Tax Payers On The Front Line

"The unemployment contribution, which is automatically withheld from pay, is expected to rise to 0.9 percent from the current level of 0.2 percent. Employers’ fees are also expected to rise, according to Finland’s Unemployment Insurance Fund."

"The hike translates into the average taxpayer shelling out hundreds of more euros every month."

Is that "lemon" socialism...trying to squeeze out any good spirit left out of the average tax payer...so it will be an endanger species pretty soon, on the same level as once a great animal: the dodo...

Is 1% key interest rate too high for Finland?

"Sweden’s Central Bank Cuts Key Rate to Record 0.25%

Sweden’s Riksbank unexpectedly cut the benchmark interest rate to a record low 0.25 percent, predicting the rate will hold at that level until autumn next year, and said it will offer a financial package to banks." - July 2 - Bloomberg

In Finland, last inflation reading was 0% in May, amid strong downward pressure on almost all prices (ranging from food price, real estate, rents, car to various type of services).

If it is not deflation, it feels like it.

Arguably in 2004-2006, European interest rates were to low for Finland and resulted in a massive credit expansion - a double digits figure that fueled almost all asset prices.

Nethertheless, congratulation Sweden...devaluating your currency has allowed you to become competitive against Finnish companies...that is the price to pay for Finland to have adopted the Euro.

Red Alert : The ECB Liquidity Deposit

"OVERNIGHT DEPOSITS with the European Central Bank (ECB) have surged to a five-month high, suggesting banks are hoarding much of last week’s massive injection of ECB 12-month funds.

Commercial banks deposited €236.2 billion with the ECB on June 26th, the highest level since since January 19th.

The Frankfurt-based ECB last Wednesday lent €442 billion to European banks at its benchmark rate of 1 per cent, doubling the liquidity in the banking system to €897 billion.

The ECB hopes commercial banks will lend the funds on to companies and consumers, which would stimulate spending.

However, after flooding the money market with a record amount of funds, the ECB is now grappling with the most difficult part of its operation: making sure the money fuels economic growth.

ECB executive board member Lorenzo Bini Smaghi and governing council member Axel Weber both told banks last week that they should toe the line after the fund injection.

“Now they have to pass it on to the real economy, make loans to firms,” Mr Bini Smaghi said.

“It will be up to the relevant authorities to ensure that they do.”

Mr Weber said that, if central banks’ efforts to kick-start the economy failed because commercial banks were too cautious in lending, central banks could bypass the commercial banks and take more direct measures.

“I assume that a credit crunch is avoidable, if banks co-operate,” he said. Mr Weber did not spell out what action the ECB might take if banks did not co-operate. But one option would be for the ECB to lend directly to companies, as the US Federal Reserve and the Bank of England are doing.

Mr Weber said he saw no need for fresh action “for the moment”.

On the one hand you have the media echoing that "the worse is behind us" and on the other the European Central Bank is working on the background to keep afloat a system , that will collapse under its ill designed regulatory and banking architecture, if more "blood" money was not injected.

So to summarize in a medical terms, the patient aka the economy had a heart attack in October, it got a electrical shock treatment (unseen low interest rates since the Cro-Magnon) to resuscitate him - remember the economy was on free fall in the first quarter.

Now the patient is artificially kept alive by periodical injection of blood (money) while no one is sure if the vital function are damaged or not - nobody at this stage want to know - it could adversely affect the confidence.

Have you seen Frankenstein? well that's what currently the ECB and the FED are engineering...some form of creature that no one knows how it look like and worse how it behaves...I have to watch again the movie to check the end...

Well I'm wondering why on earth I'm still putting or taking loan from my bank where I can get from the Ultimate Central Bank 1% rate and on top of that be sure that the bank will be around in 5 years time - after all technology allow that nowdays and they seem to be less greedy... so not sure about the rest of the banks, why do you need them anyway? they have just added noise and instability to the economy- they lent irrationally in 1985-89 to then collapse and being rescued by tax payers in 1992 - they fueled the tech boom by lending to shadow tech entities and public investment fund in 1999-2000 and now to fuel a once in life time world wide housing bubble in 2004-2008 where a correction was overdue at that time...

