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...

Finnish Housing Bubble

Statistic Finland has published the latest dwelling price for the third quarter. It is worth to understand that those prices just reflect a trend not necessarly the reality as experienced and observed on the ground since Prices are overly underestimated by Statistics Finland (even if this institution is transparent on its methodology and how it gets the data).

As expected, it shows higher prices compared to the previous quarter however still lower than the peak reached in 2007. I

The following picture shows the forecasted trend before statistics Finland published its data and provided some analysis see post "Housing Price : Warming Up Exercise".

Now what can explain the latest rise?

You must understand that the last leg up is not due to fundamentals and it is not coming from an healthy market. Distortion are hapenning at many levels and are pushing prices into a very dangerous and worrying path that could destabilize the economy as a whole and in particular the banking sector.

Now the facts:

1- Interest rates for housing purchase
As you can see in the figure above, interest rates are historically low. This is giving temporarly some oxygene to people who heavely borrowed at variable interest rates in the past few years. Lower interest rates is as well distorting the market as it is bringing into the market buyers that would otherwise not be elligible to borrow large sums for housing purchase, especially the young buyers.

Now, I would say that if Finland had its own currency and interest rates setting, I would then say that interest rates could stay low for a prolonged period but it is not the case. It is the European Central Bank that control Finland monetary faith. Indeed, the ECB will have to raise interest rates even before inflation shows its head and that could then be highly inadequate for Finland economical situation. It could be earlier than people would think.

2- State Sponsored Speculation

The government has still maintained interest rates subsidies even after IMF recommendation to phase them out. This has contributed over other elements, to an overheating of the housing market in the past few years.

In addition, the state in conjonction with banks is "lurring" the young to acquire price inflated flat, here is what YLE reported (full article here):

"Special bank accounts intended to help young adults get home loans are growing in popularity. Since July, customers of these so-called ASP accounts are eligible for a 3,000 euro bonus from the state.

OP Bank Group, Sampo Bank and Nordea Bank have all reported an increase in ASP account holders."

and from the Nordea site :

"If you start saving right away, you can have the necessary 8 deposit lots saved and buy a home before the payment period of the state home saving bonus of 3,000 euros ends on 31 December 2011."

3- Finland Economical Situation

It is pretty disastrous , just have a look the latest GDP figures, it is even worse than the 1990 recession. In 1990 we had the beginning of globalization and the birth of a giant Nokia. Today we have curretnly emerging markets overheating by ill designed stimulus that are putting at risk their economical stability - those stimulus and interest cuts were put in place due to economical distress. Moreover the Finnish giant industry are all but struggling.

Finland cannot devalue its currency which was the ultimate solution to bring back competitiveness and boost the export market. The Euro is too strong for an economy that mainly rely on export.

4- Finland DebtNow there was some talk that Finland will borrow huge amount next year (around 10 billion euro). I'm just wondering if it is a way for the country to lose its credit rating .

One explanation would be that it's better to borrow before it gets too expensive. Finland need to borrow is massive since it need to fund projects in order to limit unemployement from reaching scary figures. There are as well massive needs to fund a growing and worrying amount of retiree.

Of course, it is hapenning at a time of political elections hence no risk to see tax rise around this time hence the need to borrow...

Indeed there is nothing as a free lunch what is borrowed today will have to be repaid so expect higher tax down the line. It is sad that money being used today will mainly go to banks and builders, one that enjoyed an easy ride over the decade.

Let's see what "Bank of finland" had to say about that debt:

"As in other countries, the accumulation of debt by the public sector in Finland is justified. It has made it possible to soften the impact of the recession. Fortunately, the financial position of general government in Finland at the beginning of the recession was strong, at least relative to many other countries.

A continuing trend of increasing indebtedness is, however, not sustainable. Before long it will be necessary to reach a level at which the debt ratio can be stabilised. The higher the debt ratio, the larger the primary surplus will need to be in the future. The primary surplus is the difference between public income and expenditure, excluding interest expenditure. Rising interest expenditure must then be financed by tax increases or by cutting other expenditure."

legal note: whatever it is said in this article is not of the responsability of the author , any reference to any entities may be accidental. Anything said above may not be true and may be removed at any stage, at anytime (you like it or not).

And again I warn people by the media (lobby driven) that distort or try influence people mind - as an example see YLE (which is one the cheerleaders) and refer to the post : "...get some fresh air"

Switch-off Your TV/Newspaper and Get Fresh Air...

As I have been repeating limit your exposure to news or media in general as without much notice your way of thinking will be out of your control, on the way , the vision of the world will undoubetdly be distorted.

Take for example the free newspaper "METRO" that can be found in metro or train station. Every morning while sitting in the train, in the way to work, and I shortly observe people around me, one will be amazed by the amount of people reading this newspaper as addicts in need of their morning information. At the arrival, the target is achieved, most will probably have the same view of the world ...

TV can be put on the same level and it gets people scared!
Here is an example:

Finns perceive more threats around them now than during the cold war. According to an expert from the Finnish National Defence University, politicians are largely to blame for creating new threats.

Another outrageous subject grossly abused by the Media and the politicians ... the "SWINE" or "H1N1" or "SIKA" or "PIG" Flue ... I wonder who come up with those names...

