Tuesday, 30 December 2008

Monday, 29 December 2008

Consumer Confidence Collapsing

"Consumers' confidence in the economy weakened further in December. The consumer confidence indicator stood at -6.5 in December whereas in November it was -4.5 and in October -0.2. Prior to the past few months, confidence in the economy was last negative during the years of the recession of the early 1990s."

"The already gloomy view of the development of unemployment continued to worsen clearly. Expectations concerning unemployment and Finland's economy were at their lowest in the history of the Consumer Survey, in other words since 1987." - from Statistics Finland

Strange enough, although the consumer confidence is plunging to level not seen since the "Finnish great depression" of the 90's, The "Uusimaa" region seems to ignore those signal: More SUV on the road, unable to get a parking place in "shopping malls", people consuming as if tomorrow will be the end of the world.

Or is it the fact, that people are now hunting bargain, sales more than ever, in order to save few euro as their indebtedness is reaching record high (how crazy is to have allowed (FSA, regulators, Bankers, Central Bankers) people to get debt for 30 years +, and allowed them to purchase big items at levels not seen in human history).

I'm not sure how this is going to end, but be sure that politicians will do all they have in power to first preserve their position and second to allow the economy to keep some momentum even if artificial measures have to be committed (i.e it's not the current generation that will pay but the next).

In Iceland, they did the same thing. In order to get reelected, they allowed the system to over expand. The party lasted until an "Armageddon" collapse. At the end people have to pay a very heavy price for the foolishness of bankers and politicians. Now,about 2-3 generations are condemned to pay for something they didn't do, wanted or even see the color of it.

Tuesday, 23 December 2008

Iceland, "No, my little boy, it’s not that easy"

There is not enough words to describe the tragic, real time, story unfolding in Iceland.

Older are wiser and should guide society as long as there are fair and sensible. Today Societies are lead by business, law and journalist schools issued from known factories around the world. Like in Chaplin's "Modern Time", those "factory chain" created, and still create, people that are thinking, acting, conditioned and playing the same way, with the same rules and tools. Uniformization allows to create more coupled systems, where mistakes are amplified and hard to contained.

"All for one, and one for all", could clearly describe what has happened in the past decade or so. Bonus and wealth went into a concentrated amount of people ("All for one") while others, the majority, borrowed the wealth that was left over. When the system became instable, shaken by the amount of greed build up during so many years, it needed rescue. Government, is the hero that is appearing to get everybody out the hole ("one for all"). Government, led by politicians who will not use their money-lets be clear and transparent-, but instead tax payer money, to rescue bandits, disguised robbers, in the name of all.

In Iceland, in a land where politicians were mere plot makers and Bankers "Draculas" of modern times -sucking the wealth of real people and transforming a traditional, authentic society into one that is driven by McDonald type ideology and whose main heart replaced by virtual, borrowed values.

It all collapsed. The process was witnessed through many years by gamblers, state and institutions looking in ways of profiting of its destruction or its fall- For them, they were not people living in Iceland but instead assets.

And now the voice of the wise, speaking of the Icelanders: "The Writer and The Priest"

"Some Icelanders say the easy money of the past decade eroded the island’s traditions. A sheep farmer in the 1934 novel, “Independent People,” by Iceland’s only Nobel laureate, Halldor Laxness, preferred freedom from debt to any material comforts. His motto was: “I don’t owe anyone a penny.”

That philosophy may return, says Birgir Asgeirsson, 63, the priest at Reykjavik’s Hallgrimskirkja Lutheran church.

“I grew up learning that you work for what you get, but kids today just get what they want,” Asgeirsson says. “Now I can hear parents say ‘No, my little boy, it’s not that easy.’”"

Monday, 22 December 2008

Baltics Exposure, A Recap ...

"The euro zone’s exposure to the deterioration in economic conditions in Eastern Europe is not restricted to the real economy.

Euro zone’s banks total an exposure of USD 1,300 billion to Eastern Europe according to BIS data, while that of Swedish banks amounts to USD 104 bn, i.e. far higher figures than for American banks (less than USD 63 bn).

European banks hold USD 3,600 billion in debts on emerging countries, i.e. 14% of their total foreign debts, including 35% on emerging Europe, Turkey and Russia. Notwithstanding, there are significant differences between countries.

Austrian banks are the most noticeably exposed, as Eastern Europe accounts for 48% of their foreign debts (70% of GDP), followed by Italian banks (16.5%) and their Swedish counterparts (13.4%) because of their significant exposure to Baltic countries.

