bad or bad bad? A Private Discussion...

"Euro zone economic growth could at best start to recover some time next year, but it could also take a lot longer, Erkki Liikanen, a member of the European Central Bank's Governing Council, said on Thursday.

'If things go well (euro zone) growth could start to recover some time next year,' Liikanen told a business seminar in Helsinki.

'If things go badly a return to normal could take a lot longer. The good employment development of recent years will end, and unemployment will turn to a rise. Traditionally the marks left behind by recession in Europe have been long-lasting,' he said.

The 15-nation euro zone was officially declared in recession this month following a second successive quarterly contraction in economic output in the third quarter."

-So Eki, my friend; if things go well, it will be bad but if things go badly things will be bad bad or bad bad bad?

-You always made me laught with your prediction.

-oh oh , you look angry or stressed? is that me? I'm just being sarcastic, you know...take it easy.

-hey, what do you have in your hand? isn't that "Prozac"...it's not for you? humm, so for whom? the economy?...come on...Don't you believe that you can cure the economy with interest rate policies?...no??, really?...humm Eki, my friend..let's have a beer, things look better after...after all the world is still turning..what Eki? you think it will stop...ahaha you got me , I almost believed you! how much have you been drinking ;->

November Consumer Confidence "Plummeting"

Consumer confidence, released today by Statistics Finland, are the worse on record.

"Consumers' confidence in the economy continued to weaken in November. The consumer confidence indicator stood at -4.5 in November, having been -0.2 in October and 8.1 in September. Confidence in the economy was also clearly weaker when compared with one year ago and with the long-term average."

"Consumers' expectations concerning Finland's economy in general were also the gloomiest since the beginning of the 1990s."

Who would have though to see a deterioration occuring so fast? I suppose no one...that's the scary thing. Although in this blog, it was warned already a year ago that the economical situation will deteriorate, unemployement will rise, inflation will plummet, housing price will correct.

There were clear signs. Housing construction, and permit started to decline already last autumn. Inflation started to reach a peak, signs of an end of a cycle. The other big sign was the fact that the central bank in the U.S. started to cut interest rates amid the worse financial situation since 1930.


It's worth to note that the fear of being unemployed has shoot up quite drastically. This will undoubtedely translate into higher saving rate and lower consumption. That will make the latest measure from the government - income tax and VAT cut - ineffective. Now the country will have to solely rely on export. It means that the faith of the Finnish economy depends on the state of other economy and their stimulus plan.

"Absurdity" of The Day #1

I decided to highlight time to time, when it is permitted, some absurdities or anomalies that are either occuring in the political scenery or anywhere else.

The first reward will be given to Prime Minister Vanhanen with the following Saying:


"We will see a day when Iceland and Norway are members of the EU...in the not too distant future", Matti Vanhanen, 26.11.2008

Why is it absurd?

#1 : To put Iceland and Norway in the same bag
#2 : Misunderstanding on why Norway has not and will never join the EU.
#3: In a not so distant futur, I think our PM will retire from political life, is that absurd?

"Absurdity" of The Day #2

This time this is coming from Lehtomäki ,

"The Finnish environment minister, said Wednesday that decisions on measures to tackle climate change must not be put off under the pretext of the global recession." , Paula Lehtomäki (centre), 26.11.2008

Why Absurd?

#1 : Do not take for granted that the citizen is easely fooled.
#2 : Only global decisions can affect, if possible, the effect of global warming
#3 : The global recession will take care of handling the climate change. Slowing economy will consume less therefore polute less. So it's the other way round.

"Absurdity" of The Day #3

"Finland's National Bureau of Investigation said Wednesday that the police would establish a voice sample database within a couple of years"

"He added that the police were also mulling founding a database of odours."

#1 : How about combining both ;->

Government "Unknown" Employee Salary?

Today, Statistics Finland published some interesting data about earnings.

First you learn that working for the central government is better rewarded than the working for the private sector. You learn as well that there is no huge difference to work for private or local government.

"The average monthly earnings of all full-time wage and salary earners amounted to EUR 2,734 in the last quarter of 2007. The average earnings of wage and salary earners in central government amounted to EUR 2,984, in the private sector to EUR 2,749 and in the local government sector to EUR 2,513."


It's a big surprise for everyone that though that since the public sector is funded by tax payers and because is relatively safe sector (low risk of being fired), you should necessarily have lower salary...alas, it's not true, because of the dinosaurs..."the dinosaurs", what's that? you are saying?..

Let me explain.

In Wikipedia, you will find that dinosaurs mean:

"In English, "dinosaur" is commonly used to describe anything that is impractically large and slow-moving."

