I am trying to get data together on our housing bubble. Comments appreciated.

AFRICANS buy 36 billion bottles of Coke a year. Because the price is set so low—around 20-30 American cents, less than the price of the average newspaper—and because sales are so minutely analysed by Coca-Cola, the Coke bottle may be one of the continent’s best trackers of stability and prosperity.

In other words, Coca-Cola sells sugar water to Africans for 20 cents and still manages to make a profit. Imagine how much profit is made from selling it in Europe for up to €2.00 a bottle.

Interestingly:

Coca-Cola says it is the largest private-sector employer in Africa. Its system of distribution, which moves the sugary drink from bottling plants deep into slums and the bush a few crates at a time, may employ around 1m Africans. A study at the University of South Carolina suggested that 1% of South Africa’s economy was tied up, one way or another, in the distribution and sale of Coke.

Una’s piece is the most read on the Turbine today, and with some merit.

Now the added bonus of being right, and not succumbing to societal pressure of getting on the property ladder, sweetens the deal. Renting was previously a life usually ascribed to flakes, reality deniers, the broke, bold and immature. But it’s pretty sweet listening to all this doom-and-gloom stuff about mortgages going ballistic while the price of a house ticks down by the minute like some sick stopwatch in reverse. No worries for me. Smug? Absolutely.

Indeed. But I still have several relatives in negative equity and mortgage repayments rising - and it ain’t pretty.

And if you thought things were really bad, well you may not want to read the following. Things are going to get a lot worse. Take for example the cycle of market emotions:

Personally, I feel that throughout 2007 with all the talk of “soft landings” and all that nonsense, we were in full scale denial mode. Property prices kept falling from January 2007 to today, but we kept on denying it.

The turning point was the ESRI report last month. We finally entered fear mode. Fear is now widespread, and is evidenced by the Sunday paper coverage. And as I said earlier, we are only at the beginning. We still have desperation, panic, capitulation, despondency and depression to go. I put that as far away as 2010.

I am not fooled by government talk that we will see some sort of magical economic upswing in late 2009. I just don’t buy it. From where will this upswing come? What exactly has Ireland got to offer? And the people who might comment and say “Don’t talk down the economy” can fuck right off. Reality is reality is reality. You can either deal with it or ignore it.

Let’s move to the Sunday Business Post and see if it can offer any cheer.

Nope.

First to David McWilliams, often called a permabear. McWilliams laments Cowen’s plans for cutbacks. He asks questions of idea that Ireland today is totally different from the 1980s.

All week, this mantra was hammered home on the airwaves by the economists who work for the banks and stockbrokers. Let’s run with the idea that Ireland today is totally different from Ireland 20 years ago. It’s not hard to agree with this assertion. The question that arises then is: if 21st century Ireland is so different, why does the solution being trotted out now by the Department of Finance sound like 1980s thinking?

Examine what has been proposed as the panacea. Everyone is talking about cutting government spending as if the root cause of today’s dilemma were 1980s-style government incontinence. But that’s not the root of the problem at all and therefore can’t be the only solution.

The root cause of today’s problems is a collapsing property market, coincident with a rapid deterioration in Ireland’s competitiveness. A credit binge disguised the underlying weakness. In fact, we lived in a Botox economy where other people’s money made us look richer in the same way as Botox makes a middle-aged person look younger. Now that the Botox economy has been laid bare, we can’t hide the blemishes or wrinkles any more. The root cause of our present difficulties is too much credit; the root cause in the 1980s was too little credit. Therefore, the solutions have to be totally different.

He continues:

Today, the situation is different. The absolute number on the government’s deficit is a passive residual not an active catalyst. The budget deficit figure is the end of the road rather than the beginning. In the boom, the credit profligacy determined the government deficit. In the 1980s, the government profligacy determined the credit deficit.

In short, cause and effect today are precisely the opposite of what they were in the 1980s.Yet the government’s response has been to wheel out 1980s solutions to 21st-century problems. Obviously, government spending has to be cut as credit-driven revenues dry up.

But McWilliams suggests a novel idea:

This is where the state can start getting inventive. Why not unlock some of our personal wealth by making it tax efficient for a rich investor to put money into a real company with a cash-based business plan? We need a scheme, targeted at real businesses.

If you travel around the country you will find hundreds of small companies, starved of cash. Yet collectively, these small businesses are our national ‘get out’ cards. These companies need fresh capital. There is lots of capital about. The only problem is that it isn’t finding these opportunities. If the state made it tax-efficient for wealthy investors to back these small guys with big ideas, we could begin the process of gradually clawing our way out of this swamp.

Inventive and cost effective. But such a plan would involve visionary leaders. Ahem.

Now if you are not frightened enough, let’s move on to Financial Times correspondent Wolfgang Munchau, also writing in the Business Post. Hold onto your hats, this is not pretty.

For the world economy, this is surely one of the deepest crises in living memory. For Ireland, it is close to the perfect storm.

