Norway"s $1 Trillion Wealth Fund Gains 3.2% In Q3 As 70% Equity Allocation Pays Off

Last December we joked that the Norwegian sovereign wealth fund had responded to sinking returns and withdrawals required to fund budget deficits by allocating another $130 billion in assets to what appeared to be an already massively overpriced equity bubble in return for an extra 40bps of "expected average annual real returns" (see: Norway Buying $130 Billion In Global Equities As Sovereign Wealth Fund Continues To Bleed Cash).  The extra equity purchases pushed the fund"s total equity allocation to a staggering 70% of their $860 billion in assets under management.

Alas, with global equity bubbles becoming ever more bubblier with each passing day, the bet on equities has paid off "bigly" for Norway so far this year and grew their $1 trillion in AUM by another 3.2%, or a mere $32 billion, in Q3 2017 alone. 

As Bloomberg notes this morning, the staggering size of Norway"s wealth fund and their seemingly reckless allocation to equities, implies they now own roughly 1% of global stocks.

Norway’s sovereign wealth fund, which owns more than 1 percent of global stocks, is treating its $300 billion bond portfolio as a hedge for what it now essentially views as a stock fund.

 

“60 to 70 percent in equities -- imagine it was 60 to 80 or 90 percent -- the whole thing is that this fund is actually to a large extent now a public equity fund,” CEO Yngve Slyngstad told reporters in Oslo. “We don’t think about this as two separate asset classes that have their distinct dynamics, the real risk of the fund is in the equity market.”

 

The $1 trillion Government Pension Fund Global, which started out as a pure bond portfolio before adding stocks, returned 3.2 percent in the third quarter, or 192 billion kroner ($24 billion), the Oslo-based investor said on Friday. Equities drove returns gaining 4.3 percent, while bonds rose 0.8 percent and real estate investments grew 2.7 percent.

So what does Norway"s wealth fund own?  Aside from the obvious answer of "literally all the things," they have roughly $360 billion in U.S. stocks, with Apple being their largest bet of course and $100 billion in emerging market equities with the remainder spread between Euro equities and U.S., Japanese and German bonds.

Emerging stocks, which make up 10.2 percent of the fund’s equity holdings, returned 6.4 percent, while U.S. stocks, its single largest market with 35.9 percent, returned 3.2 percent. Oil and gas shares were the best preforming sector in the quarter with a 8.7 percent increase as increased demand for oil, OPEC’s quota discipline and lower production of shale oil in the U.S. boosted crude prices, the fund said.

 

Owning close to 1.5 percent of all large listed companies globally, the Norwegian fund largely follows indexes, but is allowed some active management of its portfolio.

 

The fund held 65.9 percent in stocks in the quarter, 31.6 percent in bonds and 2.5 percent in real estate. Its mandate is to keep about 70 percent in stocks, 30 percent in bonds, with about 7 percent in real estate that’s now separate from the main portfolio.  The fund beat its benchmark by 0.1 percentage point.

 

The fund’s biggest equity investments in the quarter are Apple, Nestle and Royal Dutch Shell, while its largest fixed income holdings are U.S., Japanese and German government bonds.

Meanwhile, the fund"s record AUM comes despite taking withdrawals for the first time ever in 2016 and expectations that another 70 billion kroner will be withdrawn this year to help offset budget deficits.

Norway’s government last year made direct withdrawals from the fund for the first time in its history and is expected to take out about 70 billion kroner this year. Meanwhile, Norway has lowered the fund’s expected return to 3 percent from 4 percent.

 

The fund has been given permission to raise its stock holdings to 70 percent from 60 percent, with an equivalent cut in bonds. That could help it eke out higher returns, or at least maintain the 8 percent annualized real return it’s had over the past five years.

 

But Slyngstad also recently said he sees fundamental issues with the global economic system and trade, which is being buffeted by increasing global political risk. And that’s not good for a fund that owns 1.3 percent of global stocks.

So, it appears that Norway"s reckless equity bet has paid off for now...but, what is the saying about "he who laughs last?"

Norway Wealth Fund Assets Surge To Over $1 Trillion On Massive 70% Allocation To Equities

Last December we joked that the Norwegian sovereign wealth fund had responded to sinking returns and withdrawals required to fund budget deficits by allocating another $130 billion in assets to what appeared to be an already massively overpriced equity bubble in return for an extra 40bps of "expected average annual real returns." (see: Norway Buying $130 Billion In Global Equities As Sovereign Wealth Fund Continues To Bleed Cash).  The extra equity purchases pushed the fund"s total equity allocation to a staggering 70% of their $860 billion in assets under management. 

