Property is the collateral of a bank and must be funded by deposits liabilities and capital. We wrote on December 9 that 2013 marked the year when the deposit liabilities of GEMS countries were all spoken for and, therefore, property collateral was in jeopardy.  In layman’s terms, the GEMS credit cycle is over and the Western credit cycle is bottoming out. Marginal money is rightly moving away from GEMS property and into western property.  Goodbye Shanghai and Bangkok — hello Dublin and Barcelona.  Hopefully, GEMS countries spent well during the credit binge. China and Singapore built infrastructure. Turkey and Brazil built shopping malls. Thailand created hair-brained rice subsidy schemes.  Let’s see.

Many investors are wondering what is going on in PIMCO. They see it as epicenter of the fixed income unwind we are seeing. Many wonder if there is a schism between Gross and El Arian over GEMS fixed income. (See Bill Gross’ February commentary — he begs to differ and says everything is fine at PIMCO. “Doth the lady protest too much?”). Whatever the case, there is a growing concern about a stealth liquidity drain which is, ironically, occurring with fantastically large central bank balance sheets.  Inflation keeps falling all over. Growth is sluggish. And market turnover is awful.  Furthermore, many fixed income positions cannot be liquidated due to low liquidity in forex markets.