Are we in 2007?

If I could revisit 2008 in 2011, why not turning back time even more and returning to 2007? If you look at the S&P chart below, showing some period of 12 months from December to November, your guess should be that it dates back to good, pre-crisis times, while in fact it illustrates recent 12 months. No major correction, low volatility and over 30% return over the year is what stockholders on average experienced in 2013.

Such patterns are typical, but for the late expansion phase, in which GDP growth is high, unemployment runs low, inflationary pressures intensify and have to be dampened by monetary tightening. Such chart could also come from a period of early economic recovery, when stock prices bounce back after a dismal bear market. But the bear market actually has not occurred since early 2009. Since late winter of 2009, stock markets have been in the bullish phase, with some major corrections: in spring 2010 when bankruptcy of Greece was a real threat, in summer 2011 when US sovereign rating was downgraded, in spring 2012 (was there a profound reason for the downward movement?), but since then most markets have been rising without a deeper break to take a breath.

Is the incline sustainable?

Every why has a wherefore. Sound bull markets the history has witnessed were grounded in economic fundamentals – economies were expanding, fewer people were jobless, taxpayers paid more in taxes and governments ran nearly balanced budgets, wheels in the economic machines were oiled property and central banks kept interest rates on moderately high level to prevent economies from overheating and preclude inflation from going up. Now the economic growth rate in USA stays below 3%, Western Europe economies are rebounding after deep slowdown. Unemployment rate in the USA is above 7% (which is very higher given the flexibility of labour market there), in the eurozone it is above 10%. To combat adverse economic conditions, tremendously loose monetary policy has been pursued over last five year. Not only have the interest rates in the biggest economies have been cut to near zero, but many central banks have been carrying out quantitative easing programmes, or in plain English, increased money supply in financial system.

Normally when if money supply goes up, everything else held constant, price level should increase by the same rate, to keep the financial system in balance. To many economists’ surprise, ultra-loose monetary policy has not sent overall price level rising. The reason for it is simple – the money intended to prop up the real economy through the financial system have not flowed out of banks and drove up asset prices.

Long ago it has been discovered that low interest rates distort economic decisions. The upshots are now visible on stock and property markets in many countries. House prices in the United States and in Great Britain have seen double-digit increases over the last year. Is this trend sustainable?

I keep asking myself a question: “why so good, if so bad?” Why are the markets red-hot if the economy is still fragile? The only plausible explanation is that market participant are buying the prospects of bright future. But can the next years be rose-coloured, if financial markets rely on drip of cheap money provided by central bankers? Near-zero interest rates cannot be kept forever. One day central bankers will have to bite a bullet on it and what then? The biggest corrections in the recent months on the stock market have been brought about by rumours of QE being tapered or petering out in near future. Central bankers realise the scale of pathological reliance of markets on monetary easing and the difficulty they have to get to grips with is how to pull out of the egregious practice of printing money without harming the markets, as the shock suffered by them would be transmitted into real economy. This dilemma niftily depicts the abnormality of current situation. In ‘normal’ environment raising the cost of credit above certain level just stifles economic activity and dampens enthusiasm of financial markets’ participants. At the present, leaving cost of credit on historically low levels, but only curtailing pumping money may wreak bigger havoc to financial system than unexpected jacking up interest rates by 100 points in a healthy economy.

Quite frequently you can hear of economists arguing, whether the recent unfettered stock market rally is a full-blown bubble, or it only has all makings of a bubble. Federal Reserve has already received a warning. Many indicators (P/E > 25, margin debt, bullish sentiment, low volatility, technical indicators) point at existence of a bubble, while other (business cycle phase, low participation of individuals in the market) may disprove the bubble theory. I only wish to stress the presence of the word “bubble” in the media and in the search engines might be a misleading gauge and should be interpreted with caution.

According to the scenario in the paper linked above, the crash is very likely to occur in 2014. If so, I foresee it will not strike out of the blue, but the show will go on in the ordinary way. At some point stock market reaches its peak, then retreats, attempts of bullish speculators to drive prices up go in vain, then ensues the waterfall (shape of a price chart when prices plummet), then a rebound, then a gradual decline and at the end the tsunami strikes… This pattern is similar to what was observed in 2008 (peak in 2007, retreat, waterfall in early 2008, decline till the early days of September 2008 and then the Lehman earthquake). The first and foremost argument against such scenario is that financial system is not full of toxic assets as it was before the crisis. On the other hand, central banks and government have run out of tools the used to rescue financial institutions and economies in 2008 and 2009. Fhe frail economies cannot endlessly underlie exorbitant stock market valuations and the sooner market participant realise it, the better for everyone.

These musings take me back to the last semester of my studies, when in late 2010 I took a course “Financial crises and financial stability”, delivered by prof. Mieczysław Puławski. I recall well the lecturer mentioning a crisis model devised in 2009, according to which a much more wrathful crisis will hit in 2H2014. Time will tell, if the prophets’ of doom prediction was right.

A few paragraphs above I stated “financial markets rely on drip of cheap money” and laid my thought out very precisely – financial markets, not real economies. Real economies are capable of bearing the burden of higher cost of credit, it may bend them, but will not knock them down and in the long run sound monetary policy will lay foundations for returning to the path of sustainable economic growth.

Compared to developed markets, Poland comes out impressively safe. The property market has been on decline since 2008. In 3Q2013 property prices nudged up, yet it is too early to judge, whether the trend has reversed, or the rebound is just a correction in a downward trend. Unquestionably, the increased demand for properties is the effect of lower interest rates and constricting regulation regarding buyer’s equity for property purchase (min. 5% in 2014, this one hastened many buyers finance the planned transactions with 100% mortgage this year). One swallow does not make a summer and it will be the summer of 2014 when with hindsight the mid-term trend on Polish property market can be observed.

The Polish stock market has been consistently underperforming developed markets. While S&P 500 and DAX indices are well above their 2007 peaks, WIG (broad market total return index) and WIG20 (blue chip price index) are not only below their 2007 peaks, but also below their highs recorded in first half of 2011. Market analyst put it down to insecurity over future of pension system in Poland. If this is indeed the case, it only bears out the reform is a step in the right direction. Despite not beating ever-time records, the stock market in Poland is red-hot, judging by IPO frequency and successfulness. 4Q2013 already saw privatisation of PKP Cargo, which was priced quite high and debuted at absurdly high price. I subscribed for shares of PKP Cargo, took the 19% profit and made off. Recently I subscribed for Newag, just for fun I signed up for 50 shares, 19 PLN each. On Friday I discovered I had been allocated mere 4 shares, as individual investors’ demand surpassed supply over 25 times, which resulted in 93% haircut in share allocation… Demand for Energa among individual investors is also record-high and over-subscription is expected. I will subscribe for those shares as well, hoping to find the greater fool to buy them from it on secondary market. I realise this has become a fad and market sentiment clearly indicates I should rush to escape.

