Cluster Family Office Blog

The compound interest of 100 € working financially correctly saved at the age of 25 means more than 800 of saving effort at the age of 50!!! Even deducting inflation, the investment effort not made during our first years of productivity will be so expensive in our maturity and old age that it will be unbearable for most people who start accumulating productive assets in their thirties or forties.

I am not talking about pension plans but about well-advised and diversified investments in optimised fixed income, real estate, real estate and other investments. profitable and with good rallies appreciation; and judicious and very moderate equities. Although of course a pension or savings plan taken out at 40 is better than nothing, it will only palliate the coming famine and, of course, condemn the descendants to follow the rat race by relays.

Your money should be used to lend it to others, and they should work with it. Logically, we should not do this ourselves, but through the purchase of financial products that are carefully tailored to our profile. For this delicate selection, we must be well advised by someone who teaches us how to do it while guiding us, and who does not simply sell us products (this is easy to say and almost impossible to find, but there are some). In return you will get more money (corporate or sovereign bonds, for example). This is the difference between producing in exchange for hours of work and lending your assets so that others can produce. At the beginning of our lives everything we earn we have personally produced, and gradually we must lend a greater proportion of our money so that others can produce. Our focus should be on reversing the initial sequence as soon as possible. Once we have achieved this, it is our own choice whether to continue working or to do what we really want to do. There will be those who prefer not to do it any more, it is a question of calculation and the will to leave the heirs in one situation or another. Freedom in capital letters. Paradoxically often Working without the pressure of remuneration leads to an even higher income if it is done with rigour and honesty, I can assure you.

Only cicadas should be able to live happily depending on an income generated by a work activity that can be truncated at any time. at any time of our lives for all eternity imponderables, In exchange for a progression (or regression!) that only serves us to go on better holidays, have a more expensive car or a house that will take us more years to pay for. Although when we are about to do so, we will exchange it for a bigger one or we will buy a second or third home for the bank.

My advice to those who, because of their working conditions, have a modest income, is to make an effort to save and invest even the smallest amount. The strictly dispensable, non-vital amount that would allow us to live a step higher than last year. This seemingly insignificant amount should invert as soon as possible in a somewhat riskier but well-advised manner. And above all, maintain investment rigour in future years, reducing risk in proportion to the total volume available over time. All of this is done with the help of a good counselor and not from financial advisors or, of course, bankers. The strategy must be tailored to each case like a tailor-made suit, haute couture if possible, even if we have little fabric.

Smoking kills. Drink in moderation. Endéudate with moderation and judgement. It is your responsibility. It should be warned in banking and consumer advertising. Unfortunately there is no other way to live life in the medium and long term. What is the point of bread for today... if we all hope to grow old?

Things are finally falling into place, and we’ve moved on from foolish the last to They're all idiots, every last one of them. As the article, written on 20 April 2007, is quite long, we will be publishing it between today and tomorrow. I’ll leave you with «By the time you’re 30, it’s too late.« Or »Take on debt in moderation. It’s your responsibility.”:

Surely we can almost all agree that during our unpredictable lives we should try to accumulate assets that will allow us to reach the end of our lives with a decent financial stability. Growing old, falling ill and dying are unavoidable stages in our lives. Although, if we think about it, we can avoid old age if we die young, and even illness if we die accidentally. But in view of this, I prefer to cling to the hope of growing old and getting sick before I die.

All this in a scenario of financial comfort is more bearable. Especially because of the way you will be treated by those around you if they are waiting for a more or less substantial inheritance. We all have close cases of people who have come to their decline depending on the charity of others, be they family, friends or the State itself. Although I could not say which of these is less reliable, I would venture to establish Friends as the most stable plank to hold on to if one has maintained an honest and noble life trajectory, which is rare.

