A Credit Bubble That Can Only Deflate

Over the past two decades, the system has seen household and corporate debt grow to historical level.

It all started in the beginning of the 80's, had a parabolic growth in that same decade to only readjust in the beginning of the 90's but to only continue, even stronger, its madness course.

Nothing, nobody has managed or was willing to stop this historical debt creation.
-the Politicians kept being re elected, so this situation was seen as politically favourable.
-the bankers were amassing an astonishing amount of money, blinding them into thinking that this was solely due to their foresight and competence.
-the regulators, were supportive, pressurized to let the market regulate itself only to found out that they created the perfect ground for the development of this current crisis.

So the reality is different, the accumulation of greed, incompetence and blind liberalism imploded on its own weight: Today we are witnessing the most serious financial, economical and political readjustment over a a century.


Some statistics to understand the extent of the problem:

Over the past decade, Finland's population has increased by 153,135 persons, or three per cent.

In ten years, the number of passenger cars has increased by over 600,000, or 32 per cent.

Over the same time period the number of dwellings has gone up by 13 per cent.



Households in Finland are getting more and more indebted. Their rate of indebtedness, that is, credits relative to disposable income, went up to 103 per cent last year, which is higher than ever before. In 1997, households' debts amounted to 59 per cent of their disposable income

The consumption of alcohol has gone up by 1.8 litres, or 26 per cent, per capita in ten years.


An update on the housing market or the economy in general

The building permit for residential is on free fall since 2006. One could argue that the peak was reach in 2000, which could be significant in term of what kind of correction we could get.

History has clearly shown that a price downturn is highly correlated with a decrease of building permits (here on this chart, from 1992 until 1996).

Needless to say that until we see a pick up of these building permits, the housing market will continue its readjustment in term of price.


Consumption was allowed to be maintained at a high level up to mid-2008. Credit expansion by banks, competition between banks and a lack of regulation can partly explain that. Since then, consumers are cutting drastically their consumption. It will most probably push economists to review downward economical prospect: I still think Bank of Finland is highly unrealistic in his prediction.

Psychology and unemployment are the two factor that will speed up the housing market downturn. The latest consumer confidence supports that view. The report is pretty bleak, in fact it is the worse since the last "short" Finnish depression.


Debt deflation

Finally governments and policy makers can only mitigate the effect triggered by the deflation of debt: household and corporates need to deleverage, see their saving rate increase and their risky credit appetite shrink. That will trigger a sharp reduction of capacities pushing higher unemployment, a unavoidable evil that will, at some point, converge toward a natural equilibrium (sustainable debt, lower prices, supply and demand match) ...we are still far from it.

In such environment, all assets price will readjust and such process has already started:
-the stock market, usually readjust the first and very fast and it did since late 2007
-the housing market, usually readjust with a lag and very slowly so it did since mid 2008 and will probably continue for the next four or more years.

Government Stimulus Actions, Still Confused?

"The government's economic policy message is still not getting through to many Finns, despite an early-year communications operation.", YLE

So are you the one who is still confused about the government stimulus plan?... "the Stimulus", what's that?, well it's not a bone, so what is it? here a definition adapted from the "Big Picture site"

Q. What is an Economic Stimulus Payment?
A. It is money that the government will send to taxpayers.

Q. Where will the government get this money?
A. From taxpayers.

Q. So the government is giving me back my own money?
A. Yes and No, they are borrowing it from Institutional investors: Pension fund indirectly you, and others.

Q. The government will be able to maintain good job level?
A. you can dream. They will never replace the private sector.

what they can do at best is to replace job that will be lost, especially in the construction sector hence they will build bridge and obviously Opera (Politicians don't lose job)

Q. So the government is selling debt, who will buy that?

Anybody in fact, You can buy debt(Bond), if you have lost sense of reality. government bonds that gives you 2.4%/year until 2012 - needless to say it will be the worse investment at this moment.

Pension funds have big liabilities and need to have secure investment, thus they will probably be pushed, because of regulation, to purchase those bonds hence indirectly it's your money that will be used to fund part of the debt in this case. (-correct me if I'm wrong here-)

It might as well be country such as china or even Russia (though I doubt since they have their own stimulus to kick in), so any country that needs to have Euro exposure and put it in a country that won't default on its debt.

Q. What is the purpose of this payment?
A. The plan is that you will use the money to purchase a high-definition TV set, the latest gadget and travel to Thailand, keep paying high rent... thus stimulating the economy.