My strategy is to liquidate my stocks portfolio in first weeks of 2014. I last bought stocks in early September 2013, when pension reform announcement triggered a short-lasting sell-off, which turned out to be a superb mid-term investment opportunity. The only reason why I have not pulled out of the stock market recently is the sizeable loss from hapless 2011 which is carried forward into next years. According to Polish tax regulations, no more than 50% of a loss from a specific year may be used as tax shield in any of next following year, so this year (in 2012 my profit was very small) I cannot use it up and sale of securities in 2014 offers a chance to reduce capital gains tax payable. And after I scram, may it all collapse. By all accounts, Poland’s economy will not be severely impacted by the downturn on financial markets and subsequent bear market might offer interesting long-term investment opportunities.

The new finance minister

At times I come to think the more I work overtime, the more hollow my life gets. It is not about doing nothing except working and focusing on mundane daily duties – over the last fortnight I easily found time to eat out (not confuse for ‘date’) with a friend, attend a conference, visit a theatre, but to offset this, I totally lost track of what was going on in the world. Just imagine yesterday, with a three-day delay, I learnt about a considerable reshuffle in the Polish government The recent pace of my work has become so dreadful (my thanks to several colleagues who have taken sick leaves, not their fault, but me is who is bearing the brunt of their infections) that I could not even find time to take a break and spend a few minutes surfing the web to check the daily news and back home, after eleven hours of toiling away, I did not feel like watching TV or reading news online. Over the working week I lost track of everything and had to catch up…

Yesterday I read the list of 7 ministers that have been replaced and their successors. Cross my heart, I cannot recall now most of them and what has left in my memory is a portrait of Elżbieta Bieńkowska, who will serve as deputy prime minister (she’s got balls) and the new finance minister.

The departing (appointment of the new minister becomes effective on 27 November 2013) finance minister, Mr Rostowski, has held his position over six years and in the recent months has gone increasing unpopular with voters, in the wake of plans of dismantling the private-run part of pension system and the budget amendments resulting in higher deficit and suspending safety debt/GDP ceilings. Having observed him over his term in office more or less cautiously, I am in two minds about Mr. Rostowski’s performance during his tenure. To make an unbiased judgement, I would need a comparison and because of the long period of time when he was irreplaceable, I cannot find a proper benchmark. When he was taking the office, Poland was in the last months of riding the waves of pre-crisis boom. In late 2008 it became evident economic reality had been turned upside down, economic growth decelerated swiftly and running a sensible fiscal policy became a much more challenging task. In 2009 he managed to strike a fair balance between using fiscal stimulus to bolster economy and keeping debt/GDP ratio on moderate levels, without jeopardising Poland’s creditworthiness. In later years he could not boast about actual accomplishments in bringing forth structural reforms that could heal Poland’s public finances in long run. In the second wave of economic slowdown, due to excessive budgetary deficit Poland ran since 2010, he ran out of tools to rouse up economy, therefore Polish economy recorded sluggish growth of mere 0.5% in 1Q2013. His plans of detracting from the pension funds were not driven by straightforward conviction of inherent drawbacks of the pension system, but by pressure to relieve the tensions in the state budget. By many Mr Rostowski is deemed to be a seasoned liar. I do not wish to examine how many times he was departing from the truth, although such summary at the end of his term could come in useful. As his positive attribute, I will memorise his power of calmness in public discussions over the pension system. He managed to clearly and substantively explain the workings of the pension system and purpose of the proposed changes. Despite being quite selective in his justifications, his way of speaking and argumentation were assessed impressive not only by me. For too many PO supporters he was intolerable, so potential positive impact of ousting him from the government has probably urged Mr Tusk to look for someone to replace him.

My first association when I heard the name “Mateusz Szczurek” was… ING. And then my second thought was… ING pension fund…

Over the whole weekend I was wondering what the rationale behind this decision was and whose decision it actually was.

By all accounts, it should have been an independent decision of Mr Tusk. Quite probably, the prime minister, minding the impact of the reshuffle on the support for the government, shied away from swapping Mr Rostowski for a PO politician and preferred to nominate a person commonly labelled as an independent expert.

Beyond all doubt, given the gruelling state of Poland’s public finances, many potential candidates turned down offers of taking up the challenge of running the shop in which one has to bend over backwards to make ends meet. A rationally-thinking man could consider such offer either as a poison pill or… as a rewarding challenge.

Mindful of this, I find Mr Szczurek’s choice mind-boggling. He had pursued his career (started at the age of 22, just like mine) with one institution – ING and in 2011 was promoted to the position of chief economist for CEE region, the prestigious and certainly financially rewarding job. What drove this 38-year-old father of five children and cycling enthusiast to give up on the position, reputation of independent expert, credentials, esteem and earnings I could only dream of, to step into the murky world of politics?

For sure the motives were not pecuniary. I estimate his salary will shrink by at least 80%. My parents told me he had been asked by a TV journalist in one of interviews, how would he get used to earnings of 15,000 before tax a month after leaving a much better paid position and Mr Szczurek was more than perplexed. The after-tax salary of some 9,000 per month will allow him and his family to scrape along, but if they do not tap their savings, their standard of living is likely deteriorate…

If it was not about money, it must have been about power. Maybe the financial conglomerate he used to work for so long was too small for him to fulfil his potential. Maybe he craved for a profession that would make him far more recognisable, influential and, if his achievements were remarkable, remembered by generations. Maybe, after years of working for a Dutch corporation, patriotic feelings overwhelmed him and he made up his mind to sacrifice the lucrative position for a benefit of his country. I am reluctant to give credence to the last explanation which here serves the purpose of playing intellectual game with the readership. I hold the view, you may share it or not, that decent people tend to stay away from the politics, do their bit in a private sector, perform their jobs as good as they can and lead stable lives far away from the spotlight…

Revisiting my first impression. I sever from any conspiracy theories, but it has to be borne in mind ING manages a pension fund being a part of public pension system, whose assets account for 24% of total assets under management in Poland. ING is a meaningful stakeholder of the pension system in Poland and has a vested interest in retaining it in the current shape, guaranteeing pension fund managers a steady flow of fees and little responsibility for returns. It occurred to me the new minister, in the light of decreasing support for the pension reform, would take steps to unwind it. On second thoughts, I abandoned this theory. Having in mind the budget for 2014 would not be overrun without diminishing transfers to social security fund, aimed at replenishing deficiencies generated by moving contributions to pension funds, one of key criterions for sure was the candidate’s promise to take over the implementation of pension reform, in line with the government’s blueprint. After stepping down from his current position, Mr Szczurek will no longer owe the duty of loyalty to ING, but by getting involved in undermining the business of pension fund managers, he burns his bridges with his Dutch-based employer.

Most economists, asked about the competencies of the new minister, either could say little about him, or spoke highly about his characteristics. Unlike many economists, he is said to be a rational and equable expert who favours modest solutions, rather than ardent follower of a specific doctrine (see besotted neo-liberal, Mr Balcerowicz) – the stance I hold dear with economists and which bodes well on his future conduct.

