Cluster Family Office Blog

It is common for human beings to have a distorted perception of reality. We are just that subjective and easily influenced – what can you do? And whilst the financial media constantly talk about inflationary fears and we structure our investments so that imminent hyperinflation does not erode the value of our assets even further, we often forget to look around us.

If we take a step back and look at the bigger picture, what we see is a bleak deflationary scenario. There is virtually not a single expansionary macroeconomic indicator, and almost all the ratios are below zero. GDP, CPI and employment are three highly significant indicators of what is currently happening across almost the entire world. Below is a chart showing changes in US payrolls over a three-month period, expressed as an annualised rate:

If we bear in mind that inflation is usually lower than the figure used for pay rises, it seems clear that 2009 has plunged headlong into deflation. Why are the official CPI figures less deflationary? Well, because the items that carry the greatest weight – and which depend on the state – are being artificially inflated at breakneck speed to prevent a free fall in prices. Only first-round inflation, triggered by a rise in oil prices – which hit us hard last summer – can mask the fall in prices that is already looming on the horizon. And this deflation is here to stay as long as the massive cash injections fail to fill the bottomless pits of the debt that has been created. Only when that happens will we see inflation rise, which may well quickly turn into hyperinflation. You can read Ethan Block’s simple but useful explanation of inflation:

http://vimeo.com/moogaloop.swf?clip_id=2782169&server=vimeo.com&show_title=1&show_byline=1&show_portrait=0&color=f5cc38&fullscreen=1

The Inflation Monster – Episode #4 from The Way to Build Wealth on Vimeo.

It is vital to realise the importance of investing wisely, even in times such as those we are now beginning to experience, when deflation increases the purchasing power of our assets. But be careful: this applies only to those assets that are protected against a loss of value. And this concept is of the utmost importance, as our clients are well aware. We are facing a period in which making our investments and structuring our wealth correctly, with sound advice, will have a multiplier effect in the coming years. Unfortunately, however, the opposite is also true, and in fact very few people are managing to protect their wealth from loss of value. Most take mental refuge in the hope that this nightmare will end, so that everything can go back to the way it was before. But what many refuse to admit is that the way things were before was a dream.

The strategies for managing wealth in deflation and inflation are, logically, very different, and it is disastrous not to be able to distinguish the correct decision at any given time. Government cash injections (machines for printing money, but not for earning it) have so many zeros after them that it seems as though deflation’s days are numbered. But hyperinflation is probably not as close as some people think. And to flood the desert, it will take a massive injection of funds, and for longer than some realise. As things stand, the world is in deflation, with all that this entails, and with an exceptional opportunity at our fingertips for our wealth to grow spectacularly.

According to the tabloid newspaper The Sun, a gang of five elderly men have cruelly tortured their stockbroker in Germany. They are aged between 60 and 79, and have no known aliases, although their grandchildren call them yayos.

They invested around 2.5 million euros in a booming property market in Florida. James Amburn, their American investment adviser based in Bavaria and owner of Digitalglobalnet, invested all their money in brand-new property developments, property deals and buy-and-sell transactions that generated, at the very least, capital gains equivalent to two lifetimes’ worth of salaries. I believe there were also people in Spain who got involved in this and stopped working, whilst mocking those who weren’t getting ahead like them. Some also did the same with shares…

But let’s get back to our «dear old folks». They waited for their victim as he left a café, and if James had known he was going to bump into them head-on, he would have gone out the back door, or would have «bent down to pick up a pencil from under the table», as our dear Carola. There were those old folks again, asking him what was happening with their investments in Florida. Oh!How awful! -thought James- It’s remarkable how well someone younger than them understands that that’s just how the markets work – that sometimes you lose and sometimes you win. And these apprentices at Cocoon They’re really going to town on it… as if their children – who are just like vultures – weren’t going to squander it all anyway. Anyway, making the best of a bad situation, James greeted them with a cordial «How's it going, lads? Out for a bit?«.

The response was a blow with the bumper of one of the elderly men’s Audis, which immobilised James long enough for them to subdue and abduct him. They kept him locked up for four days in one of their homes, with his hands and feet bound. The torture, beatings, death threats and cigarette burns were a constant nightmare. The elderly men thought that Amburn it was a A shoddy version of Madoff, and that by torturing him they might get their money back. But that wasn’t the case. James is not an alleged fraudster (and if he is, he has the resilience of a true professional), but an alleged unscrupulous adviser, like so many others. We can see him in this photo after being released by the police:

After four days of hell, during which he was given nothing but a couple of bowls of soup to keep him conscious, James has let his customers down, yet again. He told them that if they wanted their money back, they would have to let him send a fax to his bank in Switzerland, where allegedly had the money from his grandparents, who, allegedly He never invested in Florida. Naturally, that letter alerted the police, who raided the house and arrested: Roland (74) and his wife Seiglinde (79); Gerhard (63) and his wife Iris (66), both retired doctors; and a certain Willy, aged 60, the youngest of the group. All of them face a 15-year prison sentence for kidnapping and torture.