So maybe just in case we should call it WWHB I, you never know that lessons get forgotten and overwelmingly taken by greed once again...maybe in 20 years time we will have again WWHB II.

Risk Management, A Survival Story

Finnish unemployment rate - May 2009

The dynamic of the Finnish economy has changed radically in the second half of 2008.

Let's go in the past and let's revisit shortly the 1990's. During that period,the Finnish economy went through a total transformation, from a closed economy toward an open and technology led economy. It allowed the country to survive its worse post war crisis.

Today we are in a similar period, if not worse. What would take finland to starve the coming "depression" before it takes the currently fragile economy by storm?

First let's highlights few points:

-The household are highly endebted, the total endebtness is even greater than the level reached in the 1990's.

-Corporate are highly endebted and now face raging global competition. Corporate are fighting their survival while easy and cheap corporate financing is something of the past.

-The ageing population and its financing as well as a change in the consumption habits will be very challenging and will be a drag on the economy.

-The level of government debt to GDP will be greater to what it was in 1990, and could therefore bring an additional parameter of instability in the years to come.

-The global econony is experiencing a synchronized slump that are mainly hurting export oriented economies which Finland belongs to.

In this kind of environment, what would the investor/consumer do?
The best strategy is observation as you don't know the next move from this "invisible enemy" i.e the economical deteriorating further and faster.

Observing that stabilization has really occured which is not currently the case as the stabilization is not organic but purely artificial maintained by central banks and government stimulus. It works in the very short term but it will not replace the private sector in the medium and longer term.

Coming back to the housing market, in my opinion, it will be very foolish to buy or invest in real estate as it will be the most hit asset during this current severe economical readjustment.

If you need to buy - because of extraterrestrial forces - then you should wait at least a year until the dust has settle. This is just a common sense observation and could be rewarded by few tens of thousands Euro. In fact the probability of having housing price higher in year time compared to the current period is nil, the probability to have futher correction is very high and very likely.

Some are afraid that interest rates will be raised as echoed by local banks lately - foolish. Interest rates will likely stay at the same level as they are now, they could even be a non negligeable probability to have them lower if the economical turmoil increases.

Breaking News : "leaving the sinking ship?"

Sakari Ahdekivi, Chief Financial Officer of YIT Group has been appointed as CFO of Tamro Group. Sakari Ahdekivi will start in his new position as of September 2009 and will continue working at YIT until then.

Read it as the CFO of YIT has resigned and is leaving to TAMRO , a pharmaceutical company.

"Sakari Ahdekivi joins Tamro Group from YIT Corporation where he has been the Group CFO since 2007"

A good move as the construction industry has had a multidecade boom that has finally reach its maturity - mainly due to the second world war baby boomer who are entering into their retirement age while their children have created this last construction bubble. So Pharmaceutical will definetely be a good growth area in the years to come.

Irrational Exuberance : The Finnish Consumer

"Statistics Finland" has asked to a "basket" of consumer several questions in order to build up the consumer confidence index.

One question was, Is it a Favourable time to make major purchases at present?

The answer was a overwhelming 36.1 points having in mind that all time high was 37.7 and all time low -14.2 which was reach last fall.

First, it has to be noted that we don't really know if the people interviewed are really representative of the population - so clearly it is not a scientific method that is being used, it is more like predicting the weather for next month.

Second, an all time low in interest rates combined with the fact that most mortgage rates are linked to variable rate is currently boosting purchasing power and to that combined with the media "green shoot" paradox and a tsunami of almost real fake sales (i.e shoes that had max price of 100 euro a year ago are now price at 130 euro with a 20% to 30% sales, another example is the amount of really "crap" quality clothes that has flooded the shops to satisfy sales consumer hunger)

Third, at the end, what does that really mean making a major purchase? Since retail sales are on free fall, permit building collapsing, car sales at almost pre war levels and housing price declining.

I would assume that major purchase at present is about "the beer" mainly influenced by the weather which happen to be exceptionnaly good.

After a better reading of the statement, I extracted the following :

"In June, many households had plans to purchase, among other things, home technology during the next six months. Sixteen per cent of households were fairly or very certain to buy a car and 7 per cent a dwelling during the next 12 months. In last year's June the corresponding proportions were 16 and 8 per cent"

First to put together people that have "fair" and "very certain" buy feeling is strange, a little bit like mixing cow and bull, and hoping to get milk out of all...