I wish Mr Szczurek many successes on his new path and pin hopes in him – I hope his prudent decisions will contribute to sustainable improvement Poland’s creditworthiness and reduce the scale of indebtedness in the long run. Much indicates better times are coming. When the economy is expanding, expenditure cuts, accompanied by keeping tax rates intact, or even raising them, when appropriate, are the least painful to the economy and people. May he resist temptations to sit on laurels and cut off coupons from the booming economy and calls to add fuel to the fire by easing fiscal policies! May he not waste the chance to turn around the Poland’s public finances! May he not repeat the mistakes made by PiS government, when in 2007 the state budget, instead of reporting a surplus, ran a 22 billion PLN deficit!

Twists of fate

12 November 2013

How come in almost all nations the independence day brings together people who rejoice and take pride in their country, while in Poland, for the third year in a row, celebrations end up with riots? The 11 November, national holiday commemorating regaining independence in 1918, after 123 years of partitions, was reinstated after overturning communism. I watched the presence of independence day in the public sphere evolving from overbearing official celebrations into more joyful and casual events, such as recently organised marches. Joy-rendering parades attract more people to take to the streets than sombre commemorations, especially if the routes cover places that unite people of different views – such as the independence match staged by president’s office, whose participants paid homage to monuments of heroes fighting for Poland’s independence, regardless of their political views and membership.

It is a pity state celebrations have not brought all meaningful actors of Polish politics together. The main oppositional party has staged its own, peaceful march in Cracow, but credits for them for effectively dissociating from the nationalist hooligans, who organised their own demonstration in Warsaw.

Maybe the riots were not as violent as two years ago, but Monday’s goings-on give a reason for shame to most Poles… If I can share a few considerations:

1) The word ‘provocation’ has been coming up in all shapes and sizes. For some commentators, whenever anti-government organisations botch something up, the government must have had its fingers in it, i.e. all those people who yanked sett out of pavements, threw stones, scorched the rainbow, set fire to guardsman’s hut, were put up by the government, to spoil the reputation of their opponents

2) Who allowed such huge manifestation to take place when it is dark, when everyone should know dim light is conducive to acts of violence and it’s easier to go unpunished?

3) Who allowed the people, notorious for their hatred for Russia, to pass by the Russian embassy and why were the premises of the Russian outpost left without proper protection?

4) Why did the town hall decision-makers succumb to the march’s organisers insistence on absence of police in the immediate vicinity of he march’s route?

5) How can a mentally healthy person celebrate independence day by attacking other people and damaging their property?

6) Why does a person with clear intensions wear a balaclava?

7) I also noticed, talking to several people (mostly at work), after such incidence many folks hanker after ZOMO. The tolerance for the misbehaviour witnessed on 11 November is very low and given helplessness of the police, percent of people in favour of radical treatment of hooligans is on the rise.

8) Most of those people have not taken heed of the make-up of rowdy crowd, which was the chief reason why the police brigades were reluctant to take tough action on the recalcitrant scoundrels – i.e. the crown was a blend of ordinary, peaceful people and rascals with wrapped faces. The police were facing the risk of beating innocent people while trying to crack down on hooligans. BTW – on TV I saw several pairs – ordinarily-looking girls holding hands with hatred-filled nationalist boys; upon seeing this I scaled down my odds of getting married ever…

13 November 2013

Poland is slowly forgetting about the 11 November incidents, Polish diplomats weigh up what would be the most apposite way to deplore about the burnt hut. Soulmate and I pop out for a lunch to a bar on the other corner of the roundabout, then drop in on the nearby shopping centre. When we walk out of there, we sense the smell of natural gas, blown by the winding from the underground construction site. The tang is quite intense. Gas emergency service is on site, fire engines are coming over. Something is afoot. Some 20 minutes later in our office someone orders us to evacuate. We calmly leave the building, the whole procedure goes smoothly, as during exercise evacuation. Given the circumstances, I do not understand why are were told to stay on the car park (place of gathering according to health and safety procedures) which is the dangerous area. Gas leakage is not serious and relevant services are working on fixing the pipe, ripped by an excavator operator, but out of boredom we begin to wonder what would happen and what the scale of destruction would be, if the gas exploded. We bring back the pictures of gas explosion in Rotunda in 1979 in Warsaw. Our building is not connected to the gasworks, but if any pipes were laid beneath it, a little spark could… perish the thought…

14 November 2013

Gas actually explodes, causes death of two workers, leaves several locals injured and brings about a veritably apocalyptic blaze which turn a part of a village in Western Poland into a post-war landscape. I deeply hope this will be the national operator of gasworks in Poland (the company calls the whole incident a “breakdown”), not the Polish state, who will pay for all damages. Houses might be rebuilt, all materials goods can be restored (except for those having sentimental value), but no one will compensate the dwellers of houses destroyed by the fire (many of them were lucky to be at work or school in the middle of the day) for trauma they are going through, the trauma from which some of them will not recover until the end of their days…

15 November 2013

The company hatched the idea of promoting its services by giving out coffee. Those males who smiled frankly and kindly asked skilful barista girl for something special, could get such bonus. Made my day…

Sadder, but wiser, in economics…

If you want to blame someone for the recent crisis, the easiest, and the most socially acceptable way of find a scapegoat is pointing at bankers. After all the bankers were granting mortgage loans to borrowers who could not afford even to make the first repayment. After all the bankers pooled the subprime loans, repackaged them and sold them to naïve investors, spreading the disease all over the world. After all bankers were living like lords, reaping profits when good times were rolling in and refusing to take responsibility for their wrongdoing when the house of cards fell apart.

I do not aim do detract from the banking sector’s salient and undisputable contribution to the crisis. I (not as a bank employee, but as a citizen and economist) call for looking at bankers’ faults in a broader social, economic and political context.

If you carefully dissect 20 years of run-up to credit crisis in the United States, you should notice:

- millions of people chasing the American Dream, part of fulfilment of which was home ownership – these were millions of people who could not afford to buy a house, but who thanks to easy access to credit were given a chance to fulfil their dreams, a considerable percentage of those people were those who wanted to live beyond their means,

- politicians and central bankers who wanted to make voters happy, and by decreasing cost of credit and passing laws facilitating home purchases fuelled the housing bubble,

- bankers, who noticed the excessive demand for mortgage loans, decided to earn on it and then discovered ways to earn even more without taking more risk by granting the loans and instantly pushing them away from their balance sheets.

The bottom line is that the whole societies, not only bankers and politicians, can be accused of lack of forethought. Beware though, applying collective responsibility is quite unfair in this case, as the there were several people, ordinary and among the elite, who refused to indulge in the bubble spree.

The problem is, however, that common sense advocates who try to warn of the impending moments when bubbles burst, are disliked, not only when a bubble swells, but also with hindsight. I recently read a comment under another article on property prices that in 2007 in which somebody argued six years ago, when property bubble (?) in Poland was reaching its peak, an average salary in Warsaw would buy 1/3 sqm of a flat, banks eagerly were giving out loans, everyone was happier than now, when banks rebuff many would-be borrowers, despite 20% lower (in nominal terms) property prices. These days for an average salary you can buy 1/2 sqm of a flat, so the purchasing power on the property prices has risen by 50%. Paradoxically, despite less steep prices, banks’ reluctance to grant new mortgage loans will hinder your decision to buy a dreamt-up flat. Thus I come to the conclusion people do not behave rationally – consumerist desire to possess goods without considering whether they can afford them distorts economic decisions…

To shed a different light on the issue, some more examples…

The Polish government blames pension funds for fetching inadequate returns and charging exorbitant fees, without emphasising the crucial role policymakers who set stringent investment policies, flawed system of benchmarks and capped fees at sky-high levels. Companies who were allowed to deal with pension fund management acted rationally – abided by the rules, didn’t try to stick their necks out, reaped profits and ripped off future pensioners quietly. The government regulations coercing every taxpayer to participate in private-run part of public pension system generated demand for pension fund services. Pension fund managers just came up with the supply.

