The hipster’s mobile home: Part 2, Sheer joy of showering outdoors

February 10, 2016 | Affordability, Apartments, Design, Development, Housing, Innovations, Land use, Micro-units, Rental, Speculation, Tenure, Tiny houses, US News, Usonian, Zoning | No comments 70 views

[Continued from yesterday’s Part 1.]

By: David A. Smith


And I sling the hash and wash the dishes

Thank you, thank you, Mister Chairman, for those kind words; but why don’t you tell them the whole truth: founder, owner, editor, and I also sweep out the place.

– The Man Who Shot Liberty Valance

As we saw yesterday, using as source material Erin Anderssen‘s journalist-mom article for The Globe and Mail (6 January 2016), the tiny house/ micro-home movement is built on imagery and its close cousin imagination – the daydream of a better simpler cheaper home.

AHI posts on micro-housing

October 23, 2006: The 50-year trends in affordable housing, 3 parts

April 14, 2006: The evolving modern home

March 20, 2007: Home configurations: let’s get small, 2 parts

May 18, 2009: Outlaw In-Laws, 2 parts

January 28, 2013: Grandma in a can?

April 10, 2013: Micro and macro housing issues, 2 parts

August 16, 2013: Micro-housing in the realm of the impractical

February 3, 2014: Rounded-shouldered psyches, 2 parts

Then reality intervenes, starting with the most elemental of human functions: evacuation.


1b. Toilets and plumbing

As with many other tiny-home dwellers, we use a compost toilet.


Clivus, the sales diagram

For 19 years, the Boss and I lived in an urban Cambridge house with a composting toilet, the Clivus Multrum.  While it was perfectly usable, as long as you had power for its itty-bitty fan to waft air gently into the clivus, not allow the reek to rise up from below, it’s a toilet that is practical only when a tiny number of people inhabit a very large unpopulated area – people who are willing everything six months or so to hose out the liquid (which makes fantastic fertilizer) and then every twelve months or so to shovel out the ‘fine grain loam’ which is the biological residue of our fecal contributions, given a year to work in anerobic isolation. 

A clivus, in short, is barely practical in the wild; it’s an absurdity in the urban context.


The one in our basement looked even odder

For instance, consider this comment:

We lived with a SunMar NE for about 8 years. We had the little “muffin fan” exhaust. We used a combination of peat moss/aspen chips. We used all the recommended composting aids. No matter what we did – including complete emptying and washing it out with vinegar and water in a “deck sprayer”, every 6 weeks little tiny flies would begin to show up in our bathroom!

Then too, you need clean water to flow into your system.  The Anderssens eschewed indoor plumbing entirely:

We bring in our own water by boat –

If one is going to tout tiny homes, one must acknowledge that there ain’t so such thing as free infrastructure; either (1) you build it yourself, (2) you rely on the established grids, (3) you import (at high per-unit cost), or (4) you do without.

– take sun-heated showers outdoors –


“Let’s talk about the sheer joy of showering outdoors

– and cook on the BBQ.

So the Anderssens manage – and in the summertime, in balmy bright Nova Scotia, that could indeed be an idyllic holiday.  Camping in a permanent abode.

Camping, of course, without most of their possessions.

1c. Storage and possessions

Tiny living usually means getting by with little closet space and a mini fridge. 

Again, this is just great for a get-away-from-it-all vacation.

Be prepared: You can’t shrink your home and keep up a large-scale life. So cautions Travis Marttinen, who built his own 187-square-foot home in Barrie, Ont., while completing an architectural technology diploma.


The interior of Mr. Marttinen’s small home

He sees people jumping on the trend but expecting to live exactly as they did before. “You need to radically simplify. Not only in the number of possessions, but in lifestyle.”

The lifestyle point is too seldom mentioned.  Possessions and storage create optionality – what we can do, what we can choose, and how much effort it takes to undertake an activity.

“You cannot have all of the creature comforts that most people are used to. It simply doesn’t work.”

In fact, you trade those possessions and their optionality for the chance to live close to nature.

1d. Living outside needs good weather

Here’s a major draw for those who espouse tiny homes: the chance to build your own little cabin in the woods, in a place where the weather is always beautiful:

Our front view is the open ocean, as big and expansive as it gets. Our sun-drenched deck is as large as the cottage floor, a perfect work space.

That’s certainly lovely.


Pay no attention to the license plate … we’ll come back to it later

Then there’s the solitude:

Our boys spend their weekdays at sailing camp. 

Sailing camp that is, to be sure, infrastructure provided by others (and paid for by the homeowners). 