Most realise this need for financial foresight when it is too late. They rely solely on their ability to produce an income. via The banks kindly see to it that an individual can greedily consume goods far in excess of his or her productive capacity. The banks kindly see to it that an individual can greedily consume goods far in excess of his or her productive capacity. Even beyond what could The state would be able to produce healthy working people until the age of 65 and then be supported by the state. Even in these ideal circumstances, it would never be able to generate as much as the banks can. are The limit of indebtedness should be set by ourselves, not by the companies that live by mortgaging all our time and productivity two times over. The limit of indebtedness should be set by ourselves, not by the companies that live by mortgaging all our time and productivity multiplied by 2. And even so, moderate indebtedness should only be assumed as a depreciable investment and not for the purchase of leisure consumables. You will find some amusing situations in the novel «El vendedor de tiempo» by F. Trías De Bes (http://www.empresaactiva.com), which refer to the aberration of mortgaging one's entire life time for an asset, even if it is one's own home.

It is true that most people never manage to break out of the vicious circle of living at the same rate at which they are able to progress. This condemns them to depend on the income generated by their work throughout their productive lives, and only live off the state in old age, something that is increasingly evident that is not going to happen. succeed them to our generation of 40-somethings and, of course, to future generations. It doesn't matter if we are talking about an office worker with a salary of 25.000 eur/year or a high-earning professional earning over 100,000 eur/year. If they live life to the full and don’t Prevent an accumulation of productive assets over the years, they will always depend on their jobs. And unforeseen events such as work-related problems, marital problems, illnesses, etc., are always will sinkn in hardships from which not everyone will be able to recover. Robert Kiyosaki christened this phenomenon of a «rat race» from which it is not easy to get out of, in his popular book «Rich Dad, Poor Dad». You can find out more about Kiyosaki at http://richdadclub.es But it’s not just a matter of getting out of this rat race but what is truly essential for achieving success is Do it as soon as possible! That’s why I’ve titled this post ‘It’s too late at 30’: (to be continued tomorrow)

Yet another case of a sudden fortune being squandered in the space of a few years. This time in the space of just a couple of years, and the final nail in the coffin was the crash in the equity markets, which he had unwittingly exploited, carried along by bankers and crafty friends. Cannon fodder…

Here goes The Resilient Investor, written on 29 July 2007:

Let me start by saying that the observations I am about to make refer to an average investor with average capabilities and little preparation for the financial world – in other words, the majority of the population who have sufficient purchasing power to consider investing beyond simply making ends meet. Naturally, many readers will stand out from this average profile and should not feel that this applies to them. However, based on our experience with consultations of all kinds, we can confirm that what happens to the investors we are about to discuss is, unfortunately, all too common. We believe that by helping to identify the problems, we are taking steps towards resolving them or avoiding them in some way. Just as there is companies specialising in helping other companies become more resilient, it is also vital from the point of view of Counsellors that we can make the investor more resilient.

This seemingly brilliant plan solves many problems at a stroke: firstly, families facing repossession could maintain some stability in their lives. Without the trauma of losing their jobs and the money paid for a home that is no longer theirs, not even in the slightest (which is no small matter). The banks, for their part, having been suitably bailed out as is already happening through the state’s purchase of subprime mortgage-backed securities, would find themselves with market-rate rental income from the properties they once financed and which now become their property. Consequently, we would no longer see that flood of properties being dumped onto the market, with millions of homes being offloaded at any price. This would prevent a fall in property prices, which would plug the holes in the balance sheets of the financial institutions in question within a matter of months. It would also prevent the acts of vandalism the common practice among those facing repossession of vandalising their homes before leaving them, in a final act of defiance against the banks – in other words, what has come to be known as the destructive syndrome of the on the verge of being seized (as we can see in the second half of the following video):

A solution, then, that appears to benefit everyone. But just as is the case, for example, in molecular biology or genetics, any seemingly positive change can have unpredictable and undesirable consequences. In economics or macroeconomics, the unknowns are endless, not least because, ultimately, it is people who are involved, with their corruption and greed, chance… and unthinkable butterfly effects such as changes of government in a remote country, religions and unspeakable affinities, wars, pandemics, conflicts, and a million unknown causes that can distort the expected and anticipated effects. And intervention in the markets should only take place when necessary, whilst attempting to violate as few universal laws as possible and, moreover, keeping our fingers crossed. Having said that, let us try to anticipate some of the consequences which, a priori, could worsen the future scenario.

The first question that springs to mind is why help unemployed homeowners but not all homeowners in financial difficulty. Or why not help those who are already renting and become unemployed. In short, why this discriminatory double standard based on the impact and damage that the mass bankruptcy of these families causes to financial institutions? The injection of state money in exchange for worthless mortgage paper helps the banks. But it provides no help, at least not directly or indirectly, to the unemployed homeowner.