Their lawyers will have to be court-appointed unless the children – those «vultures» – see fit to pay for a good private defence for their parents, in the face of accusations from the person who has deprived them of their inheritance.

These things really make you think, don’t they?

Let’s talk exclusively about the financial aspect of wealth. Just this once, and without setting a precedent. Let’s focus solely on stock market investments and the future – which is more uncertain than ever – that investors are facing.

The current market landscape is, and will remain in the coming years, more turbulent than ever. And in the times ahead, it will be very common to see meteoric rises in various forms of investment (sectors, strategies, management styles, trading techniques…), as well as spectacular crashes and the failure of funds and managers who prove themselves incompetent in the face of the a new world (which we already warned about in 2007) of the investment. And that makes sense, since you have to stoke the fire to see flames. Whilst some achieve consistently good results (for example, in unit trusts) or stand out as outstanding investors (such as Buffett), many others must remain mediocre, whilst still others must be wiped off the map as the multi-bubbles – which will be created by the massive injections of money thrown into the fray – burst here and there.

Over the next few years, we are going to see the harsh reality demonstrated by the Monte Carlo simulation and that only the truly great manage to outperform consistently over time. The shortcomings caused by the widespread availability of funds managed by incompetent people will be laid bare, as every small bank and non-bank fund manager has, in recent years, set up its own investment funds using «the cream of the crop» from its limited staff. Managers who shone somewhat during the boom years but are limited in ability and experience (some of them, not all), and whose shortcomings will be painfully exposed in the complex times that lie ahead. All of them with loaded guns in their hands which, in some cases, will wipe out the savings of those who placed their trust in the false glamour of their mediocrity during these crazy last 20 years (comparable to the Roaring Twenties). It is no surprise that almost all bank customers have at some point heard their bank manager say things along the lines of: The fund you’ve asked me about is on a different platform to the one we use (either it’s not available, or the fees are too high, etc.), but we have another one that’s just as good or even better – you’re going to love it..

The rise of self-made, self-taught investors; the flood of courses and publications; investment training and pseudo-training of all kinds; and the globalisation of all this via the internet – whilst it has brought benefits in a few honourable exceptions – has done, and will continue to do, the rest. The medium-term result of this phenomenon: the ‘Best’ – with a capital ‘B’ – will triumph, those who possess the top managers stable with a distinguished track record, rigorous, cycle-proof methodologies, agility and brilliant intuition. Only the truly Great – in the broadest sense of the word – will be able to remain in their respective top quartiles over the coming years. And that universal law of continuity sustainable in the long term in the first quartile, will be more enlightening than ever in a turbulent situation such as the one we are facing.

The past belonged to them and, above all, the future belongs to them. But to all of them? No. The world has changed in many ways, and there are also various reasons to expect that the core future success changes hands more often than might be expected. For example:

• The rise in popularity of ETFs, which is leading to the homogenisation of the stock market performance of large, medium and small companies. This chart provides a clear example of the so-called «me-too» strategy: iShares Russell 1000 Index (IWB), iShares Russell 3000 Index (IWV), iShares S&P MidCap 400 Index (IJH), iShares Russell Midcap Index (IWR) and finally iShares S&P; SmallCap 600 Index (IJR).
• Supply and demand: When institutional investors and ETFs focus on large-caps, it is more difficult for stock pickers «author's»to achieve success in having their value recognised. It is, at the very least, a slower process, although, on the other hand, large value funds with a stock-picking strategy are also becoming more popular.".
• Results and systems are becoming shorter-lived due to the globalisation of information. We could say that market inefficiency decreases in proportion to the widespread adoption of screenings or the largest number of Dow Dogs (Dogs of the Dow). Although I would prefer to think that it is precisely these and other popularised theories that make the market inefficient when it comes to the proper search for value. Which came first, the chicken or the egg?
• A depressing environment could reduce (or at least delay) the chances of success for those who achieved it through a strategy buy and hold during periods of economic expansion.
  
• On the other hand, a prolonged economic recession could well be an ideal scenario for the search more competent Value.
  