In stating this, I’m not belittling the experience, which sounds like a wonderful way to spend a summer, merely observing that for this family, the tiny home isn’t a cost-saving measure, it’s a summer vacation where some things (indoor space) are traded for other things (the great outdoors). 


Who wouldn’t want the great outdoors?

1e. What is left out of the cost equation

Ms. Anderssen knows this:

And before tiny houses – and shipping container homes – are considered as solutions for affordable housing in cities, that should give urban planners and policy makers pause.

After all, it’s one thing to live by choice in a chic shack in a pastoral setting or a warm climate. It’s quite another to be forced into a micro-room without a view because that’s all you can afford.

A micro-home where you lack options, because you lack the financial resources to pay for them, is less an adventure in ascetic natural living and more a self-imposed economic day-relesae prison.

Living low-rent (or with a micro-mortgage) is a definite draw. Tiny houses cost a fraction of the average home on the market. Priced per square footage, however, they aren’t exactly bargain basement.  A 190-square-foot model will cost about $20,000 for an empty shell, and up to $100,000 for a designer edition.

For $100,000, you could buy a large home in Cleveland or Detroit, on a large lot, in a well-kept neighborhood – with indoor plumbing:

(Budget up for the mini outdoor hot tub.)

Then comes the next challenge: efficient design.


Sleeping in a loft that you crawl into

[Continued tomorrow in Part 3.]       

The hipster’s mobile home: Part 1, The three constraints

February 9, 2016 | Affordability, Apartments, Design, Housing, Micro-units, Rental, Speculation, Tiny houses, US News | No comments 65 views

By: David A. Smith

When the legend becomes fact, print the legend.

– The Man Who Shot Liberty Valance


“You’re not gonna use this story, are you Mr. Scott?”

The secret of Twitter or Facebook, or the political arcs Bernie Sanders, Donald Trump, and a host of others whom it would be tedious to mention, lies in humanity’s desire for cogent myths that explain our troubles as beyond us, and offer the dream of revolutionizing our lives just by ‘using one simple trick’.


Easy, isn’t it?

And yet these myths are thought balloons, which can be punctured as easily as in an unprepossessing first-person article by participant-journalist Erin Anderssen of The Globe and Mail (6 January 2016), that basically explodes the tiny house/ micro-home myth as a dream:

Teeny house, big lie:

Why so many proponents of the tiny-house movement have decided to upsize


We can totally handle this

We want what we do not have, but our wanting is in the mind where everything is clean and works, and what we have is in the world where things need maintenance and upkeep, where we have noisy neighbors and balky infrastructure, and where even when we close the door to the outside world, our troubles come into our home with us and snuggle in our subconscious. 

So it is with tiny houses: we imagine ourselves kings of infinite space, until we are bounded by their nutshell:

As we were packing up our cottage last summer, my 14-year-old casually observed: “It’s good we’re leaving, while we still like each other.”

Irritation operates by Newtonian gravity: it rises as the inverse square of the distance to the irritant.  The fat man in the adjacent seat?  The crying baby three rows back? 


I left a tiny house for this?

Now add to that irritation the deadly combination of (a) social etiquette which urges us to squelch our irritation, and (b) inability to escape the irritant and hence nowhere to blow off steam … and the emotional pressure rises.

For 10 weeks of the year, my husband and I, along with our two sons, live blissfully in Nova Scotia in a two-room A-frame that measures roughly 320 square feet, accounting for the sloped roof.

This is in summer, in eastern oceanfront Canada, nearly ideal weather. 

We sleep in the loft upstairs, which adds about 80 square feet. This puts our cottage within “tiny home” range, making us part-time members of a high-minded, green-friendly, cost-saving movement to live small in a world of super-sized mansions.

For context, a lower-middle-class urban Indian family of four lives in 275 square feet.

For a tiny house, it’s big living.

It is: some adherents of the movement pride themselves on how small they can live:

“It’s very easy to fall into the romanticism of the trailer-based tiny homes,” says Marc Davison, one of the organizers of YEG Tiny Home, a community group exploring the idea in Edmonton. Davison himself was inspired by the idea, especially if it meant more time and money to spend travelling. “In my brain, I was thinking: ‘We could totally make 150 square feet work.’” 


We’re too cool to be hipsters

Aside from their hipster optics, the trio including Mr. Davison are still in the dreaming stage:

Three Edmontonians planning to move into tiny houses are connecting with other people in the city who share their interest in living small.

While the trio envisions one day residing in a tiny-house community in Edmonton, for now they’re working on bringing together more like-minded people.

‘Planning’ … ‘envisions’ …

(In fairness to Mr. Davison, the preceding quote comes from sunny summer August, and when interviewed by Ms. Anderssen a few months later he had realized the challenges of such accommodation in cold Canada and with pets or belongings.)