Back to Statistics Finland :

"The level of earnings rises until retirement age also among wage and salary earners in the local government sector, whereas in the private sector wage and salary earners' earnings start to decline after reaching the age of 50."

Now, let's go to something quite exceptional that can probably only be found in the public sector: the "Unknown" employee.


So, there are some employee that work for the government, that nobody knows what they are doing and are earning almost as much as an average earner in the private sector...Quite amazing?

Bailing Out The System: Back To Socialism?

"The Confederation of Finnish Construction (RT) Industries said Wednesday that the government should introduce vigorous measures to stimulate the industry, adding the rate of housing construction might contract by a quarter next year.

"The collapse of new building alone would plunge the economy into the red next year," said Tarmo Pipatti, the chief executive of RT.

The Finnish Construction Workers' Union warned that the worst-case scenario was an extra 40,000 jobless builders next year.

Both groups urged the government to take action to support housing and public-sector construction as well as repairs."

I think the Government should bail out the construction sector, while on the way bail out the auto sector, and in the same line bail out the forest industry etc... etc...

How about buying a printing press, so that the government could print as much money as it wants...oops, forgot the ECB won't allow it (The ECBaby won't share its own...the ECB is a big child you know, they don't like to lend their toys (tools?)...)

So what else can they do, borrow even more? it's all fine if we have a mild recession and quick recovery but how about a very slow recovery that will push the state to take more and more debt...that's the recipe for higher tax in one form or another (for example raising alcohol price (another +10%), on the same line: oil price (another +10%), kinden garden (another +30%)..how about property price? I thought Finland has the lowest in Europe, about time to change that??).

Remember, We have had a begnin 25 years cycle that started in 1982, that saw debt being build in a very rigourus and constructive (destructive?) way...today it's imploding in all directions: auto sector, building sector, forest sector, well any sector that was pushed artificially by higher and higher debt...the system is falling under its own weight and no one seem able to rescue it, even our Young ,FT rewarded, finance minister, Mr karvinen oops sorry, Mr Katainen.

So what next? just waiting that the system to deleverage, from consumer to banks. It will take surely time. The mission of finance ministers and policy makers is to make it happen in the most orderly way, without creating social unrest or government collapse. Challenging time but once we get through that we will certainly have a very clean system ready to kick again...let's just hope that it will take 5 years? ...10 years? naaahh, 20 years?..you must be kidding?? "i have a wife and children to feed, can't wait so long"...ok...let me check my crystal snow ball...it says...

HousinK... From Boom To Bust

We have clearly entered a secular bear market for the Finnish housing market.

The interesting question is to figure out if it is the financial crisis that is bringing the Finnish housing market down or the reverse. An expectation of the a deterioration of the housing and economical markets is putting pressure on bank business model (based on continuous rise of price).

(Click for zooming)

The blue line represent some normal trend extrapolated based on 40 years data. It's what I think should have been the trend, if we didn't have episodes of boom and busts... Assuming that housing price trend always goes few percent above inflation rates. Note that this chart shows housing price inflation adjusted (if price goes up 6% and inflation is 4% then real growth price is 2%).

The Red line, represents future trend that shows a return toward trend line, with an overshoot toward lower level. As all episodes of boom and bust, people are either ultra optimistic or pessimistic...

Obviously, in order to have an overshoot to the downside, you need to have a specific event that triggers it. I suppose we will get it at some point, around 2010...what would it be? not sure...a futher deterioration of the stock market? A more prolonged and severe recession that is currently forecasted by economists...or down the road, a sudden recovery that fuels inflation to level that forces interest rates to be raised to historically high level? ...which could then explain further deterioration in 2010, pushing prices to reach 1998-2000 levels...
Regarding the last point (higher interest rates down the road), it could, as well, explain the recent move from banks to add a new clause to any new contract that allow them to unilaterally raise interest rates, should they need to. Let's call that "the poison pill"...

So for those one that are on variable rates, fixing it when rate are low is a useless procedure since it will require a change from old to new contract that will then include "the poison pill"...let me know if you don't get the idea ...

Inflationist scenario : Another thing to highlight is, if inflation down the road is getting higher and house price don't appreciate (stay stable), then in real term it would mean that price are falling...that could be a scenario if recovery comes faster than people think...

Deflationist scenario : The economy doesn't recover, but instead is drawn into a Japanese type deflationnary trend or a 1930's U.S. type deflationnary, then house price goes down fast the first years then slowly trend downward... wage growth disappear as the global slump, bring excess capacity i.e too many people looking for jobs putting futher pressure on delocalization and pushing wages lower...

