Latvia is poised to devalue its currency at least 15 percent by the end of 2010 to boost exports and cut the budget gap as the economy contracts at the fastest pace in more than a decade… deficit may grow to a record 10 percent of the economy this year, twice the initial 5 percent target set last year by international agencies that provided a 7.5 billion- euro ($11.2 billion) bailout loan. Latvia may already have taken the first step toward devaluation after an announcement on Oct. 6 that the government was considering rules to cap mortgage holders’ liability, which would help limit losses from a devaluation.

More and more scary bells each week are coming from Latvia. After the announcement the yield on sovereign bond due 2018 rose almost 1 percentage points, CDS jumped >20%. In last two weeks Latvian central bank had zero net intervention in FX market. Would be ridiculous for Mr. Rimsevics to spend another billion euros on defending currency. Probably he will not. Creditors would be flamed out otherwise.

There were few topics on SSE.LT discussing devaluation in Latvia:

The fixed currency model of bank collapse: Baltics on target, July 30, 2008.

A Few Ideas About Baltic Currency Devaluation: It Happens, November 15, 2008.

The devastation is not in the toilets, but in heads, April 23, 2009.

The conspiracy of IMF and Latvia, September 11, 2009.

The conspiracy of IMF and Latvia: part 2, legal preparation, October 6, 2009

Basically what has changed since the first post is Swedes perception in Latvian risks. Or at least their public recognition of high devaluation probability. But what is dramatically pity – Latvians has not changed: neither fundamentals nor perception. Latvian government is very reluctant about their future. And this pisses Europe off.

Ober-Haus Real Estate Advisors is presenting the Lithuanian apartment price index (OHBI), which shows summarized changes in prices for apartments in the five largest Lithuanian cities (Vilnius, Kaunas, Klaipėda, Šiauliai, and Panevėžys).

In September Lithuanian real estate prices declined 1.8% m/m and 30.3% y/y. Record setting continues. This September was the worst ever for the real estate in Lithuania.

Last month prices fell 24% year to date and 35.5% since top in December 2007. Real prices also continue to decline – inflation exacerbates poor situation of real estate holders.

Real estate price index (OHBI)

September was 16th consecutive month of deteriorating real estate prices.  But that’s logical – if people cut spending on most vital goods new flat is the last thing they would like to purchase. Probably prices call fall another 40% in real terms to erase the bubble peak during 2005-2008.

OHBI index change

Inspired by:

And:

Finance Minister Anders Borg has had talks with the major Swedish banks and warned of a near economic collapse in Latvia… The international community’s patience is very limited… In secret talks with the Swedish banks have Anders Borg explained the growing pressure that exists within the International Monetary Fund (IMF) to force Latvia to a devaluation… Since it is difficult to safely assess Latvia’s ability to pay and with conditions for recovery, one cannot completely exclude the risk of a major default.

According to translated version of SVD.SE, whatever that could mean. Anyway, one of the major barriers of devaluation could be removed by the Latvian government…

Evidence of international pressure is rising. It is much clear now Latvian government had hot debates with international community about currency devaluation. Promising much and doing little.  On that background EURLVL spot rate approached its upper legal limit:

EURLVL spot

Swedbank perpetual bond price fell 2.5%:

Swedbank perpetual bond price

Now Latvian government expects budget deficit around 8.5% next year, which compares with 7% arranged with IMF. Probably they feel too much self-confident they do not follow the arrangements, which raised logical questions on international finance arena. There is too much doubt at the moment in Latvian loyalty. The following paper fuels them even more by describing a legal removal of a major barrier for the Latvians to devalue their currency. In short, now there are chances of the law according to which people who took credit on real estate will not be liable for the amount of the loan that exceeds value (not sure which) of the real estate:

Source: Danske Bank

If this held true, devaluation will not increase cost of mortgage loans in Latvia. 2 years lasting argument of the central bank of Latvia might just become a joke.

Latvia will probably devalue its currency in the next year since the government may not be able to continue cutting spending in line with its international program… We think it’s more likely than not that Latvia will devalue… [Real effective exchange rate] needs to decline by “about” 25 percent to return to levels in 2004 “when the bubble started to inflate,” Shearing said. The real effective exchange rate has weakened 3.5 percent from its peak. A Latvian devaluation will mean Estonia and Lithuania are likely to follow suit and devalue their currencies…

That’s what Bloomberg released today. Quite a strong message from Capital Economics. Will it raise the next economy run?