After being forced to withdraw at least $15 billion to fund 2017 budget deficits, the $860 billion Norwegian sovereign wealth fund has announced that it will change it"s portfolio allocations to try to make up the difference.  The change will result in 75% of the fund"s capital being allocated to global equities, up from the current 60%.  Sure, because funneling another $130 billion to the global equity bubble is just the prudent thing to do for an extra 40bps of "expected average annual real returns."

The central bank’s board, which oversees the fund, on Thursday recommended an increase in the equity share to 70 percent from 60 percent. That will raise the expected average annual real return to 2.5 percent over 10 years and to 3.5 percent over 30 years, compared with 2.1 percent and 2.6 percent, respectively, under the current setup.

The world’s largest sovereign wealth fund said that it expects an annual return of only 0.25 percent on bonds over the next decade and that the expected “equity risk premium,” or return on stocks over government bonds, will be just 3 percentage points in a cautious estimate.

“In our analyses, this is clearly evident in global data: internationally, growth in firms’ cash flows and equity returns are correlated with growth in the global economy,” Deputy Governor Egil Matsen said in a speech Thursday in Oslo. “Global economic growth in the coming years is expected to be below its historical level. This ‘pessimism’ is partly related to the driving forces behind the low level of the real interest rate.”

Alas, with global equity bubbles becoming ever more bubblier with each passing day, the bet on equities has paid off "bigly" for Norway and pushed their AUM to over $1 trillion for the first time ever.  Per Bloomberg:

Norway’s sovereign wealth fund hit $1 trillion for the first time on Tuesday, driven higher by climbing stock markets and a weaker U.S. dollar.

The milestone valuation was reached for the first time on Sept. 19 at 2:01 a.m. in Oslo, Norges Bank Investment Management said in a statement on Tuesday.

“I don’t think anyone expected the fund to ever reach $1 trillion when the first transfer of oil revenue was made in May 1996,” Yngve Slyngstad, chief executive officer of the fund, said in the statement. “Reaching $1 trillion is a milestone, and the growth in the fund’s market value has been stunning.”

Meanwhile, the fund"s record AUM comes despite taking withdrawals for the first time ever in 2016 and expectations that another 70 billion kroner will be withdrawn this year to help offset budget deficits.

Norway’s government last year made direct withdrawals from the fund for the first time in its history and is expected to take out about 70 billion kroner this year. Meanwhile, Norway has lowered the fund’s expected return to 3 percent from 4 percent.

The fund has been given permission to raise its stock holdings to 70 percent from 60 percent, with an equivalent cut in bonds. That could help it eke out higher returns, or at least maintain the 8 percent annualized real return it’s had over the past five years.

But Slyngstad also recently said he sees fundamental issues with the global economic system and trade, which is being buffeted by increasing global political risk. And that’s not good for a fund that owns 1.3 percent of global stocks.

So, it appears that Norway"s reckless equity bet has paid off for now...but, what is the saying about "he who laughs last?"

Norway Government Forces Sovereign Wealth Fund To Buy $100 Billion More In Stocks "To Safeguard The Country's Riches"

As we reported late last year, the Norwegian government ordered its Sovereign Wealth Fund to increase its equity allocation to 70% to try and paper over what’s expected to be a 70 billion kroner ($11.1 billion) drawdown – the first in the fund’s history.

That money was needed to plug a budget hole created by falling oil prices, and it seems the brilliant minds at the Norwegian Ministry of Finance and the Norges Bank figured they could easily recoup the fund"s losses by upping its risk exposure. Indeed, they’ve already raised the fund’s expected average annual real return to 2.5 percent over 10 years and to 3.5 percent over 30 years, compared with 2.1 percent and 2.6 percent previously.

Eight months later, the MoF is still planning to make the shift, which would result in it buying about $100 billion in global stocks, though prices have risen considerably in the interim. Despite the fund’s rush to raise its 10-year earnings forecast, fund officials said worries about a near-term market slump played “little part” in their investing plans," according to Bloomberg.

“Norway’s $970 billion wealth fund has been ordered to raise its stock holdings to 70 percent from 60 percent in an effort to boost returns and safeguard the country’s oil riches for future generations. Any short-term view on growing risks will play little part, according to Trond Grande, the fund’s deputy chief executive.

