Welcome to your July issue of the Global Intelligence Wire.
This is the monthly digest exclusively for Global Intelligence Lifetime Circle members, in which I cut through the media chatter and highlight five underreported news stories from recent weeks.
First up this month…big news on central banks and bitcoin.
Central Banks Will Be Allowed to Hold Part of Their Reserves in Bitcoin
The Bank for International Settlements, essentially the central bank for the world’s central banks, has long been skeptical on crypto. Indeed, in 2018, the general manager of the BIS, Agustín Carstens, slammed crypto as a threat to the global financial system.
However, recently the BIS changed its tune somewhat…extending a hand to crypto.
In a new consultative document released June 30, the bank’s Basel Committee on Banking Supervision proposed limiting central banks’ total exposures to “Group 2 crypto assets to 1% of Tier 1 capital.”
Let’s unpack what that means…
For the BIS, Group 1 crypto assets are tokenized versions of traditional assets as well as stablecoins that meet certain conditions. Group 2 are unbacked crypto assets…things like bitcoin.
Tier 1 capital is a bank’s core capital, including disclosed reserves.
So, what the BIS is proposing is that central banks around the world should be permitted to keep up to 1% of their reserves in bitcoin and similar crypto assets.
That’s a significant change.
Sure, 1% may not seem like a big number. But 1% of all central bank reserves around the world would add up to an awful lot of money.
More importantly, the BIS permitting any amount of crypto to be included in national reserves is a big deal, and it’s not hard to envision that 1% figure increasing in the years ahead.
To be clear, this was not a full-throated endorsement of crypto by the BIS…the organization remains skeptical. However, this marks another step in crypto’s growing acceptance into the realms of high finance.
Sticking with crypto for a moment…the race to regulate the space is gathering steam.
The G-20 Is Preparing Global Crypto Rules
Recently, I wrote in Field Notes about the European Union’s historic new crypto laws. (If you missed that column, you can read it here.)
Now, the G-20 is preparing to follow suit.
The Group of 20 is an intergovernmental forum held by 19 countries and the European Union to address global economic and finance issues. Members also include the U.S., the U.K., Canada, China, Australia, and Japan.
The G-20 had previously discussed crypto, but decided against intervening in the crypto markets.
However, with the recent crypto volatility, and the steps taken by the EU, the G-20 has decided to act.
The group’s Financial Stability Board, comprised of treasury officials and central bankers, announced this week that it would develop strong worldwide crypto regulations. The new policy is set to be released in October.
The move comes after the U.S. Treasury stated that America should collaborate with its global partners on crypto legislation.
Regular readers will know that I believe this is a positive development.
Crypto is the Wild West at the moment…some investors like that about it. But to truly enter the investment mainstream, crypto companies and investors need a greater level of certainty and protection—something that clear regulations can provide.
Sure, governments will probably make a mess of developing these regulations…at least initially. But some rules are better than no rules. And once those rules are in place, far more institutional money will flow into crypto…which will be very good news for the early adopters who braved the Wild West frontier.
Next up, we head to China and the country’s brewing real estate crisis.
Chinese Home Buyers Stop Paying Mortgages on Unfinished Properties
In the July issue of the Global Intelligence Letter, I brought you a story on the indebtedness of China’s private property developers and the Chinese government’s efforts to essentially nationalize real estate construction.
Well, since then, reports have emerged of Chinese property buyers refusing to pay their mortgages.
This is a significant development.
China operates an unusual real estate model in which developers can sell unfinished apartments. This means that buyers begin paying mortgages on properties before they are delivered.
Now, desperate homebuyers across dozens of cities are refusing to pay their mortgages on unfinished apartments, out of fear that the indebted developers will never complete the properties.
This could have serious knock-on effects for the country’s banking system. Indeed, ANZ’s senior China economist Betty Wang estimated that 1.5 trillion yuan ($223 billion) of mortgage loans, or 4% of all the outstanding home loans at China’s banks, could be affected by this movement to boycott paying mortgages.
Four percent may not sound like a lot, but if the movement spreads, it could threaten China’s financial system…especially as the banks also loaned vast sums to developers, money that they may never get back. Bloomberg reported the government has already held emergency talks with banks on the issue.
China’s Communist Party will be desperate to prevent any financial or housing crash that could lead to social unrest. My bet is the government works to speed up the pace of nationalization, offers subsidized refunds, or compels developers to complete unfinished housing, to stop this movement in its tracks.
If that carrot doesn’t work, it will turn to the stick and crush the movement by force.
Next up, we head back to the U.S. and the Fed’s losing battle against inflation.
Traders Bet on the Fed Raising Rates by 1 Percentage Point in July
When word got out that inflation topped 9% in June, futures traders began betting that the Federal Reserve would go bigger than planned in July…raising rates by 1 full percentage point rather than the 0.75 percentage point hike it had previously foreshadowed.
That would be by far the biggest hike in decades…but it could well be on the cards. After all, Canada’s central bank just did exactly that recently, shocking markets with a 1 percentage point increase.
The problem with all of this is that, even if the Fed follows suit and goes with a 1 percentage point hike, the Fed’s key interest rate would only be at 2.5% to 2.75%.
What good is that against 9% inflation?
Plus, the Fed is still pumping billions of dollars into the economy every month…fuel that is helping maintain the inflation wildfire.
I wonder where the Fed’s pain point is. At some point it hits an interest rate that crushes the consumer and business, and causes interest expenses to spiral rapidly higher for Uncle Sam and his gargantuan debts. That will reverberate through the economy in many unsavory ways and probably cause a much deeper recession that the Fed is prepared to handle.
So, the Fed could well go for a 1 percentage hike this month, but I wouldn’t be surprised if that expends most of its remaining ammunition in the battle against inflation.
Finally, on a related topic…
Home Prices Are Falling in Certain U.S. Markets as Higher Interest Rates Bite
For months, I’ve been writing that soaring U.S. real estate prices were going to do an about-face, as interest rates hikes increase mortgage costs for new buyers.
Since the start of the year, the average rate on the 30-year fixed mortgage has almost doubled, making the cost of ownership significantly higher.
Now we’re starting to see real estate markets cool across the U.S.
In Boise, for instance, 61.5% of sellers reported cutting their asking prices in June, according to a new report from Redfin.
In Denver, the figure was 55%, while in Salt Lake City, 51.6% of sellers cut prices.
Another factor in falling prices, besides rising interest rates, is growing housing supply.
Inventory hit a record low in the pandemic, but is now growing again, rising 28% last week compared to the same week in 2021.
These trends likely mean a much cooler housing market in the U.S. this summer compared to the previous two COVID-afflicted years.
And that brings us to the end of this month’s Wire. If you have any feedback or any topics you’d like me to address in a future issue, you can reach me through the contact form on the Global Intelligence website.
Thanks for reading and for being a Global Intelligence subscriber.