Another consequence with potentially dire effects is that the banking sector would dominate the property market and, consequently, market prices—both for purchases and, to a large extent, for rentals. The prices set by financial institutions (even those not in danger) would be higher than market rates, for their own accounting convenience, making the property market even more illiquid and yet more expensive. That is the result of intervening in the market in a perverse and concerted manner.

Anyone interested in buying a house currently rented to its former owner (who would be «encouraged» to vacate it voluntarily) would be granted a mortgage with favourable terms, even if they were not creditworthy, since, in the worst-case scenario, the bank could repeat the process, reducing the cost of the property to the bank with each transaction (of course, obtaining a mortgage to buy a house sold by a private individual would be impossible). Besides, what the hell, all the banks would do the same and the distinction between buyer and tenant would blur. It would also have deflationary consequences that would affect CPI figures in ways that would be difficult to manage. And many others that emerge as we spend time imagining this hypothetical scenario.

If one were to be cynical, it might be a concerted strategy to prop up US property prices (Spanish prices still have a long way to fall before anything like that could be hatched). The reality is that most of the property market would be under the absolute control of the banks, and that smacks of abuses even more unjust than the relentless laws of supply and demand. At the end of the day, we would be intervening in the market, but not through the State, as we proposed at the start of the year in Mortgage socialisation and Bad Owners, but from the bench. Extremely dangerous.

G – I = ΔM + ΔD

Where G is public spending, I taxes, M the money supply and D debt. It will be clear to everyone that the left-hand side of the equation determines the deficit, and the right-hand side determines how it is financed. Obviously, if G be overtaken by I, we would be facing a scenario of a surplus, and the increases would result in a reduction in debt or even in the money supply.

The deficit must therefore be covered by an increase in the money supply and/or by the issuance of public debt. But what happens when a state has complete budgetary freedom but no monetary freedom? Let us consider the example of California, the equation for which is simply: G – I = ΔD An equation that must be balanced in every annual budget. This leads us to a scenario where a constraint on borrowing capacity causes the state to go bankrupt, for which there is only one sustainable solution: bringing G and I into balance. In other words, in a crisis environment where revenue is falling, the only solution is a drastic cut in public spending, which in turn will cause the crisis to deepen.

There is, of course, a limit to borrowing capacity. And to a large extent, this will be determined by the market, since the lower the creditworthiness perceived by the investor,, the higher the interest rate the State will have to offer to attract money into its debt. A debt that is becoming increasingly waterlogged. The other limit will be set by the legislation that regulates – or attempts to regulate – solvency, defining what is known as «country risk». However, in the case of California (an economy which, on its own, would rank among the top eight in the world), there is no escape via increased debt due to the already excessive ‘wetness’ (insolvency) of its paper, nor does it have the capacity to print banknotes. Both possibilities are a matter of decisions foreign, that is to say, the market and the US as a whole. When the deficit is spiralling out of control and tax revenues are falling, the issuance of debt It ceases to be difficult and becomes an impossible task. Attracting funding when investors« confidence has been lost is like trying to stop a house of cards from collapsing with your bare hands. And at present, it seems unthinkable that California could issue and print its own banknotes in its own currency. It therefore seems plausible that the US as a whole will »bail out’ California’s debt so that it can continue to be placed with investors with the backing of the US Treasury. This will have to be accompanied by rigorous austerity in public spending, something Schwarzenegger is already implementing in line with his neoliberal playbook.

There is also talk of the possibility that the fifty US states might be given the power to issue currency (or at least those that are unable to balance their books), but it seems, in the case of the US, that it would be less traumatic for the federal government to underwrite the guarantees needed by the spendthrift Schwarzenegger to continue inflating California’s public debt.

