When last we checked in with Norway, the country’s sovereign wealth fund - the largest in the world- was busy going full tin foil hat fringe blog [11], blasting monetary policy’s iron grip on asset prices and bemoaning the presence of parasitic HFTs and increasingly fragmented markets which conspire to cost institutional investors and those they represent billions.
That was in April. Back in March, we highlighted the tough predicament [12] the country faces in terms of combatting a housing bubble while simultaneously coping with plunging crude prices. We summed up the situation as follows: the country is truly backed into a corner, ease too much and the housing bubble becomes even more unsustainable, don’t ease enough and the oil-dependent economy gets it. Unsurprisingly, things haven’t changed much since then. Here’s FT on the housing bubble [13]:
In Norway, apartment prices have rocketed more than sevenfold since 1992. But despite worries about how the falling oil price is hurting the Norwegian economy the cost of housing has continued to gallop ahead, with a record number of dwellings sold in June.
Anecdotal evidence backs this up. The former home of the Soviet spy Rudolf Abel in an Oslo suburb sold for NKr6.1m ($750,000) this year, well above the NKr4.2m asking price.
"This market is so hot now. Low interest rates just allow people to bid more and more — and that is what they are doing,” one Oslo estate agent said.
Norway has cut rates twice since December to a record low of 1 per cent. “There is no doubt that house prices and debt levels are the main risks to this strategy,” said a Scandinavian central bank official.
Authorities are trying to take stabilisation measures but analysts query whether they are sufficient. [Meanwhile], Norway’s government is aiming to toughen up lending rules.
And just last week, the sovereign wealth fund had the following to say about market structure and the “speed race to zero [14]”:
The evolving role of exchanges should be evaluated in the context of increased market structure complexity. This complexity is due partly to a technological arms race amongst market participants and trading venues, partly to unintended consequences arising from regulations. The competitive and highly fragmented landscape that has emerged has challenged exchanges to maintain their central role in the price discovery process, and has forced asset managers like ourselves to adapt in how we source liquidity in these markets.
There is a risk of speed race to zero: investments both by exchanges – to cope with ever-increasing message flow, and by broker-dealers and market-makers/HFTs – to keep up in the speed race, have the potential to impose negative externalities on all market participants7. These externalities have the result of transferring an increasing portion of the profits from intermediation to entities outside the financial sector. For example, we are following the current speed race amongst microwave data-link providers with interest and believe that they are able to earn increasingly super-normal profits, to the detriment of all financial market participants. We support efforts to remove complexity that leads to this form of overinvestment.
Meanwhile, as Bloomberg reports [15], persistently low crude prices have pushed up unemployment to an 11-year high and although Prime Minister Erna Solberg told reporters in Oslo on Monday that “the Norwegian economy has a very sound foundation,” it appears as though the country may end up taking the “historic step” of tapping into its sovereign wealth fund. Here’s Bloomberg [15]:
Here are a few ways it's harder for Norway to deal with plunging oil prices than a global financial meltdown.
1. Norway is heavily reliant on oil
As a key driver for growth in Norway, it was largely its oil wealth that kept the nation afloat during the financial crisis. But with its key sector in trouble, there are few other industries for the nation to look to for growth.
[16]
2. The petroleum boom was about to end, anyway
Oil is losing value just as investments in the petroleum industry are heading to the lowest level since 2000. To cope with the shift, companies such as Statoil ASA started restraining spending more than six months before Brent crude started to tumble.
[17]
3. Norway might have to dip into its savings
If the government has to withdraw money from its $875 billion sovereign wealth fund, it will be a historical step. It's either that, or heavily rein in fiscal spending at a time when the country needs it most. The state's spending could start to outstrip income from oil, which it pours into its wealth fund for future generations.
[18]
So as with Saudi Arabia [19] and every other exporter who has been forced to drawn down their FX reserves [20] amid crude's painful plunge, Norway may look to tap its mammoth wealth fund to help make ends meet. As noted above, it's either that, or risk fiscal retrenchment in the face of a flagging economy - as we've seen with Greece, that is typically a bad idea.
Interestingly, the fund holds around a half trillion in equities. We wonder who will take the hit if the country does indeed decide to start liquidating.
