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Monday, 19 March 2012

Are you feeling bullish? You are in large and growing company. But please watch the bear in your rear-view mirror!

If you looked at the stock exchanges lately and you read the tweets of some investors and traders that I do respect very much, it seemed like ‘Close encounters of the bovine kind’ was the latest movie at the theater. The optimism dripped from every tweet and the whole miserable feelings of the credit crisis were gone.

Even Christine Lagarde, the cautious French chairwoman of the IMF sees positive signals in the financial markets today, due to the ample availability of liquidity in the US and European markets.

The bulls are back in town’ and it doesn’t matter much whether their enthusiasm is spurred by billions of Euro’s in government aid or not. You go with them or you are run over by them, just like some silly tourists in Pamplona, during San Fermin (This is the fiesta that every perma-bull has on its retina).

The United States showed considerable job growth for the third month in a row in March and the country is glowing from a kind of contagious enthusiasm and optimism. It’s that very optimism that puts aside the real facts of life, like the enormous state debt and the fact that Ben Bernanke still leaves the interest rates at very low levels until at least 2013.

The crisis seems to be over as the American citizens were bored with it and decided to feel optimistic again. And don’t underestimate what the power of feeling good can do for people and the whole economy of a country.

The same in true in Europe: the situation in Greece seems contained now and the problems in Spain and especially Italy seem to have virtually disappeared. Not that they have in reality, but it is how the financial markets look at them.

The interest rates are relatively low and everybody is acting like the economic problems in these countries are a thing of the past. Even if Greece will default and Portugal will follow in its footsteps, the financial markets seem to feel untouchable again.

Whether these happy feelings will turn into a worldwide secular bull-market is everybody’s guess, but the western world seems well on its way.

However, especially for Dutch investors it makes sense to watch their rear-view mirror. It might be that they see an Ursus arctos horribilis in it, that is certainly not called Teddy or Winny and who was ‘born ready’ to chew them up.

While the financial markets have been quite optimistic lately, the news from The Netherlands last week was not particularly good to say the least. The signs in The Netherlands seem to increasingly point at a deep recession instead of a mild one, especially as domestic consumption is still at very poor levels and exports within the EU might decrease strongly in the coming months.

Here are four separate news messages that are already tale-telling in their own right, but especially speak volumes when combined:

In The Netherlands in February 2012, car registration was more than 10% lower than one year earlier. This was disclosed by data that the European trade organisation ACEA published last Thursday, March 15.

The decline in car registration in the whole European Union was 9.7% in February, after a decline of 7.1% in January.

Car sales in The Netherlands got stuck at 44,000, against 49,000 in February, 2011. In the whole EU only 888,878 cars were registered, a decline of almost 100,000 cars compared to last year. Car sales in France declined even by more than 20%.

Excuse me? This doesn’t exactly look like a bullish signal, doesn’t it? And there is more.

The Dutch National Institute for Budget Information NIBUD ( sent an alarming report to the press on the dire situation of indebted households in The Netherlands. Here are the pertinent snips of this press release:

The Dutch National Institute for Budget Information (NIBUD) and the Dutch Association for Indebtedness Relief and Social Banking (NVVK) are worried on the growing number of consumers that have trouble with paying their bills.

More than 30% of Dutch citizens is in arrears with payments and more than 70% of this category has various kinds of debt. They have not only overdrawn their bank account, but direct debit payments are refused by the bank and letters of reminder for the rent or mortgage redemptions are piling up in their mail box. In 2009 this was only 56%, is disclosed by NIBUD research.

Debt will be soaring this way and payment problems become serious and complex very quickly.

Not only the number of indebted people has soared, also the amount of arrears has doubled during last year. In 2010 only 4% had an arrears of €10,000 or more. In 2011, this has already become 11%, according to the Monitor Payment Arrears of the Ministry of Social Affairs and Employment.

The NIBUD and the NVVK have noticed that during the last years increasing numbers of higher educated people and people with high incomes have come into financial problems. Double income families that loose their jobs and subsequently get into trouble, due to high mortgage debt, are increasingly forming a problem.

I have written many times on soaring debt in The Netherlands and I assure you that this problem is only becoming bigger, not smaller in 2012. That is why I try to warn you for the bear in the rear-view mirror.