Interestingly, every day I see more and more parallels between Schwarzenegger and Spain’s Zapatero, even though their strategies for tackling the crisis are radically opposed (neoliberal versus socialist). Both are leading countries facing serious insolvency problems and an inability to balance the books. It seems unthinkable that the US would allow California to collapse, but I do not find it so implausible that the EU would leave to their own devices those countries with a large gap between G e I. The PIIGS equation It could be balanced by injecting I from the wealthy countries of Europe, of course, but it is clear that patriotism within the EU does not reach the same levels as in the US. Of course, the idea of allowing an independent monetary policy within the EU is difficult to imagine, but it would bring many pieces of the puzzles and would balance the equation. However, it is even harder to imagine that the wealthy EU countries would pay up and bail out, without so much as a murmur, states that only a few years ago abandoned their flexible exchange rates and joined the monetary union with virtual pride.

Krugman He had already warned Zapatero four months ago that It’s as if the European Union didn’t exist. In other words, warns that no help should be expected from it because, in fact, it is a sham organisation when it comes to coordinating exceptional measures. This, combined with the inability to devalue the currency, due to membership of the monetary union, means that (as he said on his blog) to be in the eurozone It does not guarantee that the crisis will be overcome or that the outlook will improve; quite the contrary. The situation is likely to be even more difficult for Spain, Italy, Portugal, Ireland and Greece.

For the time being, Schwarzenegger has written a letter to the Three Kings (Obama) begging for a bailout from the US government. Zapatero has copied his letter, but the real drama – for Spain and the rest of the PIIGS – is that there’s nowhere to send it. Meanwhile, the equation is becoming deeply ingrained in our macroeconomic figures. And mathematical equations are truths that know nothing of politics or social upheavals.

http://s.wsj.net/media/swf/main.swf

Having watched this rather simple and naïve WSJ video, I think we’re closer to finding an answer to the dilemma: Past data is simply insufficient to determine with precision and certainty which strategy will bring us the greatest financial success in the future. It would be far too easy. But there is something that this video and most discussions about investing in fixed income and equities overlook when they talk about time horizons, and it is something as obvious and yet as vital as our investment journey, which we discussed back in the first quarter of 2008 in Kaizen: Quality control for our investments. Statistics are of no use to us whatsoever (assuming they were reliable and sufficient, which they are not), beyond our investment horizon. And this may be as short as the medium, short or very short term.

I think the sentence that best expresses this concept is the one we wrote in our article entitled RF vs RV: «Investing is nothing more than small segments of very long-term charts.» And that covers everything, including ruining that investment journey by heading in the wrong direction. There are no second chances; we have only one investment journey in our lives. And no one knows how long their segment will last on a 150-year chart of dubious accuracy. From here on, let the heated debate continue over who beats whom. Although we’ll surely all be beaten by our own arrogant ignorance, which will lead us to seek ways to avoid the effort of carrying out the an assessment of our investment journey.

«It is in times of economic uncertainty that the memory of gold resurfaces. The monetary stability provided by the classic gold standard is very much on the minds of investors and savers across half the world, who watch as monetary authorities perform sleight of hand with their money. Ever since the abandonment of the Bretton Woods system – what little remained of the gold standard – investors and savers have believed, or felt, that the best hedge against the shambles caused by their authorities was the yellow metal.

I want to analyse this point in detail, as I believe it is of the utmost importance. Firstly, I would like to briefly outline the characteristics that have made gold the best form of money of all time; and secondly, what interests us most as investors or wealth managers is the concept of liquidity and how gold is the most liquid asset in an economy. We will therefore conclude by stating that gold is not an investment, but rather a monetary standard – the best of all time – and, ultimately, a guarantee of liquidity.

I shall not dwell on why gold is the best possible form of money, as that is not the aim of this article, but we can say that gold possesses excellent properties for use as money: its relative scarcity, its uniformity, its malleability, its ductility, its high degree of divisibility, and the ease with which it can be transported, stored and preserved. We can state categorically that it meets these requirements to be a sound monetary standard.

Now we come to what I believe is the most interesting part of the article, namely the question: why is gold the most liquid asset in the economy? This is a topic that most economists from the main schools of thought have overlooked, having devoted themselves entirely to modelling risks using variables that are difficult to estimate. To understand why gold is the most liquid asset, we must look back to the marginalist theories of Carl Menger, Walras and Jevons, who laid the foundations for the marginalist revolution. We might say that the marginal utility of a good decreases as its availability increases and increases as its availability decreases. This explains why diamonds cost more than water, even though water is essential for life and diamonds are not.

