Risk Management, A Survival Story

Finnish unemployment rate - May 2009

The dynamic of the Finnish economy has changed radically in the second half of 2008.

Let's go in the past and let's revisit shortly the 1990's. During that period,the Finnish economy went through a total transformation, from a closed economy toward an open and technology led economy. It allowed the country to survive its worse post war crisis.

Today we are in a similar period, if not worse. What would take finland to starve the coming "depression" before it takes the currently fragile economy by storm?

First let's highlights few points:

-The household are highly endebted, the total endebtness is even greater than the level reached in the 1990's.

-Corporate are highly endebted and now face raging global competition. Corporate are fighting their survival while easy and cheap corporate financing is something of the past.

-The ageing population and its financing as well as a change in the consumption habits will be very challenging and will be a drag on the economy.

-The level of government debt to GDP will be greater to what it was in 1990, and could therefore bring an additional parameter of instability in the years to come.

-The global econony is experiencing a synchronized slump that are mainly hurting export oriented economies which Finland belongs to.

In this kind of environment, what would the investor/consumer do?
The best strategy is observation as you don't know the next move from this "invisible enemy" i.e the economical deteriorating further and faster.

Observing that stabilization has really occured which is not currently the case as the stabilization is not organic but purely artificial maintained by central banks and government stimulus. It works in the very short term but it will not replace the private sector in the medium and longer term.

Coming back to the housing market, in my opinion, it will be very foolish to buy or invest in real estate as it will be the most hit asset during this current severe economical readjustment.

If you need to buy - because of extraterrestrial forces - then you should wait at least a year until the dust has settle. This is just a common sense observation and could be rewarded by few tens of thousands Euro. In fact the probability of having housing price higher in year time compared to the current period is nil, the probability to have futher correction is very high and very likely.

Some are afraid that interest rates will be raised as echoed by local banks lately - foolish. Interest rates will likely stay at the same level as they are now, they could even be a non negligeable probability to have them lower if the economical turmoil increases.

Breaking News : "leaving the sinking ship?"

Sakari Ahdekivi, Chief Financial Officer of YIT Group has been appointed as CFO of Tamro Group. Sakari Ahdekivi will start in his new position as of September 2009 and will continue working at YIT until then.

Read it as the CFO of YIT has resigned and is leaving to TAMRO , a pharmaceutical company.

"Sakari Ahdekivi joins Tamro Group from YIT Corporation where he has been the Group CFO since 2007"

A good move as the construction industry has had a multidecade boom that has finally reach its maturity - mainly due to the second world war baby boomer who are entering into their retirement age while their children have created this last construction bubble. So Pharmaceutical will definetely be a good growth area in the years to come.

Irrational Exuberance : The Finnish Consumer

"Statistics Finland" has asked to a "basket" of consumer several questions in order to build up the consumer confidence index.

One question was, Is it a Favourable time to make major purchases at present?

The answer was a overwhelming 36.1 points having in mind that all time high was 37.7 and all time low -14.2 which was reach last fall.

First, it has to be noted that we don't really know if the people interviewed are really representative of the population - so clearly it is not a scientific method that is being used, it is more like predicting the weather for next month.

Second, an all time low in interest rates combined with the fact that most mortgage rates are linked to variable rate is currently boosting purchasing power and to that combined with the media "green shoot" paradox and a tsunami of almost real fake sales (i.e shoes that had max price of 100 euro a year ago are now price at 130 euro with a 20% to 30% sales, another example is the amount of really "crap" quality clothes that has flooded the shops to satisfy sales consumer hunger)

Third, at the end, what does that really mean making a major purchase? Since retail sales are on free fall, permit building collapsing, car sales at almost pre war levels and housing price declining.

I would assume that major purchase at present is about "the beer" mainly influenced by the weather which happen to be exceptionnaly good.

After a better reading of the statement, I extracted the following :

"In June, many households had plans to purchase, among other things, home technology during the next six months. Sixteen per cent of households were fairly or very certain to buy a car and 7 per cent a dwelling during the next 12 months. In last year's June the corresponding proportions were 16 and 8 per cent"

First to put together people that have "fair" and "very certain" buy feeling is strange, a little bit like mixing cow and bull, and hoping to get milk out of all...