And the Dutch housing market? Well, any assumption that it is or will be improving during 2012, must be made by someone that either spent the last 15 years in outer space or by someone that is using the emotional, right brain-part only, shoving aside the factual left brainpart. It won’t happen! 

It took us 12 years to build up a bubble of enormous proportions and it will take us probably seven years at least to get rid of it again.

If you don’t believe me, please look at the facts.

The number of sold houses in February was 18.3% lower year-on-year. 7805 houses were sold, compared to 9558 last year. However, in February more houses were sold than in January 2012, when 7082 houses were sold.

The sales number of 7805 is considerably lower than the average number of house sales per month over last year. That was 10,061.

Just like in January, the problems were mainly in the condo-marke. In February, almost 25% less condo’s were sold year-on-year. In January this number was 21.2% less.

These figures don’t give ANY clue on an improving housing market. And especially the dropping number in condo sales points to deteriorating circumstances for starters on the housing market: in general condo’s are cheaper than family dwellings and therefore more suitable for starters. If these numbers decrease, it means certainly that less starters can afford to buy a house.

This development cannot be seen loose from the circumstances that I described in my article Credit crisis forces Dutch companies to change their Human Resources policy. Here is a snip from this article:

  • Dutch employers don’t have any confidence in the economy and don’t want to get stuck with excess personnel. It must be easy to lay off people quickly and without any hustle and bustle; 
  • The Dutch labor and dismissal legislation is too rigid and too old for the current demands on the labor market. Therefore companies don’t want to take any risk and hire everybody on a temp contract; 
  • The condition of access to a fixed contract is often nothing more than an empty promise from companies that want to bind their personnel without being bound to them;

I’m absolutely not against the labor market in The Netherlands becoming less rigid and overregulated. The disadvantage is, however, that the whole Dutch society is still built around fixed contracts.

People that don’t have one (especially youngsters), could be in for a rough time when they want to acquire a rental or private house. Landlords and banks could very well refuse them housing, without a fixed labor contract. And even a simple loan for a car or for house-maintenance could be refused, due to the uncertainty of future labor.

It seems that the development I sketched in the last paragraph, is already on its way. Hence, the dropping condo-sales.

And last week, there was also funny news. Funny, as in surprising and unexpected, but after all logical news: Entrepreneurs that are so fed up with their banks, that they kicked them out. Dutch Business News Radio BNR reported on this.

Entrepreneurs do everything to avoid banks currently. They are so fed up with the strict financing rules of banks, that they rather put away money themselves for investments.

This is stated by Laurens Meijer, the largest hospitality, food and beverage entrepreneur in The Netherlands. Meijer thinks that banks see their number of outstanding loans diminish rapidly.

“When I speak with co-entrepreneurs, independent of the industry in which they operate, they are busy with only one thing: how to get rid of their bank. And that includes us.”

Meijer explains how it came to entrepreneurs being so fed up with their bank. “They have been treated presumptuously by their banks during the last years. You get an umbrella when the sun is shining, but when it rains the banks take it away immediately.”

According to Meijer, entrepreneurs are better off without being under the yoke of the banks, although it is utopia to think that you can do without them. “You must keep a bank, as these created the system in such a way that you can’t do without them for your transactions. However, from a financing point-of-view there is one thing to do and that is to kick your bank out!”

I almost never read so much aggression from entrepreneurs against the banks. The funny thing is that it is in the interest of both banks, as well as entrepreneurs currently, to borrow as little money from the banks as possible.

Banks want to improve their balance sheets, while entrepreneurs want to do business without some busy-body looking over their shoulder and putting a brake on their growth potential. Saving money for investments is a slow, but steady and safe way to enlarge / maintain a company.

If the impression of Laurens Meijer is correctly indeed, this leads to a few conclusions:
  • Banks will lend less money for investments in the coming years and will improve their balance sheets in the process, as many loans will be paid back, instead of being rolled over in 2013-2014. 
  • This process, although good for the balance sheet, is bad for profits at the banks. Earning money will be much harder in the coming years. 
  • Corporate bonds and other means of private investment in companies (crowd-funding, private equity funds and privately contracted loans) may soar in the near future, as not every company has the patience / possibilities to save their own investment money together. 
You could call this a sensible development, as I do so. However, I don’t think that you can call it a bullish signal. 

So, please view in your rear-view mirror in the coming months; you might see a grizzly with an attitude there. And please don’t tell I didn’t warn you.

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