Tobacco companies produce stuff that addicts is unhealthy and generally is considered harmful. Each pack of cigarettes needs to contain properly sized information on destructive impact on smoking on health and cigarettes carcinogenic effects. Are the cigarette-makers blamed for deaths of millions of people from lung cancer?

Carmakers for years have been producing vehicle reaching maximum speed at which any accident could be fatal. Does anyone who hears news of an accident with several fatalities caused by speeding think of blaming automotive industry for producing deathful machines?

Alternatively, when you have in mind the problem of prostitution, do you blame escort agency owners or prostitutes themselves for the phenomenon of the oldest profession? Maybe you see a giggling sleazy guy who runs a massage parlour who claims he runs a relaxation facility and what his female employee and his male customer do when they go together to a dim-lit room with red walls stays between them. Virtually anyone who looks into the issue of prostitution highlights misconduct of procurers and prostitutes, while has anyone bothered to delineate a profile of a typical customer of escort agencies?

Coming back to bankers – in Poland the banking sector has become a scapegoat for CHF-denominated mortgage loans and currency option crisis.

In the former case, many think the banks have earned on appreciation on Swiss currency and CHF-borrowers have been duped by the banks. In fact banks have earned on fees, margins and FX rate spreads, which are all loosely tied of FX rates. In other words, banks’ earnings have been independent of FX market movements and thus banks have not had uncovered FX risk exposure. The other story is that banks were encouraging borrowers to take out loans in CHF due to lower interest rates, which translated into lower instalments and higher creditworthiness. All this was because of the demand for cheap lending. When CHF-denominated lending was rampant, few voices of concern were audible. Banks were happy to earn on margins and FX spreads, borrowers were happy to see their dream of own flat coming true. Some even were called idiots, when they were converting their CHF-denominated loans into PLN at the rate of 2.10. With hindsight, their foresight is enviable. In Poland, unlike in other countries, all borrowers had to be extensively informed on FX risk and had to sign documents to confirm they were familiar with the risks, if they had not been properly informed by a salesperson in bank’s outlet, they should have badgered the salespeople to explain the risks… Ignorance of law is not an excuse and taking those loan contracts to the court would be senseless then…

In the latter case, when PLN was evidently overvalued, there was a natural demand from exporters being on the verge of breaking even, to hedge against risk of further appreciation and a supply from financial institutions coming up with solutions suitable for exporters (if properly used). Exporters noticed FX derivatives helped them not only offset unfavourable effects of PLN appreciation, but also earn extra income, if the same position was hedged more than once with more than one bank. Banks noticed they could earn extra income on margins and fees, if volumes of transactions hedged were higher and so foisted upon exporters the double-edged swords of currency options. When FX market capsized there was actually no winner in Poland (if Polish banks’ counterparties had their positions uncovered, they could have taken large profits). Exporters were facing financial distress, while banks had to face credit losses if their corporate counterparties defaulted. When things were going well and companies benefited from sophisticated derivatives, nobody cried out in outrage, when the tide turned against the companies some politicians were calling for nullifying options contracts. Until today I wonder if those companies that made profits on FX hedging would have to return their profits to banks…

In brief, all the paragraphs above narrow down to subject of sharing responsibility for a misery between the supply side and demand side. In each case described above, there is a demand for some service or product, matched by supply. You could of course argue, demand is a response to supply. I would point out in turn, the problem is not akin to egg and chicken dilemma. In overwhelming majority supply matches demand. Imagine there are no males willing to buy sexual services – then all escort agencies would go bankrupt and prostitutes would be jobless. Imagine nobody wants to take out a risky loan – would banks keep on foisting them upon not eligible reluctant clients?

The separate matter is whether the government should step in and impose restrictions which would prevent demand for harmful services or products from being matched by supply?

Should the government protect individuals from their own recklessness, ignorance, short-sightedness, etc. The answer to this questions probably depends on your view of a human and its autonomy. Conservatives and liberals claim a human is wise enough to take rational decisions and take responsibility for them. Socialists argue a human is fragile and pliable and someone else knows better what should be forbidden and what should be warranted. Moreover, the answer might depend on existence of spillover effects of an individual’s detrimental decisions. If a reckless individual is the one who pays the price, then OK, may the government stay away, but if price for one person’s decision is paid by other people (which indirectly limits their personal liberty), these other people are most often all taxpayers who chip in for government-funded bailouts, there is a deep rationale for governments to intervene.

Troublesome mating

Having shaken off a heartache, one usually begins to look out for opportunities to start over a new relationship. For posterity and for myself – a wry record of my endeavours over the past year. If there’s no use crying over spilt milk, I can at least indulge in recalling those hapless stories from their hilarious side… If you don’t fancy reading somebody washing their dirty linen in public, just click away.

This time names won’t be made up to withhold the real identity of persons involved. The cast are: six women nicknamed Gx, where x = 1, 2, …, 6, G stands for ‘Girl’, B (stands for my name) – me.

G1 probably was still alone because of her stringent requirements towards potential partner, or just maybe because she’d hold her head up high. To give you the flavour of it, just a short snippet of our conversation.

G1: I don’t know if you realise, but I’m a member of MENSA.

B: (concealing my bewilderment, as I heard the most above-average intelligent people associated in that organisation hardly ever boast about their membership and generally are modest) I’m impressed…

A few minutes later I mentioned in the conversation Wisława Szymborska (Polish Noble Prize in literature laureate)

G1: Excuse me, who?

B: Wisława Szymborska, you know, she got the Noble in literature in 1996

G1: Never heard of…

B: “Nothing happens twice”, “Calling Yeti” (…), rings a bell to you?

G1: Errr, no…

Exit strategy: make a getaway and then avoid like a plague!

Regular readers of PES already are familiar with the story of G2, named for them ‘Natalia’

B: After not seeing you for more than two years, I could have found you being with someone else and did consider this when trying to find you, but when we met, you told me that…

G2: I remember, when you asked how I was doing, my reply started with a declaration “I don’t have a boyfriend, I don’t have a fiancé, I’m not married”…

B: So actually you have somebody…?

G2: Well, formally we are not together… This is… a cupboard love

B: (the whole situation seemed kind of funny to me) It sounds serious.

G2: It’s a very serious feeling towards an older, mature man.

B: (I could barely help my jaw dropping open, but responded in a serious manner) Maybe it would be worthwhile to do something about it?