So the Piggy Flue have killed so far .....1 - one - Yksi person...

Yet it is considered as very dangerous disease while on the other hand more than 1000 - thousands are dying regularly from the same desease year after year, as shown in the following table while at the same time the bigger seller of alcohol is not behind bars (just kidding (see foot note)):

So my advise keep your mind "independant" and most importantly your judgement intact and not biased by the daily media calculated information coverage...

Footnote and legal note: whatever it is said in this article is not of the responsability of the author , any reference to any entities may be accidental. Anything said above may not be true and may be removed at any stage, at anytime (you like it or not).

...Next the ECB rate increase?

In yesterday's article I wrote the following:

"... In fact, price will correct due to the forced exit strategy by central banks that will led them into increasing interest rates to avert twin bubbles as already observed in the stock market and housing market."

So today we have the following headline news:

Oct. 28 (Bloomberg) -- Norges Bank raised its key interest rate a quarter point from a record low and signaled steeper increases than it previously forecast over the next three years as inflation accelerates and unemployment remains low.

So should the ECB follow the same path, we will enter a zone of turbulence with regard to the housing market.The dices are thrown ...

Housing Price : Warming Up Exercise

This is my baseline scenario reviewed based on the current interest rates and bank lending behaviour.

I will come back to the housing price trend on the 30 of October, when "Statistics Finland" will publish 3rd quarter dwellings price.

It gives me an opportunity to prepare the ground before the data is released and try to make an analysis to explain the current situation. The economy is in bad shape, there is no doubt about that however the central banks and government have flushed the market with easy credit (historically low interest rates).

This will probably push any asset price even higher and make the current bubble even bigger and quite dangerous. So in order to avert the current financial crisis they have put the seed of an even bigger financial monster.

Having said that, the outcome of my baseline scenario is still valid, but instead the correction could be more severe and more violent on the economy. In fact, price will correct due to the forced exit strategy by central banks that will led them into increasing interest rates to avert twin bubbles as already observed in the stock market and housing market.

The other intersting piece of data that puzzle me is the consumer confidence component "Finland economy in 12 month" which is at record high, even greater than the dot com bubble...

Finnish Housing Indebtdness (Updated)

By looking at the data provided by "Statistic Finland" (see reference) , one will not be surprised to learn that Finnish exponential indebtdness growth is behind the phenomenal surge in housing witnessed since 2000.

The following charts will try to demonstrate that we are currently walking on thin ice... It underlines the country's politicians and/or economists inability to oversee a situation that went out of control in the past 10 years.


Since the data has been gathered by "Statistics Finland", income has always been greater than credit, however since 2008 the situation dramatically changed...

In order to compensate for the difference between the income growth (linear) and asset price growth (asset inflation : housing, food, land, rent, etc...), credit was used to fill the gap hence the exponential growth witnessed.

Now Nordic banks are extremely nervous to see the unemployment growing since the amount of debt hold by private household is worryingly large. Should the deleveraging of the household happen, the consequence in the economy will be felt for many years to come, in particular the housing market will be greatly impacted.

Now, let's go back in the past and try to underdstand the root cause of this housing bubble. So, in order to have a housing bubble, you need to have more demand than supply. In order to have more demand, bank only need to provide more credit in order to boost the amount of transactions, and indeed this is what they have done, reckless lending, non regulated financial market that went "nuts"...Where investors were purely driven by greed and where consumers were viewed as a possible channel for reaching quick profits or high bonuses.

This is what the following chart demonstrates. The number of transactions for housing purchase have been multiplied by more than 3 in ten years (1998-2008). The same phenomenon was observed during the previous reported and well publicized bubble (1981-1991).



It is true that since 2009 the situation has reversed (unfortunately the data is not available from statistics finland database). The number of transaction has collapsed and the interest rates on housing loan has fallen markedly. The latter will probably affect/distort temporarly the indebtdness level and allow a "temporary" window of transaction growth. I insist this is temporary, and it is a side effect of the central bankers to deal with very severe economical conditions.

In addition, the Loans for house purchasing growth (year-on-year % change) shows clearly a continous weakness since the peak reached in 2006 (Reference : http://www.ecb.int):



Builders have understood that the market has turned and have drastically slowed their contruction ambition, as demonstrated by the evolution of the number of building permit granted. So on the one hand the professional have understood that the market has turned while on the other hand the media is pushing into believing that the housing price (in nominal or real term) will continue to grow and that it is sustainable.

See below the evolution of the number of building permit granted (reference : http://www.stat.fi) :
To conclude, I will say that we have had a credit bubble that fueled the housing and stock market. In the past 12 month, the economical situation went to an abrupt change and pushed central bankers to take incredible measure to stop the global economy from falling a cliff and overall sustain social stability more than wealth preservation.

I'm still convinced that the housing correction is overdue and a low will be reach in between 2010-2014 which was my baseline scenario since end of 2007 before the financial crisis was starting to be the main headline... however we are in a very unusual situation where past economical and political model have been damaged, and to that extend we will see the emergence of a new economical paradigm and see the emergence of new leaders. It will take time and the impact will be unknown, hence the need to adapt one's view with regard to possible economical development in general and to the housing and stock market in general.