To be franck, If I put as a title irrational exuberance, is simply because the Finnish consumer have been conditionned to live in a "fairly certain" begnin economical condition, a "V" type of recovery that state that crisis are mild and business as usual resume very quickly i.e inflation rising up, housing price resuming their upward trend, wage rising up and unemployement falling... As you may know by now, I do not believe a second about such scenario.

I believe more in a "W" type recovery or actually a "VL" type recovery.

In a "W" recovery, the first leg of recovery is mainly due to central banks and government pumping money into the system but the effect is short lasting and the fall resume. Ultimately a recovery restart after the economy has readjusted itself i.e less leverage, sound bank practices...

In a "VL" recovery, the first leg is similar to the "W", so after all the "legal doping" simulus is through to the economy, it fall back even lower since the growth in the past 20 years were just artificially created by easy monetary, currency manipulation and high leverage on institution and household and to that you add the demography issue that kicks in.

In Summary here is a simple forecast for the consumer confidence, a little bit like statistics finland methodologie, I used "Paint" software model combined with the help of one of my most trusted and reliable adviser, my barber:

Finnish GDP Casino Roulette

The Organisation for Economic Cooperation and Development (OECD) said in its latest outlook on Wednesday it expected Finland's gross domestic product (GDP) to contract by 4.7 per cent this year and to grow by 0.8 per cent in 2010.

In its previous outlook, made public in December, the OECD had forecast the Nordic country's economy to grow by 0.6 per cent this year and by 1.8 per cent next year.

The Finnish finance ministry said last week it saw the economy shrinking by six per cent this year and growing by 0.3 per cent next year.

...and my barber is predicting a 5.1% GDP growth..and while walking down the street, I asked kindly a grand mother what does she think about the Finnish GDP, she look at her watch and told 4:50 warmly...well I suppose she meant 4,5%....
In the meantime, Housing Finland models are as well pretty accurate as there are high tech based - an old mysterious christmas crystal ball that said it will be 3.79%...

The truth is that no one has any possible clue about where the Finnish economy will be in the next 12 month since it mainly depends on how the other economy behave, how healthy are our partners (gosh, our friend swedish are in deep sh**t with their eastern european exposure, the Russians are playing Russian roulette with the Rubble and rely on an unrealistically high oil price in the short term ...) - So highly and tight coupled economical systems, that's what we have in our hand - an architecture that was created with instability at its core - grossly reliant on an ever expanding external demand - an open economy that could slowdown tremendously if the global customer decide to reduce their "surrealist" binge comsumption, and stop pilling up debt as it occured in the past 10 years.

So -1,-2, -3,-4, -5, -6 , it's a bit like the start of the spring summer in finland, no one knows if it's going to be mild or freezing...but one thing is sure after a bottom there is only one direction, it's up...and that time the politicians and economist will congratulate themselves since the recovery is on its way ...hoping that people have forgotten the greed, the corruption, the excess that occured during a period where the normal citizen have had to pay the bigger price ("socialize the losses and capitalize the gain")

PS: note the strategy of the finance minister, you predict a catastrophique number -6% to come back later on in the year saying it's not that bad we have -4% ...which is in fact a catastrophique number - psychology, politics and economics all combine to deceive the mind.

Politics, Real Estate and Corruption, Part 3

"The Espoo City Manager Marketta Kokkonen and the city's Director of Technical and Environment Services Olavi Louko have denied allegations of bribery violations arising out of official trips they have made.

The National Bureau of Investigation, Finland's central criminal police arm, has suspected there may have been infractions, and has almost completed a preliminary investigation into the matter.

The criminal investigation centres on sixteen official trips made by Louko, one of which Kokkonen also took part in.

It is understood that the police enquiry was launched by a request at the end of last year from Espoo City Councillor Kurt Byman (Ind.).

He passed material to the police concerning 125 trips made by Olavi Louko between 2001 and 2008, examining the parties arranging the trips and events and their links with the City of Espoo.

Byman has claimed that construction firms and developers have entertained Louko and in so doing have received large tracts of land for development from Espoo. Louko has denied the claims.

Kokkonen has been the City Manager of Espoo since 1995."

Looks really like we have reach the end the real estate cycle as usually it terminate with the discovery of various criminal cases and put into light the high degree of corruption in this field.

I can't believe that the "rating agencies" put Finland as the least corrupt country in the world in the past decade...they were so blind or so uncompetent.

Politics, Real Estate and Corruption, Part 2

Political, Real Estate and Corruption - Part2

"The Local Government Pensions Institution (KEVA), which is one of the players in the controversy over election campaign financing, rents apartments to four Members of Parliament."