Consider for a second the sheer number of economic shocks the world has been subject to over the past year: a crash in the property market, the effective annihilation of securitised credit, broader financial instability that is likely to continue over several years, large shifts in global exchange rates, a sudden slowdown in US economic growth, plus an explosion in oil and commodity prices, followed by rising inflation.

A small open economy at Europe’s outer fringe, with a high reliance on property and financial services for its growth but without the full arsenal of independent macroeconomic policy tools, is going to be harder hit than traditional industrial economies.

In such an environment, you can safely throw away any long-term economic forecast. The Economic and Social Research Institute (ESRI) is almost certainly right in its forecast that Ireland will suffer a recession this year. But I doubt there will be a recovery in 2009. The ESRI’s optimism is based on what forecasting models always do: after a shock, they always assume that the world goes back to normal. Unfortunately, this is not that kind of shock.

To me, the ESRI always give low-ball estimates. So whenever they make forecasts I mark it down as a lot worse than what they are saying. He goes on on to dispel one of the myths of the Irish property boom, that house prices always rise:

There is one fact about the property market that is extremely difficult to relate to people during house price booms (and for a long time after that): house prices, after inflation, do not rise in the long run. This is true virtually everywhere. In the US, real prices have been up a touch over zero since the early 1900s. In Germany, real property prices have stayed flat since the 1970s. In Britain, they have gone up by a little, for largely pathological reasons to do with the country’s urban and rural planning laws. In most countries in the world, real property prices are mean-reverting. What goes up, comes down.

He continues:

We will know in a few years whether this assertion is true, but I am fairly confident in predicting that the Irish property crash is going to be severe. The main differences between the Irish and US property markets is that the fall in Irish house prices has started a little later, and will be a lot worse. The economic impact on Ireland will also be immeasurably harder. unlike the US, Ireland has no domestic currency, no independent monetary policy that can do the heavy lifting of adjustment.

For that reason alone, I do not believe that the Irish economic downturn will be short-lived. Since inflation is not very high in the eurozone, and only a touch higher in Ireland, most of the real adjustment will come in the form of falling nominal asset prices, as well as falling wages and rising unemployment.

Even under the ESRI’s forecasts, Ireland’s budget deficit will overshoot the Maastricht Treaty’s 3 per cent barrier next year. That overshoot is due entirely to automatic stabilisers - essentially due to a fall in tax revenues. However, if this recession turns into something longer, as I expect, you could easily see a budgetary overshoot of some 5 per cent or more. Given Ireland’s relatively sound debt position and the sharpness of the downturn, we should all accept a temporary rise in the deficit. But the EU will probably not accept a fiscal stimulus on top of those automatic stabilisers.

As for the recent rise in unemployment, things are going to get much worse I fear. Unemployment hit 5.7% according to CSO figures released last week. That means 217,400 people out of work.

Now double it. 10% in 2009, or half a million people out of work. How bad would that be for the economy? Fundamentals are sound my ass.

Doom and gloom yes. Reality yes. If we face reality we can start to deal with it.

Will Fianna Fail and Mr Cowen have the vision and competence to see us through the bad times? I sincerely doubt it.

Work is being contracted out for as little as £5 on contract coding websites usually used by businesses. Students are outsourcing everything from simple coursework to full blown final year dissertations. It’s causing a major headache for lecturers who say it is almost impossible to detect.

Citigroup economist Piotr Kalisz in Warsaw estimates that up to half of Polish émigrés to Western Europe since 2004 will return home in the next two years. In the U.K., half of an estimated one million Eastern European arrivals since 2004 have already left, says the London-based Institute for Public Policy Research in an April report.

Aiding the reversal: currency dynamics that have narrowed the East-West wage gap. Poland’s currency, the zloty, has benefited from the stability of EU membership, the growing economy, a steady flow of remittances from Polish emigrants and, more recently, Poland’s central bank raising its interest rates.

Andrej Golczewski, who arrived in Ireland in 2005 expecting to stay five years, at first earned a monthly salary for laying sheet metal that was equivalent to four times what he could earn at home in zloty, a boon in saving for his daughter’s university fees. But the euro has dropped 30% since May 2004, and with Polish construction wages rising, Mr. Golczewski left Ireland for home last month.

Similar dynamics are at work in the U.K., where a housing bust is threatening to tip the economy into recession and the pound is down 40% against the zloty since May 2004.

* Despite an estimated increase in the euro area inflation rate to 2.6% in October, the European Central Bank (ECB) is not expected to increase interest rates above the current rate of 4%.
* The fiscal position is deteriorating, and this will place constraints on government expenditure. A deficit is expected by 2009.
* GDP growth is expected to slow sharply in 2008, mainly because of the ongoing slowdown in the previously overheated property sector. However, there is a real risk of recession.
* Unemployment is expected to rise over the outlook period, as the construction sector shrinks, but inflation and the current-account deficit will both fall.

I blogged about it back then as Ahern had recently said people who talk down the economy might as well kill themselves. Well, I guess those naysayers were correct. And Ahern was simply ignoring the problem. His successor has also ignored the problem. Now we have to deal with what the EIU forecast.

