The IMF supertanker may be changing course
Policymakers seem to be warming to capital controls to avoid stagnation spreading
Steve Johnson
The IMF is rethinking its once rigidly 'neoliberal' advice © FT montage
Advanced economies have delivered a decade of woeful economic growth since the global financial crisis. The last thing the world needs is for emerging economies to be dragged down, too.
Such thinking is taking hold in some parts of Washington, where the IMF is rethinking the once rigidly “neoliberal” advice — stressing open markets and free-floating currencies — that it doles out to economies great and small.
David Lipton, first deputy managing director of the IMF, says one of its primary concerns is that low inflation in the developed world may, through capital flows, be “spreading in an undesirable way to emerging countries and causing them to stagnate”.
“Many of these countries are concerned about how spillovers from advanced world policies cause them to lose some degree of control over their domestic economies.” He questioned whether policies such as currency intervention could be used to “offset this transmission mechanism”.
Only last month Fitch Ratings warned it had a negative view on emerging market banks, in part because low interest rates were putting pressure on their margins.
Mr Lipton says the IMF began early this year to have a discussion on this topic with both advanced and emerging economies using different policy combinations, though it had not yet come to “firm conclusions”, adding: “We haven’t changed our approach, but we will incorporate what we are learning from our case studies as we go.”
His comments build on a gradual shift in thinking at the IMF, as it edges away from the Washington Consensus worldview of freely floating exchange rates and opposition to capital controls that dominated its thinking for decades.
In the aftermath of the global financial crisis, when many EMs were dealing with a deluge of capital inflows, the fund said that “in certain circumstances, capital flow management measures can be useful”. The IMF’s latest thinking appears to go further.
Gita Gopinath, its chief economist, outlined some of her thoughts at the annual Jackson Hole central bankers’ shindig in August, making the case for an integrated policy framework.
Developing countries run the risk of becoming overindebted as a result of capital inflows reducing borrowing costs. For some such countries, she said, the IMF’s preliminary modelling suggested “capital controls are the appropriate instrument to tackle this overborrowing problem, and they should be imposed as prudential policy in normal times before debt limit shocks strike”.
The use of the phrase “in normal times” suggests that, for some countries at least, the IMF is moving towards endorsing capital controls on a semi-permanent basis, not just in an emergency.
Ms Gopinath also referred to circumstances in which “FX intervention may become a desirable part of the policy mix in stressed times”, diluting the fund’s once full-blooded support for freely floating rates.
Other ideas once anathema are also swirling around Washington, with growing support for macroprudential measures, such as leverage and liquidity limits for both banks and non-bank lenders, and questioning whether inflation targeting by central banks needs to be as rigorously insisted upon as it once was.
Ms Gopinath’s thinking appears to be influenced by “dominant currency paradigm” theory, which applies when, as is increasingly the case, the bulk of a country’s exports are priced in dollars or euros, rather than its own currency.
Under this scenario, currency depreciation can lose its power to stimulate growth as it no longer increases export competitiveness, as hinted at by previous FT research. However, depreciation still retains its negative effects, such as raising the cost of servicing foreign currency debt.
The IMF is likely to tread carefully. It is wary of providing ammunition to critics of those EM governments and central banks, typically commodity exporting and importing countries, that do currently practise economic orthodoxy.
One EM economist at a leading bank, who backs the rethink but asked for anonymity given the sensitivity around the subject, said that for decades the IMF “has been guilty of capital account fundamentalism”.
He sees Southeast Asian states such as Thailand, Indonesia, Vietnam and Malaysia, all of which use capital controls and FX intervention, as being the catalysts for change.
“These governments said to the IMF, ‘You have been saying for 30 years to keep capital accounts open, but it’s not working is it? We are the ones growing and we are not doing that’,” he said.
The approach brings to mind China rather than the US. “The Washington consensus gave the US intellectual influence,” the economist added. “How close are we to China doing the same? This integrated policy framework makes me think we are close to it.”
The implication of such a shift is that the pricing of EM assets might be determined less by fundamentals and more by macroeconomic and political considerations.
Moreover, if currency intervention were to become normalised, the chances of an unhappy US president one day following suit have to be elevated. Given the preponderance of the dollar in global trade, dominant currency theory points to one country that could gain more than any other from a weaker currency — the US.
Does history repeat itself? Are price patterns and chart patterns reliable enough to suggest that a global Real Estate market collapse may be set up? What would it take for another Real Estate collapse to take place in today’s global market?
First, let’s start with this simple chart highlighting the “Bear Flag” setup from 2007 and the current 2019 Bear Flag setup. This price pattern was enough of an early warning sign for our research team to run into our offices and tell us of the exciting pattern they just identified regarding Real Estate and what they thought could happen.