Therefore, based on this concept, we can say that one good is more liquid than another when its marginal utility decreases more slowly. The most liquid good in the economy would be one with a constant marginal utility – which is impossible – but we can state that gold is the good whose marginal utility decreases most slowly. The concept of liquidity can be defined in two dimensions: an interspatial dimension – that is, we say that a good is highly liquid when its marginal utility decreases gradually as its quantity increases; and an intertemporal dimension – that is, a good is highly liquid when its utility increases gradually as its quantity decreases.

This should give both investors and managers pause for thought regarding the liquidity risks they are taking on in their asset pools. The crisis we are currently experiencing is partly due to the deliberate or inadvertent neglect of these concepts, both by individual and institutional actors. The banking sector ought to be aware of the risks involved in investing for the long term whilst taking on short-term debt, and even more so when dealing with wholly illiquid assets which, at the time of liquidation, are subject to significant discounts. John Exter’s inverted pyramid clearly illustrates this concept. Current approaches to risk assessment should be carefully considered and refined.

So, having said that, can we say that gold is the best hedge against inflation? The answer at this stage should be a resounding NO. Firstly, because the inflationary process orchestrated by central banks through credit expansion benefits some more than others, meaning that certain sectors can easily generate returns that outstrip inflation; and secondly, and most importantly, there is no better hedge than holding a portfolio of value-invested assets. This is where Value Investment and our friend Benjamin Graham come in. There’s no better refuge than a razor company used by people across half the world every day; there’s no better refuge than a company that has been making the best children’s shampoo for as long as anyone can remember – and which even adults use, There’s no better refuge than that refreshing drink you can find in a place where there isn’t even any water.

Indeed, dear readers, that is the best protection against inflation we can have. I should point out here that, for any of you who are going to read Graham’s *The Intelligent Investor*, you should pay particular attention to the chapter where he discusses how to protect yourself against inflation. But the core of his advice is sound: invest in ordinary shares.

Gold as an investment would only make sense as a last resort for liquidity in a process of monetary destruction, that is to say, in the event of hyperinflation, since, as we have seen previously, it is the most liquid asset in the economy and, as such, suffers less of a discount when it comes to realising its value.

The conclusion the reader should take away from this article is that »The best way to protect oneself is through value-based investment; gold has been and will remain the best monetary standard of all time, and those of us who defend it will continue to fight to restore sovereignty to savers and consumers of goods and services. But we must be clear that these are two entirely different things.’

ManuelMad

To all this, I would add that as long as we retain hope in the system, the speculative aspect of gold should be our main motivation. If, on the other hand, we lose all hope, it will matter little whether the price of gold rises or falls, as it will be a monetary standard without currency. And as the saying goes: where there is a standard, the sailor is not in charge.

Gold has often been compared to shares. Although it may not be particularly significant, there is one example that is frequently cited. In November 2005, Rick Munárriz of Motley Fool.com raises the question of whether a Google share or an ounce of gold represents a better investment. At that time, both were trading at around $700. On 4 January 2008, the price of an ounce of gold exceeded that of a Google share by 30.77%. At the end of the year, Google closed 2008 at $307.65 per share, whilst gold closed the year at $866 per ounce.

What determines the value of gold? At present, the price of gold is, ultimately, determined – like so many other commodities – by supply and demand. However, unlike most other commodities, hoarding and disposal play a much greater role in influencing the price, because most gold mines are still in operation and can increase their output in line with the price.

However, given the enormous amount of gold held in reserves, compared with annual global production – which is small – the price of gold is primarily influenced by changes in market sentiment rather than changes in annual production. Global demand for gold not met by production is ultimately met by sales from central banks and the International Monetary Fund, which by the end of 2004 held 19% of gold. The Washington Gold Agreement (WAG), signed in September 1999, limits gold sales by its members (Europe, the United States, Japan, Australia, the Bank for International Settlements and the International Monetary Fund) to less than 400 tonnes a year.

Other central banks are buyers. For example, in early 2006, China – which holds only 1.3% of its reserves in gold – announced that it was looking for ways to improve the return on its official reserves. Some speculators are hoping that this is a sign that China might convert some of its reserves into gold, in line with other central banks.

