Reporting from: Hong Kong
[Editor's Note: Sovereign Man Chief Investment Strategist Tim Staermose is filling in for Simon today.]
In another absurd example of what happens when unrestrained money printing meets idiotic government taxes, the price of parking spaces at a suburban apartment complex some 40 minutes from central Hong Kong is now HK$1.3 million, or approximately US$168,000.
There are two key factors driving this lunacy–
1) the tidal wave of money from across the Pacific as a result of the Federal Reserve’s QE infinity policy; and,
2) the Hong Kong government’s misguided attempts to control the property bubble here.
A few weeks ago, as we reported, the government snuck in 15% stamp duty tax affecting foreign buyers, plus a property tax increase, in hopes of snuffing out property speculation. Yet all they did was send the speculative money flows into things such as parking spaces instead, which are not affected by the tax hikes.
Hong Kong is flush with liquidity. The Hong Kong dollar is pegged to the US dollar at the rate of 7.80 +/- a very narrow band, which means that whenever the US Federal Reserve prints money, the Hong Kong Monetary Authority must also print money in order to keep up.
Interest rates here are effectively zero. And there are consequences to making money available for nothing.
All of the hundreds of billions of new Hong Kong dollars floating around in the system has to end up somewhere, and in recent years, much of it has ended up in Hong Kong’s property market.
Property prices in Hong Kong are the most expensive in the world. Recently a 6,200 square foot apartment sold for $62 million (USD), a mind boggling $10,000 per square foot.
Yes, Hong Kong is a nice place to be, and with such fixed supply and high demand, property prices are sure to rise. But fueling these fundamentals is the ever-increasing supply of hot money desperately seeking a home. Or a parking spot, as it were.
All of this is unsustainable. The only REAL long-term solution is for the government to stop artificially pegging its exchange rate to the US Dollar… and thus cease importing the ridiculous monetary folly the Fed has embarked on in the USA.
Hong Kong could re-peg its currency to the US dollar at another rate… or choose to re-peg to a basket of currencies (some combination of the euro, yen, etc.). Or even re-peg to the renminbi (a 25% revaluation). Interest rates could adjust higher to a more accurate market level and the prices of leveraged assets could come back to more sober levels too.
Hong Kong can only continue absorbing US inflation for so long. And we are closer to this dam bursting than at any other point since 1997.
Consequently, A sensible, no-downside speculation to profit from all this is to hold Hong Kong dollars rather than US dollars. I say ‘no downside’ because, for now, the Hong Kong dollar is pegged to the US dollar. So if you’re accustomed to earning/spending in US dollars, you have no currency risk whatsoever.
Yet if the Hong Kong Monetary Authority wakes up tomorrow and revalues the Hong Kong dollar by 25%, you get a free ride on the gain.