‘We don’t have any views on whether the market is priced high or low, whether bonds and stocks are expensive or cheap,’ he said in an interview after presenting second-quarter returns in Oslo on Tuesday. The decision to add stocks ‘was made at a strategic level, on a long-term expected excess return that we’re willing to take risk to achieve. And parliament has said that they wish to spend some time to phase in that increase.’”

According to data cited by Bloomberg, the fund held 65.1 percent in stocks, 32.4 percent in bonds and 2.5 percent in properties during the second quarter. Its mandate is now to keep about 70 percent in stocks, 30 percent in bonds, with about 7 percent in real estate that’s now separate from the main portfolio.

However, Grande says he’s keeping a “close eye” on market indicators.

“It doesn’t lead to anything in concrete terms, other than the fact that we’re keeping a close eye on the indicators that could indicate whether there’s a risk there, and what they’re saying,” Grande said. “Some risk indicators have actually not shown underlying risk -- take growth for example. So you should be a little cautious when the skies are all blue.”

While the fund has said little about its investment preferences, Bloomberg reports that the fund has recently been expanding into emerging markets.

“Owning 1.3 percent of global stocks, the Norwegian fund largely follows indexes but is allowed some active management of its portfolio. It has been expanding more into emerging markets and recently got permission to raise its stock holdings after Norway last year started withdrawing cash from the fund for the first time.”

Sovereign wealth funds have like Norway"s have benefited immensely from a virtuous cycle of central bank buying. So perhaps Norges Bank Deputy Governor Egil Matsen, the official in charge of the fund’s oversight, has some special insight into the thinking of central bankers, the primary engineers of the global post-crisis market rally. 

Central bankers like Thomas Jordan and his colleagues at the Swiss Central Bank, which earlier this month revealed itself as the “mystery buyer” that kept US stocks afloat during the second quarter while retail and institutional investors headed for the exits.

 

Whatever it is, the rest of us will have to wait to find out.

Norway Wealth Fund Gains $53 Billion in 2016 On Trump Rally

After previously announcing plans to withdraw at least $15 billion to fund 2017 budget deficits, the $860 billion Norwegian sovereign wealth fund announced last December that it would change it"s portfolio allocations to try to make up for the withdrawals.  The change would eventually result in 75% of the fund"s capital being allocated to global equities, up from the previous 60% allocation...you know, because equities never go down so more is always better.

Now it seems that, at least for now, that bet has paid off to the tune of about $53 billion or 6.9% of the fund"s AUM.  Meanwhile, the fund"s CEO, Yngve Slyngstad, attributed the gain to the Trump rally saying that "after the presidential election in the U.S., markets priced in higher growth and inflation in the global economy."  Per Bloomberg:

The $900 billion Government Pension Fund Global returned 6.9 percent in 2016, after rising 2.7 percent the previous year, the Oslo-based investor said on Tuesday. Stocks gained 8.7 percent, bonds rose 4.3 percent, and real estate investment grew 0.8 percent.

“The fund returned 6.9 percent after a year of political events and uncertainty,” Chief Executive Officer Yngve Slyngstad said in the statement. “All of the fund’s asset classes generated positive returns, but it was the strong equity return in the second half of the year that drove the fund’s results.”

“After the presidential election in the U.S., markets priced in higher growth and inflation in the global economy,” Slyngstad said.

Of course, the gains came after the Norwegian government was forced to withdraw capital over the past two years to fund budget deficits that are expected to reach over 8% of GDP.

The withdrawals accelerated just as the heavily oil-dependent economy of Norway started to absorb the impact of lower oil prices.

In a previous interview with Bloomberg, Egil Matsen, the Deputy Governor at Norway’s Central Bank, said the withdrawals were starting to impact the manner in which the fund manages its risk profile.   

"Relevant for how we think about the risk-bearing capacity of the fund.  Say you have a decline in the equity market, and these returns have been partly funding the government, do you want variations in international financial markets to have a direct impact on fiscal policy?”

But Finance Minister Siv Jensen dismissed criticism of the withdrawals saying that the administration is using the fund as was intended noting that withdrawals remain below the fund"s annual return target of 4%.   