I could leave it at that, with my eco-mom credentials secured, my brood stuffed in a birdhouse with the walls closing in. But that would be cheating.

The wry tenor of Ms. Anderssen’s reporting bespeaks a charming wisdom.


She’s a wry mother

Talk about the fastest family trip to Paradise Lost.


You’re out of the group house, Lucifer

We’re far from alone – although you don’t hear much about the people who shutter their tiny houses among all the upbeat stories with perfectly staged photo spreads, or those two new HGTV builder shows, Tiny House Hunters and Tiny House, Big Living. (You too can live small in an oversized world!) The ardor for tiny homes suggests it’s the next best trend in four walls.


Tiny house examples, but with no cooking, no bathing inside

The ardor is designed to create desire, to evoke aspirational feelings of moral virtue, and even a curmudgeon such as I can only praise moral desire.  Yet morality is not a strategy, as I demonstrated at length with Union Theological Seminary, and it’s important to use Ms. Anderssen’s superb reporting to explode the tiny home myth once and for all, for three reasons:

1.     The whole movement is built on a dream that isn’t real.  It does not exist because as envisioned it cannot work.

2.     As the tiny home movement evolves, its proponents are reinventing the mobile home, and they need not do this because the mobile home already exists.

3.     If actually built and occupied, the dwellings tiny home advocates imagine resemble nothing so much as informal urban housing in the emerging world … and nobody is offering that as anything other than a way station to a better city and a better life.


You might think these mobile homes are tiny houses … but nobody calls them that

The challenges of tiny housing – of any housing, for that matter – are threefold:

1.     Physical constraints

2.     Spiritual constraints

3.     Urban constraints


More thrilling than a tiny house!

1.    Physical constraints


I’m tired of bumping into you all the time!

Not enough room to swing a cat.

– Naval saying referencing the cat-o-nine-tails

1a. Maneuvering around

The photographs of tiny homes concentrate on the exterior, or use wide-angle lenses, or tight closeups, all because it is more or less impossible to photograph inside a tiny house without revealing that it is, in fact, way tiny.


Cozy means close proximity: Melanie Sorrentino reading in their movable 150-sq-ft tiny home

What constitutes “tiny” continues to be a subject of debate among devotees. There are examples under 100 square feet. Anything over 500 is typically considered “small.”

In Levittown, you could buy a house with that few square feet.  Back then it wasn’t considered small.


But there’s room to expand, both the home and the family

Could I handle twelve months of banging my head on the roof when I wake up in the morning, clambering down the loft ladder in the dark, having no place to read in private while cabin fever set in?


Don’t wake up in a fright after a nightmare

[Continued tomorrow in Part 2.]

Vote bankruptcy in 2016!

February 8, 2016 | Bankruptcy, Chicago, Cities, Homeownership, Housing, Municipal bankruptcy, Politics, Public-employee pensions, Rahm Emanuel, Speculation, US News | No comments 177 views

By: David A. Smith


When you don’t pay your electric bill, the company shuts off the power.  When you exhaust your credit card, the company cuts you off.  And when you’re unable to prepay old bond issues, this becomes a problem for you only if you cannot sell new bond issues. 


And that is the problem now confronting Chicago, and certain to consume Chicago and Illinois politics, because the bond markets are speaking truth to debtors, as reported via a shot from the Chicago Tribune (February 2, 2016) and a next-day chaser from Reuters (February 3, 2016; red ink font):


Chicago’s troubled public school system on Wednesday had to slash the size of one of the biggest “junk” bond offerings the municipal market has seen in years and agree to pay interest costs rivaling Puerto Rico’s in order to lure investors into the deal.

Troubled Puerto Rico, which I previously profiled, has already defaulted on its bonds, and is heading into some form of colonial bankruptcy whose rules nobody knows.

The Chicago Board of Education managed to sell only $725 million of an originally planned $795.5 million of tax-exempt bonds, and yields on the deal topped out at 8.5%, a massive premium relative to higher-rated debt sold in the US municipal bond market and a clear indication of investors’ view of the depths of the district’s fiscal woes.

When you’re being paired with Puerto Rico, that’s as low as it goes in US government debt markets. And in fact, Chicago Public School debt is now being priced worse than Puerto Rico’s was when it was 21 months away from default.

The 8.5% yield for bonds due in 2044 with a 7% coupon was slightly below the 8.727% yield for 21-year bonds in the municipal market’s last big junk bond sale – a $3.5 billion Puerto Rico issue in March 2014.

