Friday, August 7, 2015

Catching Up

It has been six months since I last wrote, so there's some catching up to do.

Overall, the Norwegian economy seems to be on its way towards a recession (see, for instance, manufacturing PMI which is at 45.8 with inventories building up), if it isn't there already. This is what Norges Bank was worried about in the winter, and, as I said back then, rightly so. The latest steep fall in oil price will no doubt make matters worse. While in 2008-2009 the oil price recovered quickly -- thanks to massive worldwide stimulus --, the rebound we saw this spring turned out to be a so called "dead cat bounce". So, in some ways the situation is already worse than it was seven years ago. Comparisons have been made with the mid-1980s rout (the last time Norway saw a housing bubble burst). This is not to say that oil price cannot recover again, but even if it does, it is widely expected that it will remain subdued for years. The structure of the oil market has changed profoundly.

Speaking of catching up, it seems quite clear that the housing market needs to catch up with the rest of the economy. Whereas the overall economy has been developing just like I expected in the winter, the housing market has not: Oslo at the top shows double-digit growth year-on-year, and oil-heavy Stavanger region makes an exception with slightly negative annual growth. In my earlier post I linked to above, I wrote:

But I can live with a 0,25 point cut, which I don't expect to be enough to keep the credit flowing freely to households now that the severity of the economic situation is finally dawning on the public. Should I find myself mistaken on this one later, I promise to curse today's rate cut!

Messrs Dørum and Willems were obviously right about the danger for continued credit growth, although I'm more willing to curse the irrationality of Norwegian homebuyers than the rate cut. That makes me sound like a bad loser, I know. I must admit I've been slightly lost during the first half of the year, reading news about young people rushing to buy homes. I have even heard from some well-off people that they would rather buy a rental unit than have their money on a savings account earning less and less interest. Have they lost their minds?

I can think of four reasons for the resilience of the housing market:

  1. People still believe the "housing deficit" story and act accordingly.
  2. Banks are willing to keep on lending to the less creditworthy borrowers.
  3. Complacency due to quick oil price and housing market recovery in 2009.
  4. When the interest rate on savings account declines, people think one should buy rental units (real assets, or risk assets -- although housing is still not seen as risky in Norway).

How long can this resilience last? Not for long, I believe. I will comment on the four points separately.

There are more and more signs that the housing deficit is turning into a housing surplus. The number of available rental homes is hitting all-time highs while housing starts have recovered from their 2014 slump and were very robust in June (in line with 29000 annual units). It is fairly typical that there seems to be a deficit of homes all the way until one day the demand -- which has been on abnormally high level during the boom -- collapses and the market is flooded with homes. A related measure is population growth (especially net, work-based immigration), and although we don't have any real-time data on it, I'm willing to bet that it is in clear decline. The first quarter of the year saw lowest Q1 net immigration since Q1 of 2007. Statistics for Q2 will be published on Aug 20th. (I wrote in more length about the population growth already in 2014.)

From July, the banks have been subject to stricter lending rules (less flexibility with LTV ratios, etc), and although this alone might not turn the market, it will surely affect it. We might have seen some effects already, as June was a very robust month price-wise in the market, while July surprised on the downside. Although the rules were published only in June so that there wasn't too much time for people to rush to buy before the rules were in effect, they were quite widely anticipated.

I have already touched the failed rebound and "double dip" in oil prices, and I think this makes the situation very much different than it was in 2008-2009 -- not least psychologically. Although there are signs of a broader slowdown in world economy, Norway is one of the countries that are first, and worst, hit. The oil price shock coincided with a well-advertised (already in 2013) decline in oil investments and the economy in general. As of yet, there are no signs of any big, worldwide stimulus. The slump is centered on Norway and it is not expected -- neither by Norwegian nor foreign economists -- to recide any time soon.

When the interest rates started to go down in 2008 it was not a good time to buy homes for instance in the US and the Netherlands. (Neither was it a good time to buy stocks.) Big declines in home prices are nearly always accompanied by central bank lowering the interest rates. Norges Bank is lowering the interest rates, and it will continue to do so in the autumn, because it expects a recession and possibly a housing bust in Norway.