Q. But isn’t that stimulating the emerging market economy?
A. Shut up.

Have You paid Your Loan?

link

Finnish Deposit Guaranty

In the autumn, the EU Council convening in the composition of Economic and Finance Ministers (ECOFIN) unanimously recommended that the minimum deposit protection for individual depositors be increased to EUR 50,000 with effect from 8 October 2008.

Owing to Finnish banks' good capital position and profitability, there was no immediate need for increasing the level of deposit protection in Finland. However, in order to ensure Finnish banks' equal competitive position, the level of minimum deposit protection was increased from EUR 25,000 to EUR 50,000.

Bank that are covered by the deposit guaranty:

Aktia Pankki Oyj
eQ Pankki Oy
Evli Pankki Oyj
FIM Pankki Oy
Helmi Säästöpankki Oy
OP-yhteenliittymään kuuluvat pankit
Paikallisosuuspankkiliitto ry:n jäsenpankit
Nooa Säästöpankki Oy
Nordea Pankki Suomi Oyj
S-Pankki Oy
Sampo Pankki Oyj
SEB Gyllenberg Private Bank Ab
Skärgårdsbanken Ab
Sofia Pankki Oyj
Säästöpankkiliitto ry:n jäsenpankit
Suomen Asuntohypopankki Oy
Tapiola Pankki Oy
Ålandsbanken Abp

For More Information: FIN-FSA

ECB: "Messages in a Bottle"

Message #1 :

"European Central Bank board member Lorenzo Bini Smaghi said he’s concerned investors could lose confidence in governments unless they contain spending, raising the threat of a crisis in national finances.

“There is a risk that the mistrust that there is today in financial markets, in the banking system, is transformed into mistrust in states,” Bini Smaghi told the European Parliament in Brussels today. That could hobble the ability of some countries to issue debt, which would be a “financial crisis of the state.”"

It looks clear to me that it is a warning from the ECB to government whose deficit could grow out of control. Not all have have room for manoeuvring. I think the Finnish government might have this privilege as it entered in this crisis well prepared (with a budget surplus and have so far avoided the mistakes made in 1989, although none of us can be sure if mistakes will not be made).

Now it's the case of municipalities budget which is somehow incredible. They have had about 20 years of continuous growth, profited in the phenomenal housing growth and yet their budget is already in the red, threatening to cut in social welfare, benefits and other in order...not to rise taxes (this is a republican type approach, or a kokomus one), which they will have to at some points.

Regarding municipalities, if they are bailed out, I do hope that the current management is removed and replaced by competent one...

Message #2:

"The European Central Bank could cut interest rates lower than 2 percent and will continue to provide liquidity to solvent banks, ECB Executive Board Member Jose Manuel Gonzalez-Paramo said on Wednesday.

"A rate of 2 percent is not the lowest rate we can think of, taking into account the situation right now, inflation expectations continue anchored and growth slowdown is intense," Gonzalez-Paramo

As highlighted many times in this blog, interest rates will go in the first phase to 1%, most probably a rate cut of 50 basis in March, bringing the base rate to 1.5%, then another to 1% in either around June or September.

Obviously it all depends if an implosion occurs in different part of Europe:
-In eastern Europe, where social tension could rise amid implosive economical deterioration.
-In Spain where unemployment could be fatal for a quarter of the population.
-due to the collapse on few European banks, French, Nordic and others.

This dooms scenario can occur only if the situation is not stabilized by summer and emerging countries do not give the impetus required to kick start an unresponsive economical engine.

The ECB, working in cooperation of government inside (and outside, if there is) the EU, will try hard to avoided this doom scenario, so most probably they will try to be proactive, in order:
-to avoid any banks from collapsing, it might then create a bad bank that can absorb toxic asset held by banks.
-to stop debt cost from rising, which is currently the characteristics of Spain, Greece and Ireland , it will then create European bonds that will allow to fund at a cheaper rate those country and could be backed by the rest (Germany mainly).

That is just some thought on how the situation could get out of hand if confidence in the system is not and quickly or if "economical war" is started i.e protectionism by currency devaluation and state aid to key industry in a non competitive mindset.

Each country, outside the EU, will try to use the current crisis as a motivation to gain market share, economical strength and geopolitical influence. This won't be a fair game where all countries seem united to fight what could be the worse depression since the 1930's.

That are just some thought worth to share and of course all might be wrong.

Warning Monitor : Pohjola - OP

"Bancassurer Pohjola (POH1S.HE) reported a sharp drop in fourth-quarter earnings on Thursday, hit by falling asset values and higher claims, and unveiled a $388-million rights issue to bolster customer lending."

