Ooops: Interest Rates Won't Come Down??

"European Central Bank council member Axel Weber said there's no scope for interest-rate cuts and the bank may even need to raise borrowing costs again once the economy emerges from its slump.

'Monetary policy at the moment is roughly where it should be and I think the discussion about declining rates in Europe is premature,' Weber, 51, said in an interview in his office in Frankfurt yesterday. 'If the economic outlook brightens somewhat again towards the end of the year and next year, which I still expect, we'll have to see if action is necessary.'

'we're not even sure that inflation on average will be below 2 percent in 2010,' Weber said.

'If inflation risks further materialize and if we come to the conclusion that the inflation outlook has deteriorated, we'll have to re-examine our monetary-policy stance,' he said. 'At the moment, this isn't an issue.'"

That comes as a shocker!...that defies what most economists and analysts have been forecasting...unless it's a bluff which will make Axel Weber a master poker player and ECB Trichet a chess master...

In that sense, I kind of agree with Dr. Weber with this approach. You just have to go back in history to see that policy mistakes have been made since often they underestimated the strength of the economy thinking that it was weakening too much and lowered iterest rates to only fuel inflation and exarcerbate current "bubbles".

In 1987, there was a massive stock market crash - 20% down for the dow jones in one day in the U.S. , interest rates were cut to only fuel an asset bubble worldwide.

In 1997, there was the Asian crisis that had its own banking crisis and asset deflation. They cut interest rates to only fuel what was the biggest Technology bubble in history.

Some investors are asking the ECB to cut interest rates , they are trying to push for a policy mistakes as greedy investors always profit massively during time of high volatility and asset bust.

On the other hand what would be the consequence if interest rates were to go to 5% or higher...maybe massive defaulting for those who have been borrowing on variable interest rates which represents about 90% of the Finnish lending...

Government Tax Relief "Discrimination"

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-Click on the blank image for zooming-

if nothing happen then most probably your are in the mid-poor level income bracket- you have just experienced the effect of the tax break -

Government Income Tax Cut:

1-for lower income 1.4 percentage points
2-for mid-level incomes by 1.25 percentage points
3- for upper income groups by 1.0 percentage points

Let's do some abstract calculation.

1- 20.000 euro at 1.4% bring an extra 280 euro
2- 40.000 euro at 1.25% bring an extra 500 euro
3- 200.000 euro at 1% bring an extra 2.000 euro

So don't be fooled, the poor get poorer and the rich get richer.

The poor or family with children will be using that money to pay for rising day care and healthcare as well as rising food price. After all these group is the one that is allowing the service economy to function.

The rich will use that money , well... they won't use it. That why they are rich, they are greedy they want more money from money so they will park it somewhere with high dividend.

A Controversy or How To Value Housing?

07.08.2008 : "Georgia's President Mikhail Saakashvili has accused Russia of carrying out an air raid on Georgian territory, saying Moscow was trying to provoke panic ...We are waiting for an official explanation from Russia"

09.08.2008 : "Russian tanks have entered Georgia's breakaway region of South Ossetia"

12.08.2008 : "Bush condemns Russian 'invasion' of Georgia "

22.08.2008 : Meanwhile , "Friday's US airstrike in west Afghanistan 'killed 60 children', United Nations says."

13.08.2008 : "Georgia and Russia agree on truce. French President Nicolas Sarkozy has agreed an outline plan with Russia and Georgia to try to resolve their crisis"

20.08.2008 : "Russia has rejected a draft UN Security Council resolution on Georgia, saying it contradicted the terms of last week's ceasefire deal"

24.08.2008 : "A US warship has arrived in the Georgian port of Batumi carrying the first delivery of aid supplies by sea."

26.08.2008 : "Moscow Regions recognises the independence of Georgia's breakaway regions of South Ossetia and Abkhazia."

27.08.2008 : "Russian President Dmitry Medvedev meets his Chinese counterpart Hu Jintao today as he seeks to muster support from Asian allies for Russia's recognition of Georgia's breakaway regions."