G2 just pulled a face and flushed…

I haven’t seen her ever after despite working in neighbouring building. None of our common friends could not tell me how she was doing, no one has heard anything from her. PES Commentator Basia claimed I could have done her an incredible favour; I doubt it – even if my emergence served as an eye-opener, she closed her eyes as soon as I made off.

The date with G3 was actually quite nice and promising until the moment I drove her home and we were about to farewell…

G3: May I ask you a question?

B: Sure, go ahead.

G3: Is it your car?

B: Why are you asking?

G3: You know, some boys tend to impress girls with not their cars…

B: (baffled) You’ve got me there, this one is stolen!

G3: You know, it’s not what I meant. Can you… show the registration certificate?

B: I took the car’s documents out of pocket and showed her (I know I should have refused, but at that stage I wanted to bring this situation to an ultimate end)

G3: It’s yours, not your father’s. So when do we meet next time?

B: Never. Because I don’t go out with blachary (blachara is a Polish word for a girl who falls for boys who have cars, don’t know if there’s any English equivalent…)

Comment: Had I possessed a barn-tuned Volkswagen Golf III with darkened rear windows, alloy rims and sizeable spoilers, the date could have had its final on the back seat of my car. Unfortunately my immaculate Renault doesn’t work on women like this…

I had to make some efforts and prove some patience to ask G4 out, but my determination was rewarded. Actually this was not an awful experience, it was in a way… uncanny…

She told me about her parents divorce, how her father treated her mother, her siblings and her since the time their family began to break up, how her brother escaped it by getting hitched to a girl from a rich family, how her sister quit studies two times. She confessed:

G4: I’ve never loved anybody and I don’t think I ever will, it’s just what I’m like – I don’t care, I don’t get attached, that’s how I function, people have to accept or not – their choice.

Then she also described me how her boss was harassing her…

Despite the whole burden she had thrown at me and despite her ‘emotional instability’ (something that attracts me in women) I claim this one relationship had a chance to work out. Months after that meeting I still regret being too open about my intentions. Had I held my horses, I could have hit it off with her and slowly tame her.

G5 was also a good example of a resistant girl. For a long time she remained totally indifferent to me showing interest in us getting to know each other better. Once we accidentally met in town. I was returning from work after doing vast overtime, it was getting late, so I offered her a lift.

B: Maybe I could drive you home…

G5: (perplexed and feeling like vanishing into the air) Maybe better not!

B: (decided to find out whether it was because she had a boyfriend or for some other reasons that she turned down each my proposal) Is your boyfriend so jealous, that he would damage my car and throttle me? (was meant to be a joke)

G5: Eeerrr… Yes… He’s very aggressive…

B: (stumped) So I’ll better hold back and go home… alone… it’s late… bye…

This short dialogue until now seems absurd and no matter if that was true, or just a lame excuse, the message is clear – keep away from such women. Case similar to G2 – the mystery to be never unravelled and even if it was, what the benefit for me would be?

G6 deserves a slight introduction. We first met in 2008 on a language course, then accidentally met during exam in April 2009 and a few weeks ago ran across each other in a tram. I sensed an opportunity cropping up, I put forward we met, she agreed…

I’m not reticent, but I somehow kind of like meetings when I don’t have to speak much. This was one of them. Before we got to a restaurant I listened to the story of her struggle in the run-up to her legal counsel exams that plunged her into neurosis and which medicines her psychiatrist prescribed her and how she reacted to them. In the restaurant the actual rough ride set on…

G6: Yes, you remembered well I don’t use Internet often, but this doesn’t mean I’m unfamiliar with technology (she pulls from her handbag some Apple-made device and shows off her smartphone – both devices keep her online all the time) – I change them every year to have always state-of-the-art electronics by my side. Actually they don’t endure more than a year, my previous iPhone’s mainboard gave up the ghost after a year and I lost all the files I had stored on it…

B: (decided to pick up the gauntlet and play this game, so took my Nokia handset bought in early 2008 from my pocket) I prefer to stay offline, I simply don’t need gadgets. This one offers me as much as I need and for almost six years has never let me down.

G6: But aren’t you ashamed of using it in public. I would be…

This was when the show was hotting up

G6: I like big cars. I feel safe and mighty behind the wheel. Recently my dad leased a Mitsubishi Outlander for me. I adore this car.

B: This is an SUV, right? finally met a woman aged less than 35 who can be seen in such petrol-guzzling hideous vehicle) Well, I somehow don’t need big stuff, they simply don’t impress me. My 10-year-old Megane serves me very well

G6: Aren’t you afraid of driving such old car?

B: Of course not, it’s as reliable as my phone (indeed, today engine cranked up briskly after 10 days of sitting idle)

Then came the part in which she laid out her opinions in fundamental matters…

G6: A man should be resourceful. He should have at least two full-time jobs and moonlight in order to have money to indulge his woman’s needs.

Then she made my hackles rise…

G6: This is awful when people bring packed lunch to the office instead of going out to eat… If they earn money, what can be the reason for them to deny themselves pleasure of eating out?

B: But don’t you realise most of them may have budget constraints or prefer to spend money on other things or have loans to pay off? Many of my colleagues spend a lot of money investing in their children and therefore they relinquish eating out…

G6: And this why I will never have children. These are sponger. If I had a child I would have to spend money on it and spent time looking after it. And as a child-free woman I can spend money for satisfying my needs and take care of my own matters…

I must have been totally bemused, if I didn’t feel like shouting in her face: “you vacuous cunt”…

I haven’t even bothered to send her a brief text message to thank for the evening…

For the two days following the nightmarish date I felt a bit off-colour, broke sweat after small physical efforts and shivered. Fever ensued on the third day before dawn. At first I thought I’d caught a cold (weather and heating conditions in my office and public transport were conducive to it), but soon I realised instead of sore throat I was nagged by aching stomach. As the disease developed, it turned out to be regular food poisoning (details left out, nothing pleasant) – first in my life since early childhood and quite severe.

I wonder whether the obnoxious tribulations I’ve gone through recently were just a coincidence, an aftermath of G6’s bad taste (after roaming around town for almost an hour and griping about menu contents in several restaurants) or a sign (maybe the Guardian Angel is vigilant and had his fingers in it) from the fate. That date was a katharsis – I felt like swimming in a pond of shit, keeping my head above water, breathing in fragrant air and knowing no one has enough power to push my head down. It made me finally realise going out with somebody just for the sake of mere going out makes no sense. It’s sometimes better to be left out in the cold if the house is on fire…

The recent date probably was also meant to serve as a cure for my fondness of older women (all six women were older than me, with age difference spanning from a few weeks to seven years). I stared at G6’s face – instead of sincere grin I saw a frown, instead of joy I saw displeasure, instead of youthful energy I saw jadedness. I saw a grumpy, elderly materialist who didn’t need a man as a human, but craved for his money. Never before have I found a company of a woman so off-putting that I prayed we parted as soon as possible and if I could I would probably run away as fast as legs could carry. I even thought about finding an excuse, writing an SMS under the table with a request for an urgent call, but gave up on those ideas, decided to stay tough and stick it out…

Now if this was indeed a turning point, then comes a question where to look for a younger girl if in my natural social groups are work and the same since years circle of friends? For the former the hope lies in staff turnover, yet beware… For the latter, if there was meant to be an opportunity, it would have long been seized or missed. Should I take second studies, sign up for language course / dancing course, enrol in an organisation? Makes a point, if I wanted squeezing extra activity into my weekly timetable, but… signing up can do the job if the real goal is to learn something new, or engage in new activity, not to meet a girl – if not, the whole idea can turn into a huge cock-up… My Soulmate told me there are surely plenty of girls that would fit me well, but I have no chance to meet them, despite quite probably passing them by every day – they follow the same daily routine I do – move between home and work, in free time help at home or meet the same group of friends. But because it takes two to tango, even if I break away from the circle, odds of meeting them are low.