No reaction in the forward markets yet, ~0.2% jump up.

12 months EUR-LVL forward

Lithuania’s central bank said on Wednesday it had ordered the country’s sixth-largest bank, Snoras, to raise capital and imposed limits on its risk-taking…  Snoras had to shore up capital to cushion risks, mainly from operations with non-residents, but the bank was stable… A Snoras bank spokesman said the bank’s capital adequacy ratio was 8.42 percent at the end of the second quarter, compared to the minimum requirement of 8.0 percent.

Oops. 8.42 means should the bank’s equity decline 5%, it will brake the minimum requirement. In the last 12 month Snoras lost 9.32mn litas or 1.6% of equity. More to follow.

Lithuania will sell euro- denominated bonds in less than a month in a second auction this year. The government targets reducing the budget deficit next year and will cut spending and raise taxes by a total of 4.2 billion litai to narrow the gap, Kubilius said today.

4.2bn litas is ~11% of 2008 government revenue or 3.7% of 2008 GDP. If government expenditure multiplier is 1 than GDP of the country will contract 3.7% only from lower public spending.  In fact, the decline can be as much as 7% or 10%, as more money is saved in recession than it is spend. And this excludes firms and households consumption.

Industrial production in Baltics is in double digits deficit. All the latest readings show the smallest contraction this year. In Lithuania the figure is -13.2%, in Estonia – -27%. Previous months downward revisions create the visual effect of falling rate of deterioration and month-on-month improvements.

Baltic industrial production

Retail sales in Estonia and Latvia declined to all time lows in August: -17.9% and -30.3% respectively. In Lithuania the decline was 19.6% excluding autos, the same as in July, and worse than 19.2% in June.

Baltic retail sales

Total number of unemployed people rose to 431,000. This compares to 7.2mn inhabitants of the three Baltic states.

Baltic unemployment

Lithuania… had its foreign and local- currency debt ratings cut by Moody’s, which cited “severe pressure” on the budget…  a reversal of this trend [recession] is unlikely to occur within the medium-term rating horizon…  Subdued growth in western Europe will lead to diminished demand for Lithuania’s exports and less foreign investment… Domestic consumption is also likely to be limited by falling employment, wage cuts, a weakened banking sector and government budget consolidation.

A quite unexpected step from the Moody’s, reminding for all those “bottom searchers” where the country is heading. Additionally, statistic department reported consumer confidence index of  -40, compared to -47 in August and -26 a year ago.

The index shows net 40% of respondents believe consumption environment has deteriorated during the last 12 months.  The government contribution to the decline is the major thing to blame. It is not global slowdown, but Mr. Kubilius who decided the country will feel comfortable with deflation.

Lithuania consumer confidence

Moody’s rating cut means one big thing – 20% drop in GDP is not the end yet. As an opposite consequence to devaluation, the drop should be far deeper. The government was very reluctant to play aggressively: we didn’t devalue and we don’t cut expenditure. I am worried we don’t experience both soon. On the background of zero action, 20% drop in GDP is just a piece of cake. We shall be prepared for the real move.

The surplus will increase because “the goods and services deficit shrank, as well as due to losses of foreign companies and the intake of European Union funds for agriculture,” Rimsevics said today in a statement.The bank will officially
release the data on Sept. 23.

Many thanks are going to Mr. Rimsevics for creating transparency in Latvian accounting. Now we see more of what we would like to see from a country with doubtful currency peg and weak fundamentals. That’s foreign companies’ losses and EU funds that drive rising CA. The question “how sustainable it is” persists.

goods and services deficit shrank

True in some way. Trade balance became more balanced, but still negative, despite severe drop in internal demand caused by fiscal tightening. Should the country touch “the bottom”, trade deficit will again return.

losses of foreign companies

Are they going to operating below the breakeven infinitely? No. Either they leave, and transfer capital outside Latvia. Or continue to earn rents when GDP recovers, further worsening external balance.

intake of European Union funds

This will continue until the EU wants it to continue. By the way, stimulus money transfers from the European Commission should also expire soon, just IMF left.