To be franck, If I put as a title irrational exuberance, is simply because the Finnish consumer have been conditionned to live in a "fairly certain" begnin economical condition, a "V" type of recovery that state that crisis are mild and business as usual resume very quickly i.e inflation rising up, housing price resuming their upward trend, wage rising up and unemployement falling... As you may know by now, I do not believe a second about such scenario.

I believe more in a "W" type recovery or actually a "VL" type recovery.

In a "W" recovery, the first leg of recovery is mainly due to central banks and government pumping money into the system but the effect is short lasting and the fall resume. Ultimately a recovery restart after the economy has readjusted itself i.e less leverage, sound bank practices...

In a "VL" recovery, the first leg is similar to the "W", so after all the "legal doping" simulus is through to the economy, it fall back even lower since the growth in the past 20 years were just artificially created by easy monetary, currency manipulation and high leverage on institution and household and to that you add the demography issue that kicks in.

In Summary here is a simple forecast for the consumer confidence, a little bit like statistics finland methodologie, I used "Paint" software model combined with the help of one of my most trusted and reliable adviser, my barber:

Finnish GDP Casino Roulette

The Organisation for Economic Cooperation and Development (OECD) said in its latest outlook on Wednesday it expected Finland's gross domestic product (GDP) to contract by 4.7 per cent this year and to grow by 0.8 per cent in 2010.

In its previous outlook, made public in December, the OECD had forecast the Nordic country's economy to grow by 0.6 per cent this year and by 1.8 per cent next year.

The Finnish finance ministry said last week it saw the economy shrinking by six per cent this year and growing by 0.3 per cent next year.

...and my barber is predicting a 5.1% GDP growth..and while walking down the street, I asked kindly a grand mother what does she think about the Finnish GDP, she look at her watch and told 4:50 warmly...well I suppose she meant 4,5%....
In the meantime, Housing Finland models are as well pretty accurate as there are high tech based - an old mysterious christmas crystal ball that said it will be 3.79%...

The truth is that no one has any possible clue about where the Finnish economy will be in the next 12 month since it mainly depends on how the other economy behave, how healthy are our partners (gosh, our friend swedish are in deep sh**t with their eastern european exposure, the Russians are playing Russian roulette with the Rubble and rely on an unrealistically high oil price in the short term ...) - So highly and tight coupled economical systems, that's what we have in our hand - an architecture that was created with instability at its core - grossly reliant on an ever expanding external demand - an open economy that could slowdown tremendously if the global customer decide to reduce their "surrealist" binge comsumption, and stop pilling up debt as it occured in the past 10 years.

So -1,-2, -3,-4, -5, -6 , it's a bit like the start of the spring summer in finland, no one knows if it's going to be mild or freezing...but one thing is sure after a bottom there is only one direction, it's up...and that time the politicians and economist will congratulate themselves since the recovery is on its way ...hoping that people have forgotten the greed, the corruption, the excess that occured during a period where the normal citizen have had to pay the bigger price ("socialize the losses and capitalize the gain")

PS: note the strategy of the finance minister, you predict a catastrophique number -6% to come back later on in the year saying it's not that bad we have -4% ...which is in fact a catastrophique number - psychology, politics and economics all combine to deceive the mind.

Politics, Real Estate and Corruption, Part 3

"The Espoo City Manager Marketta Kokkonen and the city's Director of Technical and Environment Services Olavi Louko have denied allegations of bribery violations arising out of official trips they have made.

The National Bureau of Investigation, Finland's central criminal police arm, has suspected there may have been infractions, and has almost completed a preliminary investigation into the matter.

The criminal investigation centres on sixteen official trips made by Louko, one of which Kokkonen also took part in.

It is understood that the police enquiry was launched by a request at the end of last year from Espoo City Councillor Kurt Byman (Ind.).

He passed material to the police concerning 125 trips made by Olavi Louko between 2001 and 2008, examining the parties arranging the trips and events and their links with the City of Espoo.

Byman has claimed that construction firms and developers have entertained Louko and in so doing have received large tracts of land for development from Espoo. Louko has denied the claims.

