Warning Signals... "The survival Of The Fittest"

From a reliable source to another that is not... lets try to express the uncertainties that are currently taking place.

The reliable source is certainly the ECB that have started to send "clear" signals to the market. You could try to decipher their "secret code" or what are the messages that the policy makers are trying to send in order to influence the market participants i.e the investors - the profesional one (the amators are being misled by newspapers such as Kaupaleti or Helsanginsonomat and YLET (*)).

So the ECB last article is worth its weight on gold (when you know that gold price start to enter into a bubble mode...)

"The US and other advanced countries would exit last, as their economies are proving to be the slowest to recover. This would be the ideal sequence.

...Unfortunately, the reality appears to be quite different. Emerging Asian economies have not yet exited and do not seem to be in the mood to exit first, despite the stronger pace of their recovery, at least compared with that of the US..."

"The consequences of a late exit strategy have not been sufficiently examined. A delayed exit aims at increasing the incentives to lend at (low) fixed rates. But the more the exit is delayed, the greater the adjustment will have to be when interest rates are ultimately increased, in order to catch up. And the greater the interest rate adjustment, the larger the capital loss to fixed income asset holders."

Note that they are clearly syaing that the emerging market are currently making a mistake by not exiting from their current extraordinary policy measures. To that extent one can say that the next wave is currently developping under our eyes, a massive overheating of the emerging market (China, India, Latin America and indirectly Russia).

Obviously this is caused by the fact that interest rates are incredibly low in developped country (US around zero and Euro zone around 1%)...so money is flowing into emerging market. So we could be entering in an exception and turbulent period. And it is not clear whether the developed country (US and Euro zone) are creating in order to fullfill the following paradigm "the survival of the Fittest".

Another interesting point is the stress that interest rates will have to be increased on time, a failure to delay such a move (as the hyperinflationnary camps thinks) will have painfull consequences such as increasing interest rates to a very high level and during a longer that wished period.

The big question is again about "timing" and obviously the current state might change for the best or the worse in the next few months or years , so the need to monitor those developments.

Ok to be consistent with my introduction, here is the not so credible source:

"Pekkarinen says that stronger stimulus measures would help avert an interest rate trap and improve employment.
...
He notes that stimulus is one of the few options that Finland has to turn its economy upward in synch with the rest of the EU and avert an interest rate trap."

They will use any mean to use tax payer money that will be purely wasted (except for political purpose) as the finnish economy is fully dependent of the external world (even more as time goes) so no stimulus could replace that. However it could, at best, on a temporary basis (1-2 years), smooth the rise of unemployment and stabilize the strengh of the deterioration to an acceptable level (;->, can't help it might be due to the bad weather...) .

(*) spelling mistakes were mysteriously made by the spellchecker...

Large Scale Disinformation?

Statistics Fniland has released the unemployment figure.I could hardly find any references to furlough or people being put temporarly out of work (since there are not job seekers, again they seem to manipulate the data by putting "Unemployed job seekers"). If there are not included in the figures and the figures itself have no values and again a disapointment from what should be a transparent and honest organization.

On the other side of Disinformation, the most unfamous media scare of the moment:

"A mutation of the H1N1 swine flu virus reported in Norway was also discovered in Finland some months ago. The National Institute for Health and Welfare(THL) says the mutated virus was found in a patient in April, 2009."

The virus mutated already in April but nothing was put in the media as it could jeopardize the idea of the efficiency of the vaccin. Of course most probably the vaccin were already produced and bought...

It is a very lucrative business especially during recession time...these are worrying times...

The Story Of Mr Dharod

Nov. 3 (Bloomberg) -- Kajal and Vishal Dharod paid $559,000 in 2006 for a new four-bedroom house built in Rancho Cucamonga, California. Today, it’s worth about $360,000.

“We don’t know how we can come back from a loss like that,” said Kajal Dharod, 29, a first-time homeowner with a $4,200-a-month mortgage. “Buying the house was a mistake.”

Buying a house at the top of the market and on top of that being a first time buyer is the last thing to do.

Mr Dharod, by looking at my crytal ball, you could come back from a loss like that if the Federal reserve continue to weaken further the dollar and allow interest rates to flirt with the zero levels.

So Mr Dharod, Mr "hyper" inflation could come to your rescue however he may take time before ringing at your door...

Mortgage Situation Snapshot

"The number of loan payments being delayed is slowly on the rise. Indeed, it is evident that households are having increasing payment problems," says Nordea Bank Unit Director Jussi Mekkonen.

According to Nordea, payment problems are being seen with larger home loans.

"Calculated in euros, newly contracted home loans have fallen by 25 percent, but in terms of the number of individual loans, by 15 percent. So, fewer large loans are being contracted," points out Mekkonen.

Who said that there was no problem in the mortgage market in Finland?

Housing Bubble : The Demonstration

The last few days I read a nice research paper:
"The housing price boom of the late ’90s: did infl‡ation
targeting matter? by Sébastien Frappa and Jean-Stéphane Mésonnier, June 2009"

From that I extracted two critical information that fit pretty well with the current context.

"As households are confident that the central bank will not need to raise short term interest rates in a foreseeable future because they think that inflation is on check, they will tend to believe that observed and projected growth rates in housing prices are sustainable.

Since their expectations of low future interest rate should increase mechanically their assessment of the present value of houses considered as assets, they will be more willing to buy housing property at high current prices (compared to historical records).

Finally, they will be less reluctant to finance their home acquisition through mortgage contracts with adjustable rates, which are generally cheaper than fixed rate mortgages."

This is exactely what is currently hapenning in Finland.