The respective commitments of French and German banks are far smaller, i.e. 4.1% and 4.5%, respectively, of their external assets. The substantial exposure of Spanish banks to emerging countries is accounted for by their commitments in Latin America (24.6% of their foreign debts).

All in all, the euro zone is exposed to the deterioration in Eastern European economies via two channels: on the one hand, the reversal of the cycle and, on the other hand, the huge size of debts held by some banking systems on this region."

So 2009 will see the first test of the Nordic banking sector since 1993. We certainly see if the foundations are sound and risks well managed.

2009 will be an interesting year. It will tell us , sometime in the second quarter, if the measures taken globally (interest rates cut, income tax cuts, bail out, etc..) are working.

All in all we will either see a stabilization then anemic growth , if interventions were successful.
If such stabilization doesn't occur and further unknown shock appear, then the deterioration risks will increase substantially and the impact will throw economies and countries into uncharted territories.

Let's hope that the stabilizer will work, which is highly probable due the extent of government intervention. Although, I will recommend a "wait and see" approach if you are planning to do big investment as the timing is risky unless you follow the "Warren Buffet" approach ...

Wednesday, 17 December 2008

PTT- 15% Drop, Only?

"Pellervo Economic Research Institute (PTT), Finnish thinktank, said in a statement Wednesday it saw inflation-adjusted house and flat prices falling by 15 per cent in 2009-11."

1-Speculative pricing - 10%

I think PTT, the economic research group has been and is disconnected from reality. 15%, is something that has already occurred on the ground in the past month. 10% could quite easily represent the growth rate sellers were pricing in the value of their "Home "Sour" Home" value - which you could call speculative pricing.

2-The third encounter

When price fall, usually they get a sharp disconnect with the trend and usually break their natural equilibrium. What is a natural equilibrium? is when there is a balance between demand and supply. Supply is on free fall to adjust to an "overnight", UFO type disappearance of the demand. Fox looking-Buyers are searching sellers looking-rabbits running away from the supply. -Carrot needed here- Maybe Fox-Buyer were smart at some point...but the wind is turning...The British, prince led, Fox hunting has started...

3-What do I do?

Duck... you are most probably going to get lots of information that will distort the reality. News - newspaper and TV news - are only good at distorting the reality according to certain criteria that are either political, religious, racial or editor-owner self oriented . So I will advise you to reduce your exposure to such media. Your existence will be better off, believe me(not polluted by those type of coverage that anyway doesn't improve your quality of life, on the contrary...).

Coming back to Housing, indeed you will get report that price will fall by 10-20%, in the same way they said that in 1990 that house price will not fall, to only fall 40-50% in the following years.

Personally, I limit myself into looking news only in a very seldom way- i.e I watch BBCWorld every 9 years, and reducing my exposure to YLE and HS as they clearly distort the reality, or lets say they present it in such way that you think there is no other alternative.

Instead ,I look at data oriented source of information : Statistics Finland, People, Government web sites, STT newsroom - at they are governed by rules that are promoting transparency, accuracy and integrity. Or at least they are making the effort to converge toward it.

4- Bottom line

There is no bottom in sight for a housing hard landing that will start next year. At the end it depends on how the economy develop or simply put, how much it will contract. This time you have a massive retirement issues combined with a slump in the global economy and a frightening Baltic economical development.

5- Bush- shoe-Irak

Now some might understand why the U.S. invaded Irak (pronounced eye-rac). As you all know, US got out from the 1930's depression, not because of the new deal, but simply because the second world war started and provided a massive export market and kicked in the engine. Today Irak could help, let's say in 5 years, to restart the U.S. engine as there is no chance of war in the "old continent"- the reason, the continent is old and german-french relationship at historical high - obviously the Europe foundation is helping here.

The shoe? see the first word in paragraph 3.

6- nothing
7- nothing
8- nothing

9- 1996

The housing price could revisited price set in 1996, in the worse (or normal?) case scenario. What is the worse case scenario? ask your collegue...he must have switch on TV news recently....

Monday, 15 December 2008

Worse Than 1990 , part II

"The Chairman of the Board of Finnair, Christoffer Taxell believes that the economic situation now is worse than during the recession of the 1990s and that the state should share in the risks needed to keep companies in business

Interviewed on YLE TV1 on Saturday, Taxell pointed out that the economic crisis is a global one, and no one yet knows how deep the recession may be.