27.08.2008 : "British Foreign Secretary David Miliband is visiting Ukraine in an effort to build a "coalition against Russian aggression"."


What next?

I suppose Russia could not have choosen a better time. After all the U.S. and its allies are overextended in Iraq and Afghanistan. Their financial system on the brink of collapse while Iran rearming itself make the world less safe than it was yesterday.

Coming back to earth, The Russian stock market has collapsed in the past 3 month, its currency the Rubble is weakening. The Baltic Economies are about to witness a "hard landing". So where could it leave the Finnish Export and economy? I guess toward a sharp downturn. I'm not even talking about the Finnish Internal consumption as up to now it mainly driven by credit and debt ("the Minsky moment"). One has to pay back at some point...

What would then be a value of "Housing" if event degenerates or bring further down the economic slump?

One have to bear in mind that it is very slow process, at anytime the direction could rapidly change in both direction, good or worse.

Disclaimer: All elements, statements or forecasts put forward in this article are purely fictious and are based mainly on cartoon type reading and non-credible newspaper like HS. If you feel offended by such reading, then don't read further this blog, go to the pub and have a lager. If you enjoy such article, then it's about time to see a psychologist as those idea are not real and should not be...well that was my disclaimer.

Wage Spiraling?...Nope

We have had a economical boom , that have not seen wage taking off as in 1999 or 1989.

"For the whole of 2007, the average year-on-year increase in earnings was 3.4%. Real earnings last year went up by 0.9%"

And why is that? Globalization forces in action. So either you hire cheap labour from abroad or you delocalize part of your production thus having a choice in case of hiring difficulties.

Union don't have the leverage they used to have as now the main economy driver is global not very much local. Although I wouldn't be surprised to see healthcare wage soaring in the year to come, putting pressure in the Nordic wealthcare model. Basically cost will rise as the government will slowly cut the cost on wealthcare system.

Now it's up to the global economy ex Japan, US, Baltics, Europe...well let's say it's all about Chinese and Indian Consumers. Should they stop consuming, less money will fall into European pockets ...

What about Housing price...well with anemic wage growth, I wonder where the rescue is coming from... maybe people should start playing Lotto or check wether there is petrol or gold in its own yard..never know...

Building Permit On Free Fall

"In June 2008, building permits were granted for a total of 5.4 million cubic metres, which is 12 per cent less than one year ago. Cubic volumes went down in all building types, public service buildings excluded."

"In January to June 2008, building permits were granted for a good 15,000 new dwellings, which is 15 per cent less than in the corresponding period one year previously. New building permits were granted for a total of 26.4 million cubic metres, which is 12 per cent less than in the year before. The cubic volume of commercial and office buildings decreased by over one-fifth and that of agricultural buildings by nearly one-third from the January to June period of 2007."

First it's important to stress that the government or public sectors are aggressively ramping up investment in construction to try to smooth out the cycle. Indeed the increase year on year of public building permit has soared by a stunning 280%! looks like municipalities are racking up more debt at a time where the cost are elevated.

Second, excluding the public sector, the drop is significant. Building permit reflect the confidence of the construction builders on the residential and commercial market. It's faltering as either the demand or affordability has collapsed. I think it's the combination of both.

Commercial buildings have been popping out everywhere- it's crazy - that's going to put downward pressure on commercial rent, no doubt about it (Same phenomenon currently witnessed in the U.K.).

With regard to residential market, the demand is faltering too. The worrying part is that it has nothing to do with banks. Banks are desperate to provide loan for house purchase. At the end that's how they grow. I guess during a boom there is excess demand and during a bust that demand vanish...this is what is currently happening.

Sweden Housing...More Overvalued Than The U.S.

"The US is a step ahead. But now, Europe is increasingly vulnerable, which has become apparent for Sweden. This applies to both the economic recession and the financial crisis, as well as in the case of house prices."

"The fall in price in Europe has not gone as far as in the United States. At present, it is in several European countries, including Sweden, where house prices are more overvalued than the U.S., according to an estimate from the International Monetary Fund, IMF."