In total, Latvian authorities couldn’t do anything valuable to fix its external balance. Fiscal policy is too powerless to curb overheated economy, most of the changes are subject to foreign decision makers. But transparency problem is being tackled. And that creates some promise in there.

Latvian current account summary

New York state made claim for $1.2 billion in taxes, interest and penalties from Lehman Brothers Holdings Inc. The state is seeking payment for tax bills dating to 1994, according to the claim form.

Bad luck. Would the head reached out Lehman as they did Goldman, they would have been received at least $1.2bn. Goldman Sachs paid $568m in taxes during the last 13 months. However, it obtained $13bn via AIG and $10bn from the government to keep going, making Goldman’s tax paid equal to 2.5% of the total sum. Not the best return on investment. Efficiency, efficiency, efficiency…

Past. Lehman from $70 to $14. Worth $34:

Present. Where would we be today without the government:

State debt may exceed 60 percent of gross domestic product in 2011, Rimsevics said. The debt ratio may fall below 60 percent the following year in time for meeting criteria to adopt the euro in 2014, he said. State debt was below 10 percent of GDP in 2007.

Dear Mr. Rimsevics, I am decently asking how could it be you have mixed up this statement with previous credo about Debt/GDP ratio (<60%). Please let me know where my interpretations are wrong when I compare the above words with this interview.

Once again I am watching it and feel uncomfortable. Especially at 4:00. I am worried, because I am not sure whether I won’t make such misinterpretations in future.

Original memorandum of intent of the government differed from what had been published. Two issues from the published document had indeed been removed at request of the Bank of Latvia and the Treasury. One is related to some information that can put investors into more advantageous position relative to the Treasury in sale of government debt.  Another was able to create more benefit for speculative attacks on Latvian Lat. One particular number could harm the whole country interest.

That’s how Wednesday’s Latvian press described the deal between Latvia and IMF.

Apart from a list of reporting obligations, Latvia has to do something which is mysteriously hidden from the public. I know nothing about that, but I like guessing. The first  point should certainly be related to limited Latvian government bargaining power in debt issue questions. Real country risk of Latvia must jump to stratosphere, which should be reflected in bond prices. But if IMF doesn’t show that, investors accept risk. By the way, there were several cases last Summer when Latvia was not able to sell debt on open market. They know it is impossible for them now, if real situation is exposed.

The second point, as I imagine it in my bright head, is in one or another way related to foreign reserves, market interventions and Lat nominal exchange rate. In fact, devaluation is one of the main country risk factors, which puts investors into more beneficial position in bonds battle. Thus, I assume IMF kindly asked the Central bank of Latvia to stop market intervention (read to stop buying that cheap evil Latvian currency and spend highly expensive Euros) if they exceed some pre-specified number. 100 million lats a week? 1,000 million? All 7.5 billion offered by IMF? Your guess?

So, is current Latvian exchange rate sustainable? Yes, if all agree. No, if something big, but not necessarily the majority, does not agree. Hopefully, 12 months forward declined 3% from the August peak.

Lat 12 months forward rate

Ober-Haus Real Estate Advisors is presenting the Lithuanian apartment price index (OHBI), which shows summarized changes in prices for apartments in the five largest Lithuanian cities (Vilnius, Kaunas, Klaipėda, Šiauliai, and Panevėžys).

In August nominal price index fell 3.3% m/m and 30% y/y, which is 13th consecutive y/y decline and even worse than July’s maximum. It is the first time since 2003, when August prices declined m/m, which significantly disappointed market expectations. So where is the bottom?

In August, real estate prices declined 34% from the top and 23% year to date. The market is falling deeper into the hole.

Real estate price index (OHBI)

The most unexpected and unfortunate things was the m/m growth deterioration. When everybody saw a break-even point on the index graph, it had reversed sharply and hit painfully.

OHBI index change

Over 80% of the world’s corporate and government data resides on mainframes.  Over $5 trillion worth of corporate application and data assets rely on its mainframes today.  Almost 95% of Fortune 1000 companies use its  Information Management System (IMS) for their most critical data management needs. More than 50 billion transactions—including financial ATM sessions, healthcare record access, tax accounts and other critical information—are running through IMS databases on a daily basis.

All these statements refer to IBM – worldwide data manager with an absolute market power.  Most essential global information is directly or indirectly controlled by IBM. Summary of the Computer & Communications Industry Association’s report follows.