We listened to them share their ideas and concepts of how we have 11 months to go before the 2020 US Presidential election takes place and how higher risk delinquencies and foreclosures are starting to spike. They suggested the political theater of the global markets and US election cycle will likely distract from the weakening economic cycle which could present enough “smoke and mirrors” to keep investors’ attention away from this potential collapse in the housing market.
Much like a magician attempts to distract you just long enough to pull of their new trick, could the political theater, global economic news cycles and the never-ending battle in Washington DC be just enough of a distraction that skilled traders miss this critical setup? We hope not.
The peak that occurred in 2007 setup about 19 months before the 2008 Presidential election took place. The 2019 peak occurs about 13 months before the 2020 Presidential election. In both instances, a highly contentious political battle is taking place which may distract traders and investors from really paying attention to the underlying factors of the global markets.
A real estate crash is no something to dismiss. For most of the people, their home is the nest egg, or their largest investment and watching this asset tumble in value 10, 20, 30% or more is serious. Before you continue, take a couple of seconds and join our free trend signals email list.
2007 vs 2019 Real Estate Market Topping Formations
Recent economic data suggests that builders and permits experienced an increase over the past 60 days – which is vastly different than what happened in 2006-2007. By the time the Bear Flag had setup in IYR in 2007, new building permits had already started to fall dramatically – for at least 12+ months prior to March 2007. Currently, the number of building permits on record is sitting near 50% of the range established between 2000 and 2009.
We authored a number of research articles this year that more clearly highlight our expectations:
– PART II – Is The Fed Too Late To Prevent A Housing Market Crash?
– Are Real Estate ETFs the Next Big Trade?
The recent increase in building permits could indicate a euphoric level of buying/flipping by builders and speculators thinking “its easy to make profits flipping these homes in this market”. Much like the euphoric activity before the 2007 crash.
The collapse that happened after the Bear Flag setup in IYR in 2007 resulted in a dramatic -73% decline in value over a very short 24 month period. Could something like this happen again in today’s market?
Our research team raised a couple of interesting points relating to the potential for a “rollover” type of event taking place over the next 12+ months.
First, the US Presidential election cycle could setup a very real fear that a new president could attempt to derail/damage the marketplace with new policies, taxes and other unknowns.
Second, the current Real Estate market has experienced real price growth for almost 10+ years since the 2009-2010 bottom and wage earners may already be priced out of certain markets – reducing overall demand at current price levels.
Third, a lot of recent news has been published showing massive amounts of people moving away from larger cities/states like New York, California, New Jersey, Chicago, and other locations. These people are moving away from higher taxes and housing costs and trying to move to areas that are cheaper and quieter.
Forth, there are an estimated 40+ million “baby boomer” homes that must be liquidated over the next 10+ years as these people/families transition into elderly status.
The reality is that unless price levels revert to levels that make housing more affordable or earnings levels dramatically increase over the next 3+ years, the price level for homes in the US and Canada is already historically high.
2007 Real Estate Housing Selloff
Real Estate Prices/Valuation Testing 2007 Extreme Highs
How high? Take a look at this last chart of IYR and pay attention to the fact that current price levels are already at the historic high price levels from 2007. This should tell you almost all you need to know.
Unless earning levels somehow rise dramatically over the next 24 to 36+ months, housing prices are already at or near peak levels for most consumers – even if the US Fed decreases interest rates another 25 to 50 bp.
The other thing to consider is what type of new policies, taxes, costs would a new US president do to the housing market and global stock market? What would happen in Bernie Sanders or Elizabeth Warren were to suddenly take the lead in the polls wanting to raise taxes on everyone and install new trillion-dollar policies while attacking America’s millionaires and billionaires? Think that may have some pull on the markets?
Our researchers believe we should cautiously watch IYR for further signs of weakness over the next few weeks and months. Yes, there is a very real potential that the US and global housing markets could collapse over the next few years – but right now we are looking at a Bear Flag pattern that may be an early warning sign of a potential price selloff. Nothing is confirmed yet but any week now could spark the start of something ugly for home prices.
Yes, housing market economic data show some weakening while building permits and construction ramped up last month. Housing has certainly reached a mature economic state and we believe any collapse in the global stock market could send a wave of fear throughout the housing market as people attempt to get out before prices start to collapse. We’ll keep you updated as we continue to watch the Real Estate market and our researchers pour over the data.
As a technical analysis and trader since 1997, I have been through a few bull/bear market cycles. I believe I have a good pulse on the market and timing key turning points for both short-term swing trading and long-term investment capital. The opportunities are massive/life-changing if handled properly.