Again the pension fund messing up withreal estate- Do they really think that money that pensionnner or young worker have been paying can be used for personal purpose- do they think it is money at their disposition- utterly discouraging, staying polite...

"Minister of Transport and Communications Anu Vehviläinen (Centre), Minister of the Interior Anne Holmlund (Nat. Coalition Party), and Centre Party members of Parliament Hannes Manninen and Mirja Vehkaperä all have rental apartments owned by KEVA, which they use while they are in Helsinki."

"The rental terms are the same as for any tenants, except for Manninen, who pays EUR 412.39 a month for his 42-square metre two-room flat in Tikkurila in Vantaa. One possible reason for his relatively low rent could be that the lease dates back 14 years."

I would like to know as well how much and what type of property they own and the type of financing they had to contract in order to purchase them.

Corruption and real estate Part 1

Alko Taxi - Alkotaxi !!

For the past few weeks an Alko taxi, a van painted in a garish yellow, has been delivering Estonian alcoholic beverages to thirsty dwellers in the capital city region.

Customers place and pay for their orders online. To date some 50 orders—mostly in Helsinki—have been placed with this unconventional drink-dispensing service.

Vasili Visnapuu, who’s in charge of the cab's deliveries, says the business is legit as the alcoholic beverages are delivered for free and because the transaction occurs on the internet.

“It would be illegal to import alcohol for sale in Finland. The purchase is actually made in Estonia, we simply don’t charge for delivery,” says Visnapuu.

The state versus Visnapuu... Would the state lose its market share from new type of entrepreneur...it seems so!

Good luck for him as he is bringing a touch of competition into this closed - cartel oriented - market.

We keep on talking about Finland being an open economy - so please let's make it happen.

PS: ALKO is a monopoly set by the state to control the sale of alcohol and most importantly to receive all the profit derived from heavy drinking,binge, sophisticated and social drinking.

Mind The Gap

"Lemminkäinen Group's Oy Alfred A. Palmberg Ab has made agreements concerning the construction of several new housing sites.

Espoon Kuusama, a 41-unit apartment building completed in May in the Laaksolahti district of Espoo, has been sold to Tapiola KR IV Ky, a real estate investment fund managed by Tapiola Real Estate Ltd."

They can sell to to private people as the demand has collapsed thus the only alternative is to sell between investors -most notably linked to Pension Fund (Tapiola Pension fund investing through its real estate branch?) - Well there is a Gap to fill, I suppose.

The other explanation is of course a "run to cash", the property developer need money and is not able to wait otherwise quite few bankers will lose their sleep with the insolvency shadow in the background. Who said that the market was back to normal and that sales were back to last year level?

"As a follow-up to the deal, Oy Alfred A. Palmberg Ab and Tapiola have agreed on the construction of a new rental housing site in Viertola, Vantaa. The 68-unit apartment building will be built on a site owned by Oy Alfred A. Palmberg. Planning work will start in August-September and the site is expected to be completed in November 2010."

"The construction of an 18-unit apartment building (As Oy Helsingin Lammastarha) has begun in the Fallpakka district of Helsinki for TA-Asumisoikeus Oy. In August-September construction work will start on a 26-unit apartment building (As Oy Helsingin Hevoshaka) in Fallpakka and a 38-unit apartment building (As Oy Espoon Esikko) in the Laaksolahti district of Espoo, also for TA-Asumisoikeus Oy."

So lots of rental supply coming in the year to come added to that to the glut of unsold property - I am wondering if we are going to see the first rent deflation in the Finnish real estate history - probably.

The same will apply to the commercial real estate where the number of offices being build has reach an extraordinary level - expect offices rent to drop as well as their value (which will probably ripple on Banks profits)

"The project is still awaiting confirmation of funding from the Housing Finance and Development Centre of Finland(ARA)."

Quite funny - Tax payer money is still on the line otherwise AAP cannot build since it doesn't meet its profit target (where was the fatty profit made in the past 15 years? (distributed as dividend and large pay to shareholders and executives?)

Politics, Real estate and Corruption

Millions in municipal pension funds invested in Nova Group projects.

"About EUR 20 million in pension savings for municipal employees was invested in a project of real estate development company Nova Group.

The approval of the investment was put forward by Markku Kauppinen (Centre), CEO of the Local Government Pensions Institution (KEVA).