"The danger of further price decline in housing looks to be, therefore, greater in Europe, even if the correction does not need to be as drastic on all sides. The risks are increasing, however, that the crises in the financial sector as well as to the current economic downturn will be deepen."

"Sweden appears so far to have done better than most euro area countries. A lot of Swedish industrial companies, focusing on global markets, have felt a tailwind. Strong public finances mean that there is space to support the economic situation, mainly through tax cuts, which is lacking in many other places."

"Yet, it will be felt here too with weaker export performance and a depressed domestic economy, where inflation and high interest rates grits out of household purchasing power. A sharp drop in the Swedish house prices would make the situation much more difficult, especially if it is combined with an increase in unemployment."

Sweden is more analysed than Finland most notably because it has a bigger and stronger economy. I think that the Swedish housing market, throughout history, has been behaving in the same way as the Finnish one.

So the IMF warnings could, somehow be extrapolated to the whole Nordic region and in particular to Finland. In fact the scenario could be worse for Finland as Sweden has its own Central bank, so they can adjust the monetary policy accordingly which Finland is unable to...

Are Cows Drinking Oil?

Sometime you wonder...




"The Central Union of Agricultural Producers and Forest Owners (MTK) said Wednesday that the price paid to farmers for milk should be raised." , STT, 21-08.2008

While at the same time, Russia, our friendly neighbourg, is having issue on storing its grains (Wheat, Barley) on a record harvest.

"Russia, the world's second-biggest barley grower, risks running out of grain storage capacity after the best harvest in at least 15 years, threatening a government plan to expand agricultural output and exports. " , Bloomberg - 21.08.2008

So on one hand you have massive deflationnary pressure on grains and oil price - In fact agriculture commodities are all plummeting - and on the other we have a global economy that is slowing sharply, which will make inflationnary pressure subsides. Deflation will then be fought with lower interest rates, ECB rate cuts are on the pipeline some time the year to come...

Coming back to MTK, they should not try to pass cost or to make it happen, as its window of opportunitty has passed. It should have fooled the consumers earlier. At the end, what they are doing is only scaring consumers into believing that their purchasing power will deteriorate - they will only contribute to a bigger consumption slump and consumer confidence- Maybe they will profit in such slump as greedy investors and institutions do...

So Milk and Bread price should go down and massively in the next few years. If MTK protected "lamb" producers cannot handle that, then they should think about changing job...there is a shortage of nurses...

SRV or A Symptomatic Housing Market

"As the US economy decelerates sharply, the growth of the global economy is expected to slow down. Uncertainties concerning the prolonged credit crisis in the US, inflation and exchange rates hamper the assessment of the construction market outlook.

The US-led financial market turmoil increases uncertainties in the real estate market.

The residential market in Finland slowed down in the first part of the year and the volume decreased. Residences stay on the market for a significantly longer time before being sold. The demand focuses on completed units. The number of residential start-ups has decreased.

Availability of subcontracting and materials has developed favourably.

The economic situation in the Baltic countries has deteriorated quickly. The housing market has clearly cooled down and private consumption is adapting to the slower growth pace. Due to the fast pace of growth in recent years and the small size of the market, the assessment of the outlook for economic growth in the Baltic countries involves uncertainties.

Revenue in the Housing business area amounted to EUR 63.1 million (EUR 84.0 million) and operating profit was EUR 1.3 million (EUR 4.8 million). The decline in both revenue and operating profit was attributable to the slowdown in housing sales. The housing sales picked up during the second quarter of the year increasing the revenue and operating profit compared with the first

The share of revenue generated in Finland was 90 per cent (90%), whereas 10 per cent (10%) came from Russia and the Baltic countries. Revenue in the Business Premises business area grew to EUR 197.0 million (EUR 151.6 million). Revenue in the Housing business area declined to EUR 63.1 million (EUR 84.0 million)."