“Now that we are in an extraordinary situation, hit by the biggest oil price shock in 30 years, it would be crazy if we didn’t have an expansionary fiscal policy,” she told Bloomberg. Jensen rejected suggestions that the fund was “vulnerable.” She described it as “rock solid.”

The fund’s managers have warned it’s getting harder to live up to a real return target of 4 percent. It has returned 3.44 percent over the past 10 years. For now, planned withdrawals aren’t big enough to force the fund to sell assets. It estimates income from dividends, real estate and bonds will reach 207.5 billion kroner next year, almost double the amount the government plans to withdraw.

But there is no risk in equity investing, right?  In fact, we just found another $40 billion that will be pumped into the global equity bubble promptly.

Norway Central Banker Warns Of Massive 50% Drop In Wealth Fund Assets To Cover Budget Deficits

Back in August, we noted that, for the first time since it"s creation in 1996, the Norwegian government had started raiding its sovereign wealth fund in 2016 to cover government deficits.  Then in October the Nordic country revealed plans to massively increase withdrawals by over 25% in 2017, to $15 billion, to cover a budget hole that was expected to be roughly 8% of GDP. 

That said, Norway"s ultimate GDP potential, and therefore budget deficits, are heavily dependent on oil prices so any further weakening of crude could result in even more withdrawals.  Moreover, given the substantial YoY increase, it"s important to recall that there are fiscal limits imposed on fund withdrawals equal to 4% of assets, or roughly $36 billion, which could come into play at some point in the future if oil prices remain "lower for longer."

Of course the withdrawals accelerated just as the heavily oil-dependent economy of Norway started to absorb the impact of lower oil prices.

And what do you do when you depend on portfolio returns to fund everyday living expenses but are faced with extremely low returns courtesy of artificially depressed international bond yields?  Well, you just buy more equities, of course.  Which, as we noted back in December, was exactly the motivation behind a decision to increase the fund"s equity allocation from 60%, to a staggering 75%, all while funneling another $130 billion to the global equity bubble.

The central bank’s board, which oversees the fund, on Thursday recommended an increase in the equity share to 75 percent from 60 percent. That will raise the expected average annual real return to 2.5 percent over 10 years and to 3.5 percent over 30 years, compared with 2.1 percent and 2.6 percent, respectively, under the current setup.

The world’s largest sovereign wealth fund said that it expects an annual return of only 0.25 percent on bonds over the next decade and that the expected “equity risk premium,” or return on stocks over government bonds, will be just 3 percentage points in a cautious estimate.

“In our analyses, this is clearly evident in global data: internationally, growth in firms’ cash flows and equity returns are correlated with growth in the global economy,” Deputy Governor Egil Matsen said in a speech Thursday in Oslo. “Global economic growth in the coming years is expected to be below its historical level. This ‘pessimism’ is partly related to the driving forces behind the low level of the real interest rate.”

But despite their best efforts to protect the principle balance of Norway"s sovereign wealth fund through statutory spending caps and buying more and more equities, Norway’s central bank governor Oystein Olsen warned earlier today that increasing reliance on the fund to cover budget deficits could result in a "sharp reduction" in the fund"s capital over the next 10 years.  Per Bloomberg:

Governor Oystein Olsen said that the continued rise in oil cash spending, which now accounts for about 20 percent of the budget and 8 percent of gross domestic product, must now be halted to protect the $900 billion fund, the world’s largest sovereign pool of cash.

“With a high level of oil revenue spending, there’s a risk of a sharp reduction in the fund’s capital,” Olsen said in the traditional Annual Address in Oslo Thursday. “This could, for example, happen if a global recession triggers both a decline in oil revenue and low or negative returns on the fund’s capital.”

In fact, in some of the more dire scenarios, Olsen warned that 50% of the fund"s $900 billion in assets could be wiped out over the next 10 years in the event of a global recession that kept oil prices low while also driving equity valuations down.

While the fund, which is overseen by the central bank, so far has said it’s more than able to handle outflows without selling assets, Olsen’s speech did lift the lid to reveal some of the worst case scenarios being calculated by the investor.

For example, it sees a 1 percent chance of a 50 percent decline over 10 years if spending is kept at the current level of about 3 percent of the fund. If spending is raised to 4 percent that probability rises to about 5 percent. If the fund’s allocation to stocks is boosted to 75 percent from 60 percent, which is currently being discussed, the probabilities rise even further to about 2 percent and 6 percent, respectively.