Kauppinen’s links with Nova Group were put in a new light when it came out that he was also present at a discussion held at the Prime Minister's residence on raising funds for the Centre Party’s 2007 Parliamentary election campaign.", HS

No comment except that it is a disgrace to use Tax Payer money for political ambitions or to bring wealth to a small group of people.

Anyway have a nice - honest - Mid summer !

The Truth About Current Finnish Housing Market State

Yesterday, randomly I was head to head with huoneistokeskus and various real estate high representatives talking UP the housing market...Well when I say head to head, there was separation between us : my TV screen...indeed they were parading in the YLE channel - as usual.

So for them it's back to normal..."ouch" I thought - when I heard that (well after a real time translation, as I asked total freeze in the room and requested a detailed transcription from Finnish to any other easy-to-learn language i.e English, Sami)

So after this "ouch", the few neurones I have still left hinted me (quite few were hit badly by the changing weather in Finland - from +30 degres celcius to +2 in about 2 days) that I should show the lastest hard data about what's going on in the Finnish real estate market.

So here we are...and as a hard fact, you can see, on top, this table that shows you clearly the downward trend on the loan growth. (here is the source if you are willing to dig into the details : BOF)

So loan stock growth is plummeting following sharp drop on interest rates (from a high during the peak of the bubble in 2005-2007 to now, the growth rate has been divided by 2). Less and less people are willing to buy since the music has stopped playing and house price has started their downward trend. What is important is the dynamic or the trend since it tells about what could happen in the medium term...

Conclusion, the market is not recovering and as I said do not expect it to recover until :
1- the unemployment situation stabilizes - so until at least later in 2010
2- well after the economy recovers which is far from being the case - maybe after 2011 - I say maybe because there are worse alternatives.
3- Housing permits grow again, which is currently not the case and actually has corrected quite sharply.
4- After a further price depreciation of at least 20-40% in the next 2-4 years

This table show another interesting point, the relation between interest rates and housing loan growth (and price) - usually it's pretty uncorrelated. In fact House price grows when the economy has well recovered and is growing but it usually drops when interest rates are falling or are very low levels (the reason being that interest rates stays depressed as long as the economy is).

Now do not be fooled by those kind of media circus - people will always advise wrongly at market top - the same happen in the stock market where the target is the public and the beneficiaries are the institutionals and banks. Unfortunately people keep on falling in those kind of traps - maybe people have short memory but in todays internet capabilities it's unforgiveable.

How Does The Government Fight Deflation? ...

Well simple...we have the following equation:

hypothesis : The Finnish government is at the head of an Alcohol cartel called ALKO - as well as a gambling cartel (which soon will include online poker)

Inflation = funtion(X + Y + Z + alcohol tax + tobacco tax + oil tax)

Since X Y Z are plummeting due to a plummeting demand, highly undebted household, there are only few variables to play with.

Since you want to massage the data in order not to anchor deflation, they should then try to keep afloat the inflationnary components.

- Oil tax was raised in early 2008 by 10%
- rent for subsidised flat was raised by 8%
- Alcohol Tax will be raised in autumn 2009 by 10%
- Tobacco Tax was raised
- Electricity price was raised (irrationally, against market logic) by Fortum, a partly owned state company.


At some point you will really wonder what the data really mean as the rules change or are artificially manipulated to show what people want to see or hear.

PS: The other way to fight deflation is to create the ground for hyperinflation - sowing the seed of the next crisis (i.e keeping the interest rates very low, increasing government deficit)- At the end, you hear about price stability but in the past 30 years we went from bubble to bubble where prices were absolutely instable...

Troubling Signs

So far we are the following the track of early 1990's...but to my opinion, this time it could be a little bit worse.

Why worse? well in 1990, the US, UK and most emerging markets had a mild recession and resume their growth pretty fast, the banking system was untouched and globalization was in full force.

Today we have a global financial system that is kept artificially alive, the world trade has collapsed and industrial confidence has been broken. On top of that, we have a globalization of economical issues not to speak of the complexity of the current economical environment.

Today Policy makers are as confident and lucide as a Matti Nykänen after a long night stand. Basically, they are currently driving the world economy, under a very heavy fog - no visibility and no way to predict what is next.