Mark my words: There is trouble ahead, and the (seasonally-adjusted) home prices will most likely start to decline in the coming months. (I hope you have forgotten any similarly gloomy predictions of mine from 2013 and 2014.)

Thursday, January 29, 2015

What Really Is Going On In Norway

In order to understand better what is going on -- and has been, for the last 15-30 years -- both in the Norwegian and global economy, I suggest you check out this blog: Clumsy Statements.

It corresponds very much with the way I view the economy. Similar "worldview" guides what I have been writing here the last two years. It explains why I think there is a private debt "bubble" in Norway and why the housing market is both the largest driver of this bubble and why this market will be the largest cause of economic trouble in the future -- likely in the near future, now that oil price has collapsed.

I always take the long view. Therefore, I find it actually quite sad that there is right now so much fuss about some temporary strength in the Norwegian housing market. If there really is strength, it is due to a simple reason. Norges Bank and Finanstilsynet seem to be done with their quest to restrict banks' lending to households, and therefore -- as there never was a lack of willing borrowers, especially first-time buyers -- new credit still flows strongly to homebuyers, or has even picked up slightly. This "U-turn" is understandable from the authorities' side, as they are worried about a coming recession. They -- rightly -- think this is not the time to restrict credit growth. They are already preparing to fuel it when needed.

Then we have the commercial banks. I can despise the lax lending decisions taken by these banks as much as I want, and I do, but I also understand how the banks' leadership positions are mostly filled with well-meaning people taken over by their professional role. They keep on lending and hope for the best. They probably see that it is anyway too late to stop now without causing a recession and big trouble for the bank(s). It would take a hero to come out and say that this cannot go on anymore, and heroes and heroines are a rare breed.

Finally, there are the households, and especially the young households. They might try to justify their decision to buy with all kinds of calculations and excuses, but buying a home is not about that. Especially in Norway -- thanks to the "Cult of Homeownership" (see this previous article for more details on the situation) -- the value of a "home of one's own" is not measurable in monetary terms, at all. Neither are the costs related to having other people know that you are "only renting".

I am not saying that there aren't many financial incentives, tax and collateral-related ("rammelån"), connected to owning. Yes, there are, but those are already "priced in". They are part of the very high price one has to pay for a home in Norway today. The real costs -- which go mostly unnoticed -- are related to uncertainty, to the risk of finding out later that one paid way too much. One cannot quantify these (very real) costs with any precision, which is a common problem with any "risks". As a consequence, they are easy to dismiss when one has already thought out thousands of reasons for buying.

These young people -- smart and good people -- are in this case "sheep", who, partly unknowingly, give the most important financial decision of their lives in the hands of commercial bankers. These bankers' careers depend -- or so they are led to think -- on them lending to these young people and thus growing the bank's profit. The bank shareholders, as too often is the case, have very little clue about what is going on. They focus on the current profits, and those are magnificient. There will be losses, but "optimists" remain skeptical till it's too late to turn around.

And finally, the authorities -- Norges Bank and Finanstilsynet -- cannot act decisively enough until it is too late to act decisively. To be fair, this is not a phenomenon restricted to Norway -- it is global -- and in my view both Øystein Olsen and Morten Baltzersen are highly competent people.

There you have my view on what has been going on and what is to come. Don't get me wrong: I am not a pessimist. I am a realist, and a pragmatist, who will become an optimist the moment the majority of people become pessimists.

It is time for Norway, and Norwegians, to face the facts. A boom is followed by a bust (as, for instance, this blogger has been saying for long), and our task is to minimize human suffering during the bust -- soften it, but not try to avoid it altogether. "Whatever it takes" mentality in both monetary and fiscal policy is a bridge to nowhere -- a huge misunderstanding. And just like bubbles, this misunderstanding will become obvious only after it has led us to real trouble.