Kokkonen has been the City Manager of Espoo since 1995."

Looks really like we have reach the end the real estate cycle as usually it terminate with the discovery of various criminal cases and put into light the high degree of corruption in this field.

I can't believe that the "rating agencies" put Finland as the least corrupt country in the world in the past decade...they were so blind or so uncompetent.

Politics, Real Estate and Corruption, Part 2

Political, Real Estate and Corruption - Part2

"The Local Government Pensions Institution (KEVA), which is one of the players in the controversy over election campaign financing, rents apartments to four Members of Parliament."

Again the pension fund messing up withreal estate- Do they really think that money that pensionnner or young worker have been paying can be used for personal purpose- do they think it is money at their disposition- utterly discouraging, staying polite...

"Minister of Transport and Communications Anu Vehviläinen (Centre), Minister of the Interior Anne Holmlund (Nat. Coalition Party), and Centre Party members of Parliament Hannes Manninen and Mirja Vehkaperä all have rental apartments owned by KEVA, which they use while they are in Helsinki."

"The rental terms are the same as for any tenants, except for Manninen, who pays EUR 412.39 a month for his 42-square metre two-room flat in Tikkurila in Vantaa. One possible reason for his relatively low rent could be that the lease dates back 14 years."

I would like to know as well how much and what type of property they own and the type of financing they had to contract in order to purchase them.

Corruption and real estate Part 1

Alko Taxi - Alkotaxi !!

For the past few weeks an Alko taxi, a van painted in a garish yellow, has been delivering Estonian alcoholic beverages to thirsty dwellers in the capital city region.

Customers place and pay for their orders online. To date some 50 orders—mostly in Helsinki—have been placed with this unconventional drink-dispensing service.

Vasili Visnapuu, who’s in charge of the cab's deliveries, says the business is legit as the alcoholic beverages are delivered for free and because the transaction occurs on the internet.

“It would be illegal to import alcohol for sale in Finland. The purchase is actually made in Estonia, we simply don’t charge for delivery,” says Visnapuu.

The state versus Visnapuu... Would the state lose its market share from new type of entrepreneur...it seems so!

Good luck for him as he is bringing a touch of competition into this closed - cartel oriented - market.

We keep on talking about Finland being an open economy - so please let's make it happen.

PS: ALKO is a monopoly set by the state to control the sale of alcohol and most importantly to receive all the profit derived from heavy drinking,binge, sophisticated and social drinking.

Mind The Gap

"Lemminkäinen Group's Oy Alfred A. Palmberg Ab has made agreements concerning the construction of several new housing sites.

Espoon Kuusama, a 41-unit apartment building completed in May in the Laaksolahti district of Espoo, has been sold to Tapiola KR IV Ky, a real estate investment fund managed by Tapiola Real Estate Ltd."

They can sell to to private people as the demand has collapsed thus the only alternative is to sell between investors -most notably linked to Pension Fund (Tapiola Pension fund investing through its real estate branch?) - Well there is a Gap to fill, I suppose.

The other explanation is of course a "run to cash", the property developer need money and is not able to wait otherwise quite few bankers will lose their sleep with the insolvency shadow in the background. Who said that the market was back to normal and that sales were back to last year level?

"As a follow-up to the deal, Oy Alfred A. Palmberg Ab and Tapiola have agreed on the construction of a new rental housing site in Viertola, Vantaa. The 68-unit apartment building will be built on a site owned by Oy Alfred A. Palmberg. Planning work will start in August-September and the site is expected to be completed in November 2010."

"The construction of an 18-unit apartment building (As Oy Helsingin Lammastarha) has begun in the Fallpakka district of Helsinki for TA-Asumisoikeus Oy. In August-September construction work will start on a 26-unit apartment building (As Oy Helsingin Hevoshaka) in Fallpakka and a 38-unit apartment building (As Oy Espoon Esikko) in the Laaksolahti district of Espoo, also for TA-Asumisoikeus Oy."

So lots of rental supply coming in the year to come added to that to the glut of unsold property - I am wondering if we are going to see the first rent deflation in the Finnish real estate history - probably.

The same will apply to the commercial real estate where the number of offices being build has reach an extraordinary level - expect offices rent to drop as well as their value (which will probably ripple on Banks profits)

"The project is still awaiting confirmation of funding from the Housing Finance and Development Centre of Finland(ARA)."