Anyone who has been watching sites like Treesdontgrowtothesky, DaftWatch or Irish Property Watch will see that the property market is in very serious doo-doo. And it is getting progressively worse. The number of houses coming on the market is rising, and the number of buyers out there is falling as a result of a return to normal lending conditions (yes we were living in a credit bubble for some time).

So what does all this mean for Ireland?

It’s the big R. And it will be with us for a while.

Update: The ESRI press release is available here.

According to AAA, the national average price for a gallon of regular gas rose to a record $3.936. That compares with an average price per gallon of $3.23 last Memorial Day.

“With it being near $4 a gallon, you definitely have to drive slower and pick and choose when you’re going to do it,” said Steve Kahn of Roswell, Georgia, at a Memorial Day festival in Atlanta.

Some Americans have turned to public transportation. Ridership increased by 2.1 percent in 2007, in part because of rising gas prices, according to the American Public Transportation Association.

Americans took 10.3 billion trips on public transportation in 2007, the highest level in 50 years, the group said.

The Energy Information Administration says gas consumption for the first three months of 2008 is estimated to be down about 0.6 percent from the same time period in 2007.

For the summer season, gas consumption is expected to be down 0.4 percent from last year.

At current exchange rates I am paying $7.57 a gallon (€1.27 a litre) for petrol here in Ireland, most of that composed of taxes. It would be more if the euro was not so strong right now.

Oh for the days of $3.936 a gallon…(67 euro cent a litre).

It is impossible to call a bottom on any market, except through sheer luck. And claims to have done so should be treated with nothing but derision. NIB clearly has vested interests in this sector.

Did Bernanke know about the fraud on Monday? Did Societe Generale tell the Bank of France, who then would have told the ECB? Did the ECB inform the Fed?

The dumping of all those futures contracts, says the WSJ, certainly contributed to the market falls on Monday and Tuesday. What now for the presumed Fed Cut on January 30? IF Bernanke knew of the fraud, then he acted partly on that basis, if he didn’t then he acted without knowing the full picture.

This story will run, and is certainly bigger than the individual fraudster himself.#

Update:

According to this breaking Bloomberg story: Federal Reserve policy makers didn’t know about a $7.2 billion trading loss at Societe Generale SA prior to their Jan. 21 decision to reduce interest rates.

Policy makers were convinced by late December that increasing volatility in financial markets reflected a weakening U.S. economy and that further rate reductions were needed, said the official, who spoke on condition of anonymity.

The Federal Open Market Committee convened a conference call at 6 p.m. on Jan. 21 after stock markets in Asia and Europe tumbled. Members voted to cut the federal funds rate by three quarters of a percentage point, the most since the Fed began using the rate as its main tool of monetary policy in 1990, to 3.5 percent. Chairman Ben S. Bernanke and his colleagues concluded that losses in financial markets may result in reduced credit for companies and consumers, the official said.

While I am of the opinion that government should be kept to a minimum, and that the market should be largely left to it’s own devices, I am dismayed by the lack of broadband in this country. I would like to put existing arguments concerning the legacy of state monopolies and local loop unbundling aside for a moment and ask a straight forward question.

Should the government have mandated several years ago, that all new housing estates be piped for fibre to the kerb or even fibre to the home technology? I ask that given that the housing boom has led to something like half a million houses being built in quite a short space of time.

Now I can imagine that a person in favour of free markets would say - if the market does not demand this technology, then developers will not provide it. And if people do demand it, they will either ask for it, or specifically choose a development that does incorporate it.

But is there not a bigger picture? Is there not an argument that says economies that have implemented such policies (Korean and Scandanavian models come to mind) have benefitted from the foresight, and that such government interference has actually led to the market benefitting from something that, if left to it’s own devices, may not have happened?

I know it sounds like I’m saying the governments knew best, but it puzzles me that given such massive house building we are still in the same situation we were a decade ago - copper to homes where DSL may not reach.

It may have been sensible for developers to approach ISP’s or TV stations and offer a deal to cable homes with extremely fast connections, both to save money digging roads up again later, and give companies instant access to customer’s homes without a proxy like eircom - or even to enable a huge amount of homes to have technology that may not be available to them over copper.

Did Korean people demand super fast broadband and then benefit from it, or did the government see the benefits in advance and force it on a market that did not see the potential positive future effects on the economy?

Incidentally Cringely’s piece this week covers a similar subject.

Comments welcome!

In related news read Cringely’s latest. He speculates that Apple will buy Adobe.

Right after September 11 it plummeted to 8235, returning to an average of about 10,000 in the last few years. At close yesterday it reached 11,268.

One arguments holds that the market is essential to individual freedom or to respecting people’s self-ownership. Forced redistribution of resources away from the outcome resulting from individual exchange violates people’s freedom to do what they like with what is theirs. Another, quite distinct, argument claims that the market gives people what they deserve. Talented, hardworking people deserve more than untalented feckless ones, and the market makes sure they get it. These justifications may coincide, in particular cases, but defenders of the market shouldn’t slide from one to the other without being aware that they may not.

Political Philosophy, Adam Swift, page 39.

I tend to agree.