In short, social changes that are affecting the world of investment. But it seems clear that globalisation is creating more and more uncontrollable disruptions to traditional, purist systems. Whoever can weigh up the most unpredictable factors, whoever can navigate best amidst the chaos, will hold the future in their hands. But in a minefield such as the one before us, it is better to go hand in hand with one of the Greats than to follow a mediocre figure to whom Monte Carlo granted a moment of glory before the summer of 2007.

There are almost a thousand ETFs which are available on the market, catering to all tastes and in all sizes. But the most influential players in the market are, of course, those with the largest asset volumes. Here are the top 10:

Recently we have seen how Pau Gasol managed to reach the top in the world of basketball. Watching news about this achievement, I happened to come across the film: «The whites don't know how to put it in«which is a basketball movie in which two hustlers try to pull off the heist of their lives.

Today we won’t be talking about wealth management, though we will be discussing Wealth with a capital W. It is a sad day, and yet we won’t be discussing the crisis. Today is a day for reflection, taking a perspective that goes beyond the the bigger picture which we have mentioned so often in our articles. Today is also a sad day as we mourn the loss of someone truly special.

A wonderful person has passed away tonight: Vicente Ferrer. They will never beatify him like they did homonym (and so the Church will once again be shown up), but I cannot find the words to pay sufficient tribute to this man, who is more committed than anyone else to those in need. Fifty years devoted exclusively to helping the poorest and most needy in the most remote and destitute region of India, Anantapur. A caste, the untouchables or Dalits, who are relegated to the most extreme marginalisation. That is where Vicente Ferrer arrived 50 years ago, at the very heart of marginalisation, where the need was greatest. His work, and that of all the donors, has ensured that today the Vicente Ferrer Foundation serve as a model of cooperation.

He popularised sponsorship in the most sensitive and effective way, and today more than 2.5 million people depend on the work of his team. These are staggering figures that should make us all feel ashamed when we compare them with what we have done for those most in need. Personally, I believe that rarely has a Nobel Peace Prize been more justified. A man who, as one would expect, donated all the income he received from his many honours and awards to the same cause.

Fortunately, his wife and partner Ana Ferrer, his son Moncho, and his nephew Jordi Folgado Ferrer will carry on with the work for as long as we all wish. I leave you with a message from this wonderful team on this very sad day for humanity:

Continuing to observe the behaviour of banks in these critical times, we have come across several very curious and significant cases in which solvent customers are strategically mistreated. Let us explain this with an example, fictitious of course:

«Don Solvent Entrepreneur (E. S.) must renew a credit policy of your company ERE, S.A. on its usual bench, the Molculo Bank. The amount is €1 million at annual Euribor +1.5%, which had always been guaranteed with the company's own buildings and installations. ERESA, valued at almost double that amount. The company has reduced its workforce in 2008 and 2009 (as the more astute among you will have already guessed), but it is still standing with a dignity envied by most. With much reduced profits but without losses and with good prospects of a merger with another company in the sector, a strategic alliance that would leave the group in a position of clear competitive advantage. The current circumstances and prospects are, therefore, among the best that can be found in the business world today. In other words, a good old-fashioned bank customer.

Well, Don E. S. cannot understand why this year, his banker and friend S. M. (Soyún Mandao) explains to him that the conditions have been tightened due to new management in the bank's risk department. For the renewal of the policy, the bank is demanding collateral for the warehouses, installations, machinery, the fleet of trucks, the adjacent land, the not so adjacent land and his personal villa. A total value, which even in this day and age, more than quadruples the €1 million policy to be renewed. But that's not all, the rate to be applied for the renewal of the bloody policy is now 7%! (they are ashamed to index it to the Euribor and round it off by hand).

Solvent Entrepreneur cannot believe that the Molculo Bank, its long-established bank (although a few years ago it was called Muntiro Bank), is doing this to him. Y I am only repeats the assigned mantra: «I'm sorry Empren, The risk managers have become inflexible, there's nothing I can do. Many are not even being given the option to renew their policies... You know what it's like, what can I tell you».

Of course, E. S. is not going to pledge all his assets for a 1 million policy, let alone at 7% per annum! So he decides to visit the director of the Jeando Bank, recommended by a good friend. There he gets a policy for 600.000′- at Euribor +2,25% guaranteed by the warehouses and facilities of ERESA. He also goes to the plodding and almost pre-retired director of the Mopueden Bank, who had so often proposed to his father good conditions for his father to ERESA (when it was still called E. Solvente e Hijos, S.A.). There he gets 400.000′- € more at Euribor +2%, secured only with the land adjacent to the company.

Finally Empren (he's almost like family now, isn't he?) manages to return the policy within the deadline to the Molculo Bank, that this is the end of its commercial relationship with ERESA. Surprisingly (or not), however, he maintains his personal relationship with I am, The Solvente and the Mandao have even been spending their summer holidays together for years.