Regarding back the former – I used to avow I would refrain from any ambiguous relationships at work. With time I’ve given it second thoughts and slightly changed my mind. What really should be avoided are relationships with women from your team and all other you work directly with, have frequent professional interactions with or if your job responsibilities overlap. If your positions are, however, functionally and physically separated, no one should view it as a problem. Such proximity makes it even easier to foster a relationship (how convenient to pop out for a lunch together or to meet after work).

Some time ago it occurred to me some opportunities stand no chance of being even missed. Some time ago I met a girl. Until then I had been unable to define what the “ideal woman” or “a girl of my kind” would be like. When I met her (none of the G1 – G6 described above) I realised she was such one. But when we first mean, it was all said and done, or rather the know was tied. She got married last year, a year before we met. I didn’t even dare to make any step, even held off on trying to get to know her better, just to ward off any temptation. No chance to light a single spark in the dark…

All adventures with those girls also had one common denominator – they all lacked spontaneity, something which in the past made it work smoothly, naturally. Back in middle, then high school or at the university, I had a chance to meet many girls, spend more time with time in different situations and then could find out whether I liked any of them more and if I wanted to make a step to get to know her better and ask her out. Today, when I often have to fight for opportunity to meet, I need to ask a woman out to find out whether I want to get to know her better… Maybe I’m weird, but I don’t seem to understand it. I know, this is a part of mating rituals, but if you ask somebody out, you make an effort to show that you care. And the whole absurdity for me is that I don’t know if I care, so the whole fuss seems incongruous to me…

The upside of all those miserable attempts is that none of them has got me so far to spark any emotional commitment. Sometimes I felt relief it didn’t work out (G1, G3, G6), sometimes it’d hurt a bit (G2, G4, G5) – as no one likes being turned away, but getting over it was a matter of days rather than weeks.

From time to time my colleague (30+ married woman, has no children and not the Soulmate) and I pop out for a cigarette. Actually she smokes, I take up the role of a passive smoker and we chat, not only about work. One day I asked her why she got married. Her response was straightforward and disarming: “I was about to turn 30, he showed he cared, had a job, had no addictions, was kind of handsome and just like me liked dogs, there was no use in waiting for a knight from a fairy tale”.

So what’s the reason for me to get married?

To have somebody to cook dinners for me, wash my socks, vacuum-clean carpets and iron my shirts? No, I can do it myself, or hire a servant!

To meet the most elementary needs a male has? This problem might be solved by frequent trips to escort agency or picking up girls in some clubs – I hope to never stoop so low!

To have somebody to support me? For all those years I learnt to cope with all difficulties on my own, I’m used to not sharing problems as they appear with other people.

The only reasonable motive is to have a company in life – and then everything changes…

My Soulmate also told me with age I’ll become more demanding and will find it harder to accept a woman with all her habits, shortcomings and peculiarities. In fact, at that stage I can’t pick and choose, as many valuable women are already either married or in long-lasting relationships. It’s just like in a free-market economy where rational consumers compete with one another to pick out more valuable goods before others snatch them for themselves – so leftovers are not the most desired ones. There is an option to wait until one of such relationships breaks up and step in, but one needs to have it in mind, this would be a relationship with a person burnt and bruised after a bitter experience of broken-up relationship…

Relationship is an art of compromise, but not all concessions can be made and in some matters I see no room for compromise. I can’t imagine a relationship with a woman who has totally different priorities in life, or has different hierarchy of values. Surely, I could try, but having seen many such relationships from the stage of fascination evolving into disillusionment and bitter end, I treat such opportunities as waste of time which additionally increases probability I miss the right opportunity… Which I hope lies still ahead.

Sickie...

Just coming over to let you know I'm alive.

When I heard the news of stomach flu decimating staff of my division, I simply shrugged them off and thought it could affect anybody, but me. I doesn't mean I haven't taken precautions to fend off the disease being spread. Despite strictly obeying personal hygiene rules (as always) I somehow contracted it, or alternatively I'm down with some food poisoning - symptoms do not indicate unanimously any of the possible causes why my digestive system has been being turned upside down for the third and fever doesn't ease off, but I hope to pull through by the end of the month. In the meantime I will spend four days on a sick leave, first since two years - good opportunity to catch up with reading and film watching (as soon as the disease eases up).

Will post something substantive next weekend.

Cheers!

Worries - shelved

It's been a sort of a hectic weekend, hence a very short note. My dear few avid readers - accept my apologies.

The political event of the week in Poland was a debacle of referendum in Warsaw. The turnout of 25.66%, vs. roughly 29% required to deem the voting valid, was too low to oust Mrs Gronkiewicz Waltz from her stool in the town hall. A month before the referendum at least 40% of Warsaw's inhabitants would avow to take part in a vote (and depose the mayor). In my opinion all the efforts of the civic movement aimed at removing the haughty mayor were thwarted, when the referendum campaign was dominated by politicians trying to capitalise on Warsaw's inhabitants disgruntlement. Warsaw remains a stronghold of PO, but those people would easily give up on supporting the party, if only they were faced with a decent alternative. When Mr Kaczynski stepped in, the lesser of two evils was chosen. PiS officially treats the referendum as its success, however I dare to argue had it been engaging so actively in the anti-mayoral campaign, the turnout would have been higher. Lots of people must have got angry seeing the civic initiative turning into political squabble. The proper course of action would have been for the politicians to launch a campaign after the new election were called, or to run a campaign in more constructive way - all what the critics of the mayor would say was "Mrs Gronkiewicz Waltz is a bad mayor, let's oust her", no proposal beyond the moment she loses her position, no counter-proposals on how to sort out what has been done wrong by her. To recap - pure flavour of Polish politics with little policies.

The global political event of the week was the debt ceiling in the United States. As illustrated to the right, the easier option has been chosen - now there is more room to pump in the shit. Currently creditworthiness of the United States cannot be evaluated in terms of its capacity to repay its debt, this may only be considered as ability to roll it over. Yet, this cannot be done until the end of the world. The only way the US government can get rid of its huge debt is... inflation, which would reduce the real value of liabilities, thus through inflation tax the US government would dupe its creditors and its own citizens - the middle class, except for those heavily indebted, who usually benefit from high inflation. The new Fed governor, extremely dovish, would most probably see to it.

Pension law - draft released

Five weeks after the general shape of the pension reform was unveiled, the government made public the document which might become the new legal act governing the pension system in Poland. The document is available here, is 47 pages long and… I have taken the trouble to read through it quite carefully.

