and regurgitating information. That same process takes places through my words here on POM. So I thank you all as well for being patient with me as well.
One last thing before I go eat a burger and watch the new Jason Bourne movie – the real estate markets in some of the world’s largest cities will soon take a hit. These cities are Vancouver, Toronto, Sydney, San Francisco, New York, and a few others scattered around.
The reason for this ties directly into what we have discussed above. As capital outflows from emerging markets, mainly China, increased it went looking for a place to land and earn gains. The mortgage boom in most western markets provided an obvious target. The reason for the capital flight had to do with the uncertainty of the Chinese financial market and the future valuation of the renminbi. Even in China, contrary to what some say, there has been uncertainty in the general investing population about the outcome of monetary and financial reform.
As the changes take place in the system, and it becomes apparent that the renminbi will in fact appreciate while its liquidity expands internationally, the capital which poured into these real estate markets will be sucked out and will become capital inflows back into China and other emerging markets. The gains available will far outweigh the potential losses of staying in peak real estate markets.
This will happen, and will in fact be supported by local and regional governments, such as the implementation of a 15% property tax fee increase on foreign buyers in the metro Vancouver area last week. In Vancouver West, home sales dropped to just a single 1 in the week after the announcement, down from 20 and 37 over the previous two week period. That is a dramatic drop in home sales. Whether it is attributed to something else or is a direct result of the 15% increase, time will tell. But the capital inflows into emerging markets will come from somewhere. Staying in a peak market is not a good investment strategy.
Now back to the grind of mining trucks and oil sands operations. – JC