But the school district’s so-called credit spread over the market’s benchmark triple-A scale was wider at 580 basis points versus 514 basis points for Puerto Rico in 2014, indicating investors are demanding a stiffer penalty from the Chicago Public Schools (CPS).

As bad as the spread is, worse is the widening of spread in the last two years, as shown by this smoothed graph:


Worse than the state since August, 2013

A little over two years ago, Chicago’s bonds cost 190 basis points above benchmark; now they’re 580 basis point above.  That’s three times the spread.


This fulfills a prediction I made a little over two years ago, in A fool and his bond market (December4, 2013), where I wrote about Rahm Emanuel’s protesting the rating agencies’ downgrade of his Windy City

Translating Fitch’s comments into normal language:


1. Chicago is broke.

2. Chicago has not cut its high unionized-labor costs (and 90% of its labor force is unionized).

3. Chicago won’t get help from (equally broke) Illinois.


The state not only has $95 billion in pension liabilities, it also routinely lets accounts payable accrue unpaid, to the tune of $4.2 billion by the end of 2013, according to S&P.


As I posted some years ago, it’s possible for a city to run out of cash, and when that happens, it’s the retirees whose checks stop.  Stop dead.

“Most investors I’ve talked to continue to believe they’re going to work it out and the city’s going to improve,” said Chris Mier, managing director at Loop Capital.


Confident man? Chris Mier

In such commentary I detected the noxious odor of mendacity:


“Mendacity is a system that we live in.  Liquor is one way out an’ death’s the other.”

Are the investors who say that ready to buy new Chicago bonds, or do they own current Chicago bonds, and are talking themselves into believing all is well?


Remain calm!

A fool and his bond market are soon parted.  Or soon should be.


All is well, don’t you get it?


This is happening now, and in fact Chicago was humiliated in its first bond market offering, so it crawled back at higher yields:


Wednesday’s sale came a week after the school system had to pull the deal in its first attempt at an offering amid worry by investors that the district could end up in bankruptcy.

Notice how Mayor Emanuel, who was so full of bluster and bounce two and a half years ago, has gone completely silent? 


Sell the image, because the reality is terrible

Of course, Mayor Emanuel hasn’t exactly been forthcoming with the voters, suppressing damaging information until after his re-election.


AHI blog posts on Chicago’s looming municipal bankruptcy

September 13, 2013: Next up, Chicago; 5 parts, predicting bankruptcy in the near term

December 4, 2013: A fool and his bond market; 2 parts, inevitable bond market shutoff

December 31, 2013: Sub-cities; 3 parts, widening spatial Gini coefficient in Chicago

April 15, 2015: A tale of two cities; 12 parts, fiscal collapse and city’s potential breakup

May 18, 2015: Chicago’s first domino,  Illinois Sup Ct’s rejection of pension reform law

Readers who are not familiar with the dynamics of financial markets may be forgiven for thinking, Well, eight and a half percent’s high, but that must mean Chicago will pull through somehow.  But that’s not how a bond trader looks at it.  He or she sees everything in terms of spread and default risk:

In contrast, a top-rated issuer’s debt would yield only around 2.70% on Wednesday, according to Municipal Market Data’s benchmark scale.


Up to date spreads

So a trader thinks, I can get 2.70% for an instrument at par, but if I buy one at 8.50%, how much value can it lose and still be better than 2.70%?  The answer is, a 68% drop, because 8.5% x 32% = 2.7%.

True this analysis oversimplifies, in that the yield it’s evergreen and the loss of principal eventually makes a difference, but it does so to make a point – the market is pricing in expected default.  We saw this in Jefferson County, Alabama, which went into and out of its bankruptcy a few years back.

AHI posts on Jefferson County

The perfect dung storm (September 12, 2011), Part 1, Part 2, Part 3, Part 4, Part 5

The financial ‘nuclear option’ (November 15, 2011)

The most important slow country boy in America (December 20, 2012)

Out of the muck (January 6, 2014); 5 parts

And the deal Chicago just did doesn’t solve the problem, or even begin to solve it – it just buys time, at premium rates, and with imminent potentially toxic consequences.


I can handle 8.5% — you got anything stronger than that?

CPS officials said bond proceeds will reimburse the district’s operating fund for out-of-pocket capital costs and free up $206 million by pushing out debt service payments. Portions of the deal to restructure variable-rate debt to fixed rate and finance-related interest rate swap termination fees were postponed.


So far nothing’s closed the deficit gap

“Along with the tough cuts announced yesterday and earlier this year, the sale of these bonds will produce sufficient proceeds to mitigate our cash flow challenges through the end of the fiscal year,” said CPS Senior Vice President of Finance Ron DeNard in a statement.