First, let’s start with this simple chart highlighting the “Bear Flag” setup from 2007 and the current 2019 Bear Flag setup. This price pattern was enough of an early warning sign for our research team to run into our offices and tell us of the exciting pattern they just identified regarding Real Estate and what they thought could happen.
We listened to them share their ideas and concepts of how we have 11 months to go before the 2020 US Presidential election takes place and how higher risk delinquencies and foreclosures are starting to spike. They suggested the political theater of the global markets and US election cycle will likely distract from the weakening economic cycle which could present enough “smoke and mirrors” to keep investors’ attention away from this potential collapse in the housing market.
Much like a magician attempts to distract you just long enough to pull of their new trick, could the political theater, global economic news cycles and the never-ending battle in Washington DC be just enough of a distraction that skilled traders miss this critical setup? We hope not.
The peak that occurred in 2007 setup about 19 months before the 2008 Presidential election took place. The 2019 peak occurs about 13 months before the 2020 Presidential election. In both instances, a highly contentious political battle is taking place which may distract traders and investors from really paying attention to the underlying factors of the global markets.
A real estate crash is no something to dismiss. For most of the people, their home is the nest egg, or their largest investment and watching this asset tumble in value 10, 20, 30% or more is serious. Before you continue, take a couple of seconds and join our free trend signals email list.
2007 vs 2019 Real Estate Market Topping Formations
Recent economic data suggests that builders and permits experienced an increase over the past 60 days – which is vastly different than what happened in 2006-2007. By the time the Bear Flag had setup in IYR in 2007, new building permits had already started to fall dramatically – for at least 12+ months prior to March 2007. Currently, the number of building permits on record is sitting near 50% of the range established between 2000 and 2009.
We authored a number of research articles this year that more clearly highlight our expectations:
– PART II – Is The Fed Too Late To Prevent A Housing Market Crash?
– Are Real Estate ETFs the Next Big Trade?
The recent increase in building permits could indicate a euphoric level of buying/flipping by builders and speculators thinking “its easy to make profits flipping these homes in this market”. Much like the euphoric activity before the 2007 crash.
The collapse that happened after the Bear Flag setup in IYR in 2007 resulted in a dramatic -73% decline in value over a very short 24 month period. Could something like this happen again in today’s market?
Our research team raised a couple of interesting points relating to the potential for a “rollover” type of event taking place over the next 12+ months.
First, the US Presidential election cycle could setup a very real fear that a new president could attempt to derail/damage the marketplace with new policies, taxes and other unknowns.
Second, the current Real Estate market has experienced real price growth for almost 10+ years since the 2009-2010 bottom and wage earners may already be priced out of certain markets – reducing overall demand at current price levels.
Third, a lot of recent news has been published showing massive amounts of people moving away from larger cities/states like New York, California, New Jersey, Chicago, and other locations. These people are moving away from higher taxes and housing costs and trying to move to areas that are cheaper and quieter.
Forth, there are an estimated 40+ million “baby boomer” homes that must be liquidated over the next 10+ years as these people/families transition into elderly status.
The reality is that unless price levels revert to levels that make housing more affordable or earnings levels dramatically increase over the next 3+ years, the price level for homes in the US and Canada is already historically high.
2007 Real Estate Housing Selloff
Real Estate Prices/Valuation Testing 2007 Extreme Highs
How high? Take a look at this last chart of IYR and pay attention to the fact that current price levels are already at the historic high price levels from 2007. This should tell you almost all you need to know.
Unless earning levels somehow rise dramatically over the next 24 to 36+ months, housing prices are already at or near peak levels for most consumers – even if the US Fed decreases interest rates another 25 to 50 bp.
The other thing to consider is what type of new policies, taxes, costs would a new US president do to the housing market and global stock market? What would happen in Bernie Sanders or Elizabeth Warren were to suddenly take the lead in the polls wanting to raise taxes on everyone and install new trillion-dollar policies while attacking America’s millionaires and billionaires? Think that may have some pull on the markets?
Our researchers believe we should cautiously watch IYR for further signs of weakness over the next few weeks and months. Yes, there is a very real potential that the US and global housing markets could collapse over the next few years – but right now we are looking at a Bear Flag pattern that may be an early warning sign of a potential price selloff. Nothing is confirmed yet but any week now could spark the start of something ugly for home prices.
Yes, housing market economic data show some weakening while building permits and construction ramped up last month. Housing has certainly reached a mature economic state and we believe any collapse in the global stock market could send a wave of fear throughout the housing market as people attempt to get out before prices start to collapse. We’ll keep you updated as we continue to watch the Real Estate market and our researchers pour over the data.
As a technical analysis and trader since 1997, I have been through a few bull/bear market cycles. I believe I have a good pulse on the market and timing key turning points for both short-term swing trading and long-term investment capital. The opportunities are massive/life-changing if handled properly.
