Tuesday, 7 October 2008

"Carnage" On The Stock Market

As I have highlighted in previous article, the deleveraging process has started. Banks, Companies and others have to sell their holding to pay off their debt. They cannot take more debt to pay off debt. The illusion time has come to an end.

What is painful, it's the synchronization of the fall with the global slowdown.

How far can the stock market fall? could it go as low as in 2003 or even lower? we can't rule it out. Remember in 2003, the financial system was still in good shape and household were still heavily borrowing for purchasing house, cars, gadgets... Bankers were still smiling.

Today it's different.

The financial system has had an heart attack. House prices have soared to level incompatible with future earning and employment growth.

Interest rates will come down, but banks will not lend as before as they have been hardly hit by the crisis through lower stock market and higher margins. The impact will be that the amount of loan for house purchase will be below average and interest margin will be higher. This will prolong the downturn on the housing market until the financial system, worldwide become healthy and sound. It will take time, a decade? one cannot rule that...Bankers are not smiling any more.

Unfortunately, Finland has come in this downturn with highly indebted consumers albeit with budget surplus. As highlighted by the Bank Of Finland and the ministry of Finance, should the consumer start saving then matter will get worse. I think consumers will start saving, especially if unemployment rise, house price and stock market fall...

But will come a time - 2-5 years? -, when birds will resume singing and bankers will get back their trademark smile, then nobody will remember about the financial crisis...it will then be "business as usual".

Update 1:
Let's learn some vocabulary: London Stocks Fall 7%, Germany Sinks 8%, Paris Tumbles 8%, Helsinki nosedive 6% by Mid day -08.10.2008


Andrew said...

Right now Finland needs first quality leadership. It has to be a concern that the finance minister is so young and has no experience of adult life in a bad recession. On the other hand the president seems wise and we need wisdom now.

"The financial system has had a heart attack" suggests the system is now very ill.

If a doctor told you after a heart attack that you would be fine if your heart kept beating what would you say?

The Finnish Finance minister mirroring the most powerful leader (and probably most dispised one) said yesterday Finland will be fine if consumers keep spending.

Another financial leader, Alan Greenspan said the US economy would be fine if house prices just rose 10%, that bubbles could not be predicted, and financial innovation was a good thing.

Ben Bernanke and US treasury secretary Paulson said "it was contained"

The Icelandic premier now confirms to us all that it is contained to planet earth and he wishes for God to help his fellow countrymen.


"Fellow countrymen

I am well aware that this situation is a great shock for many, which raises both fear and anxiety. In such circumstances it is extremely urgent that the authorities, companies, social organisations, parents and others who can contribute make every effort to ensure that daily life is not disrupted.

If there was ever a time when the Icelandic nation needed to stand together and show fortitude in the face of adversity, then this is the moment. I urge you all to guard that which is most important in the life of everyone of us, protect those values which will survive the storm now beginning. I urge families to discuss together and not to allow anxiety to get the upper hand even tough the outlook is grim for many. We need to explain to our children that the world is not on the edge of a precipice and we all need to find an inner courage to look to the future.

Despite this major setback the future of the nation is both sure and bright. What is most important is that the foundations of our society and the economy are solid, even though the superstructure has given way in the face of the present disaster. We have natural resources, both on sea and land, which will ensure us a good living whatever happens. Our level of education and the human resources which we have here are no less enviable in the eyes of other nations than our natural resources. By the same token, we will have the opportunity to rebuild the financial system. We have learnt from those mistakes which were made during that period of massive growth and that experience will prove to be valuable when put to the test. With a common effort and with that optimism which characterises the Icelandic people, we will emerge from these difficulties and make a new and energetic come-back.

Fellow Icelanders

The task of the authorities over the coming days is clear: to make sure that chaos does not ensue if the Icelandic banks become to some extent non-operational. For this the authorities have many options and they will be used. Both in politics and elsewhere it will be important to sheathe our swords. It is very important that we display both calm and consideration during the difficult days ahead, that we do not lose courage and support each other as well as we can. Thus with Icelandic optimism, fortitude and solidarity as weapons, we will ride out the storm.

God bless Iceland"

God bless our planet!

We are all Icelandic now!

HousingFinland said...

"Iceland said it got a 4 billion-euro ($5.43 billion) loan from Russia, pegged the krona to a trade- weighted index and nationalized the nation's second-biggest bank after the currency's slump and bad debts crippled the financial system.

So Russia is bailling out Iceland... astonishing...didn't know they had some kind of involvement in Iceland...

"Finland had been very critical of the countries that increased their protection of bank deposits."

How on earth they are critical in the fact that government are backing up the saving of their citizen...I don't get it. Si is the Finnish Good Student, want the other to fail badly since it behaved well during the crisis i.e cutting healthcare in the past 10 years to have not deficit (which is a mistake, as you can see people strating to complain of the welcare system and a total degradation of the hospital service level i.e look at the shooting spree and a lack of psychologist resources..well they did cut in public spending...)

HousingFinland said...

humm...it seems that the Russian Bail out of Iceland was just a rumour...

Andrew said...

"How on earth they are critical in the fact that government are backing up the saving of their citizen..."

My personal opinion here is:

In a fair world a country that manages its finances in a prudent manner can use its financial safety to attract bank deposits and can rely on its good track record to attract deposits when it most urgently needs deposits at a time of the worst world financial circumstances. The Finnish Financial services authority yesterday said that Finnish banks are currently attracting bank deposits as investors move away from shares and other investments.

Finland had a good record and had attracted some good new deposits.

Nordea today said Iceland owes them 15 million euros:-)

Insolvent banks need to go bust as per the Swedish plan rather than steps being taken that risk failure where governments are on the hook for their banks sins while the banks owners are endlessly bailed out while solving absolutely nothing at all.

No sane government of the people ever wants to be on the hook for the sins of its private and corporate citizens and yet this is what we risk moving towards.

Deutsche bank decided to finance building casinos in Las vegas and it seems the German Hypo and worlds? biggest mortgage lender has also not been acting in a prudent manner.

There are now in play forces at work that are unknown, unmanageable, and have loss making potentials many times even of the total debt of the USA and the laws of the land will allow them to have it all at any cost if governments are fully backing their banks losses. Today it is some deposits and then it is all deposits but when is a deposit an ordinary deposit and when is it just another liability of a failing bank that owes more money than there is existing in the entire universe?

Banks have to be allowed to fail.

I think that is the message here. Failure should get determined by how scared you are to put your money in the bank rather than how big the government is.

But as i have said before Finland is just a no mans land that is always part of somebody elses empire. We are expendable in this save yourself first world of financial weapons of mass distruction.

Rui said...

I just took 1000 Euro cash out of Otto machine, and put it under my pillow, now I sleep much better...

HousingFinland said...


That's the reason why the financial ministers agreed about raising the guarantee to avoid such behaviour because if people were to do what you are describing then bank will become insolvent as they mainly rely on deposit.

I think in the U.S. there were not far from doing that...it will be catastrophique, not only for the U.S. but Europe, China and the rest of the world.

But I think now the fear is overdone, it would mean that at some point any asset will be cheapear...so bargain will start, maybe from the year or two depending on the damage on the real economy...

They underestimated the linkage between international economies, now they are paying the price...The ECB should cut rate and as early as this week? it is a possibility.

Rui said...

Just used the money bought myself a new car. I try to blow away all my cash asap.

HousingFinland said...

Rui... we are not in an inflationnary environment...on the contrary, we might get into a deflationnary environment and that's the reason why the US rates are approching zero, Japanese rates are near zero and Europe will probably converge to that...since Assets, All asset classes, are deflating...