For those still thinking that the housing market has not yet turned around, for those who are still on denial, SRV, a Finnish Contruction Builder, is not only providing the proof that the Finnish housing market has come to a sudden halt but is clearly showing that the situation is deteriorating and fast... I will not be surprised to see SRV merging with YIT in order to limit the damages and of course lower their costs which will have an impact on unemployment no doubt about it.

Housing market is cyclical by nature.

The Finnish market has enjoyed a 15 years of continuous growth. In the past 3 years it has mainly been driven by euphoria, low interest rates and "Doctor Jekkil" type bankers...

So the party is over. Now, it's about time to assess the general impact of declining assets on the wealth perception and ultimately on the consumption. Should the consumer slow its spending pattern or stop taking more debt, banks business model will be jeopardized. Lending for house purchase will slow dramatically as banks won't have the necessary leverage to lend. The spiral will start pushing house price lower.

Unless a miracle happen...

I don't think so.

Euribor Will Go Down: Tighten Your Belt!

Interest rates vs housing cycle (click on the picture)

By looking at the evolution of the base rate set by the bank of finland and the housing cycle (click on the picture to zoom-in), we could make few observations:

1-this housing cycle is over extended

2-the bust in 1990 was not necessarly created by the level of interest rates as it moved from 7% to 9.5%, a mere 25% compared to todays situation where rates moved from 2.25% to 4.75% so about 100%.

3- The downturn in 1990 was mainly due to a lax credit standard from banks and an overly too optimistic view on the economy. Similar remarks could be made since 2003. Banks around Europe or around the world have lended to consumers with little deposit, very weak collateral and quite often just some kind of time limited insurance (5 years)...

4- In the late 90's , a global downturn started with UK economy falling into recession and the U.S. recovering mainly due to its export. The situation is almost similar if not worse as this time the U.S. has massive problem with its banking system, a similar situation Finland had in 1991.

5- Housing price falls when interest rates fall and starts recovering just before interest rates rise. That could play the same in Europe. This situation seem to be hapenning now in the U.S. . They will start raising rates after housing price fall has bottomed and is showing signs of recovery.

So now what about Finland housing price? they will fall. By how much? god knows! but a guess , based on a technical analysis based on historical value, calls for a minimum of 30% on average for the country. For how long? let me check my cristal ball...4 -5 years? maybe...

Could housing price stabilize? I think demography, immigration and mass retirements is against that ..just look at Japan...even interest rates at around 0% dowesn't help a 20 years housing deflation...

Indeed the Euribor will go down, it will just signal that a downturn has started, the end of overextended business cycle and inflation won't be any more a threat. Housing deflation will start ...

Note : The base rate data has been kindly copied from Bank of Finland and the boom and bust housing cycle is based on Statistics Finland data.

Recoupling...

"The euro zone economy recorded its first ever contraction in the second quarter, pulled down by falling activity in its biggest economies, which could lead to a technical recession.

The European Union's statistics office Eurostat on Thursday estimated that the economy of the 15 countries sharing the euro contracted 0.2 percent against the first quarter and grew 1.5 percent year-on- year."


When the U.S. Sneeze, Europe catch a cold... that saying is still true.
What about when the U.S. gets pneumonia, Europe catch a...? let's cross the fingers - hand and feet-

Europe is technically about to enter a recession if the contraction is confirmed next quarter, which most probably will happen. Remember that the ECB through its president warned about a very difficult 3rd quarter.

When Europe was in a recession in 2001-2002, house prices started to fall until the ECB put an end to it by lowering the interest rates to an historical low. It not only put a floor but propulsed house price to the sky, thus creating a bubble that some generation had never witnessed.

The bubble is about to deflate, 2009 will see a big drop in price between 10-15% followed by the same amount in 2010 and 2011.

Would they stabilize? it's all about the ratio population and house availability and affordability.

At the end it's all about how attractive Finland is... Ask the beggars:
"Finland attracts fewer beggars than expected -social services"

Only around one hundred beggars arrived in Helsinki this summer from abroad, the Helsinki City Social Services Department told the Finnish News Agency (STT) on Thursday.

