Sunday, 7 August 2011

Deflation Forces, back Again in Finland.

Link
The chart above - the 2 years Finnish government bonds - shows that the yield (interest) has literally collapsed since July as if investors are panicking, ready to get almost no return or even paying for it (less than 1% when inflation is running at 4%) on those bond investment in return to investment safety. Sure they must be betting for deflation, they clearly foresee no inflation or worse deflation.

To me it looks like investors hint a recession in Europe - a deflationnary force that would be inline with the bond reading. In this context, It would be strange to see real estate price going up, or at least a last shoot up and a collapse. Actually, here is my forecast, from this point:

The bizarre situation is that in Germany, Finland, interest rates on 2 years are falling while in France, Italy, Spain and Portugal, yields are soaring. What can the ECB do? nothing really .

I am wondering how Finnish Pension Fund (Ilmarinen, Varma, etc...) will be able to cope in such environment, which would mean higher unemployment, low interest rates , lower stock price and rising retiree departure (which means income need to be provided, a promise made during the worker lifetime). Of course, this is based on the catastrophic scenario of Europe going back to recession.

Above is the chart of the 10 years Finnish Government Bond and a possible project on where yield could go. To me this chart is important, as it could show that the rebound in yield we say in the past two years (similar can be said to the economy
) was powder in the eyes, only supported by more debt and an artificially inducted confidence.

So should yield fall to the level of March 2009 or go lower than, we are a depression territory. Obviously this are only conjecture from a long time bear (since 2007), my negative view on debt binge and artificially supported economy has not changed, and more they fail to recognize the size of the problem , the bigger will be the fall and the negativity it will bring to the society as a whole (I'm still thinking of post 1929, and its far reached consequences - I'm just hoping they have learned their mistakes)

16 comments:

Andrew said...

Italy owes French banks over 500B. French banks and the entire world is totally doomed if the ECB does not support the system.
Is Soc Gen going to fail next week?? The french cannot possibly support their banks without european wide support
Massive deflationary expectations and realities will mean they have to monetize the debt. Germany and Finland cannot survive if France fails.
Fasten your seat belts!

Balmat said...

Well well ... interesting discussion ...

@ Housing Finland
I thought that in Finland, interest rates for household loans were based on the Euribor + Margin for the bank. Thus my view of having interest rate to be paid by household going up ...

Regarding your chart, a question ... is the move due more to a flight to safety or a short covering crunch?

@ Andrew
I would be surprised if Soc Gen goes down next week ... but who knows ...
Do you Soc Gen as the weakest big bank in Europe?

HousingFinland said...

... Looks like the ECB just opened the Pandora box this morning by purchasing Spanish and Italian bond.

Since there are larger compare to previous rescue (i.e Greek, Portugal), that could be inflationary... Oh my!

Balmat said...

Agreed with you ... there must have been a very heated session within the ECB board ... since Merkel announced that Italy was too big to br erescued ...

We are in a big ... (whatever words you can use)

We had a Stock bubble based on New Tech in 2000, a stock bubble based on the financial services firm in 2008 (ok with the bond market) then now a bubble within the bond market ... which is exploding ...

HousingFinland said...

http://newsroom.finland.fi/public/default.aspx?app=803&newsid=30525

"Exports rose by only nine per cent year-on-year to some 4.9 billion euros, down from the May growth rate of 17 per cent.

Imports only increased by eight per cent compared to the previous year to some five billion euros, down from May’s growth rate of 29 per cent."

The bond market seems to be getting it right, as it foresaw a sharp slowdown - regardless of what has happened in the past few days...

Balmat said...

It is really getting ugly ... I thought that last Thursday was a black thursday ... in fact we have a black Monday ...
The worst is to come ...
Damned it ...

HousingFinland said...

2 years and 10 years Finnish Government Bonds still falling - quite amazing considering the action from the ECB. That tells you that investors are still looking for safety - and are foreseeing a sharp slowdown.

Balmat said...

Investors are buying "true AAA" :-)

Andrew said...

I see France has CDS twice as high as Germany where presumably ECB buying of debt is just going to make both CDS worse where bond holders can know that if it all turns to custurd German bonds are going to be better than French ones.

Not surprisingly the better countries bonds are rising in price.

HousingFinland said...

"Not surprisingly the better countries bonds are rising in price."

Japan and US have seen their bond price near all time high, while sending their yield to record low.

If you take these two example, we have low inflation, a depressed housing market and country trapped in deflation (at least currently in the US). The market participants are not here for charity, they put their money where there is profit to make.

Do you see those country as fitting your definition as being (economically) "good country"? Japan, US, Germany now? I think those country are currently being slowly trapped in deflation (already for Japan)....

Andrew said...

Hand on heart can you say that
Germany and France will have the same currency in a few years time?

Remaining in the Eurozone sounds like it will be very inflationary.

France obviously wants the ECB to buy bonds

Balmat said...

@ Andrew ... Seems that you were right regarding Societe Generale ... My network is confirming what we see in the news ... getting really ugly ... wondering how it goes in the repo market for the French Banks ...
Does anyone have a view on Spanish banks such as Santander?

Now Regarding France ... I have always seen countries as massive Ponzi Scheme ... France being more in the Maddoff league with the US the leader ...
France will leave its AAA pretty soon thus the need of having the ECB buying its bonds ...
The story is quite interesting, when they created the Euro they were not considering adding the PIGS ... France insisted on getting them in order to counter balance the weight of the Nordic countries (Germany included)
We are living in the middle of great time (our grand grand parents saw the same last century without knowing what was happening) ...
The recession is waiting down the road which is a short one ... I agree with Housing Finland assessment of the situation ...

HousingFinland said...

it's getting quite ugly for the French banks:
http://www.cnbc.com/id/44101147


Bank in Asia Cuts Credit to French Lenders: Report

Finnish banks are not insulated either:
http://newsroom.finland.fi/public/default.aspx?app=803&newsid=30546


Moody’s revaluates Finnish OP-Pohjola’s credit rating

Balmat said...

Not good ... with the current market, any rumor is problematic ... "no fire without smoke" as we say in French ...

Andrew said...

So Finland has 4% inflation, the ECB bought 22B of bonds last week to recapitalise the failing banks and protect existing owners. Germany remains the wild card but since the banks and asset owning classes in Germany must be reasonable happy so far, it remain to be seen how the renting classes respond. Protests and strikes generally you would imagine sooner or later.

It would be nice to see a few epic bank failures to even the score a bit.

Balmat said...

Actually you were right ... sounds pretty bad for Societe Generale ... Let s see if Societe Generale will be the "European Lehman Brothers" ... it would be funny to have BNP Paribas absorbing them ...