Investors in gold who use fundamental analysis generally analyse the macroeconomic situation, which includes international economic indicators such as GDP growth rates, inflation, interest rates, productivity and energy prices. It is also worth analysing the annual global supply of gold against demand.

Global demand for gold soared by 38% in the first quarter of 2009. Three years ago, investment demand for gold accounted for just 10% of global gold demand, whereas today it stands at over 30%. That represents a very significant increase in investment demand.

The problem, however, as noted earlier, is that the price of gold often fluctuates depending on the perception of security surrounding other currencies, rather than on the macroeconomic situation “per se”. Just over a year ago, one could find books predicting the end of the euro and the dollar and the supremacy of gold. Or families investing in Swiss francs because of the backing of the Swiss National Bank’s gold reserves (which, incidentally, has been one of the major sellers of gold). Therefore, whilst gold production is unlikely to change in the short or medium term, Private supply and demand are highly liquid and subject to rapid changes, unlike almost all other commodities.

We must not forget that if we strip gold of its strong speculative element, current levels are probably already very high. And the gradual easing of systemic risk – though not of the crisis itself – is on the horizon. The (slow and arduous) recapitalisation of the global banking sector is a priority and has already been initiated by the most capable players, even though we are yet to see the skeletons of many institutions lying by the wayside. In a scenario where banks are recapitalised and the strongest nations remain solvent – with or without inflation – systemic risk will disappear. There is no historical precedent to draw upon for a scenario such as the one described. However, the easing or disappearance of the factors driving the “flight to quality” in gold should be decisive in reversing this trend. As always, the secret lies in knowing when.

Disclosure: Strategically speaking, neither here nor there…

What Summers discovers is not that gold rises when the dollar falls (the correlation of .28 cited by Scott Reamer of Vicis Capital is not really conclusive), nor its role as a store of wealth (if the dollar collapses, gold will recover due to investors seeking a safe haven, regardless of the correlation between gold and the dollar), but its safe-haven value even during periods of deflation.

To reach this conclusion, Summer draws on Roy Jastram’s book *The Golden Constant*. The author conducted a study of the performance of gold over a 416-year period in English history (from 1560 to 1976). His conclusion is not only that, historically, gold has acted as a store of value through wars, plagues and other vicissitudes, but that this precious metal actually increased its purchasing power during periods of deflation. This finding is surprising, as it was commonly accepted that gold rose with inflation but fell during deflation. Yet historically, this has not exactly been the case.

In addition to the fact that doubts about the value of the US dollar are beginning to affect the general public on a widespread basis, the conclusion of Summers’ article is that gold will perform well in any future scenario, regardless of whether it is inflationary or deflationary. If the dollar changes and falls to a low point, gold will benefit greatly from a flight to quality or by taking on the role of a non-regulatory currency.

If our readers will allow us, we would like to explore the merits of investing in gold in a little more detail.

It is true that for centuries, people have used gold as a store of wealth and as a hedge against market fluctuations, the depreciation of fiat currency and other macroeconomic and geopolitical risks. Perhaps no other market in the world has had the universal appeal of the gold market. Through shares in gold mining companies, ETFs and other gold-based financial instruments, anyone can invest in gold. For those who want physical gold, a German company, T G–Gold-Super-Markt, plans to install vending machines at 500 locations. The first vending machine, on a trial basis, has been installed at Frankfurt Airport (photo above). In Switzerland, it is possible to buy gold bars at post offices.

Investment guides repeatedly emphasise that investment success hinges on diversification and risk management. It’s the old adage of “not putting all your eggs in one basket”. It seems clear that a well-balanced portfolio should include a wide range of assets. But what is not so clear is determining what proportion should be allocated to each asset class. Some gold specialists, such as Mark O’Byrne, believe that an investor should allocate 10–15 per cent of their liquid assets to gold-related investments. The fact is, there are so many ways to invest in gold that, in principle, depending on the chosen method, it should suit speculators, investors and savers alike, as well as those with short-, medium- or long-term investment horizons.

Some even argue that, just as the family home should not be regarded as an investment in itself, physical gold (bullion) is not an investment but a kind of insurance policy, and that it should not be traded but rather form the foundation of the family’s wealth. Is that true?

(to be continued…)