"The Roma say they are looking for work. The group is very motley, what they hold in common is bad education and lack of language skills," said Jarmo Räihä from the Social Services Department"

Yes Jarmo, next time beggars will have a university degree and speak 2 or 3 foreign languages. Is that guy dumb? i guess they won't be beggars if they were educated as I think Romania being part of Europe will have as much chance to be wealthy as Finland thus attracting foreigners...the Fact Finnish(?) Nokia open a Factory there...

Frankly if I was a beggar, I would choose Costa del Sol or the cote d'azur...why would one choose a country where summer is similar to Autumn ? hummm after a thought maybe beggars don't care about sun but more about money..not sure if Finnish are the kind of people that give money to beggars with all the discrimination I read about beggars in the past 2 years in newspapers....

Finnish SME outlook dims further in July

"Overall business confidence among small and medium-sized enterprises has weakened significantly in July, the Confederation of Finnish Industries (EK) said on Wednesday."

"According to EK's survey, already more than one third of SMEs expected the business situation to deteriorate in the coming months. Construction companies were the most pessimistic."

No Surprise, the Nordic region is on the brink of recession. I heard that the South of Europe was called "the Pig", wonder why?, nevetheless they are all plunging in recession : Spain, Italy, Portugal and Greece. Now it's all about Germany and France..after all Europe has been messed up in the past century with this two power fighting each other. Let's hope that social stability is not eroded in those two sleeping giants, a good reason to have price stability as stamped and promised by the ECB.

UK figures are really horrible, unemployement is soaring so is inflation while the economy is collapsing. The english or best know as European Real estate speculators are now slowly disapearing...

"The Swedish publication Dagens Industri wrote in late July that the figure indicating the ratio between the price of construction companies and their result is exceptionally low.
This can be an indication either that the stock is undervalued, or that the market expects the result of the companies to fall sharply."

Let me remind you that the P/E or ration described above was very low, single digit for construction builders in the U.S. in 2006. In 2008, most of them have shed about 80% or more of their stock price value...so undervalued? no...One could argue that they could be overvalued and are pretty optimistic on the outlook of the real estate in the Nordic region or globally...

Money Can Still Buy Finnish Politicians

"With municipal elections coming in October, doctoral research at the University of Turku shows that potential for campaign finance violations is high, as there are large loopholes and next to no oversight of funding. "

"Researcher Tomi Venho says that theoretically, the law governing local elections is fine, there just isn't anything to keep candidates from failing to follow it. According to his doctoral research, local election officials simply collect a finance statement from each candidate but no follow-ups are made. "

"We don't know who's funding the municipal elections," he says. "It could well be banks, construction companies, retail co-operatives, or unions. But we just don't know."

disgusting... Corruption will be with us since Finns "feel" that the economy is doing well and they pocket are filled for the moment, the rest (corruption, welfare cut etc...) who cares? indeed they are right in the short term although the damage could be dramatic in the longer term and could distort and weaken the economical balance of the country...

So The ECB Will Cut Rates, Why Is That?

You remember about the image of this big locomotive that has had it engine cut while giving the impression of moving... well it's now clearly stopping and fast.

This locomotive can be the world, the European or Finnish economy, it's all the same as all are coupled. Commodities are on free fall since the locomotive is about to slow dramatically, so not any more needing energy.

The Euro is collapsing after Jean-Claude Trichet, the ECB president clearly said that Europe is slowing and the second half could see further deterioration. Inflation is not a threat as people will bargain not to be fired instead of a salary rise, the window of opportunitty has passed... Asset price increase (any real estate) is not a threat either as it has started its cyclical downturn. Retail sales are surviving only by providing huge sales to consumers that are not willing to spend since burden by debt.

So the ECB will cut rate as I highlighted in this chart, it will start cutting rates at best in the third quarter as early as September if the data deteriorate faster or beginning of next year to make sure that threat of second round effect doesn't occur. Rates will be cut until 2010 to 3% in order to stabilise the economy. Of course rates could go much lower if special event happen such as escalating Russian war or an attack agains Iran.