Monday, January 19, 2015

The Truth

[If you're only interested in the truth about the Norwegian economy, feel free to scroll down!]

I may be far from the smartest or the most experienced voice among the Norwegian economic and financial commentators. But I have one advantage compared to practically all of the commentators you see on mainstream media (Dagens Næringsliv, NRK, Aftenposten, etc): I have no superior who's opinion and interests I would try to take into account when I talk about the economy. The lack of this kind of a boss does not give me any pure, 100 % independence, but I cannot think of any person who scores better than me on this one (many bloggers might tie with me, though). My only "bosses" are my readers, and I try to write what I know you want to read but without asking you for your approval or even comments beforehand. Sometimes I manage better, but sometimes my self-critical "bullshit radar" lets me down.

I said I know what you want to read. What is it then? It is nearly always the truth. I have learned recently that what makes even a stand-up comedian succeed is being able to tell the truth, from a new angle. For us who write, or act, the challenge is to try to deliver the truth without letting our conflicting interests get in the way. A writer like me knows that my audience wants the truth, but I --like everyone else-- only have my truth. I have many interests that may conflict with the truth, interests I need to remain aware of (e.g, the wish to be right rather than wrong), but my employer's interest is not one of them. I do not even have any career interest, other than that I have found speaking one's mind usually rather career enhancing as long as one does it even somewhat politely. To speak the truth: While sharing my truth, I have too often been impolite --many times unknowingly, although others might have viewed it differently-- and it nevertheless has not got me fired and has rather brought me acceptance among the higher ranks of the leadership. I got this kind of praise even when I was, paradoxically, fully prepared to make them pissed at me. (Actually I once made one "big boss" outright angry, only to later earn respect from him for my conduct that day.) They don't usually give you praise publicly, because the last thing they want is everyone trying to follow your example. There is a rational, empirically (by myself, so this is very subjective!) established "organizational health limit" when it comes to the number of "truth-tellers" and based on my experience it probably is in the low, single digits (when we talk about the ones who do it in front of the crowd, not just privately, one-to-one). The praise you might get means that the leader was happy to hear your opinion on this particular matter, and not just that, but she was, if not happy, then at least OK with your colleagues hearing it too. In other words, you really said something smart even if you were shit-scared of how it will come out the moment you opened your mouth, with your palms sweating and heart beating.

There is, of course, a "catch" in everything. If you have a big mouth, some of your colleagues will not like you, either because what you said was not nice or because of the "stinking air of intellectual superiority" they smelled in the way you did it, unashamedly, with the reckless impudence typical of "people like you". So you need to have a certain "haters gonna hate" attitude to speak out loud your truth. If you often feel that you "just can't keep it inside", then you have plenty of that attitude. We all interpret these things differently, and that is a fact you need to accept. Those "haters" are generally good people and have probably good reasons to not like the way you "roll", but you should never worry about it too much. A historical fact: Einstein, while still a student and without a PhD, pissed off most --if not all-- of the greatest physics professors of his day by being unable to see why they would not tolerate his honest critique of their magnificient theories; theories that he otherwise appreciated, and made this clear in his correspondence with the professors. All this happened despite the fact that Einstein's goal was to impress those professors, and we know about his goal because he had often attached a job application to the critique he sent these professors all around Europe.

Two lessons I have taken home from Einstein's story:

  1. Making these "mistakes" does not kill your career. It might kill a career, but then that career is most likely not the perfect one for you.
  2. Being once considered an "asshole" does not mean being always considered an asshole. Later in his life, Einstein was often praised for his kindness and humbleness. Of course, Einstein of all human beings alive back then must have understood that this too was a very relative thing: Even the same behaviour can be considered to be either impudent or humble, depending on if others see you as a smart-ass student or the greatest genius alive.