The text is a compilation of amendments into several other legal acts regulating workings of pension funds, social security system and public finances. For this very reason is it absolutely unreadable for an average reader. In other words, just like most official documents in Poland, the document is a piece of anything, but informative twaddle, whose authors probably have not intended to confuse recipients, but have done so…

May the first article of the draft law give you the flavour of how reader-unfriendly it is:

Art. 1. W ustawie z dnia 26 lipca 1991 r. o podatku dochodowym od osób fizycznych (Dz. U.

z 2012 r. poz.361, z późn. zm. 2)) wprowadza się następujące zmiany:

1) w art. 30:

a) w ust. 1 dodaje się pkt 14 w brzmieniu:

„14) od kwoty wypłat...

Okay, I concede this incongruous form has to be retained for legislative purposes, but a reader who comes across such stipulations, unless equipped with several other acts, has no idea what the paragraph is referring to. My proposal of best practices in such instances is to attach to a draft of new law all other legal acts it changes in “track changes” version. For those unfamiliar with such methods – a “track changes” document marks what has been added, removed and changed – very convenient for readers who need to opine changes or simply quickly find out what has been amended.

The other thing I noticed (not necessarily rightly, as at second glance, I spotted a paragraph setting forth framework for settlements between pillars of the pension system, to be governed by a separate decree) is a potential cock-up regarding the 10-year period before retirement when “money” should gradually flow between pension funds and state-run social security fund. The law states 10 years before planned retirement the social security fund informs a pension fund (to be precise a company which manages it, on its behalf) about the obligation to redeem settlement units amassed by a pension fund participant and transfer money to the social security fund. The capital assigned to a fund participant is divided into 120 equal parts, then 1/120 of all settlement units a pension fund participant has is transferred each month. Amounts of transfer will vary depending on current market valuation of settlement units (i.e. underlying assets). For the whole operation to hold water mathematically, new contributions must not be transferred to pension funds over 10 last years before retirement. Otherwise the moment an employee retires, they would still hold in the pension fund account assigned to them all contributions transferred there over last 10 years, while the government’s intent was to bring the balance of pension fund account to zero.

Contrary to original plans, the choice between private- and state-run parts of the system will not be irrevocable. The decision taken in 2Q2014 might be changed in 2016 and then in 4-year intervals. On one hand this offers additional choice to future pensioners, which is an upside, on the other I fear this option will not work for the benefit of the would-be retirees. 4-year period does not offer enough flexibility for those who would like to benefit from long-term trends on stock market (75% of assets will have to be invested in shares of publicly traded companies), while given the retrospective approach to results of pension funds, many people might choose to transfer their contribution there after a period of substantial rallies (seeing high past returns), just before the oncoming bear market. In the long run this solution is quite likely to incur losses to future pensioners and discourage them from participating in private-managed pillar of the pension system. Maybe the ‘revocable freedom to choose’ has been a deliberate step towards scrapping private-run pension funds at all?

                       

When laying out the blueprint of the reform, government had declared in case of moving government bonds from pension funds to social security fund and writing them off, debt-to-GDP safety levels would be decreased accordingly to reflect drop in official government debt (not to give room for extra indebtedness). As the draft law shows, this avowal has vanished into their air. The law brings forth only amendments to so-called ‘expenditure rule’ which would now be more restrictive in containing unfettered growth of government spending, but 50% and 55% debt-to-GDP levels, serving as a safety valve against reckless politicians, will, unfortunately, be intact.

One of more meaningful changes for future pensioners who will decide to have part of their contribution transferred to pension funds is a decrease of load fee from 3.50% to 1.75%. Slashing the commission charged at each paid zloty means higher pension benefits for system participants and undermines risk-free business of fund managers. Noteworthy is to observe pension fund defenders stance on the reduction. When interviewed, they assert this is a fine move, long overdue and then deftly sidetrack into other aspects of the reform that as a whole are, according to them, likely to decrease overall potential return beyond gains from load fee savings. Actually such stance has been quite common whenever topic of exorbitant fees was brought up – each time there came an ‘expert’ who would claim the government should focus on initiatives that could increase potential returns fetched by pension funds, rather than confining to taking the easiest way out, i.e. regulatory decreasing fees; thus denigrating the importance of low cost of the pension system for its participants.

On Friday I took a day off to make use of the great weather and catch up with some gardening. In the late afternoon I sat back in front of TV, turned over to TVP Info and watched a TV programme dedicated to the pension reform in which the audience were free to call and ask questions representatives of the ministry and pension fund managers, send text messages and write e-mails. The show contained also some footages recorded on the streets of Warsaw with people having their say on the reform and sharing the ideas on how to secure their pension. The picture that emerged from the programme was horrific. The economic ignorance in the Polish society is a crying shame. Most people do not understand how the pension system works and therefore can believe in every lie / misrepresentation / distortion they told about it. Given the level and bias of public discourse, an average Pole who lacks basic understanding of economics is meant to end up confused. Once they hear minister Rostowski saying the government is the best guarantor of pension payouts – this holds water, so why not trusting him? Then they see dr hab. Balcerowicz shouting the government is brazenly seizing citizens’ money to pay benefits to current pensioners at the expense of future pensioners whose savings are depleted – at first sight this also hangs together so they feel like a theft victim. Then they listed to prof. Oręziak who says due to existence of pension funds the public debt of Poland has risen by additional 300 billion zloty and pension funds are a huge burden for public finances that is a ball and chain – so again they think from the taxpayers’ perspective this must be a praiseworthy reform. Then comes up dr Petru who pronounces the government is taking the path of least resistance and instead of seeking savings somewhere else, destroys a good pension system and destabilises it.

Same issues, different opinions. If you are familiar with economics, you can critically assess utterance on the pension system. If you are not, clashing opponents make you even more lost and more indifferent about what is going to happen…

Meanwhile in the capital – soon comes the verdict…

Wishful thinking

Don’t wait for the perfect moment! Take the moment and make it perfect!

7 December 2008:

- Why do you argue now is the right time to buy a flat? When will the property prices go up again?

- Prices won’t rise soon, however in my opinion the third quarter of 2009 will bring the onset of slow, yet stable upward trend (…) Those who take decisions swiftly will be the winners.

- Do you think then prices on secondary market will not decrease in the coming months?

- Where they were meant to fall, they have already fallen.

1 March 2009:

The scales on the property market have not been tipped so favourably for a while. And it seems this won’t last long. Hurry up then!

3 June 2009:

Decline of property prices has come to a halt and prices are not going to fall any more. This is a good moment to buy a property, but a bad time for selling it.

12 July 2010:

Property prices are still low and banks are more willing to grant loans. According to property agents, this is the perfect moment to buy a dreamt-up flat.

Some time later in the second half of 2010:

This is the best moment to buy a property. It won’t be any cheaper!

24 November 2011:

Some property agencies seem affected by the slowdown on the market, other describe the current market as ‘stable’. Nevertheless, all property agents claim in unison this is the perfect time for property buyers.

11 December 2012:

Last days of 2011 and first months of 2012 will be the perfect time for property purchases – experts convince.