Explaining how making it to next year is the best they can do: DeNard

This news the Teachers Union greeted with its customary wisdom and restraint:

One day after the Chicago Teachers Union rejected a contract proposal from Chicago Public Schools, district officials said they would slash school budgets and stop paying the bulk of teachers’ pension contributions, CTU President Karen Lewis said the district’s action was retaliatory and an attempt to coerce union members into signing on to a deal.


Apparently saying ‘there is no money’ constitutes ‘an act of war’

“Due to their attack, we have no choice but to express our outrage at this latest act of war by rallying against CPS and the bankers who are siphoning off millions from our schools,” Lewis said.

Having previously exploded public-employee pension doublethink at length (ten parts), I will not rehearse the fallacies in Ms. Lewis’s bombast; it’s simply wrong.


CTU President Karen Lewis’s is opposed to tightening fiscal belts

Republican Governor Bruce Rauner on Wednesday condemned the district’s second attempt at borrowing, but denied trying to sabotage the system’s bond issue by publicly advocating bankruptcy for CPS.


Rauner urges Chicago to surrender to bankruptcy

“The numbers don’t lie,” he told reporters. “CPS has been a financial disaster for years. The balance sheet is stunningly bad. Now they’re looking at borrowing more money to cover operations.”

Chicago’s insolvency has long consumed the Illinois State Legislature and is likely to keep consuming it, with Governor Bruce Rauner pushing for the same type of state powers that Michigan Governor rick Snyder used to prepare the way for Detroit’s bankruptcy.

“[Mayor Emanuel] caved in the teachers strike 4½ years ago, and he’s sending the message right now [in contract talks that] he’s going to give them what they want and then say, ‘State, pay for it.’ We are not going to let that happen,” the governor said.

With Chicago and Cook County representing roughly half of the 118 state legislative districts, the city’s insolvency is going to dominate state politics, in not only an election year but also a Presidential election year.


The political arithmetic still says blue, but the city’s finances say red

Though the mud splatter will likely stop at Mayor Emanuel, his tenure as President Obama’s chief of staff, and President Obama’s touting of his deep Chicago roots, will encourage political opponents to pick up big handfuls of the Chicago mud and lob them at Democratic candidates. 


Now, candidates, let’s have a reasoned discussion, shall we?

Late on Tuesday, the district tried to assure prospective investors that revenue pledged to pay off the debt could continue to flow to them should the school district end up in bankruptcy court in the unlikely event the Democratic-controlled Illinois legislature would pass a Republican-sponsored bill permitting the move.

Chicago is broke; more than broke, it’s about to be cut off entirely from the capital markets.  When that happens, it’s like cutting the body off from water – death seizures commence.  All the idiotic lawsuits being mooted will not change this.  Eventually political survival will cause the state legislators, especially those from beyond Cook County, to disengage from defending the Windy City, and then bankruptcy will swiftly follow. 


Not financial death, the liberation of a spirit trapped in chains of past debts

Yuan to buy American housing? Part 4, Fall back on the tired old trick

February 4, 2016 | Apartments, Capital control, Capital markets, China, Exchange rates, Finance, Global news, Housing, Investment, Monetary policy, Rental, Speculation, US News | No comments 136 views

By: David A. Smith

[Continued from yesterday’s Part 3 and the preceding Part 1 and Part 2.]

You must not fight too often with one enemy, or you will teach him all your art of war.

Napoleon Bonaparte

Whenever a government decides to intervene in the financial markets – and modern governments are already intervening, for reasons good and bad, and with results more effective or less effective – they set off a chain of events that neither the acting government nor anybody else can foresee through to their conclusion.  But usually, as with President Nixon’s Wage and Price Controls, the results backfire.


But we’ve already cut back on shaving … pits too


It wasn’t for the wage-price controls – something else intervened

As a result, both Bloomberg Business (January 14, 2016) and a similar article and editorial in the Economist’s January 16 issue suggest that China’s efforts to prevent capital flight will fail unless the Middle Kingdom does the one thing that up to now has been ruled out of bounds.


That’s a head-scratcher

E.         In the end, China will have to devalue the yuan

China’s economic governance has been built on a premise that would turn Karl Marx in his grave: that the country can always run an industrial productivity surplus because people and machines make much more valuable products than it costs to have them do so.  In short, it’s not the capitalists who control the means of production, and not the abstract Platonic philosopher-king government, but rather the state-owned-enterprises (or said in reverse, the government-controlled monopolists).  If you and your friends have control at the top (laws, police, media, business) and can deliver either the reality or at least the widely held belief that things are getting better, then that strategy can keep the lid on, and underneath that lid can conceal a host of inefficiencies and corruptions:


Against lax lending

Gunther Schnabl, a professor at the University of Leipzig, says that lax lending merely keeps zombie enterprises on their feet: “If you do not have a hard budget constraint, you do not have an incentive to put forward dynamic, innovative investment.”