Back to business life. I have not yet fully figured this out, but I think that in private, 1-to-1 meetings the leaders would like everyone to tell the truth. I myself have probably too often mixed public with private, and done publicly what I should have done only privately. Neither have I figured out how many of you now think that I think I am an "Einstein". We all tend to take "comparing one's personal traits to someone else's" for "equating oneself with someone". And pointing out what I just pointed out in the previous sentence is no doubt taken by many as being a besserwisser. So I better stop. "Individual reasoning" does not take us further than this, so it is best to switch to "social reasoning" (I have no clue if these are scientific terms or not, nor do I care) if you --like Einstein-- want to score a job.

Before moving to the Norwegian economy, I want to assure you of one thing: I usually learn a lot from the mistakes I make, even if it takes some time!

Contemporary Norwegian Economy As I See It


 The truth is that the Norwegian economy is in a crisis. I would not be stating this as plainly as that, at least not at this moment, if I was the prime minister or the finance minister or the central bank governor, perhaps not even if I had only moral authority as one of the most respected professors in the nation. There is a reason why, for instance, professors Hilde Bjørnland and Ola Honningdal Grytten can be fairly honest --as professors should be-- compared to, say, bank economists. But even professors need to be careful of what they publicly say. So I do have respect for other commentators' and leaders' choices, as they need to be very careful of balancing between the need to make people aware of the difficulties that lie ahead and the need to avoid a panic. These people are usually neither lying nor telling the whole truth.

So, Respect!, Øystein Olsen! Respect! (with certain qualifications related to the conflicts caused by the electoral cycle and your pressing need to do "something" so that it looks like you are doing your job, even if that something turns out to be against the long-term interests of the Norwegian people, and so the right thing to do would have been to not do it), Erna Solberg and Siv Jensen! This is a tough place to be, but we can be sure that this crisis will make Norway stronger in the long run. It is up to you, Øystein, Erna and Siv, to help your fellow citizens, old and new alike, to make the best out of this crisis. Do not do "something". Do the right thing! Forget your own, petty, personal interests. Read that Churchill biography again, if it helps. Whatever you do, do not make us find out in 20 years that you were "just like all the rest", that you only looked confident but let every single piece of criticism and the fear thereof to affect your decisions. This is all up to you. You make the final decisions, and those choices will affect how the future generations of Norwegians will remember you. I do not think I need to remind you that you only live once, but I do it nevertheless.

We are supposed to be here, now -- in this crisis --, whether we like it or not. If there was no such need for temporary sacrifice in life, at least half of the working age population would skip going to work tomorrow morning. Or if they already do, then what I meant is that 75 % of them would skip it. You get the point.

When one tries to be funny, one needs to be careful: I view Norwegians as hard-working as any other nationalities, if not more so. Let's say we replaced, overnight, the current Norwegian population --one by one-- with people from Denmark, Finland or Poland. We gave them the salaries of persons they replace (who we had sent to Spain to get some needed vitamin D); their bank accounts; their Teslas, Porsche Panameras and Audi Q5s; the beautifully renovated homes and gardens where the new people could kose themselves and just slappe av; the Canada Goose jackets and Mulberry bags; the nice bosses who know how "stiv nakke" makes it impossible to type "" in the web browser at the office; and finally we told them how high the market price of their home was in 2014 (Note: we don't know yet how much they can sell it for in 2015). These people would probably all call in sick tomorrow morning!  Yes, even the traditionally hard-working Finns. (I'm a Finn, but I can speak only partly from my own experience, as I have never been that hard-working to start with. The stereotype has been, of course, beneficial for me. That it comes with the addition "...and hard-drinking" is a small cost to pay for being considered hard-working.)

To make the above thought experiment more realistic, I suggest we do not replace the CEOs of the largest banks overnight, as we need someone who is willing, from day 1, to keep providing traditional mortgages to first-time home buyers and home equity lines of credit ("rammelån") to the ones who are driving cars manufactured before 2011 or who have not renovated their kitchen since 2010 (these are often the same ones who many view as having "limited means"). I cannot stress this point about the bank leadership enough, as I see a huge risk for an immediate recession if the credit flow to households slows markedly down from the growth rate of around 6 %. That would bring to an end the "age of plenty", it would make the "paradox of gluttony" turn into "paradox of thrift" (sometimes it is best to refer to "deflation" with a more benign name, in order to avoid inducing panic), and our psychological experiment would be ruined. Ruined! (I will bear like Robert Shiller the risk of being considered just another jealous foreigner.)