Coming back to the 1990's comparison, Statistics Finland has recently a pretty good article showing the state of the economy and made a clear comparison with this period, here is what they had to say:

GDP grew by 0.9 per cent in 2008. Seasonally adjusted GDP was at its highest level in the first quarter of 2008, after which it has fallen at an accelerating pace. Finland’s economy is currently diving as quickly as it did in the early 1990s when the biggest single drop in GDP, which occurred in the first quarter of 1991, was also -2.7 per cent (compared with the quarter before). The biggest year-on-year drop in the 1990s was -8.0 during the last quarter of 1991.

Finland’s economy is currently also contracting slightly faster than the economy of the EU area taken as a whole. According to preliminary data compiled by Eurostat, the GDP of the EU area contracted during the first quarter by 2.4 per cent from the previous quarter.

Finland is doing a little bit worse than its European counterpart. What can you expect from an export oriented economy, when the world trade suddenly come to a standstill.

Unfortunately, it is not like in 1992-93 when the country could devaluate it's currency in order to kick start its export - the Euro is hurting badly since too strong agains a sinking dollar and against major emerging market that have pegged their currency directly or indirectly to the dollar.

Now Finland is in a state of economical emergency should the global economy doesn't stabilize as predicted by the oracles- the one who couldn't foresee the impact of years of unsustainable debt accumulation as well as history of financial greed.

It really needs an urgent review of its internal economical architecture, far too reliant on export and too much on unsustainable internally debt-fueled consumptions- as if the 1990's lesson were not learned.

Ok, that's enough of realism pessimism for the beginning of this week.

Green shoots ... Not Really.

Some country have witnessed signs of recovery, what some officials called "green shoots".

In March , it seems that the downward trend was broken and that a recovery was appearing, it was short lived. Indeed in April the data show again a continued deterioration and no signs whatsoever of a recovery.

Let's look at the data.

The industrial output is still extremelly depressed:



The same can be seen in the new orders in manufacturing :



While at the same time, around the world the "growth" or "green shoots recovery" was partly fuelled by very low, dangerously low interest rates, government stimulus and money printing in some cases (US, UK etc...).

In some big country, the recovery could turn to the worse as they are creating the base for an economical tsunami. Here is more precisely what I mean:

"China’s new lending doubled in May and industrial output and retail sales climbed more than economists estimated as government stimulus spending revived the world’s third-biggest economy.

New loans jumped to 664.5 billion yuan ($97 billion) from 318.5 billion yuan a year earlier, the central bank said today. Industrial-output growth accelerated to 8.9 percent and sales rose 15.2 percent, the statistics bureau said"
...

" 'The rapid growth of credit should be regarded as a warning sign,' Andrew Crockett, a member of the China Banking Regulatory Commission’s international advisory committee, said in Beijing today.

'Nearly always when we have financial difficulties at banking institutions, it’s preceded by rapid growth in lending,' said Crockett, also JPMorgan Chase & Co.’s international president."

Nethertheless in the past 3 months the policy makers had averted a confidence crisis.

In the meantime, I will advise to be very carefull if you are thinking about taking big debt -it is definetely not the moment - as this crisis has not yet reached it's full force and next year could be very decisive.

It is clear that the export market is being hit pretty badly, while in the meantime the internal consumption is not doing any better.

Kesko press release highlights some of the symptoms.

"In the building and home improvement trade, sales in May were €218.8 million, a decrease of 27.0%.

Sales in Finland were down 31.0%. Sales in foreign countries decreased by 23.6% in terms of euros and by 16.3% in terms of local currencies. In the Baltic countries, sales were down 33.5%.

In the car and machinery trade, VV-Auto's sales in May were €44.0 million, which is down by 46.5% compared with the previous year. "

All in all retail sales are doing pretty poorly as highlighted by statistics Finland

According to Statistics Finland, retail trade sales fell by 2.2 per cent in March from March 2008. Sales volume fell by 3.5 per cent during the same time period.

A Stable Slow Down of The declining Economy

So Bank of Finland through its Governor Mr Erkki Liikanen, gave a press conference on the outlook of the Finnish economy.

The little information that came through the media channels shows mixed signals.

Let's analyse that.

"Erkki Liikanen, the governor of the Bank of Finland, said at a news conference Tuesday that there are some signs of stabilisation in the global economy, but no quick recovery was on the horizon."

Well as economists turned politicians put it: there is a slowdown in the slump that occured in the first quarter of 2009. I think it's not surprising considering the amount of stimulus they gave in the form of interest rates cuts and government stimulus.

A stabilization was clearly expected but the issue now is: what next?