He noted that as a country highly dependent on exports which account for about half of the national economy, the crisis will hit Finland hard. He warned that the squeeze on financing may lead to bankruptcies.

"Indeed, I feel that the importance of commercial financing right now is greater than imagined. Working capital, that is a lack of cash, is starting to become a problem in many companies,”said the Finnair chairman

I think I have highlighted many times that we are currently in the same time-point as 1990. So I have warned you (but not refrain you) to be very careful in taking huge investment today- Assess the risk and wait until the fog dissipate-

I have been saying, all along, that what we are currently observing is worse that what we have witnessed in the past two decade. What we have, instead, is not a local banking crisis that was restricted to the Nordic region in 1990 but instead we have in our hand a wide spread global financial crisis, the worse that has occurred in the past century.

At last, one courageous guy - The chairman of Finnair- is saying out loud what some have known for a quite long time. Some have been downplaying the risks, this was either for self-interest or politically motivated.

Nowadays it seems that everybody is aware of the problems. For some I think it's a bit late to know now, due the investment they made in the past. Nevertheless it's a very popular subject of discussion.

Regarding those discussions, I had last week a very interesting discussion on the cause of the current and older financial crisis. One very interesting finding and somehow original was the fact that around the turn of the previous century in 1900, one major innovation was electricity. This had contributed in an acceleration and modernization of factories which led to a massive reduction on employment in manufacturing as machine replaced workers. It brought as well, a mismatch between the amount of product that was created and absorbed due to rising unemployment. Somehow that could be among one of many causes the 1929 crisis.

The same similarities could be drawn at the turn of this century, the year 2000, with the wide spread use of the internet or ICT technology in general, that effectively allowed an acceleration of productivity and cost reduction through resource delocalization allowing on the way massive amount of service/manufacturing jobs to be lost (or to be).

Nevertheless, the cause and effect are always different and could come from unexpected sources.

Anyway this blog I hope has allowed you to understand the seriousness of the situation a bit earlier than it was reported in the Finnish media.
It allowed you to understand that what some say is not necessarily true, even if they have high profile reference- Some have mastered the art of spinning off: switching camp as the situation evolved and playing with words. Basically be critical although don't fall into those conspiration theory (At the end, don't lock yourself in A scenario)

On the other hand , I will warn that some will try to portray the situation worse than it is currently in order to achieve business or political point. You could assume, if you read between the line on what Finnair chairmain is saying, that he is preparing the public on a wider public support or bail out. This idea is not new. When the economy is doing well, no body put any brake and all the gain are privatized (some get massive bonus, some make a fortune).
On the other side of the coin, when the economy reverse gear and deteriorate, then public funds are called upon rescue in order to socialize the losses (read it as tax payer coming at the rescue of private company directly or indirectly. I would agree to do that, after assets of shareholders and directors are seized to repay the cost of the bail out, after all during good time they didn't create enough "cash assurance" for the company in case of bad time, instead use it to build lavish offices, and for some, boats, cars and houses. Why tax payer will have to forget that? if politician do, then the consequence will be harsh as minority political group will rise in strengh. At least it's what History has been telling us).

So in this current environment, you have to understand that the situation is serious but thing can change any time. You have to be pragmatic and not static in the way you see things: neither over optimistic or over pessimistic- you need to find the right balance. All in all you have to manage risks better than the latter two decades as today situation, if not stabilized, could turn to the worse.

Tuesday, 9 December 2008

U.K. Home Sales On Free Fall, Finland Next?

"Prices are continuing to fall fairly sharply"

"U.K. home sales declined to the lowest level since at least 1978 as Britain plunged deeper into a recession, the Royal Institution of Chartered Surveyors said."

Real-estate agents and surveyors sold an average of 10.6 homes in the quarter through November, the least since the series began three decades ago, RICS said today. A separate report showed retail sales fell in two consecutive months for the first time since at least 1995.

The Bank of England last week reduced the benchmark interest rate to 2 percent, the lowest in a half-century, as policy makers sought to prevent deflation from taking hold in the economy. With homebuyers shunning the housing market and a squeeze on bank lending, central bank Governor Mervyn King has refused to rule out cutting the rate to zero.

“The problem is partly mortgage finance, but the other thing is the state of the economy,” Simon Rubinsohn, chief economist at RICS, said in an interview on Bloomberg Television. “Prices are continuing to fall fairly sharply.”

After the U.S., Spain and Ireland, U.K. is now meeting with the reality: Housing Boom and Bust.

Like Dominos, other European countries will know the same faith..with a time lag as history has shown.

