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SOVEREIGN MAN

Practical advice: Make an easy 25% on the dollar’s decline

HongKongDollar

November 2, 2012,
Los Angeles, California.

For several decades now, the Hong Kong dollar has been ‘pegged’ to the US dollar at 7.80 plus/minus a very narrow band (7.75 to 7.85).

This means that the Hong Kong Monetary Authority has to mirror whatever the US Federal Reserve does. If Bernanke prints, Hong Kong has to print. And as you have probably noticed, Mr. Bernanke has done quite a bit of printing over the past few years. As such, interest rates in Hong Kong are practically zero.

Such monetary policy has been instrumental in driving Hong Kong’s property prices to the moon. It’s absurd– a small hovel in Hong Kong’s central district will easily set you back more than a million dollars.

It doesn’t take a genius to figure out that when banks are handing out mortgages at nearly 0% interest, property prices are going to spike.

As an example, if you can afford a $2,000 monthly payment, that will buy you a $370,000 home when amortized over a 30-year mortgage fixed at 5%. But if the loan terms are changed to ‘interest only’ at just 1%, suddenly that same $2,000 monthly payment affords you a whopping $2.4 million home.

Printing money doesn’t work; if the government sent everyone a check for a million bucks, price levels across the board would go up. It’s happening in Hong Kong, especially in the property market where financing is so readily available.

Hong Kong’s government is desperately trying to cool the property market now; in fact, last Friday they quietly passed a new 15% stamp duty that applies to foreigners buying local property. The new tax took effective almost immediately.

(As you would expect, shares of Hong Kong’s major property development companies tanked when the markets opened on Monday morning. Big time.)

It’s clear that the authorities in Hong Kong are really scared of inflation. Evidence of rising prices is obvious– taxi fares have increased. Food at the grocery store. Drink prices at restaurants. Etc.

Unfortunately, the Hong Kong dollar is at the ‘strong’ end of its band right now. This means that the authorities have no choice but to keep printing… buying US dollars and flooding the market with Hong Kong dollars.

This is only going to push prices up even more. The stamp duty won’t make a difference, like putting a band-aid on a sucking chest wound.

The only REAL solution… and the inevitable one… is for Hong Kong to drop its peg against the US dollar. There are two obvious options:

1) The Hong Kong dollar is re-pegged to a ‘basket’ of currencies; in this instance it will gradually strengthen against the US dollar.

2) The Hong Kong dollar is re-valued with immediate effect to the renminbi. This would be about a 25% gain in US dollar terms, overnight, for anyone holding Hong Kong dollars.

Consequently, if you have obligations in your life that require you to hold US dollars, one solution may be for you to hold Hong Kong dollars instead. For now, the two are completely interchangeable at a fixed rate, so you have zero currency risk.

But by holding Hong Kong dollars, you essentially have free upside to any potential revaluation.

Holding Hong Kong dollars is fairly simple. You can try opening an account at a bank like Everbank in the US, but the best option by far is to have an account in Hong Kong. Anyone can open a bank account there, especially if you’re willing to travel.

If not, I’ve put together this short paper explaining how you can open a Hong Kong bank account remotely.

The authorities in Hong Kong are flat out denying that they will drop the peg… which makes me think even more that it’s a near-certainty.

In fact, just yesterday the authorities had to print nearly $1 BILLION in order to intervene in the currency markets. It’s just not sustainable.

Holding Hong Kong dollars makes sense– it eliminates your currency risk while giving you all the upside of a revaluation… that could potentially come very, very soon.

About the author: Simon Black is an international investor, entrepreneur, permanent traveler, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.

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Comments on this entry are closed.

  • harblthecat

    Couldn’t you just go to a foreign exchange and just buy Hong Kong dollars?

    • ATex

      Check the price you actually pay, may or may not be a good price.

  • ATex

    Elegant. Nice.

  • greenlander

    It’s not clear to me that if they peg to a “basket” of currencies that it will change the situation much. The other major currencies, the euro and the yen, have the same money-printing policies, and these are probably going to constitute most of any hypothetical basket. It’s hard to imaging the basket consisting of currencies with responsible governments.

  • http://www.facebook.com/mike.mulrooney.9 Mike Mulrooney

    Why is it that HK property prices have gone to the moon but USA’s has gone the other way but both presently share the same monetary policies ?

    • Alan Brown

      The Fed is using “quantitative easing” to try and re-inflate a collapsed bubble. That’s much harder than inflating a real estate market that hasn’t suffered collapse.

  • reflector

    why would re-valuing the hkd to the renminbi cause it to gain 25% in usd terms?
    can you explain this?
    thanks.

    • http://www.facebook.com/profile.php?id=210602009 Sebastian Coe

      easy, because the rmb is pegged at 6.3 to 1 usd

  • http://www.facebook.com/swiss.bank.14 Swiss Bank

    Point 5 in your linked paper is incorrect. If your “offshore” bank has a single office anywhere in your country all of your accounts with that bank, no matter where they are, can be frozen or seized by your government just as if it were a domestic account. There is all kinds of precedence for this and it is widely practiced in the USA.

  • romed bucher

    Agreed, printing money is not sustainable. But in the long term, the whole idea of betting valuta against each other in order to draw profit is not sustainable, is it?

  • http://evilspeculator.com molecool

    I hope none of you retail suckers took that advice.

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