IBM commercial at first:

Mainframes – are basically supercomputers used to process large scale data used by big corporations, governments, hedge funds and scientists. IBM holds a leading position in the market due to several things. First of all, IBM as the largest patent holder in the world, uses its legal benefit to either limit access of other companies to the market or require regular fees from competitors which makes it economically inefficient to sell your own servers. Secondly, it refuses to sell its software to be installed on third parties servers, creating customers lock-in. Besides, its software can not be used on other machines. Thirdly, IBM acquires its competitors. For instance, Platform Solutions. Fourhtly, that’s the size of the market and prisoner’s dilemma. Since everybody buys IBM, one should buy it either to render information faster than your rivals, or to obtain the same advantage as your rivals. As long all companies believe IBM mainframe will increase their profitability, everybody will buy it. In total, nobody but IBM benefits.

As a result, “the price for 1GB of mainframe memory is approximately $6,000 while the price for 1GB of memory for Intel or AMD based servers running Linux or Windows is less than $100″. Are you still concerned about Windows OS dominance of your PC?

Interestingly, would quantitative-research-loving hedge funds and major high frequency traders like to buy IBM mainframe to frontrun the market?  Or Goldman Sachs and co is not involved in that?.. I believe one’s power and another’s tools could be united in a perfect money making instrument. Good for them.

Goldman Sachs Group Inc. and Morgan Stanley got it wrong in declaring the start of an economic recovery… record government spending may be forestalling another slowdown and market selloff… This is more likely a ski-jump recession, with short-term stimulus creating a bump that will ultimately lead to a more precipitous decline later

Nice move performed by Paul Tudor Jones of Jones’s Tudor Investment Corp, leading Macro hedge fund. This is one of few cases when official projections are tackled by a sophisticated investor with no direct relationship with the government.

As the article says misleading indicators are driving markets up: sentiment indices, month-on-month changes, neglected seasonality effect, changes in accounting standards, adjusted labor and GDP figures, and of course deceptive interpretations. Many things help in creation of blurred recovery effect, everyday playing adult games with people brains. Hopefully, sustainability of  this manipulation is questionable.

What real indicators show is that share on home loans in the US with one or payments overdue rose to 9.24 in the second quarter of 2009 – all time high. Distressed deals including foreclosures account for a third of new sales in the USA, which is not included into news headlines.

They couldn’t prevent one small downtrend, I believe they won’t – a bigger.

Bulgaria’s economy will fail to grow until 2011, lagging behind other European Union states, where most of the Balkan nation’s exports are shipped… Real estate, construction and financial services, which drove growth before the crisis, won’t be able to recover to pre-crisis levels… Recovery will have to be export driven

But what can Latvia offer? Or Lithuania with Estonia? We already now expect fast recovery in 2010. But Baltic case is much more complicated than Bulgarian. There are several short but explicit reasons.

First of all, both Bulgaria and Baltic states have pegged their currencies to Euro and both claimed to protect them. Thus more deflation should occur in our economies to reduce value of the currency and rebuild competitiveness. Bulgarians admitted they will not grow in 2010. Next step is expected by Latvians and their neighbors. Wages should fall further and more considerably. No question here.

Secondly, Bulgarian labor is the cheapest in the EU. Income and corporate taxes in Bulgaria are lowest in the EU, reaching only 10%. In Lithuania, taxes generally increase twice a year. If a rich guy wants to build a labor intensive factory or establish an outsourcing office he would prefer Bulgaria over other options, because it will have lower cost of capital, simply. Who disagrees that entrepreneurs and matured companies are praying for their government in Sofia?

Thirdly, Bulgaria, as well as Baltic states, suffered from fragile construction and financial services. However, the country acknowledges the only way to return to positive growth is to sell goods and service abroad, given tough financing opportunities.  Baltics are using foreign debt to patch holes in its budget balances and expect for real estate prices to go up one day. If they won’t we actually will have no other jobs. Losers.

Both China and America are addressing bubbles by creating more bubbles and we’re just taking advantage of that. So we can’t lose… Lou said CIC was building a broad investment portfolio that includes products designed to generate both alpha and beta; to hedge against both inflation and deflation; and to provide guaranteed returns in the event of a new crisis

Now they say about that openly. Lou Jiwei, the head of Chinese sovereign wealth fund, admits the only way to defeat financial crisis is to produce another bubble economy.  Controlled by few people, who serve as a monopoly, with no competition or control.

