Monday, 12 January 2009

Clearly NO to Inflation pressure

It's just an anecdote but worth to mention. The idea is that certain price can be sustain only if there is a demand for it, or an expectation that the price is right or will rise further.

Today I received a phone call from a nice lady (based on the voice) working for Welho, a cable TV operator.

-She told me that the TV package I'm using will be phased out. I have been using this package for the past 5 years and I have been paying 20 euro/month.

-So I ask, what was the alternative in order to keep at least 2 channels, the one I was interested in.

-She proposes me one package with a price tag of 30 euro/month.

-First I made her notice that it is a 50% rise in price. Second hinted that most probably she will lose a customer if she didn't find an alternative as the price rise was absurd. So I change the roles, I gave her the alternative of either keeping me as a paying customer or get a 100% drop in price.

-Since her voice seems to be nice, I kept polite. I told her , that it will be fine to automatically cancel my subscription at the end of the period.

Service or product producer have been thinking that customers have a static behavior and somehow are product "addicts" i.e cannot alter their consumption behavior. I think they will be surprised to see how wrong they are and will find that their assumptions are wrong as we are slowly moving from an inflationary behavior toward a deflationary one where excesses are being corrected in all product or assets classes.

In fact, during the period that we are know entering - a deflationary one - the pressure to lower prices are rational. As the demand has literally collapsed, shops, producer have not choice but to try to get rid of the production as fast as possible as storing is expensive and capacity too great. So in order to fulfill that, they need to lower prices and lower capacities. Usually the latter will be done first, the second is always lagging...

But it is true that Finland has a strong wage bargaining structure that allow wage to follow rising price but not the reverse - price could fall but not salary. I think this flawed system (which was sometime praised by Finnish politicians), will prove disastrous for this small economy, as it will prevent it to readjust. The outcome will be seen in higher unemployment and bankruptcies since company will struggle to meet their wage obligation while selling services or products that will fall in price.


Anonymous said...

one thing about this place is no matter how bearish you are you can always rely on HousingFinland to make you feel it really is the end of the world. Seems like only 4 months ago you were saying that it was a good time to invest in shares about now.

At the time i thought this was a bit odd but right now i am thinking that it could be a good idea if we can pick some survivors.

despair seems to be multiplying. now could be the time to get bargains?

Billpete002 said...

you said a price rise from 20-30 euros, isn't that a 50% price increase..?

HousingFinland said...

"one thing about this place is no matter how bearish you are you can always rely on HousingFinland to make you feel it really is the end of the world."

To Be honest, I never tough we could have so much deterioration in so little time. I knew for sure that we will have deterioration any banks behaved irresponsibly with regulators completely missing out the issues.

"it was a good time to invest in shares about now"

I wouldn't dare invest in any stocks, I think by summer we will be lower than we are today. But then again who knows there is too much uncertainties, especially when government start to intervene -as usually they make things worse, although they don't have much choice either it's Armageddon (end of the world ;-> as we know it) or a very severe recession, one that can be remembered for decades to come and the worse since the WWII.

But if you are a short term trader, it has never been so great because market are so volatile. You can get +-20% sometime in only few weeks. So the strategy will be to buy when there is a very big deep and the market panic, then sell only few days after. To be long invested is a non sense with those uncertainty: you will not see market rally as we had in 2003-2007 simply because the financial system is broken, households over-endebted.

regarding the bearinesh...I will say that last year some were saying that I was painting too bleak scenario...the point to remember is that in Finland we have not yet seen the visible impact of the crisis: sharp rise in unemployment, sharp fall in housing price, social tension and rising pessimism: all will happen from sometime this year until 2011-12?

But if you really want to invest or need too (kind of addict ;->), then it will be safer to do it in the summer (?). My feeling is that we will see stock market rise until March or april and then collapse around that time. But then again no one knows the future...


Good you notice, I was just testing if one notice...;->