Disclaimer: Investments or strategies mentioned on this website may not be suitable for you. This material does not take into account your particular investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. You must make an independent decision regarding investments or strategies mentioned on this website. Before acting on information on this website , you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own financial or investment adviser. All opinions expressed by this website do not reflect real opinions. Past performance is not indicative of future results. Anything missing in this disclaimer can be added unilaterally at any time ...

Housing, An Old Story...

Yesterday, while cleaning up some boxes and looking for my "Santa Claus" tree , I found my old snow crystal ball.

This crystal ball has a strange story as it was not offered by relatives but instead by an old woman with very strange clothings...That brought me back straith 20 years ago... That day, the night was unusually bright and the moon was showing a perfect crescent... in the middle of the street, I was stopped by this old woman that looked so different to any women I have seen...

She told me, "take this little present," - the snow crystal ball - "when the day is right, shake it and ask it a question"..."you will get two answers, one you want to hear and the other you don't want..."

Then suddently, a big sound, behind me, make me turn...it was just a cat...turning back...I was amazed: the old woman vanished. That night, I went back home, I was tired...I just dropped the crytal ball in that old box, and never thought about it for the past 20 years, until today...

I decided, to shake it and play the "game"...asking "what do you see for the housing market and the economy?"

First Answer: "this message is only to home owners or people that think the sky is the limit"

Click the image for Zooming

The chart describe housing price, inflation adjusted, in Finland for the past 40 years or so. The red curve is the forecast while the red blocks represent past recession. The blue one being forecasted recession. The blue arrow is the trend...

The sky being the limit, price will grow and are insensitive to economical disturbance. Credit will carry on flowing and more and more first time buyers will come to the market. This will be even stronger as interest rates keep on falling.

Housing is not seen as an ordinary investment but instead as a place to live as well as the most valuable investment. People are reconforted to invest in housing as stock markets around the world, plunge to level not seen since the 70's.

Unemployement stay stable allowing homeowner to meet their requirements. Nordic Banks show an exemplary behaviour, lending and at the same time replenishing their capital base.

By the way, you could hear in the background, the song "What a wonderful life" from Ray Charles...

Second Answer: "This is the answer?"

Warning 1: If you are a home owner, it is preferable that you switch off your computer and have a tea..watch some great and wonderfull program such "Bold and Beautifull" or just press CTRL-ALT-DEL if you are a happy user of Windows Operating systems....

Warning 2: If you do not exercise enough and think that some heart malfunction has been detected in the past few years, please read Warning 1 (Ps: if you end up in infinite loop, just quit after 10 loops)


For the past 30 years, the Finnish housing market has shown clear signs of cyclical movements -Boom and Bust behaviours. One could conclude, by simple observation, that, somehow, it exists some kind of tunnel (in grey in the chart) that represents a sustainable trend.

Each time the tunnel is broken, on the upside, We enter in a period of Euphoria mainly driven by credits hysteria and extreme optimism. In the reverse side, when the tunnel is broken in the downside we have a period of extreme pessimism and credits contract...

Banks in the Nordic Region are under tremendous pressure, and will be tested in 2009 with the dramatic slowdown of the baltics, as well as Europe, USA and Emerging markets. Most Baltics countries will see unsustainable budget deficits, currency under extreme pressure/attacks and unemployment rising to double digits. Subsequently, massive loan defaults will push most of the Nordic bank to reverse their lending behaviour deteriorating futher the housing market.

The sudden Export collapse is not fully compensated by the internal consumption as households heavy debt burden, combined with the sense of wealth loss due to massive decline in stock market and housing values, slow dramatically their spending and increase saving...Economical growth is showing, for the first time in two decades, a first contraction, a sudden decline that put politicians and economist in "a once in lifetime" challenge.

The Government will enter into massive deficit and unemployement will be rising to level not seen since 1995.

Price correct to level compatible with this new environment. A 40% correction cools, for another generation, the idea that housing is a safe investment...

... that's what the old snow ball had to say...

In the meantime, I will come back pretty soon regarding the rents and the news that the media has been disseminating throught out last week in TV, newspapers etc...

Disclaimer: Investments or strategies mentioned on this website may not be suitable for you. This material does not take into account your particular investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. You must make an independent decision regarding investments or strategies mentioned on this website. Before acting on information on this website , you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own financial or investment adviser. All opinions expressed by this website do not reflect real opinions. Past performance is not indicative of future results. Anything missing in this disclaimer can be added unilaterally at any time ...

Mr Shiller...Mr Shilling?

Thanks Andrew for the video.

For some reason, I have been in the same view as Shiller in term of pessimism in the past year and a half.

There is a risk, non negligible that stock markets could revisit their 1996 level , same for housing. If such thing happens, then we will be fighting a depression not a recession.