Even so, the most insular nation eventually succumbs, the more so now when social media and the ubiquity of the Hollywood-ized view of American decadent consumerism make the seepage of an acquisitive mindset inescapable.  So unless Chinese wants to wall itself in unreality like North Korea, it must make peace with the global markets, and that means getting voluntary foreign inflows to balance voluntary domestic outflows.

That is harder to do than it sounds:

One option is to lure money back by making the country more inviting to both Chinese and foreign investors. That would involve:


Should I really release you?

1.     Decontrolling interest rates.

2.     Halting directed lending to heavily indebted state-owned enterprises and local governments.

Neither of those will come easily to President Xi, because the former goes against his instincts and the latter against his friends and political entourage:


We smile at you only as long as you’re the money train

But doing so would:

3.     Loosen the Communist Party’s control over the economy.

4.     Harm some powerful domestic constituencies, like long-favored companies and provincial chiefs.

To do the right thing by repudiating the self-interest of those around whom you have consolidated your power?  That takes guts, and guts come from either megalomania, vision, or desperation.  So President Xi has shown neither of the first two, and he seems unready to accept the third, especially when he can staunch the flow, for the time being anyhow, simply by giving his central banker the simplest direction: Buy yuan. 

The IIF projected in October that the government would need to sell off more than $220 billion of its reserves last year to meet the demand for foreign currency. The actual number was probably closer to half a trillion. The nation’s stockpile of foreign exchange reserves has dwindled to about $3.3 trillion.

While that sounds a huge number, it’s not, especially when you look at this chart.


Spending $600 billion propping up the yuan for only 1¾ years

It can’t be easy for Xi to suffer the indignity of losing a fight against the world’s financial markets. That’s one reason to think he’ll try to escape the trilemma by restoring at least some controls on capital.  

Markets have no ego.  That’s part of why they win.

The cushion is shrinking. “Considering China’s foreign debt, trade, and exchange rate management, it needs around $3 trillion in foreign exchange reserves to be comfortable,” says Hao Hong, chief China strategist at Bocom International Holdings.

Mr. Hong, described by Bloomberg as the “man who called China’s boom and bust,” is quoted as saying, “all roads to hell are paved with positive carry [a shortage of global dollars].”


It fairly makes my hair stand on end

To University of Macau economist Vinh Dang, the answer is obvious: Because flexible monetary policy is essential and China is too big to wall itself off from the world, “exchange rate control must be given up,” he wrote in an e-mail.


In the long run, that has to be right, but before the long run there is the short run.

And the short run can be bumpy.

They say any landing you walk away from is a good one

F.         There’s ain’t no political soft landing

If I’m right – and your blog subscription money back if not! – then China’s fundamental premises of domestic policy are tottering.


Reality can be fooled only if we can wall ourselves away from the world

One of the big questions for the global economy in 2016 is what Xi will do next to stop the flight of capital, which threatens to sap funds from China when growth is already weak.

You can stop the flight of people much more readily than you can stop the flight of capital.  Which is why, among other things, that dictatorships function best in countries of extreme poverty.  (And of course, dictators believe in theft and plunder, both of which kill economies, so even if they take over a rich country, within their lifetime they will impoverish it.) 

HI blog posts on China and on foreign investment in US housing

The ultimate in ‘this time it’s different, Jul 18, 2011: 2 parts, Monopoly SOEs

A little learning is a dangerous thing, October 27, 2011: 2 parts, Hukou system

Capital’s bolt hole, December 22, 2011:  Influx of money into New York residential

Old before rich? May 2, 2012, 2 parts: Economy like India, age pyramid like Japan

Ex-mittances, August 17, 2012: French capital buying Manhattan condo’s flats

A theory of China’s cities and housing, August 23, 2012: 7 parts.  Read this one first.

Just outrunning the currency bears, September 24, 2012: Dollar as ‘least bad’ currency

China’s whistling tea-kettle, November 9, 2012: Flight of private capital

Runaway money train, July 22, 2013, 4 parts: Monetary policy out of control

Urbanization, meet displacement, June 13, 2014: Chinese buying Australian homes

Where the money goes, the people will follow, September 19, 2014: 3 parts

Live-in safety deposit boxes, February 10, 2015: Using apartment as bolt holes

Money is optionality – which is why dictators and autocrats fear it.

