In the movie Havana, Robert Redford tells Lena Olin, "A butterfly can flutter its wings over a flower in China and cause a hurricane in the Caribbean."
The butterfly effect describes a finding of chaos theory known as "sensitive dependence on initial conditions." Even a minute change in inputs (the butterfly's wings in China) can trigger massive effects on the other side of the globe (a hurricane in the Caribbean).
It is as true in the world of finance as it is in the world of weather... especially when the butterfly in question is Godzilla-sized.
The new Japanese prime minister, Shinzo Abe, and Japan's new central bank chief, Haruhiko Kuroda, have taken "quantitative easing" (aka debt monetization) to a level never seen before. Call it "Godzilla-sized."
Relative to the size of its economy, the Bank of Japan's stimulus will be three times the size of that of the Fed.
And that is where the butterfly effect comes in...
Imagine the following scenario:
You have been saving and adding to your nest egg for many decades. It is all you have for your retirement. Your prime minister comes on television and basically says, "We are going to print currency until we get a 2% inflation rate -- no matter what."
You have no idea what the outcome of this massive experiment will be. You understand, through some basic research, only that it is the biggest monetary gamble in the history of the world. It is a gamble with your retirement funds, which could potentially lose half of their value (or more) over the next two years.
You also know that, if your government screws up this "experiment," runaway inflation could wreak havoc on your country. Your food and energy costs alone, for example, could triple or quadruple (as you are essentially an island nation with no natural resources).
This is not hypothetical. The Japanese prime minister has already announced his crazy plan and hired a crazy central banker to carry it out. What would you do if you were in this situation?
One thing you might do is seek out assets denominated in a stronger currency... assets that function as inflation hedges... assets such as real estate.
Property booms in Miami, New York City, Las Vegas... and even Houston... are being driven not just by easy monetary policy and Wall Street private equity capital, but also by foreign investors sending their capital to the US.
When, say, a wealthy Brazilian decides to buy a block of Florida condos as a diversification of assets, he can do it only by exchanging the Brazilian currency for dollars. These exchanges occur on such a massive scale they have kept the dollar more stable than many expected...
Also, the US remains a military and agrarian superpower. This combination of military might and food stability makes US Treasury bonds attractive to foreign capital as a safe haven. (The political and military positioning of the US is a valuable intangible asset, not unlike the value of the Coca-Cola brand.)
Japanese savers are already rushing to escape a doomed currency. That means their investment dollars will flood US markets -- fueling a US real estate hyper-bubble.
To play this setup, you could buy shares in the iShares FTSE NAREIT Resi Plus Capp (NYSE:REZ), which tracks the performance of the US residential real estate equity market.
This isn't quite a pure play on the residential real estate sector. (There are some health care and personal storage REITs in there too.) But you get exposure to plenty of apartment complex REITs, such as Equity Residential, AvalonBay, Essex Property, Camden Property Trust, UDR and BRE Properties.
Or you simply avail of ultra-low interest rates, buy a second home and rent it out.
Both are great ways to prepare for the Godzilla-sized flood of cash out of Japan and into the US real estate market.
Carpe Divitiae,
Justice