Thursday, 4 December 2008

Sweden , U.K. , ECB , Shock Interest Rates Cut

"Sweden's central bank slashed its key interest rate by a record 175 basis points to 2.00 percent on Thursday, a shock move to try to prevent the economy from sliding deeper into recession.

The cut, more than three times larger than any reduction the central bank has ever made, was a far bolder move than markets had expected. Most economists were calling for 100 basis points

So from 3.75% to 2%, what a move!, it looks like a panic or a shock therapy to resucitate a non-reacting credit market.

So economist models got it wrong - they thought that high debt was sustainable as Asian countries were willing to save and allow the other to consume - Unfortunately the adjustement was far faster than anyone would have predicted.

Bankers made the same mistakes as in the late 80's. They clearly learn the wrong lessons- they lent in the past 10 years or more, to consumers in a frenzic way amid stagnating real income.

I wouldn't be surprise to see the ECB following in the same foot step, slashing rate to 2% sooner than people think as the situation could even be worse than the one in the U.S. . The U.S. starting correcting while the global economy was still growing...Europe will correct during the worst time possible...

2% is the first step, I think we could go toward the 0.5% by 2010, and follow the same "quantitative easing" as Japan, in order to put a floor to the debt deflation process...

Now, not sure about the implication on the Finnish economy...since the Swed have their own central bank, therefore are more agile than the Finn. Is that a race to attract capital inflow?, a way to devaluate its own currency to boost its competitiveness? ... time will tell.

Some updates concerning the U.K. :

"The Bank of England cut the benchmark interest rate to 2 percent, the lowest level since 1951 as lenders rationed credit, pushing the U.K. economy deeper into a recession.

The Monetary Policy Committee, led by Governor Mervyn King, reduced the bank rate by 1 percentage point, the central bank said in London today. The move matched the median forecast of 61 economists in a Bloomberg News survey. Sweden’s central bank also cut its rate today by the most since 1992.

“Conditions in money and credit markets remain extremely difficult,” the bank said in a statement. “The committee noted that it was unlikely that a normal volume of lending would be restored without further measures.”"

Indeed, it's all in the "Shock and Awe" technique... it's just reflect how bad the situation is. Obviously, it's not going to take any effect in the very short term but all the hopes are about the medium term: 2-5 years, that the current stimulus will prevent Economical and Social "Armagedon".

How about Europe?:

"The European Central Bank delivered the biggest interest-rate cut in its 10-year history (0.75% from 3.25% to 2.5%) after the economic slump deepened and the inflation rate plunged."

First, It worth to note that they will deliver more in the future. So for the moment, it's just a warming exercise as they need to keep some ammunition to deliver in January further cuts when the situation will seem or is about to get out of control.

Second, they don't want to see the Euro plunging against other currency i.e they will try to keep interest higher than the rest (UK, US) .

So for the moment, tighten your belt, keep calm...at least until 2010, at best or 2015 at worse.

Wednesday, 3 December 2008

FSA: "Drink With Moderation"

"The Finnish Financial Supervision Authority said in a statement Wednesday that some households' debt encumbrance was "alarmingly high".

The FSA quoted its survey as indicating that about 18 per cent of Finnish households used more than half of their disposable income to service mortgages.

"That is a high figure," said Jukka Vesala, a deputy director-general at the FSA.

'It was some degree of a surprise for us.

I suppose, as all the regulators and watchdog around the world, they were either legitimaly or intentionnaly sleeping.

I think it's a surprise to hear that it surprises them : "a surprise for us"...but again doesn't FSA stand for "Failing Still Again" since they have got a so poor track record. At some point you wonder what those agency are overseeing since at best they notice the problem, after the event, when it burst in daylight. Is that due to the famous bureaucraty or/and incompetence or/and strategy.

So they notice the problem, surprisingly late. What they do about it? nothing really except maybe trying to extract tax payer money to create a net for those who behaved quite clearly irrationally (not only debtor but creditors that allowed this to happen).

It's a little bit like a pikku joulu...people drink and drink, the barman (creditor) give more drink...and it seems that the night will never finnish so people keep on drinking, the world looks great...until morning. A big headache and a realisation than you were better off not drinking...so you try to handle the headache for few days, and promise you won't drink any more..until 2 weeks passed and start again. Well just transform day in years and you have a typical credit cycle (housing, stock cycle with the usual boom and bust).

So If I was the CEO of the FSA-AA (Finnish Special Alcoholic Administration Association), I will advise : "drink with moderation"