Let's just hope that the later will happen - just a longer than usual recession. I'm more in the camp of a more severe than usual recession albeit still a recession that will last at least 2 years but then it will back to growth but a slow growth.

But no one can predict the future, at least one can manage risks: no more debt, more saving and holding into the current job...at least until the storm unravel...

Obama - Biden : "Changing The World"

Obama is the new president of the United States Of America!

He could not have come at a better time to rescue a dying economy, driven by debt and fear by Republicans. The Democrat will have plenty of challenges, but change was needed and Americans got it! They can be proud of their decision.

He is the first African-American president that could as well give the direction on the next continent that will see phenomenal growth: the African continent.

The credit binge will come to an end, the deficit will go down (import will slow dramatically while export could rebound on the longer term). The Gap between the Rich and the power will shrink as fast as the deficit (finish the time of Republican tax break or cut as well as the lack of investment in infrastructure).

Coming to Finland, the same will happen in 2011, The Right-Centre (KoKoomus), pro tax cut (i.e refilling the Rich pockets amid deteriorating social wealth net) will lose power to the SDP amid falling house price and anemic economical growth. Obviously, they will have to come with a new leader, charismatic and smart.Finally, it's not only the economy or housing that knows cycles but so do the political landscape.

Again, Obama : Congratulation!

Making Finnish Pension Fund "Flexible"

Last week, I had a chat with a friend that was about to retire in the month to come. After a lenghty discussion, I was questioning, the impact on the financial crisis on retirement benefits.

First, let's set the background. You have to understand that the stock market has seen some Finnish stock plunged from a range of 10 to 30% in October alone, while most shares have lost around 30 - 60% of their value since the beggining of the year.

So one has to question the extend of the pension fund portfolio losses that they have endured. Second raise the issue of solvency of those institution that must guaranty a safe start of a massive amount of people that will retire in the year to come (i.e the WWII baby boomers).

So I did some search, quick one - you are welcome to share more elements....

"The €23.4bn Ilmarinen Mutual Insurance Pension Company has reported a negative return of -9.4% for the first nine months of 2008 and a loss of €2.3bn in the third quarter, but its solvency ratio could improve under Finnish government proposals to relax regulations.

It appears Ilmarinen was not alone in suffering significantly losses within the last three months as the Finnish government is now discussing a Bill to temporarily reform the solvency regulations for employment pension companies to make them more "flexible"."

Make them more flexible..."Flexible" Damn, for some reason, I don't like this word... Does that mean that the losses made during October, made them insolvent or about to be? I don't have an answer for that, but if they have to pass a law to change the rules on the fly, it clearly state of emergency.

"The Finnish government said as the market value of Finnish shares owned by pension companies have fallen sharply, the solvency rates of the firms have also come down fairly quickly, so the proposals are designed to avoid pension companies having to divest from stocks in a way that would disadvantage Finnish stock prices."

So we don't want to see the "casino" "stock market" to plunge further, since the Pension Funds will have been forced to liquidate positions in order to stay solvent within the current rules.

The combination of "Free market" and State intervention might work if we are in the position of a correction not a fundamental (technically and ideologically) readjustment. Should it be the latter, the consequence could be dire...

"The Bill, which is designed to strengthen private sector employee pension insurers' solvency, is expected to come into force as soon as possible and the law could remain in place until the end of 2010.
As a result of the recent market volatility and the poor returns, Ilmarinen saw the value of its investments fall from €25.7bn at the end of June 2008, to €23.4bn at the end of September, a drop of €2.3bn in just three months. (See earlier IPE article: Ilmarinen loses €1.7bn in H1)

Ilmarinen has revealed its solvency capital reduced from 22.3% of technical provisions at the end of June to 15.5% at the end of September, while its solvency ratio had dropped to 1.3 times the minimum requirement, compared with 1.9 times held three months earlier."

"However, Jaakko Tuomikoski, deputy chief executive and president of finance and risk control at Ilmarinen, said even though the financial market crisis "worsened to unprecedented dimensions" in October, the solvency capital of the pension fund has remained above the solvency margin."

It looks like Ilmarinen (you can put Varma, the other pension Fund, in the same bag), is flirting with insolvency. Their Portfolio contain as well property, and as we all know , property price have turned and started to decline...

I do hope that The parliament, the government will have an open, transparent and heated debate in the month to come to expose the truth so that confidence, and reassurance is not lost among its citizen... At the end they are gambling money from hard working citizen, so that's the minimum they deserve...

Isn't that, after all, a transfer of wealth from workers to shareholders, as the pension fund are supporting the stock market or at least certain company share price?

Source : IPE , Varma , Ilmarinen