13 April 2012:

Whoever plans a property purchase should not put it back. Downward trend in prices is likely to reverse.

27 August 2012:

If you consider buying a property, this is the perfect moment. Prices have gone down, but fewer buyers can boast about desired creditworthiness. Even if next year prices fall, the decline will be negligible.

5 October 2012:

Planning to buy a flat? Property market practitioners point out sellers are ready to make bigger concessions in price negotiations. This indicates the perfect moment to buy has come!

19 April 2013:

Property prices keep falling and have reached the levels last seen in 3Q2006 – good moment to buy a flat!

20 September 2013:

Experts claim now is the best moment to buy a flat!

22 September 2013:

Over the last year property prices have significantly gone down. The economy is markedly reviving. The probability of further price decline is miniscule, while choice of flats is wide. It seems this is the perfect moment to buy a flat!

Chart 1: Average price of one square metre of a property on primary and secondary markets in Warsaw over last almost seven years. Source: National Bank of Poland’s quarterly report on property market, figures based on data collected from notaries (reflect only transaction prices, rather than asking prices (sellers’ wishful thinking!) in property ads).

Chart 2: Average quarterly prices of one square metre of a property in Warsaw, this time sample covers all properties from primary and secondary market. All data are transaction prices and are based on data collected from notaries. Source: excerpt (short version of) from AMRON-SARFiN’s quarterly report.

Conclusion 1: chart 1 is biased – by starting in 3Q2006 it omits the first phase of property market frenzy which kicked off in late 2005. Since then up to the peak of property market bubble (?) in prices went up by up to 100% - growth scale in time frame of 3 years (therein some 50% growth in 2006 alone) makes it justified to call it a bubble.

Conclusion 2: the perfect moment has lasted for five years. It has been one of the longest perfect moments in the history.

Conclusion 3: based on the recent history of property price fluctuations and frequency of developers and property agents bleating about the perfect moments, there is no significant correlation between intensity of obtrusive urging to buy and higher demand for flats reflected in mounting prices.

Conclusion 4: The regularity observed during many stock market and property bubbles, i.e. when everyone tells you to buy this is the best moment to sell has proved true between late 2008 and now.

Conclusion 5: the future trend is rather unpredictable… (deserves the ‘conclusion of the year’ award ;-))

…Albeit my expectation is that within the coming year (i.e. by the end of September 2014) average property prices will decrease by 3 percent year-on-year and with 95% probability the price change will range from –10% to +6%. Over the coming decade the prices are most likely to stabilise in nominal terms and drop in real terms on average (with some deviations from the long-term trend). Here’s the rationale:

Why property prices might rise:

1. Interest rates, now at their historical lows, are predicted to stay unchanged for about a year, and then are unlikely to rise quickly. Lower interest rates have a huge impact on amount of monthly instalment of a mortgage and hence on creditworthiness. Thus a borrower with the same earnings has some 30% higher creditworthiness than a year ago. But watch out – this is a trap. The capacity to repay a long-term liability is assessed based only on current market conditions and National Bank of Poland’s base rate will not equal 2.50% forever. If it goes up by 2 percentage points, monthly instalment of a 250,000 PLN loan with current interest of 4.00% taken out for 25 years will rise from 1,319 PLN to 1,610 PLN (by 22%) if the interest rate increases to 6.00% (note annuity payments are very sensitive to interest rate changes).

2. Low income on bank deposits discourages wealthier depositors from keeping their savings in banks and makes some of them to invest in properties in pursuit of higher yields on rents. Beware though, this is a trap as well – if everyone buys flats with the intent to lease them – will the supply of new properties be matched by demand from lessees? Won’t this trend exert a downward pressure on yields to make them equal with bank deposits? And note flow of income from a relatively small group of well-off people is a rather one-off occurrence, therefore the price incline cannot rely solely on demand generated by wealthy buyers.

3. There is a group of buyers who’ve already had enough of waiting for prices to go even lower and are running out of patience. In the meantime they’ve amassed some cash, so they can either pay in 100% or take out a small loan to finance the purchase – this group is capable of generating steady demand and unlike wealthy disgruntled depositors can make the upward trend sustainable.

4. Supply of new flats offered by property developers and number of new dwellings under construction are both shrinking. As the basic laws of economics state, lower supply should result in higher prices.

5. New government-run scheme (flat for the young), bound to take effect in January 2014 – the government will fund 10% - 15% of purchase price of a flat from the primary market only. The biggest restrictions in getting the subsidy are a square metre price cap (to be set at 5,865 PLN in Warsaw in 1Q2014) and the fact an applicant must not be older than 35.

Why property prices might fall:

1. Demographics, one of key drivers of the property market. People naturally seek to have their housing needs met and want to buy (or rent, or build their own) properties. Number of young people entering the labour market is decreasing year by year and given that the population of Poland is set to contract, prospects for price hikes in the long run are downbeat.

2. The biggest demand for flats is generated by youngsters looking for their first flat (later they swap one for another, bigger one, i.e. upgrade) – not only their number is lower, but also labour market is not on their side: unemployment rate among youngsters is higher than a few years ago, many of them work under ‘junk contracts’ (banks do not view it as steady source of income), salaries for workers under 30 are much lower than before the crisis.

3. Recommendation S, issued by Polish Financial Services Authority (KNF) which states a mortgage borrower will need to put up a specific percentage of purchase price as equity. This percentage will be rise 5% in 2014 to target 20% in 2017. This recommendation (banks won’t date to try not following it) will bring to the end dicey 100% loan-to-value lending.

4. Banks’ reluctance to increase their mortgage portfolios. This product is not the most profitable (hard to cross-sell it) and its risk seems to have turned out underestimated – for many CHF-denominated mortgages, outstanding debt considerably exceeds property market value, putting banks at risk of not recovering the lent amount in case of borrowers’ defaults.

5. Future insecurity among potential borrowers – given the scale of layoffs in the corporate sector (which should by all means fall back along with recovery in the economy), many people think twice before taking out a loan for several years (who can guarantee nothing bad happens in such time horizon). Even if someone has not been affected by a job loss or salary cut, they could have observed someone else losing their source of income. Mortgage-taking spree from 2006-2008 was fuelled by booming economy and over-optimistic expectations that good time would last forever. That craze is extremely unlikely to repeat in many years.

6. Despite considerable decline (some 20% in nominal terms over last 5 years in Warsaw on average), property prices are still steep in relation to ordinary people’s earnings and for many potential buyers out of reach. Currently an average monthly after-tax salary in Warsaw (some 3,600 PLN) is enough to buy a half of a square metre of property in Warsaw. This means after two months of putting aside 100% of one’s salary (in practice impracticable) you can buy one square metre of an average flat; after a year you can buy six square metres; after eight years of not spending at all you can buy a decent one-bedroom 50-sqm flat for cash.

7. In the meantime costs of living have risen disproportionately to nominal wages growth. This means the discretionary income, i.e. the share of monthly cash inflow that can be either saved or spent on mortgage payment has dwindled. Needless to say what effect it has on demand for properties.

I’m planning to buy a flat in about a year. Hope the wind blows in the right direction…