"According to Mr Liikanen world trade has stopped contracting further and stock prices have started rising. Nevertheless production volumes are still decreasing in many countries."

Stock price rose maybe a little bit too quickly as overoptimism is growing. In Finland, especially in Uusimaa it seems like almost business as usual - I suppose the same thing could have been witnessed in 1990 before the storm hit. Notice that Statistics Finland published the GDP figures and there are awful , similar to the level of the early 1990's - another worrying sign.

"Mr Liikanen also said he was concerned that an increase in credit losses could impair the ability of banks to grant credit"

I suppose regulator did not do their job, are not doing their job and provide a laughable stress test that was suppose to indicate that it's all fine with the banking system - albeit if interest rates stays low - sub 2 - for another 2 or 3 decades then most probably the banking system will survive.

But here is the dilemna, either we have a quick recovery and interest rates increase sharply and will push the banking to its knee or we don't have any recovery and unemployment will be depressed and loan losses will shoot up.

I see for the moment a lose-lose scenario due to the fact of what had hapenned during the regulators holidays period of 2003-2009...so until we do not see a sharp readjustment in the debt ratio as it happened in the US, then we are far, far away of seeing light out the tunnel...

In fact, what we see is an electrical light set by the central bank and governments to put a floor of the economical free fall that hapenned in the first quarter of 2009 and last quarter of 2008 that allow to provide some time to fix a financial system or an financial architecture that became irrelevant after 15.11.2008.

Regarding more sensible and focused speech, here is the one from Jurgen Stark

First a good summary:

"Following the default of Lehman Brothers in mid-September last year, the turmoil in financial markets which had started in August 2007 turned into a major financial crisis.

Liquidity dried up, and credit flows to the economy slowed down. Problems in the financial system quickly spilled over to the real economy, and an adverse feedback loop between the real economy and the financial sector emerged.

This has led to the most severe and synchronised global economic downturn for 80 years. The euro area has not been spared. Economic activity has declined sharply, and inflation is at its lowest level since the launch of the euro.

Monetary and fiscal authorities across the globe have responded quickly and decisively to these extraordinary developments".

And last what I think is the correct view the actual situation:

While the world economy continues to face a severe and synchronised downturn, recent international business confidence indicators suggest that the pace of the decline in economic activity is slowing down somewhat.

Source : Liikanen - BOF, Stark - ECB

The "First" and "Last" Time Buyers, A Long Story...

A good analysis was given my My "friend" Professor Robert Shiller on the New York times.

He really gives some good ideas why the housing market can continue correcting for quite a long period. He gives the example of the first time buyer - the young couple - and the "last time" buyer - the old couple about to retire- .

Let's decorticate certain point made - you can as well read the full article - for archiving purpose, in general, I prefer to copy fragment of the article, the one I think are important to highlight, instead of providing a link as links don't survive time.

"HOME prices in the United States have been falling for nearly three years, and the decline may well continue for some time."

"Such long, steady housing price declines seem to defy both common sense and the traditional laws of economics, which assume that people act rationally and that markets are efficient.

Why would a sensible person watch the value of his home fall for years, only to sell for a big loss? Why not sell early in the cycle? If people acted as the efficient-market theory says they should, prices would come down right away, not gradually over years, and these cycles would be much shorter.

But something is definitely different about real estate. Long declines do happen with some regularity. And despite the uptick last week in pending home sales and recent improvement in consumer confidence, we still appear to be in a continuing price decline."

I suppose the same phenomenon has started in Suomi-Finland about one year ago and according to my deep studies and my materials (crystal balls, www), the correction will last for at least another 3-4 years to end sometime in 2012-2014, to stagnate for a very long time- well until the next wave of babies - boomers arrive in force in the market - in the past 10 years an army of baby have popped up around many cities , and may flood the "housing" market in about 2025-2030 and at most create another financial crisis ;-> - be careful when you make babies, think about the economical impact on bankers income and stock options...

"This dynamic helps to explain why, at a time of high unemployment, declines in home prices may be long-lasting and predictable."

In Finland we are just starting to witness the process of higher unemployment from a low of 7% it will most probably reach double digits of about 11-12% (or more if the economical deterioration is higher than expected) - of those figures could be much higher if the retirement process had not started (since the work force will be shrinking)

"Imagine a young couple now renting an apartment. A few years ago, they were toying with the idea of buying a house, but seeing unemployment all around them and the turmoil in the housing market, they have changed their thinking: they have decided to remain renters. They may not revisit that decision for some years. It is settled in their minds for now.