And you know how that works:

If our returns are not bad and the state’s FX reserves are still rising, we may go and ask for more

If consumers don’t buy they go and buy themselves. If producers don’t produce, they subsidize or nationalize them and produce at loss. Examples: Chinese industrial or metal sectors; American GM or Fannie Mae; TARP or US record budget deficit. Many similar things, and all done by the largest money suppliers of the world: China and the USA. It is hard to say how would economic environment  develop without the help of external sources. However, government intervention into the market creates optimistic mood for one, and higher potential bearish return for another. Let’s see whose luck will be the first.

Employees in financial, mining and construction sectors experienced steepest declines in salaries. Wages in the sectors declined 4.9%, 10.6% and 22.4% respectively. On the opposite, teachers earned 12.9% more in 2q 2009 than during the same period a year ago.

Despite that was the first quarter of wage decline, wage growth has been falling for 5 consecutive quarters.

Average 2q 2009 monthly earnings. Respective quarter of the pervious year = 100

Major GDP driving sectors, construction and financials, experience steepest declines in earnings, indicating bottom is still not reached.

Average 2q 2009 gross monthly earnings in LTL

Little understood outside the securities industry, the business [high frequency trading] has suddenly become one of the most competitive and controversial on Wall Street… The profits have led to a gold rush, with hedge funds and investment banks dangling million-dollar salaries at software engineers. In one lawsuit, the Citadel Investment Group, a $12 billion hedge fund, revealed that it had paid tens of millions to two top programmers in the last seven years.

Now your investment fund value, or profit if your are Goldman Sachs, depends on how quick you are able to frontrun the market and protect the philosopher’s stone.
High frequency trading algorithms

The most essential idea of high frequency trading is to split big orders into small pieces to hide the activity from other investors. On the one hand, this helps to eliminate significant market moves caused by big deals. On the other, some other specialists are using software to find out about splitting and manipulate share price down in order to buy a piece of the big deal at a discount and later sell it back, when market manipulation overs.

Another type of modern computerized trading is a use of predictive models based on historical correlation between some particular news, events or filings and further share reaction. Often computerized hedge funds purchase such info at very low latency from Reuters or Bloomberg, so they can benefit from the news much faster than all other investors.

Another type of the thing – automated market makers. They are buying large quantities of shares at price which is only disclosed to one investors and is unknown for others. The investor can either agree or disagree upon the offer. By reducing market transparency and setting their own bid-ask spread and trading on high volume they earn money.

Value added for Goldman Sachs and co

Using new trading technique large investment banks and hedge funds can easily beat analysts expectations on their profit. Some of new hedge funds consist only of several PhD programmers and a good mainframe computer. Now the major task of banks is to protect their intangible assets: people and software code. Yet, people can not always be kept in a stall, like Sergey Aleynikov, a programmer of Goldman Sachs.

How serious is it

Final

It took one day for Goldman Sachs to convince FBI Mr. Aleynikov was guilty. In Goldman Sachs we trust.

So better July’’s number in manufacturing category, the major contributor to total economy industrial production, resulted from higher than 100% y/y growth of crude oil and natural gas extraction (in Lithuania?), 103% growth in medicine production (absolutely “the best” measure of GDP growth), and a 4-month 45% average increase in production of electronic and optical products.  All rates are hardly sustainable. On more realistic side, production of food fell 11% , clothing – 27%, metals – 44.6%.

Industrial production

Transportation load is more complicated to observe, as the same good or passenger can travel by several types of transport to reach its destination. Both categories include train, marine, which carries 44% of goods, local water and air transport. Deterioration rate of international Klaipeda port’s load improved the most in July, which contributed to general picture. However, volatility of amount of goods handled in the port is extremely large compared to other categories. In July, its activity was only 2% lower compared to 2008, in June the figure was -22%. Historical monthly standard deviation is around 19%. I won’t be surprised to see a >20% drop again in August.