“This shows what you may risk if you increase oil spending from today’s level,” Olsen said in a separate interview. “This helps us to strengthen the message.”

“It must be recognized, however, that the longer-term challenges facing the the Norwegian economy can’t be resolved by spending more oil revenue and keeping interest rates low,” he said in the speech, arguing the Norwegian economy needs more legs to stand on.

That said, we wouldn"t be too worried because equity prices never go down, right?  Silly Central Banker...

The Norwegian Economy In 2017: Black Swans Hovering Overhead

Submitted by Nick Kaman of Letters from Norway

Introduction:

Norwegians are just now starting to grapple with the effects of their “single cylinder” economy, mostly dependent on oil and gas (ca. 60% of exports). Despite optimism about $50-$70/barrel oil, American crude output is surging, on track to be the highest ever, since 1970, while cracks start to form in OPEC’s latest agreement. In addition to the oil tailspin, a flock of “black swans” have taken flight, led by one with a very orange beak.

Source: ZeroHedge.com – Where are the Black Swans Hiding

The global sovereignty movement is in full swing. People are finally asking about the role of government, what they are getting in return for their taxes, and what they can do at home. The Chinese economic risks as well as the continued fracking proliferation, now going global, pose the greatest threat to oil prices in 2017. That is already evident in the latest supply report. Meanwhile, Norway continues to spend its’ savings instead of investing it into a new economic engine. Even worse, individual Norwegians keep digging themselves into debt.

Oil: Global Fracking Proliferation:

When OPEC challenged America, it forced the engineers on the Great Plains to innovate. Fracking continues to get better cheaper and faster, driving the costs down to $45 per barrel! Now the technology is going global, bringing more oil to market. That may explain the surging inventories.

Sources: Baker Hughes and EIA

The chart above illustrates that when oil held $50 per barrel, the rigs started to come back online markedly, proving that fracking breakeven costs fell substantially. Innovation and cost reduction are now a way of life for the American Roughnecks. Moreover, there are almost 2000 more rigs standing by. Rarely acknowledged are the breakeven costs lowered by bankruptcy and the subsequent reassignment of assets. For example: If Joe’s Fracking Service purchased a brand new rig for $1000 and then went bankrupt during the last downturn, the rig and accompanying exploration data still remain. At a fire sale, Jimmy’s Energy can pick up that rig for $300-$400, if not cheaper, and start drilling at a much lower cost level, making money even with low prices. Perhaps that explains the surging inventories. Hence, the EIA predictions (below) may be overly optimistic.

On a side note: Although Norway’s Johan Sverdrup field now breaks even at $20-$30 per barrel and is one of the largest discoveries made on the Norwegian continental shelf (2-3 billion barrels of oil in reserves), the Norwegian Government requires $70 per barrel oil to break even, balancing the budget. Statoil estimates that construction will take 51,000 man-years (ca. giving 17,000 people a job for three years) and 2,700 man years in the production phase (ca. 54 people a job for 50 years). After going online, it will account for 25% of total Norwegian oil production. Putting this find, ca. 3 billion barrels, into perspective, America consumes 7 billion barrels of oil per year. Hence, Sverdrup, spread over 50 years, may buffer the economy but not save it.

Trade: Fishing for Deals:

After oil and minerals, fish is the next largest export. 2016 was the year of awakening: With the lowest trade surplus in 17 years, The Norwegians realized their vulnerability to the oil and gas sector.

Source: Statistics Norway – External Trade in Goods

The chart below further illustrates the oil dependency predicament. The trade surplus is what made Norwegian’s rich, giving them a strong currency and funding the welfare state without consequences. That allowed for some of the highest salaries (before the oil bust) in the world while maintaining the shortest work weeks. As the trade surplus diminished, the NOK went down with it. Overall 2016 exports were $90 billion vs. $149 billion in 2013.

Source: SSB.no and Norges Bank for FX Rates

A weakened currency, in theory, is good for exports. However, one needs something to sell abroad to take advantage of that. Since early 2013, the NOK fell 46% against the USD, moving from ca. 5.7 to 8.3 now. It almost hit 9, just after New Year 2016! Ironically, Norway was exporting more and running a larger surplus when the currency was stronger.

Source: Yahoo Finance – USDNOK over 10 years.