On the other hand, an elderly couple who during the boom were holding out against selling their home and moving to a continuing-care retirement community have decided that it’s finally the time to do so. It may take them a year or two to sort through a lifetime of belongings and prepare for the move, but they may never revisit their decision again.

As a result, we will have a seller and no buyer, and there will be that much less demand relative to supply — and one more reason that prices may continue to fall, or stagnate, in 2010 or 2011."

Regarding the young couple, it is clear that they have been completely priced out of the market and on top they are slowly denied participation in the job market.

Although the strong dynamic of the past 15 years has pushed some to take massive debt (where debt servicing burden is undocumented by the statistics officials) or need to leave in "rabbit" size dwelling (though rabbits are smarter, they don't pay a penny for the place they live in).

"Even if there is a quick end to the recession, the housing market’s poor performance may linger. After the last home price boom, which ended about the time of the 1990-91 recession, home prices did not start moving upward, even incrementally, until 1997."

So no hurry, usually a bust in the housing market stays fresh in minds for many years that follows- of course media, banks economist and some politicians (by providing trap subsidies, wrong tax scheme, permit control) will try to scare people off by suggesting that housing price will resume again their growth - fallacy and lies made to trap honest and young or old workers for the greed of few.

You have to remember, as well, that a boom is mainly a concentration of demand in a specific point in time that outpace the offer and is usually created by low interest rates, lax regulations and deterioration of credit qualities - this of course is amplified by the media (TV program, self interest) and social behaviours (the sheep behaviour - a friend or relative is buying and the wave start).

This will not happen for at least a decade or two or maybe never (though I doubt this latest point, history has shown the contrary) - household are not speculators after all they want to live in a place they like without having high debt pressure - this is not the case today but probably will be down the line at least in term of quality and affordability.

Source : Shiller - NYT

Shorting The Stock Market

Since the stock market is getting a little bit too euphoric to my taste I decided today to "Short" the market.

What does that mean? well, trying to make money when the stock market is falling.
i.e when the market fall by -1% you make +2%... It's a "contrarian" view.

Obviously there are risks, if the bet is wrong you will lose twice as much the market gain.

So how do you short the market?

Well if you live :

In sweden you could buy : XACT Bear

In Paris or Europe you could try BX4 or BXX

In the US you could try QID

Obviously, you should be aware that these instruments are very speculative and could be use to protect your portfolio in case of a market correction.

The question is to know when to short because if you have the wrong timing or have wrong position you could lose big. The best is to use those intruments when you have a clear bubble...as in 2000 or 2007.

So today I'm betting for a short correction -10%? then the market will resume higher.

Obviously you should have clear stop-loss to minimize losses in case of a wrong bet.

For fun :
1- The best indicator to short is clearly when Nordea announces new funds, usually it is about 1-2 week before the fund collapses. They did the same thing with the Russian Fund, new European Fund...and now they have announced not long ago, index linked bond related to energy (petrol etc..)...indeed banks are here to make money and not to make their customer rich...

2- When Kauppalehti says that it is a good time to buy and that the media/economist are repeating that we will have a V shape recovery and that it is a very good time to buy (as they will not tell you that when the market is "cheap" as in March,but instead highlight the losses and "stock market crash" to scare you off)

More seriously (?, as if the previous paragraph was not?):

1- They are some indicators that give you the pulse of the market i.e when the market gets over optimistic or pessimistic, have a look to the following market sentiment - equity put/call

2- You should buy shares when the market is highly pessimistic and sell when it becomes euphoric...the same apply for the housing market and the reason I created this blog in 2007 when I clearly detected housing market euphoria and wanted to share that information with people - personally I decided not to buy at that time and as you may now, my target is to buy in 2011-2012, when price become reasonable - of course I am referring to the capital region as I think some region in Finland are already very cheap.

Last but not least:

You should never speculate more than 5%-20% (depending of your risk appetite and capability to digest total losses) of your total assets as you want to minimize losses if you got it wrong.


What are your views?

Disclaimer: this is not a recommendation to buy such products and you should take all the responsibilities in case of losses. What has been said about Nordea is a joke as I believe that they are not involved heavily in the Baltics and do care about making money. Please see an adviser, doctor, psychiatric and avoid bankers before taking any financial investment.