Transportation load

… Current account has been balanced, inflation is falling back, foreign debt will not exceed 60% of GDP, which is a Maastricht criteria level… Our current account deficit is not in double digits… This is not because the overvalued currency, but because of huge lending… We just need to have more communication…

Latvian year to date trade deficit is  LVL -145mn including both goods and services. Its income balance (the rest part of current account) was LVL -300mn in 2008, and the last time it was positive in 2002. But mysteriously, income deficit reversed to a surplus this year! How? Why? What affects? Mr. Rimsevics, can you please communicate on this topic?

I can only guess that funds from European Commission to protect Lat were accounted as investment income in the current account of Latvia. According to the Bank of Latvia:

The current account shows exports and imports of goods and services, income and expense (wages and salaries, reinvested earnings, dividends, interest payments) as well as current transfers (EU funds, contributions to the EU budget, cash transfers of private persons, pensions, donations, taxes, etc).

Not to claim Mr. Rimsevics is hiding something, I am simply wondering how much of EU funds were included into current account since the beginning of the year. Why income from direct investment on a debit side becomes positive when it is supposed to be an outflow? Is it sustainable? My guess is “no”. Than, so much honored current account surplus is also a fake. Hope, somebody will communicate it to me and other wondering enthusiasts.

Meanwhile, there’s a  full interview dated today on CNBC with the head of the Bank of Latvia on the stage:

PS and yes, Mr. Rimsevics, nobody cares what is the capital of a country, until the country is famous for its people in science,  research, culture, sports. In case of Latvia, I mostly hear about its debates with neighbors, pension cuts, riots, minorities discrimination, money laundering, etc.

It is easy to participate. You only need to select one of six cells on a lottery ticket to find how much additional interest will be assigned to your deposit. The lucky number will be added to your specific saving account.

Voila! Lithuanian banks have officially started playing games. If you have lost money in one of Danske funds you can try your luck with their new entertainment. At least you will be able to experience some honored pleasure now if you didn’t try their magic deposit two years before. So what are you offered?

Current VILIBOR rates are the following: 3 months – 8.13%, 6 months – 8.69%. These rates are 0.63%,  and 0.19% higher than Danske’s, which is logical. To be in equilibrium, and not lose money for the bank, expected lottery outcome should be 0.6% when you choose 3 months deposit and 0.2% when 6 months is chosen. Possible lottery outcomes are claimed to be 0.1%, 0.2%, 0.3%, 0.4%, 0.5%, 1%, 2%, 3%, 5%, 7% or 10% with implied mean of 2.68%. If I assume that probability of 0.1% is the highest and is decreasing with each nominal value by some constant factor, I get probability on finding “10%” equal to 0.74% for 3 months and 0.01% for six.  This compares to 0.04% probability to die from alcohol intoxication in Lithuania.

Ober-Haus Real Estate Advisors is presenting the Lithuanian apartment price index (OHBI), which shows summarized changes in prices for apartments in the five largest Lithuanian cities (Vilnius, Kaunas, Klaipėda, Šiauliai, and Panevėžys).

In July nominal price index fell 0.9% m/m and 28% y/y, which is 12th consecutive y/y decline and the largest ever. Monthly deterioration rate reduced in line with historical trend.  During the second quarter of 2009, apartment prices fell 26.5%, slightly more than 22.4% decline in GDP. Too bad, the bottom is not here yet.

In real terms, the index contracted 0.1% m/m and 30% y/y, meaning inflation is still curbing into yearly prices.

Real estate price index (OHBI)

The yearly rate of weakening has been negative for already a year and rising. Month-on-month prices have been falling for already 19 successive months. Meanwhile, activity in the market fell to a record low, with only 50 new Vilnius apartments sold in July. This compares to 3,500 flat deals monthly during the end of 2007 in the whole country.

OHBI index change

Two of the three Baltic nations saw their economies decline at a slower pace in the second quarter, increasing tentative hopes that the worst may be over in the crisis-hit region… The improving quarter-on-quarter trend bolstered the argument of those who believe the Baltic economies have bottomed out after suffering the deepest recessions in the European Union this year.

