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.

10 comments:

Andrew said...

I think many aspects of this crisis are related to banks and other parties like construction companies wanting bailouts.

As interest costs come down banks that lent freely can hold back passing on the costs and create more difficulties than there need be. And obviously their actions create wider effects.

In NZ there is shameless media distortion of figures for example for the next 12 months, there were 26% farmers expecting conditions to improve. 44% unchanged and 29% getting worse. The story was hysterical 'collapse in confidance' with net 3% of farmers saying things are getting worse'. Never mind the 70% of happy farmers with 54% remaining fully invested and 26% increasing investment - no mention of that. This is obviously the way to get a bailout. But it also creates a reality. Bit by bit if the media hammers away at this night and day they create that reality.

After a while even a person who attempts to be informed no longer actually knows what is real and what is just spin unless they actually visit firms and have inside contacts. The banks here fore example are not all having problems. Some are. But the media is full 'credit tightening'

In Finland many firms have either permanently or temporarily laid off workers. At this point in time we dont really know what is going to happen in March and beyond. When Wartsila reports at end of January it will be for me an important reality check as to what they say then, compared to what they said in late November when they were amazingly optimistic.

Rui said...

Ha! Ha! Ha!

Interest rate has dropped. http://www.kauppalehti.fi/5/i/porssi/korot/

I bet next spring we see housing loan interest rates drop to 2%.

Anonymous said...

http://virtual.finland.fi/stt/showarticle.asp?intNWSAID=20578&group=Business

"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."

That is 5% a year...

Island Crow

HousingFinland said...

Hi "Island Crow"

Nice to hear you again- Thanks for the link, I made a short entries, where I put some views on how to treat such output from "thinktank" or "tanks" simply put ;->

HousingFinland said...

Andrew, I agree with you. Information should be deciphered and filtered as some much noise pollute the "right" information.

The good thing is that we have internet. So the news "cartel" have seen their power lowered but still influence, unfortunately, a vast majority of the public.

Internet allows you get different insight and learn what the news decide to censure or transform. Although, I'm not sure for how long search engine will not start their own either self or forced censure. Hopefully this time is still far ahead.

September and November saw a ceasure hapenning. The world in September and November are different especially after the collapse of Lehman that has speed up the credit downturn.
Now it's true that company is highly reliant on its management and vision. But with today global consumption collapse, the challenge has shifted from gaining market share to just surviving and securing financing for a year or two, hoping that a recovery is on schedule.

So the dice have been rolled. No one can clearly tell the outcome but everyone will agree on one thing: risks of further meltdown is increasing.

Andrew said...

Credit24

"Thanks Credit24 for helping me and my baby enjoy Christmas"

http://www.mcbfinance.com/content/investor/board.asp

Andrew said...

Just to clarify. My wife described the credit24 add and we thought it distasteful to prey on people marketing debt like that at this time of year.

HousingFinland said...

Hi Andrew,

I will look into that. I almost thought it was some kind of advertisement ;->.

In Todays environment, it will be crazy to add more burden in the form of credit.

If banks are not willing to lend, i think it's more about people not willing to take on more debt.

Without debt the system can't work.

You wonder after all, if we don't have in our hand a massive Ponzy scheme...

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