So the temptation to amp up command-and-control will be great.  True, a clampdown would jeopardize China’s ambition to become an equal of the U.S. in global finance.  But it would insulate China from the ungovernable swings of the global financial markets,

Yet here’s the thing: in the modern global-economy world, no country can insulate itself from other countries’ currencies.  Everybody is either borrowing foreign and spending domestic, or vice versa, more or less all the tie.  And in that world, all currencies will be constantly rising and falling, like any other commodity.

Embracing the uncertainty – surfing the chaos – is the province of the zen capitalist (if there is such a person).


Definitely a capitalist

Kevin Yan, an analyst at Stratfor, a geopolitical intelligence firm based in Austin, agrees with Alicia Garcia-Herrero, chief economist for Asia and the Pacific at Natixis Asia, that the short-term trend is toward closing China off from the world, but he’s more optimistic about the long term. “It’ll be opening and closing, opening and closing, but slowly moving in a positive direction, probably over the next 5 to 10 years,” Yan says.


Two foreign investments per green

To us that sounds plausible; to China that sounds nervewracking. 

The worst thing China’s leaders could do now would be to fall back on the tired old trick of supporting employment by building roads, bridges, and apartments.

Yet building, ever building, is the only thing you can do inside a country, and then you wind up with pre-packaged wastelands like Ordos.

And you get nakedly shorted:


There goes a billion pounds

Global financial markets, investor George Soros once memorably said, are more a wrecking ball than a pendulum.


I shorted them because they were shortable

He should know, he used it that way, making a billion dollars by shorting the pound in the ERM. 


Yuan to buy American housing? Part 3, Befuddled by free markets

February 3, 2016 | Apartments, Capital control, Capital markets, China, Exchange rates, Finance, Global news, Housing, Investment, Monetary policy, Rental, Speculation, US News | No comments 182 views

By: David A. Smith

[Continued from yesterday’s Part 2 and the preceding Part 1.]

Never interrupt your enemy when he is making a mistake.

Napoleon Bonaparte

Markets have a nasty habit of speaking truth to power, and for that reason, they are worth hearing, even when the power is the newly assertive nation of China – so as we saw in yesterday’s Part 2, the report in Bloomberg Business (January 14, 2016) and a similar article and editorial in the Economist’s January 16 issue suggests that China’s President Xi Jinping is getting into a breath-holding contest with those who do not breathe:


How long can you keep that currency up?

That’s understandable only given one premise that has become all too obvious.

C.        China’s leadership distrusts and fears markets

President Xi Jinping … seems befuddled by free markets, at times allowing them to operate and at times trying to throttle them—as with the circuit breakers that have failed to arrest the slide in stock prices.


Do as I tell you, got it?

In western countries, monetary and fiscal policy are decided by economists and others who are intended to be independent of politics; much is made in those countries, and in the World Bank and IMF, of the importance of technocratic and independent central banks.  That’s not how it works in China:

China’s central bank isn’t freestyling.  It takes its instructions from the government, which means President Xi Jinping.


Trust me, everything’s under control

Modern economies have a complexity beyond the comprehension of any individual and beyond the control of any government, and just as dictatorship is uneconomic, no single individual can out-think the market, because the market is billions of transactions every day, so the market’s OODA cycle speed is a hundred million times faster than that of a government. 

Judging from China’s stop-and-go policies, its leaders haven’t completely wrapped their heads around the idea that they must make a choice. They still want all three parts of the impossible trinity.

Worse, in fact, from the perspective of cycle speed if nothing else, is when power is concentrated from a government into a committee, and from a committee into a single person.

Xi has shrewdly consolidated power since his ascension in 2012.

The skills that enable one to rise to the top of the Chinese hierarchy are unlikely to be those of a market deregulator who is willing to ride out the fluctuations of unexpected market complexity.  Instead he seems likely to revert to what he learned in his youth, say a quarter of a century ago.


What lesson did young Mr. Xi take from this?

Some China watchers say the question of Xi’s direction is already being answered. “China will become increasingly closed to the rest of the world,” predicts Alicia Garcia-Herrero, chief economist for Asia and the Pacific at Natixis Asia, a unit of Groupe BPCE, France’s second-largest banking company.


Garcia-Herrero predicts a reversion to cultural history

“Xi Jinping’s mindset is one in which China is at the center of the world’s economy but not necessarily open to the rest of the world, or at least not vulnerable to it.”

While President Xi grapples with the unruly market, those who report to him are hewing to the party line:

Calls for a large depreciation are “ridiculous,” Han Jun, the deputy director of China’s office of the central leading group on financial and economic affairs, said on Jan. 11 at a briefing in New York.