Realizing that oil, priced in dollars, was not viable, no matter the exchange rate, the Norwegian Government started to panic. Instead of looking for ways to industrialize or make the economy smart, “they went fishing.” Although fish exports are rapidly growing, they are still relatively small, compared to overall exports: only around $11 billion in 2016. Moreover, they already forgot that commodity-based economic models are either be overcome with technology or replicated. Fish farms only require and open ocean, preferably in cold water, and a pen. It is a matter of time before people in Maine, New Foundland, Alaska, Russia and Greenland pick up on this trend. Moreover, large-scale salmon farming has its’ own issues like sea lice, which have plagued the fish farms in recent years.

From a position of disadvantage and without leverage, at the behest of the fishing industry, they started selling out everything to gain access to new seafood markets. Currently, the Norwegian government is selling their souls to China, agreeing not to criticize them on human rights, and their brains to India, potentially compromising domestic labor standards to accommodate cheap offshore labor. Over time, such deals will diminish Norway’s national identity as a humanitarian country.

Moreover, the “fish for brains” deal with India will deter Norway’s best and brightest from entering the engineering profession altogether, fearing offshore replacement and limited salary potential. Right now Norway is in dire need for homegrown talent, with a vision, innovating and moving the country forward and away from resource dependence. If the Government compromises labor standards to appease the fishing industry, the best and brightest will choose other professionals or go abroad, seeking higher pay and a better life. Engineering has been a part of Norway’s history, selling it off is a bad idea!

One great example of Norway’s engineering ability is in their defense sector. One company, in particular, is very interesting; Kongsberg Gruppen which has been growing through both by increasing sales and performing acquisitions. Their surface to air missiles system protects President Trump! Considering the current state of the world and where it’s going, this sector should be developed. Additionally, defense technologies often result in consumer applications: sensors, security, and electronics. Norway will increase defense spending in coming years, reaped from cost-cutting in other areas, hinting that they are at least moving in the right direction on industrial development. Hence, this industry should be emphasized: not fishing.

Interest Rates & Inflation and the Wealth Fund

Despite real interest rates and economic growth remaining negative for almost four years, there is no indication of raising rates to curb inflation or lowering them to continue support housing. Nevertheless, the bias remains downwards, willing to step in if needed (indicated in a September release by Norges Bank). Although interest rates are at historical lows, Norwegian economic growth remains anemic. Just like with the exchange rates and exports paradox mentioned earlier, low-interest rates are not helping the economy. It’s only boosting inflation, caused by having to pay more for imports due to cheaper currency.

Source: Norges Bank and SSB

Norway started cashing in the Sovereign Wealth Fund in 2016, denominated in foreign currency. Norges Bank needed to buy NOK to fund the local economy, unintentionally supporting the Krone. Perhaps these purchases are all that kept the Norwegian Krone from turning into the Nordic Peso. The purchases started in October 2014 at 500 million NOK per day, quickly jumped to 700 million and now reached 1 billion NOK per day. At this level, the fund has 20 years, assuming stocks and bonds remain stable and they don’t hike the daily purchase rate again. That is only one generation of the good life left! However, the market’s tone has turned markedly bearish: Larry Fink of BlackRock recently warned about hidden risks (the “Horrifying” Chart) Ironically, Norway is a labor country that depends on strong corporate earnings. As American companies start paying their employees better, bringing more money to the middle class, the corporate profits will suffer, perhaps impacting the fund.

Norges Bank sold all of its’ gold in 2004, but perhaps they should think about buying it back. Although off highs in USD it’s at near all-time highs in NOK.

Government Spending

Although the government reined in the budget compared to previous years, the surplus (source 32 below) is the lowest in ten years. Moreover, the expenditure per person (Budget/Person) has dropped substantially due to rapidly rising population on the back tax revenues, which have not risen in lockstep. Every Norwegian has almost $170,000 in national savings, but when considering the local prices, it won’t last long. Although having an economy buffered better than any other in the world, the policy makers need to make a strategic shift. Otherwise, Norway will diminish over time. The risk of social unrest lingers along this path: when people see a reduction in benefits or a decline in the quality of public services.

Sources: Statistics Norway and Norges Bank – table compiled by LettersfromNorway.com.