Black is white. Baltic States are not so big to moderate their GDP or unemployment figures significantly, unlike the US. Their only tool is to present real numbers in mystery interpretations.  Just note what is the current macro environment in the countries:

GDP contraction is the all time severest in all three Baltic countries (Bloomberg ironically doesn’t show 2q GDP of Lithuania, which contracted 22.4%):

Baltic states GDP (Lithuania should be -22%)

Number of unemployed people have never been so high in Latvia and Estonia. In Lithuania 193,900 people don’t have work and the number is rising:

Unemployment

Retail sales dropped so deep they won’t recover soon:

Retail sales

Remember, Baltic States preferred deflationary path over devaluation. That means we still have to experience 30-40% deflation to get to equilibrium.  However, Latvia and Lithuania still have inflation! And only Estonian prices started to fall compared to the same period last year by bulky 0.7-0.9%. Good start.

Inflation

11:23 Retroactive laws and whether to pay an income tax
16:10 In democracy 51% of the people controls 49% of the people
22:42 Rockefellers’ and banks manifesto
51:10 Money machine, debt, inflation, 1913
1:06:40 Carbon taxes monopoly

However, in my opinion this factor is scrubby. There’s a winter season approaching, and many people already now start thinking how to maintain debts and public utility bills, new electricity prices and so on. Many apartments waiting to be sold now will become a true load for real estate brokers in winter and as a consequence of winterizing (and many other factors) prices is likely to be falling.

According to the authors, there are 70 real estate projects in Vilnius today, 30 apartments were sold in eco-class sector.  But real estate brokers are mastering great plans. They are motivating people to purchase flats citing real estate web-portals traffic increase. In my opinion those two factors are hardly correlating. That’s like comparing nation’s healthiness with health related portals visitors. Like banks with  invest-portfolios pretexts (that’s a bottom – buy, its rising – buy) real estate brokers can always find a reason and its description to invest in Lithuanian flats. Think your own head, dude.

Economists are nearly unanimous that Ben Bernanke should be reappointed to another term as Federal Reserve chairman… He deserves a lot of credit for stabilizing the financial markets… Meanwhile, the majority of the economists The Wall Street Journal surveyed during the past few days said the recession that began in December 2007 is now over.

Huh? Recession is over means companies start earning money, apart from other things. It doesn’t mean expectations about future earnings emerge. But in reality we see the opposite:

1972:

1973: Oil crisis

1987:

1987: Black Monday

2001:

2001: Dot Com bubble

2007-current:

2007-2009: World financial crisis

If we presume as a benchmark a period starting a year before market high and subsequent collapse and 4 years after the high, we can find a certain pattern there. Only in the latest case we can observe how P/E rockets in 6 months since the bottom and tops during the period. Never in the history of S&P index market expectations regarding the end of recession were so high. Note, only in the current period there is a sequence of 6 straight months of rising hopes. It means every month after November’s low investors expect more and more of real income.

But they get forth consecutive quarter of earnings decline:

Four consecutive quarters of S&P earnings decline

S&P said it was cutting Latvia’s sovereign rating a notch deeper into junk status from BB+ to BB, citing the “political and economic challenges” facing the country as a result of “rapidly contracting” incomes and the associated pressure on public finances.

Latvia posted real GDP contraction of 19.6% in the second quarter of 2009. That’s the deepest fall in the country’s history. Meanwhile, foreign government debt increased to LVL 3.2bn (EUR 4.6bn). As a result, gross government domestic debt to GDP is set around 20%. To fulfill Maastricht criteria, the ratio can not break 60%. However, it’s not easy any more.

Latvia's Real GDP touching the floor

Retail sales fell 28%, meaning the most necessary products are becoming less available due to lack of real money. By a third! Industrial production is 19% lower, indicating long-term projected economic decline.  Earnings in restaurant and hotel sector, which Riga was famous for, plunged 35%! You will not see British stag-parties on the capital streets anymore.

In the best case scenario, Latvia’s economy is expected to shrink 20% this year and somewhat 3% next year.  (3% is a nice assumption given deflation path over devaluation and still rising consumer prices, but that’s another topic) Neglecting budget deficit and resulting debt build up, but only assuming EUR 7.5bn in loans from IMF, Latvia’s debt to GDP ratio will blow up to 60% by the end of 2010. So even under the most optimistic government scenario, the country meets the lowest end of Maastricht criteria to adopt Euro. Too bad.

Baltic equity funds performance follows:

Hope you didn’t invest into Invalda’s, Swedbank’s or any other funds managed in Baltics.

1 year Baltic funds managed returns