"Since 1970, nominal housing price growth has fluctuated widely in developed economies with four expansionary phases:
-in the early and late 1970s,
-in the mid to late 1980s and
-from the late 1990s to the mid-2000s
and three slowing phases:
-in the mid 1970s,
-the early 1980s
-the early 1990s.

Note that, while housing price busts are normally characterized by a significant drop in real house prices, nominal house price defation is rare and was associated in the past with episodes of severe economic downturns, such as the recessions in the early 1990s in Finland, Norway and Sweden.
"

The ECB, The Government and the Donkey

“…in the euro area, there is evidence that the credit quality of banks’ loan books has deteriorated on account of intensifying financial distress in the household and corporate sectors.

Banks could be getting over the valuation losses they have suffered on their securities holdings; however, the rapid increase in loan loss provisions suggests that a renewed wave of write-downs on euro area banks’ assets may be imminent, with ensuing capital reductions”. by Lorenzo Bini Smaghi, Member of the Executive Board of the ECB, Florence, 16 October 20

The first ECB warning shot...I suppose the "economical optmimism" period is about to be over in about 6-12 months and then we will be resuming the market correct in almost all asset types : stock market & Housing.

With regard to Housing, the media did a pretty good job at foolling the "last foolish"...spreading that the recovery is on its way and that the housing market was recovering...indeed it will temporarly, thanks to the "last foolish" and helped by generously blind banks (who will be waiting for the "last foolish", in the dark, round the corner, like a "bad dealer" providing the addictive "credit shot"...)

On 30 of October, Statistics Finland has published the Quartely housing price trend that has shown growth due partly by record low interest rates, no inflation and our "last -poor trapped- foolish".

As I said previously we will experience a "double top", troubling sign that happen at the end of a bubble (check the Nasdaa or OMX-H in 2000, or the petrole price in 2008)...after that, usually the fall is pretty sharp and last about a year or two.

Now what will trigger that, nobody knows ... in the meantime the government is borrowing as fast as it can in order to have a cushion (and avoid raising tax too early - that is, to ensure the current government is re-elected) in the next few years to come.

Raikkonen Lovely House

"Oct. 30 (Bloomberg) -- Kimi Raikkonen, the world’s second- highest paid athlete before being dropped by the Ferrari Formula One team, is having trouble selling a 14.5 million-euro ($21.5 million) second home in his native Finland.

“The potential clientele for this price range is very small,” the realtor for the property, said in an interview. “It’s the most expensive home for sale in Finland.”
The price, 16,111 euros per square meter, compares with the mean price of 2,614 euros per square meter for new one-family homes in the Helsinki metropolitan area, according to second- quarter data published by Statistics Finland on Sept. 11."

It is bit sad that "Statistics Finland" is misleadng the external world on what is the real price in Helsinki. In fact you can quite easely double that.

One famous economist, British Prime Minister Benjamin Disraeli, said:"there is lies, damn lies and statistics" , He can't be more right.

Coming back to Raikkonen house, if one reader has still some pocket money left, why not making a bid? here is the link to the house.

It is worth to note that the picture gives you the impression that you are near Monaco...well don't be fool you are in Finland and if you are lucky you will be able to enjoy in between 1-2 month sunny weather.

So my point here is for 14 million euro you better put it somewhere a little bit sunnier, maybe Spain where price are bound to be divided by two in the next few years. Having said that, if it was a great house why selling it?

Predicting Interest Rates Burst

The central bankers have driven their interest rates policies based inflation targets.The European Central Bank (ECB) target is 2%.

However, with globalization and massive speculation on financial markets, can we really be confident that central bankers are in control? For example, petrol price currently is mainly driven by financial institutions/speculators hedging against the fall of the dollar instead of reflecting the real fundamental of the global economy.

In addition, they clearly underestimated asset prices speculation (housing and stocks) effect on the real economy and its effect on consumers (wealth effect) or choose to completely ignore it.

Now here is one over many scenarios (see chart below) on what could happen to interest rates. This is based on the fact that central bankers have currently no choice than to support a very weak economy in which many actors are deleveraging (paying of their debt under low interest rates). They are taking big risks where we could see interest rates burst into an explosive and fast manner.


To check the inflation in Europe, here are links inflation indicators:

- ECB Inflation Dashboard
- 3-Month Euribor
- Government Bonds

PS: I have added a reference on the right menu of the blog

"Food" For Thought

Back in 2008 during food price soaring including grain:

"Reijo Miettinen, 62, never had to worry about going hungry until global food prices soared and he had to join a growing number of Finns forced to turn to charity to fill their bellies.

Miettinen, a pensioner with thinning grey hair, eagerly shows off the day's catch: bread, ham, milk and a couple of ready-made meals -- all for free courtesy of a group called Veikko and Lahja Hursti's Acts of Charity.

"After I pay my rent and buy a monthly bus pass, I don't have much money left. That's why I come here," he told AFP as the food queue behind him circled around the yard before disappearing around a corner."

In October 2009, few months after hunger strikes around the world and growing queues in finland (which I suppose still exist but not so much mediatized)

The Finnish economic affairs ministry said in a statement Wednesday it had asked Esa Härmälä, a former head of the Finnish farm lobby, to draw up a report on the feasibility of launching grain-based fuel ethanol production in the country.

Mauri Pekkarinen (centre), the economic affairs minister, said Mr Härmälä's job was to establish whether surplus grain could be used to make ethanol while ensuring self-sufficiency in feed.

I suppose that this time they will use the "environment" reason and manipulate the "lost in translation" green party that are still travelling with big air plane and driving cars to sprout their green ideas...