Quite funny - Tax payer money is still on the line otherwise AAP cannot build since it doesn't meet its profit target (where was the fatty profit made in the past 15 years? (distributed as dividend and large pay to shareholders and executives?)

Politics, Real estate and Corruption

Millions in municipal pension funds invested in Nova Group projects.

"About EUR 20 million in pension savings for municipal employees was invested in a project of real estate development company Nova Group.

The approval of the investment was put forward by Markku Kauppinen (Centre), CEO of the Local Government Pensions Institution (KEVA).

Kauppinen’s links with Nova Group were put in a new light when it came out that he was also present at a discussion held at the Prime Minister's residence on raising funds for the Centre Party’s 2007 Parliamentary election campaign.", HS

No comment except that it is a disgrace to use Tax Payer money for political ambitions or to bring wealth to a small group of people.

Anyway have a nice - honest - Mid summer !

The Truth About Current Finnish Housing Market State

Yesterday, randomly I was head to head with huoneistokeskus and various real estate high representatives talking UP the housing market...Well when I say head to head, there was separation between us : my TV screen...indeed they were parading in the YLE channel - as usual.

So for them it's back to normal..."ouch" I thought - when I heard that (well after a real time translation, as I asked total freeze in the room and requested a detailed transcription from Finnish to any other easy-to-learn language i.e English, Sami)

So after this "ouch", the few neurones I have still left hinted me (quite few were hit badly by the changing weather in Finland - from +30 degres celcius to +2 in about 2 days) that I should show the lastest hard data about what's going on in the Finnish real estate market.

So here we are...and as a hard fact, you can see, on top, this table that shows you clearly the downward trend on the loan growth. (here is the source if you are willing to dig into the details : BOF)

So loan stock growth is plummeting following sharp drop on interest rates (from a high during the peak of the bubble in 2005-2007 to now, the growth rate has been divided by 2). Less and less people are willing to buy since the music has stopped playing and house price has started their downward trend. What is important is the dynamic or the trend since it tells about what could happen in the medium term...

Conclusion, the market is not recovering and as I said do not expect it to recover until :
1- the unemployment situation stabilizes - so until at least later in 2010
2- well after the economy recovers which is far from being the case - maybe after 2011 - I say maybe because there are worse alternatives.
3- Housing permits grow again, which is currently not the case and actually has corrected quite sharply.
4- After a further price depreciation of at least 20-40% in the next 2-4 years

This table show another interesting point, the relation between interest rates and housing loan growth (and price) - usually it's pretty uncorrelated. In fact House price grows when the economy has well recovered and is growing but it usually drops when interest rates are falling or are very low levels (the reason being that interest rates stays depressed as long as the economy is).

Now do not be fooled by those kind of media circus - people will always advise wrongly at market top - the same happen in the stock market where the target is the public and the beneficiaries are the institutionals and banks. Unfortunately people keep on falling in those kind of traps - maybe people have short memory but in todays internet capabilities it's unforgiveable.

How Does The Government Fight Deflation? ...

Well simple...we have the following equation:

hypothesis : The Finnish government is at the head of an Alcohol cartel called ALKO - as well as a gambling cartel (which soon will include online poker)

Inflation = funtion(X + Y + Z + alcohol tax + tobacco tax + oil tax)

Since X Y Z are plummeting due to a plummeting demand, highly undebted household, there are only few variables to play with.

Since you want to massage the data in order not to anchor deflation, they should then try to keep afloat the inflationnary components.

- Oil tax was raised in early 2008 by 10%
- rent for subsidised flat was raised by 8%
- Alcohol Tax will be raised in autumn 2009 by 10%
- Tobacco Tax was raised
- Electricity price was raised (irrationally, against market logic) by Fortum, a partly owned state company.


At some point you will really wonder what the data really mean as the rules change or are artificially manipulated to show what people want to see or hear.

PS: The other way to fight deflation is to create the ground for hyperinflation - sowing the seed of the next crisis (i.e keeping the interest rates very low, increasing government deficit)- At the end, you hear about price stability but in the past 30 years we went from bubble to bubble where prices were absolutely instable...