I use the word "crisis" here also because there is one thing I feel I need to criticize in this post. And it is the use of the word "crisis". One should consider carefully how one uses it. A politician might think that it is wise (= it is aligned with the long-term interest of the whole nation) to make people think that there is no big crisis when there seems to be a bit too many reasons to think there is a huge crisis and run. I would agree with this politician. It is wise to try to prevent a panic. The problem is that it is usually not wise to say to people "There is no crisis". And it is a big mistake to say it five times during a single interview. People are way too smart for that kind of tricks. People can usually be divided into two camps based on their reaction after they hear from a politician that "there is no crisis":

  1. Those who are happy to hear this, because they were already dead-scared, had stopped buying stuff (save canned food which they had started to pile in their basement) and they wished that it was all just a bad dream. They were searching for the "fairy" that would tell them that everything was OK.
  2. Those who were not yet that scared but became a lot more scared when they realized that there must be something that the government and the financial authorities know that makes them say this kind of silly things. This category is comprised of an absolute majority of the people, and the individuals who command the most spending power in the economy are all in this category.

So let us be brave and avoid saying silly things. Just like there are options between "doing something --anything" and "doing nothing", there are options between saying "there is a crisis" and saying "there is no crisis".

But some of us, sometimes, have to say how things really are. In my opinion, that task falls mainly on the ones who are fairly independent and without much authority. People like me.

Norway is in a crisis, and we better make it a good crisis by making sure there will be a relatively soft landing. We have reached the destination of this flight and we better get all the people out of the plane in one piece. It is fun to fly but it becomes boring if you never reach any destination. Even a very bumpy landing is million times better than no landing at all.

Nevertheless, I hope you have enjoyed your flight and I welcome you to fly again with Norwegian -- we hope to see you on board in a couple of years!

(I know you will not sue me for that, Bjørn Kjos. You are currently safely on my list of top-2 business leaders in Norway. Probably on the top of it. We all are better off having intelligent risk-takers like you. People like you make the world go forward, no matter if you "make it or break it", and that is why you can count me as a fan. I do not know if it is true that you have broken a chair in a meeting after you got angry, but I know that I might have done the same. A chair can take it, whereas a business cannot take a "Chair", or a CEO, who does not have a strong, passionate mind. That kind of a mind is needed to push the limits. This is especially true in one of the toughest businesses of all, the airline business, where leaders like you, Herb Kelleher and Michael O'Leary often do better than the rest. All the best, Mr Kjos!)

Friday, December 12, 2014

Norges Bank Not Worried About Rising Home Prices

I actually think Norges Bank is factoring in a very high probability for a recession in 2015 (Olsen basically said it out loud, "severe downturn"), so I don't understand the current fuzz about higher home prices and Norges Bank having abandoned their push for lower household credit growth. They must think that they will get lower credit growth anyway, and the rate cut is actually aimed at softening the expected fall in lending to businesses and households.

The Norwegian Krone has already fallen so much, so fast, that I don't see this 0.25 per cent cut had that much to do with lowering the exchange rate. From any non-short-term exchange rate point-of-view, it didn't really matter if they cut now or in March 2015. Had they not cut now, it would have been more likely that they cut 0.5 per cent in March. That would have been, at least partly, reflected in market expectations.

The timing of the rate cut matters much more for private sector credit growth, and this cut is about conveying a message of looser monetary policy to that sector, to keep the credit growth from following the outside temperature too closely now that winter is coming (it's +1 degrees in Oslo today...).

It's time to wake up to reality: Norges Bank is not anymore worried about rising home prices. If anything, they are worried about falling lending -- both demand and supply-driven-- to businesses and households, and eventually falling home prices.