Norwegian Housing Sucking the Life out of the Economy

It is not only becoming apparent that housing is in a bubble but also that it is starting to suck the life out of the rest of the economy. The media and banks are finally making the admission that the current prices are interest rate driven: a 1% rate hike would plunge 70,000 households into dire straits. (Note, from above, that real interest rates are currently -3%, requiring that much adjustment in the opposite direction to balance inflation and interest rates.) Despite the macro risks and black swans lingering overhead, Norwegians are pouring their heart and souls into buying apartments. Despite Norwegians already having some of the highest household debt to income in the world, some are starting to take “piggyback loans,” using consumer credit to fund down payments. The frenzy is reaching a point that now other parts of the economy are starting to suffer:

First, we can see that, although consumer debt is rising, it appears to be fueling housing and not the retail sector at all.

Source Statistics Norway

Despite the rapidly rising population, almost up almost 20% since 2002, the retail indexes haven’t kept pace and now started to turn down after holding steady since 2014.

Source Statistics Norway

Housing Reality Check

Interestingly, despite the meteoric rise in Oslo housing prices, the prices remain well off highs in US Dollar and Gold terms!

Sources for both charts: Statistics Norway, Norges Bank & Kitco

Capitalization rates and Price to Income ratios offer telltale signs of trouble ahead. Norwegians went from spending 4x earnings to 6x earnings to buy a place while seeing the return rate take a dive, indicating that there is growing rental supply. The rental market generally leads housing prices (i.e. like a PE ratio for housing).

Despite the spending on housing, Norwegian salaries have flattened in NOK terms and took a dive in USD.

Anecdotally, I have personally seen in Oslo a lot more vacancies in retail and office space. A friend who works in real estate told me that she normally requires a five-year commitment for commercial space, but recently did a deal, requiring only one year. On my bus trip to work, I see advertisements for entire floors in office parks where there was once a lot of oil services companies. Therefore, the crunch has already hit the commercial sector. Personally, my salary, determined by unions and corporate policy, only went up 2.4% last year while inflation averaged 3.5%. Therefore, overall productivity is not rising.

Debt-Driven Psychology

In the book, “Think and Grow Rich” by Napoleon Hill, he states that fear of destitution is one of the greatest contributors to anxiety, causing lack of sleep and driving erratic behavior. Stressed people, paralyzed with indecision, doubt, and fear, cannot form friendships, use their imagination or remain self-reliant. Innovative people generally have their finances in order and free from fear of poverty. When the entrepreneurs started in their garages in Silicon Valley, the garages were mostly paid off, or the mortgage burden wasn’t significant. Moreover, being in debt makes it more difficult to strike for new wages as union members cannot afford a lot of unpaid time off.

The condition, hunkering down into survival mode, often leads to less than honest behavior. Although Norway still remains lofty on egalitarian values, altruism, and honesty, it is starting to slip: losing one place in the corruption ranking to sixth place, ranking last among Nordic countries. Considering the wealth and short work weeks, they should be number one.

I personally feel a lot of tension in the office, more so than in previous years and noticed an uptick in “political behavior,” where people’s personal agendas come before the needs of customers and shareholders. This may be rooted in the stress associated with indebtedness and uncertainty about the future. The picture below perhaps illustrates a new desperation that is starting to form:

”SUGAR BABY “: Young Norwegian girls exchange sex for gifts and expensive trips.

Going Forward

Considering the current government leaders (Erna Solberg (PM), Siv Jensen (Finance Minister), Øystein Olsen (Head of the Central Bank) Børge Brende (Foreign Minister)) insular educational background and private sector business experience, we should not expect an imaginative and visionary path to the future. Choosing between the Krone and housing prices, they will choose housing. However, the NOK’s decline will continue to be curbed by open market Krone purchases, moderating the decline over twenty years. Nevertheless, that estimation could be shortened if they increase public spending and benefits to appease voters.

Once the interest rate lever has been exhausted, used to support housing and boost exports, they may introduce 50 and 100 years mortgages like in Sweden. In essence, down payments will become a reservations fee, entitling one to pay rent for a lifetime but with one huge disadvantage: being tied down in a slowing economy, unable to move to take a new job. Moreover, the lower foreign exchange rates, which will transform the NOK (Norwegian Krone) into the NOP (Norwegian Peso) will make it difficult to attract the truly highly skilled immigrants. They are needed to work with local best and brightest to make the Earth moving breakthroughs. These type of people, having an IQ over 142, only occur only in 1/400^th of the overall population. Norway must compete against America, Germany, and Japan for such talent. That requires a strong exchange rate and high quality of life.

As long as real interest rates remain negative, gold and dividend paying, export related, stocks are looking bright.