Obviously, data could change in both direction delaying either a rate cut or even triggering a rate increase, today the world is probably impredictable. it's like an addict that took to much of the credit drug, its reaction can be quite erratic, but the best will be to send it to rehabilitation for a while, to bring it back to a normal state...

Today it feels better for the one who foresaw the craziness in the run up of this real estate frenzy and bank lending binge. Having debt is fine in good times, but a very wrong choice in bad times, in a deflationnary and a deteriorating geopolitical environment.

Talking about Geopolitical tensions, if the Russian-Georgian conflict spread or impact the energy supply balance then oil could rally again, deepening futher the economic dowturn. If at the same time social partners and Union decided to bargain higher wage in order to compensate lost purchasing power then interest rates will shoot up.

As Mr Trichet said in his press conference last thursday, a clear warning that second round effect will not happen :

"Moreover, employment and labour force participation have increased significantly, and unemployment rates remain low in historical terms. However, these developments, which support household disposable income and consumption, are unlikely to fully compensate the loss of purchasing power caused by higher energy and food prices. "

Rent Up or What's The Duck Situation

"Rents rose on average 4.1 percent from April to June compared to the same period last year, reports Statistics Finland."

So rent are up 4.1%, while inflation is 4.4% so by simple arithmetique, I could say that rent are up by -0.3%. Great, I'm donald duck, and I'm going to buy a flat to make -0.3% instead of 5% in a simple risk free euribor linked saving account...

humm, forgot something, I'm making this massive profit of -0.3 % if I assume that my asset is no losing value...

Let's dig in ... clever as usual, I (Donald duck) start to ride the housing bubble and bought, at the top, a 300 000 euro flat which i plan to put on market for rent for making this massive -0.3% profit.

So I take a loan, open a bank account in Sampo while closing my accounts in any other small Finnish banks (although they don't have IT problem, they might have insolvency issue...I'm a duck but not a donkey). Why Sampo, because the banker is my best friend in town, no need to get drunk for that ... plus they offer, not a free round, but lower interest rates than say Nordea.

Interest
So I take my 300.000 euro for 5.5% for 30 years (duck don't live that long but the banker insisted that it's the best for me, my children and gran children... I trust bankers and I trust that they won't give my credit information to "katso" paper...)

so it makes 360 euro for capital , 1 250 for interest that brings 1 610 euro monthly payment

Charge

Since this Flat is being build by enthusiastic builder YIT (I still predict that their share price will go to 3 eur at some point), they made it so that cost of maintenance are high ...

so 200 euro charge

Other hidden cost
Insurance, tax, reparation, month not rented etc...
190 euro

Total

2000 euro / month

So now, I need to make some profit on my buy to rent business, so I call VuokraTurva, the king of the pigeon, to get some advise...after a long conversation, I become very optimistic as the guys there seem to be genius and visionnary. They told me to advertise for 2500 euro, because it will make you a 500 euro gain...damn I could not have had better advise... they as well told me that the sky is the limit and they know how to turn lead into gold : rent business...

After 6 years

My health has been deteriorating fast, my debt is rising faster than time... I have been losing 2500 euro per month in the first year as nobody was interested in that flat...the second year i lowered the price to 2000 euro to at least cover my costs ...still nobody. I took a job as a night cab driver to fill the gap since I'd lower the rent to 1500 euro still nobody...

in the meantime...

Prices has gone down by 30%, my asset is valued strongly lower than my mortgage. The banker, that old friend doesn't answer my phone calls and keep sending me emails threatening to take over the assets of my gran mothers... Finnaly, I had become the slave of the bank, I stopped travelling, stopped eating to restaurant, stop seeing my mistresses ...I have been in under water for so long...now I'm now even proposing to pay someone to get in the flat as its state is deteriorating very fast.

Buy to Rent sucks like ducks I tell you... Buying on top is like playing Russian Roulets with canons...