Do not have more than the guaranteed limit in this bank, as it looks like investor are running away - This morning they announce that they needed to raise money. I think it's better to be cautious as the next wave of issues is slowly approaching (burst of the eastern country economy bubble, Russia defaulting? or worse a collapse of the Dow Jones...)

Sweden Economy on Free Fall...

"Sweden Lowers Main Interest Rate to 1% on Recession.

Governor Stefan Ingves is cutting borrowing costs more than his counterparts at Norway’s Norges Bank and the European Central Bank as he struggles to contain the fallout from a deepening recession in the biggest Nordic economy.

Swedish unemployment will double to 12 percent by 2010, and gross domestic product may shrink 1.7 percent this year, Swedbank AB, Sweden’s biggest bank by branches, forecasts.

Sweden's central bank said it could not rule out rates at zero given that the economy has worsened sharply.

The repo rate is now at its lowest level since its introduction in 1994 and marks the lowest official Swedish interest rate since records began in 1907."

UK, US, Russia, now Sweden...which country can still support Finnish export?I guess none, thus this temporary layoff to cut capacity...then on top of that the strength of the Euro is hurting very hard exporters(The Swedish Krona, and the Russian Rouble have been falling very abruptly, which somehow will boost their export).

Remember the monetary policy is directly targeted to Germany and maybe France..the rest will have to live with it.

If Finland was out of the Euro monetary system, they will have slashed interest rates and the ex-"Markka" would have plummeted providing some breathing to export oriented company. But no luck, it won't happen...

Where Could housing Price Fall?

I really think there is a strong probability that price could fall to their level reached in 1997.

The reasons for such correction can be listed as follow:
1- The worse global slump witnessed since the WWII will undoubtedly affect the Finnish Economy.
2- The Finnish trading partner have seen their economy falling a cliff: Sweden, Estonia, Russia, India and China.
3-Nordic bank balance sheet is greatly damaged by their exposure to the Baltics, therefore there will have to rebuild their balance sheet, meaning less loan or let's say less risk taking (which basically started since 1999)
4- House Debt level is unsustainable.
5- current price are disconnected with the future level of the economy
6- The risk to have a depression in Finland is not negligible, should the financial crisis intensify.
7-House price falling generates another dynamic, it anchor the fact that price can fall further (the reverse of a boom: bust)

8-...in fact there are so many reasons that you could add further arguments...

Nordea... The Lost Principles

About time to write about Nordea, don't you think?

Investment

A bank reputation is mainly funded in trust, trust between the client and its customers. However, lately, it seems that customers are being put on the front line and used as cash machine.

The story is simple, Nordea advertises a Fund, a Money Market Fund which investment model, in principle, is in the safest possible grade.

Imagine, I'm the Nordea fund manager, My name is "Smiley B". Now, here is the customer, let's call him "Lamb Da". So "Lamb" want to give his lifetime deposit to "Smiley", X euro saved throught hard and real work (no "ponzy" bonus here), and trusting that person.
"Smiley" give "Lamb" all the insurance that his money is safe and will get some safe return on it.

Now, Smiley, take that money and lend it on the market, either by purchasing Government Bonds or similar type of very safe investment vehicule (that's the whole idea of the money market fund).

You see, If "Smiley" lend X euro for a specific period to a government, he will get X+Y back, obviously Y will be a small percentage of X (2%-5%). That should be guarantied by the fund.

So you cannot lose, even if interest rates fall, you just wait for maturity to get back your capital and with it some interest.

So "Lamb" is happy since he doesn't want to speculate in the market and is happy to lend his money to government or equivalent that can use his money wisely since he doesn't need it during that period of time.

In Nordea, the reality is diffenrent Since it turns out that in our case, "Smiley" is a crook, and our "lamb" being cooked by the Crook.

A picture is worth 100o words or a billions "Crooks", so let's look at some chart:

Evidence #1 : Money Manager Fund, or "Money Losing Machine"


The red curve is the benchmark, which is here JP Morgan equivalent Fund. As you can see JP Morgan fund has evolved as it should be, a linear progression.

The Nordea Money Manager Fund is a Total Disaster!. Now, how can you trust a Bank that show such performance, especially when you start to discover the goal of such fund (short term lending, they take your money and lend it at fix rate, so in theory you cannot lose money, at worse you don't gain).

From Nordea's mouth :

"The fund is a money market fund with a relatively low exposure to interest-rate risk. A rise in short-term interest rates may temporarily decrease the NAV per fund unit...The fund is suitable for short-term investments: the recommended minimum investment period is 3-6 months."