There will be denial right up to the precipice.


Bark bark bark!

D.        Meanwhile, private Chinese are cashing out of yuan before the currency drops


If you think this is a dais full of white men who might be the Illuminati, you’re right

While China’s leadership holds its fiscal breath, others have already decide how to diversify their currency risk:

The Institute of International Finance estimated in October that net capital flows out of China would reach $478 billion in 2015. New estimates due this month could show even larger outflows, the IIF says.

That half a trillion dollars’ worth of outflow, remember, has migrated in the face of fairly restrictive capital controls – meaning it’s been moving quickly and decisively, and it’s been buying large scale assets, because otherwise you can’t possibly spend that much money in that short a period of time.

And is there any doubt where it’s been going?  Residential real estate in strong urban markets – Australia’s magnet cities (Sydney, Melbourne, Brisbane), London, and eight or ten US cities (New York, San Francisco, Los Angeles, Seattle, Washington, Chicago, Miami, and Boston for sure).


For a couple hundred million, we’ll put up your flag

AHI blog posts on China and on foreign investment in US housing

The ultimate in ‘this time it’s different, Jul 18, 2011: 2 parts, Monopoly SOEs

A little learning is a dangerous thing, October 27, 2011: 2 parts, Hukou system

Capital’s bolt hole, December 22, 2011:  Influx of money into New York residential

Old before rich? May 2, 2012, 2 parts: Economy like India, age pyramid like Japan

Ex-mittances, August 17, 2012: French capital buying Manhattan condo’s flats

A theory of China’s cities and housing, August 23, 2012: 7 parts.  Read this one first.

Just outrunning the currency bears, September 24, 2012: Dollar as ‘least bad’ currency

China’s whistling tea-kettle, November 9, 2012: Flight of private capital

Runaway money train, July 22, 2013, 4 parts: Monetary policy out of control

Urbanization, meet displacement, June 13, 2014: Chinese buying Australian homes

Where the money goes, the people will follow, September 19, 2014: 3 parts

Live-in safety deposit boxes, February 10, 2015: Using apartment as bolt holes

Beyond those actually expatriating capital, some capital sources simply are telling the Chinese government what it does not want to hear.  That’s true of Chinese individuals, and also true of Chinese companies:

During the boom years, Bank for International Settlements economist Robert McCauley wrote, a hypothetical Chinese multinational made money by borrowing at near-zero rates in the U.S. and Europe, converting the money to yuan, and investing in China at higher yields.  Now, he wrote, it was reversing course: borrowing more in yuan and holding more money in foreign currencies.


We forgot something

Why borrow at (say) 6% domestically, and invest at (say) 4% internationally?  There can be only two reasons:

1.     You think your country’s currency is going to depreciate.

2.     You’re willing to pay a huge toll to get your money out of your country.

Either way, it can’t be explained by interest rate arb – it’s a statement of anticipated currency depreciation.  An indictment, in fact.

With China’s growth outlook darkening and capital flowing out of the country, speculators have been betting heavily against the yuan.

Markets don’t give up.  Traders may go bankrupt, but for every trader who falls, another arises.

Yet this will not stop China’s leadership and President Xi from trying:

Alicia Garcia-Herrero, the economist for Natixis, predicts that permission to send or keep money abroad will be doled out more stingily in the future. The One Belt, One Road initiative to make China a hub of Asian commerce should have no trouble getting financing, she says, but an investment that doesn’t obviously serve the national interest could be rejected.  


A pipe(line) dream?

When I first read a description of One Belt, One Road, I thought to myself, Napoleon’s Continental System.


That’ll fix perfidious Albion

Having perhaps remembered his ignominious flight from Egypt after a failed expedition he brilliantly spun as a victory, Bonaparte sought to ‘blockade the ocean’ by limiting his conquests to anything he could march to on land

Chinese authorities will remain open to investing or extending credit outside the country when it’s fully under their control, predicts Garcia-Herrero.

Except it never is – credit outside the country is never under domestic control, because other governments have other laws, and the assets are elsewhere.

An example would be the nascent “panda bond” market, which allows foreigners to borrow money in yuan inside China.

Good luck with that: aside from the difficulty of writing rules that traders cannot maneuver aro0und, the external markets can always create (and price) a hedge to counteract the internal market.

Michael Every, head of financial markets research at Rabobank Group, called the rate spike “murderous” and predicted that things wouldn’t end well for Chinese authorities. Central banks “usually win a round like this, but lose in the end,” he told Bloomberg.


Michael thinks that markets win Every time

That’s the thing about markets – there’s always another round, and they always answer the bell for it.

[Continued tomorrow in Part 4.]