One day, while sharing the third tinto de verano (a traitor if ever there was one) and some boquerones (anchovies) at a beach bar, I am he commented absentmindedly to Empren that the risk managers were renegotiating debts left, right and centre with business clients in distress, some even in a pre-insolvency situation. That they had no other solution than to refinance policies, with hardly any guarantees and in demolition conditions, if they did not want to eat more real estate and uncover more bad debts than the Bank of Spain was willing to ignore. And while they were asking for the fourth round, he began to indiscreetly and recklessly tell him about the case of the 1.2 million euro policy renegotiated for a company named Ebitdapena, S.A.....»

This is just a humorous example of what today's hard-pressed banks are doing. Due to the inability to release asset operations with customers in the red, they have no choice but to release ballast through solvent customer debt. In other words, they mistreat solvent debtors to the point of forcing them to transfer their credit operation to other institutions. It does not matter how solvent or profitable this good customer has been, is and will be in the future. After all, what bank today cares about the future? A few months or years ago, a customer like our friend Solvent Entrepreneur, was a treasure for any entity. And yet today the priority is bailing water and coefficients, balancing balance sheets and defaulting on payments by hammering. In short, surviving at the cost of whatever.

It has always been said: «If you owe the bank 1 million, the bank has you on the hook. If you owe the bank 1 billion, you are the one who has the bank on the hook.«. Well, it is clear that this maxim is an understatement. And today, the banks are not only caught not only by the debtors of 1 billion but also by the defaulters of small and medium-sized mortgages. It is the power of the anthill next to a large, seriously ill and dying prey.

That's how bad banking is, gentlemen. Of course, this doesn't happen to one's own bank, it always happens to other people's banks, whether or not they are in the list of the downgrades massive.

Continued from Social Exclusion and Show Business (1).

Against this tragic backdrop, in which social hardship is beginning to overwhelm countries such as Spain – a former contender for the title of the world’s eighth-largest economy (sic) – and in which the situation PIIGS, falls into the abyss of its own excesses, at the very heart of an EU that is more turbulent, strained and under scrutiny than ever before. Against this backdrop that we have outlined, we suddenly see news stories from the world of show business such as the signing of two footballers for €158,000,000, which nor do they guarantee sporting success. Excesses that must to make one reflect to any human being, and which I personally find inconceivable, inappropriate, immoral… unbelievable. Just as reprehensible as any other financial or sporting excess, of any colour, in the current climate of social constraints and a bleak outlook.

Even in the absurd world of the showbiz, there are different ways of keeping oneself entertained in times of depression, suffering and social exclusion. It has been shown that that you can achieve everything by developing footballers from the grassroots up, and in the current climate it is more important than ever to invest in productivity and in-house R&D, as well as in the search for sporting talent. It is not just a matter of avoiding a further increase in the debt bubble (the club owes 562 million euros), as you can see in this excellent article from GurusBlog and which is also wreaking havoc the finances of many clubs. But also of having, or at least pretend to, a certain awareness of the difficulties facing Spanish society and humanity as a whole. This is donate, today more than ever, far more than 10 million $ to an organisation such as UNICEF in five years, and of course to stop completely to promote the betting and to siphon off and squander 158 million owed within five weeks. It’s all about entertainment in the world of showbiz without overstepping the boundaries of ethics, which social deprivation is serving to highlight and define, even though many continue to look the other way.

Absurd excesses are reaching record levels these days, as reported by *La Voz de Galicia* in this article:

«Florentino Pérez, who during his first spell as Real Madrid president (six seasons) spent 499 million euros on transfers, has already spent 159 million, a figure never before reached in a single season by the club and which exceeds half of the 300 million that, as he announced, he would obtain through loans.»

Other prominent figures such as Xavier Sala i Martín, faced with the figures showing such waste, they ask themselves:

«…Someone will have to give them the money, and it would be good if they could explain how. How is it possible that a football team is being given all that money, given the country’s current economic situation and the credit restrictions that all the banks are imposing…»

Real Madrid have been responsible for the four most expensive signings in the history of football (Cristiano Ronaldo, Zidane, Kaká and Figo). The objection is, to say the least, an ethical one – at least whilst the Titanic remains afloat under its own steam, without covert aid or preferential corporate treatment. But the fact that the first and third signings took place in the midst of a global recession and against a backdrop of unprecedented social decline in Spain is far more than just ill-timed.

For those who are socially excluded, there will always be the madness of the show business to escape their bleak reality, but this economic and sporting madness – whatever its political leanings – in the midst of a social debacle strikes me as morally reprehensible. That’s not it, no. Entertainment like that? No.