All is well in Sweden

All is well in Sweden

07 February 2019 from Mikael Syding

Sweden is standing steadier than ever

The inflation rate is right on target, GDP growth is close to the sustainable potential and the employment rate is at all time high. At the same time, the policy rate is the lowest since the Riksbank was started with a death sentenced eco-crime operation as a base 350 years ago. The low interest rate level also means that households' interest expenses in relation to income are at all time low.

It is difficult to imagine a better situation for Sweden than the above. But we still take a look at the numbers in detail to see if I missed something.

Perfect inflation combined with continued stimulus

Inflation (CPIF) was 2.2% in December 2018, slightly above the level in November and the Riksbank's target of 2.0%. Admittedly, this means that the Riksbank is probably considering trying to reintroduce a positive interest rate - but mostly for the sake of visibility. I guess, however, that it is received by the members, who nowadays seem to see positive interest as something outdated and outdated.

Of course, it remains to be seen, but regardless of what the Riksbank really wants, the members are forced to increase the interest rate gradually, as long as inflation is above the target and the GDP forecasts do not warn of significantly reduced pressure in the economy.

GDP plus the Riksbank can lift the retail trade

The growth forecast for real GDP is currently around + 2.5% for 2018 and + 2.0% for 2019. These are very good figures if they are achieved. Given that a normal level for the policy rate is usually considered to be about growth plus inflation, or at present just over 4%, a policy rate of -0.25% means that the Riksbank has chosen to give Sweden a huge growth impulse. It boasts good for anyone who wants to see more investments, high growth and inflation.

If the situation is maintained, increasing investments can be expected, as well as rising house prices and share prices. At the end of the process, the payroll spiral may also gain momentum and contribute to increased consumption, which would especially appreciate companies like Hennes & Mauritz, MQ, Clas Ohlson and Mekonomen.

Increasing competitiveness for Sweden's important export industry

The low interest rate level is not least noticeable on the falling krona exchange rate. In the past year, the krona has weakened by 13 per cent against the dollar and by 5 per cent against the Euro, which increases the competitiveness of our export companies and gives positive effects on reported earnings.

Note, however, that the crown has run sideways or even strengthened in Q3 and Q4, so there will hardly be any major positive currency surprises in the reports for the fourth quarter. The improved competitive situation from the first half of the year (thanks to weaker krona), however, remains.

All the major export companies could benefit in one way or another from the falling krona, e.g. Sandvik, SKF, Volvo and Atlas Copco. Many of these also belonged to last year's losers and may bounce back this year.

If one dares to rely on the trend during the first half of January, the process of rising prices for cyclical companies is already underway. However, it is important to buy with both hands if you want to keep up, because all the active on the stock exchange over the past decade was characterized by buying all dips and getting ready all the faster. The situation may well already be over for this time.

Everyone has jobs, everyone can shop

Not only is interest rates low, while inflation is at target level and growth is good. The employment rate in November is also at the highest level ever (68.9%). The previous record for this seasonally adjusted figure was set in 2001 and was almost two percentage points lower.

Even a crash that would only normalize employment after 2008

In order to put that difference in perspective, the employment rate fell by three percentage points from the 2008 peak (67.1%) to the deepest bottom-up in 2010 (64.1%). A similar crash of historical proportions would thus only bring the employment rate back to normal level of about 66%.

Lowest unemployment in two decades

If we measure the labor market based on unemployment as a complement to the employment rate, it looks pretty much the same there. In November, the seasonally adjusted figure was 6.2%, basically the same as the previous low scores of 5.9% (2008) and 5.8% (2001-2002). Note that work data always lag behind the economy, so when Sweden and the world's stock markets and economies crashed, the labor market achieved its most positive record prices.

No reasons to worry

Between 1999 and 2003, the number of bankruptcies increased by 32%, and between 2007 and 2009 by 41% (42% if we count on the top 2013). In the past two years, the number of bankruptcies has only increased by 17% since 2016, so even here the figures indicate that there are no reasons to worry.

Record low interest expenses

Finally, in the second quarter of 2018, household interest expenditure was only 2.5% of disposable income, which was the lowest price since at least 1971. If the Swedish households cannot afford to buy everything from food and shoes to fashion, cars and housing now, so they never have it.

When everything is at its peak, it can only go down

Everything seems to be almost perfect: The households set a record in the employment rate and have a record-high amount of money left after interest expenses. The export industry's competitiveness is strengthened for every penny the krona falls, thanks to the Riksbank's 350-year negative interest rates. Growth is high, unemployment was low and the stimulus the strongest since eco criminals laid the foundation for the central bank.

More fun than this is simply not. And with that, it should be understood that it is more likely that this is the top than the bottom, that this is a selling position, not a buying position.

Risk management

The minimum that every responsible investor should take is to reduce their exposure to cyclical and interest-sensitive shares, which in addition to the workshop, property, building and finance companies include not least (expected) fast-growing technology companies in biotechnology and IT.

The latter are in practice cyclical companies on steroids but are often painted during the growth part of the cycle as cyclical independence, which makes the bang the worse when it comes.

One can choose to reduce the exposure in the long term through direct sales of shares, or more short-term as temporary hedges through trading in various derivatives and listed products.

Last year (January) started out as the best in over 30 years. That was fun. That is, before the S&P 500 fell by close to 10% in February.

It is difficult not to see the same noises today as warnings of a replay. The whole system of debt, interest rates, employment, values etc. is even more stretched today than a year ago - not to mention in comparison with before the crisis and the crash in 2008.

It speaks for an even worse decline once it arrives, and probably thereafter even more powerful stimulus measures than the last crazy ten years. The question is whether ordinary people, such as The Yellow West of France, will accept that the money ends up with bankers rather than the people. In such a situation, gold and commodities teach a better position than stocks, not to mention safer.

@Mikael Syding

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30/11/2022 07:50:59


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