Evidence #2 : "there is no such thing as a free lunch"


They persist and sign, as currently it is still showing that the fund is a very low risk...Common, the FSA (Financial Supervision Authority), are you sleeping? otherwise soon they should rename themselves as "Financial Super-No-Vision Authority"... Here you can clearly see in action the total failure of the regulatory system. Most probably they were spending their time watching Opera or listening at katainen daily positive speeches on YLE 1, who knows?

For reminder:
"In Finland, the fund management operations and companies are supervised by the Finnish Financial Supervision" , coming again from the mouth of the lion, excuse me.., Nordea?

Evidence #3: "let the lion speak"...

Here is what the "acting" fund manager, as during such situation, you better be seen as acting instead as being the one in charge. (For complete "smooth" talk)

"The year was bleak for money market investors, and the sharp rise in the credit risk premiums for bank bonds crushed the yield on floating rate bonds in particular.

When the investment bank Lehman Brothers went bankrupt, several investors redeemed their units in the fund and we had to sell some of the bonds in our portfolio on a non-existent market.

We have avoided bankruptcy transactions, though."

Epilogue:

To have such losses, they might have invested in Lehman or Madoff. In reality we will never know the truth, unless the FSA publicly gives the explanation.

Note as well, that the chart above show clearly that problems started sometime in late 2007.

The conspiracy case:
In the worst case, Nordea used the opportunity to draw funds from the Money Manager Fund, and relating it to the difficult market. That we won't know if it's plausible or not and neither I'm saying that it is the scenario explaining such disastrous performance.

The Non Funny Part:
They have avoided bankruptcy transactions, maybe we should be thankful for that...it's really worrying...

Lesson Never Learned:
Lesson learned for customer, do not trust your smiley banker. Instead investigate and make them sign paper if they promise that it is 100% safe, since later you might be able to sue them and get your money back...though I'm not a lawyer. The other alternative, is each time you open a fund with Nordea, bring a lawyer with you.

Last, read any bank contract small prints as well as the big prints and even maybe take the banker finger prints, just in case....

Disclaimer: Whatever is said above is wrong and does not represent the thinking or the position of the writer. Most probably this article was written by a hacker and was published unintentionally. It is strongly known that Nordea is a great and trusted bank. The view express in this article and in the comments made following this unententionnaly published article, do no represent its authors. Anything forgotten in this disclaimer can be added any seconds. By reading this article you are abiding yourself to this disclaimer.

Dramatic GDP Fall, Another Evidence...

Contraction has started, the economy is about to deliver ... delivering what? the worst downturn observed in an adult life? certainly.

Not surprising, as the credit market kind of collapse in the last quarter of 2008. This year won't be better has temporary layoffs combined with a housing slump will put the GDP in territory not observed since the "Winter" War.

Housing? well it will put inflation in check, most probably putting it in negative territory and this time, since 1995, housing will be a drag on the economy looking forward.

YIT? 95% drop in profit in last quarter, who can do worse? Most probably they will be the first recipient of the "Finnish TARP": building bridges, roads...

Nationalizing Nordea?

"Jaakko Kiander, the director of the Labour Institute for Economic Research, proposes nationalising Nordea Bank.

In the SDP-affiliated publication Uutispäivä Demari he says a common Finnish and Swedish state bank could help the countries survive the economic crisis.

He also proposes that both governments significantly increase their holdings in the Nordic bank Nordea. Kiander says this would infuse the bank with new capital which it could use to grant loans. "

We are hearing all around that the financial system in Finland is sound - which in no doubt, I entirely disagree, since their involvement in the Baltic Sea Region and their reckless lending in the past 4 years.

Russia, which economy is on free fall and have been devaluating their currency by about 30% or more.

Estonia, Latvia, Lithuania and all surrounding will most probably go through their first depression and social instability pushing default at historical high and putting into their knees all the involved banks that participated in the miracle turning to be a "monetary" mirage...

Now, if banks were all "sound", why would we here such political juggling which appear to be a way to prepare the public involvement, in one word: "lemon socialism"

Beyond The Age of Leverage

"Call it the Great Repression. The reality being repressed is that the western world is suffering a crisis of excessive indebtedness.

Many governments are too highly leveraged, as are many corporations. More importantly, households are groaning under unprecedented debt burdens.

Worst of all are the banks.

The best evidence that we are in denial about this is the widespread belief that the crisis can be overcome by creating yet more debt.",

Niall Ferguson, Financial Times, 02.02.2009

Mr Ferguson remarkably summarize what I have been thinking for the past few years .