As Keynes knew, "animal spirits" play a much bigger role in business investment decisions than any interest rate changes Norges Bank is able to create from an already low level. So we can expect that household lending is the area that is affected the most by this rate cut. But really, do they believe such a small cut would offset the effect of negative psychology, witnessed in steeply falling consumer expectations (in Norwegian, but see graph)? I think we are seeing here again the mental model many Norwegian economists have managed to build in their heads: Home prices just can't fall.

Thursday, December 11, 2014

Norges Bank Trying To Stay Ahead Of The Curve

Norges Bank unexpectedly cut its "steering rate" today from 1,50 % to 1,25 %. It stated the following as a justification for its decision which somewhat surprised the markets (via Richard Milne -- @rmilneNordic -- at

“Growth prospects for the Norwegian economy have weakened. Activity in the petroleum industry is softening and the sharp fall in oil prices is likely to amplify this tendency. This will have spillover effects on the wider economy and unemployment may edge up ahead. At the same time, the krone has depreciated markedly, which is helping to dampen the effects on the Norwegian economy and underpin inflation.”

Some economists and other pundits, Øystein Dørum of DNB Markets and Atle Willems of EcPoFi among them, have argued that this is "wrong kind of medicine", as they expect that it might lead to increased lending to households, and higher home prices. Of all the people, I should find myself in agreement with them. And I can't say that I strongly disagree. I just don't think it's as simple as that.

I believe there's a good chance that Norges Bank is much more worried about the economy than most of us realize. One sign of this is how they today expressed their concern for the world economy:
"The upturn in the world economy remains moderate and there is considerable uncertainty surrounding developments ahead."

As of late, one of the main arguments for an expected soft landing in Norway has been the strength of world economy, a factor which, combined with a weaker Krone, is expected to help Norwegian non-oil exporters. The oil price fall has been widely interpreted as being supply-related, which would mean it would stimulate oil-importing economies. That is a dangerous over-simplification. You can never forget the demand side, and there it is expectations that matter. China, one of the main locomotives of world economy since 2008, has been slowing down for a while and this trend is expected to continue in 2015. Europe is another headache that won't go away, and it's the destination for around 80 % of Norwegian exports.

It has been suggested that today's rate cut is a sign of strong pessimism on the part of Norges Bank, and I can't but agree. To be fair, Dørum of DNB says that if credit growth would slow down substantially, then a rate cut could be the right choice. Whereas he would like to see more evidence before the cut, Norges Bank has decided to act already on the expectation of much slower credit growth. In other words, it's trying to do "whatever it takes" (please, Mr. Olsen, don't ever use those words...) to stay ahead of the curve.

I see also a human factor behind this decision. This might come as a revelation for some of the readers, but central bankers are human beings like the rest of us. To better understand what they might be thinking at Norges Bank, I suggest you read this article from the Financial Times: "Central banks: Stockholm syndrome". It shows how Sweden's Riksbank, and especially its head Stefan Ingves, has been crucified -- by Paul Krugman and the likes -- for too tight monetary policy, the aim of which was to fight credit growth and higher home prices. I do recognize that the inflation and unemployment situation is different in Norway at the moment. But so is it with GDP growth (6,6 per cent in Sweden back in 2010!) and the expectations thereof. My point is a broader one: In the current environment, the prevailing (academic) opinion -- which I disagree with -- makes it very likely that central bankers will get punished for anything that in retrospect turns out to be too tight monetary policy. This has happened to Riksbank under Ingves in 2010 and the ECB under Trichet in 2011.

 Whether we like it or not, the "easing bias", much critized by the Bank for International Settlements, is still there. But I can live with a 0,25 point cut, which I don't expect to be enough to keep the credit flowing freely to households now that the severity of the economic situation is finally dawning on the public. Should I find myself mistaken on this one later, I promise to curse today's rate cut!

UPDATE: Olsen puts it like this at Bloomberg:

“Our job now is that we need to prevent a severe downturn in the economy”