Cluster Family Office Blog

The concept of social exclusion is becoming a regrettable trend, because it is affecting sections of the population we thought were far removed from marginalisation: the middle class and the lower-middle class. The figures are staggering and are amplified by the false sense of calm surrounding the sinking of the Titanic. In organisations such as Caritas In the first five months of this year, more applications have been received by emergency accommodation and primary care services than in the whole of 2007. And what is even more worrying is the profile of the people who have caused these figures to skyrocket. These are not homeless people, or those with addiction problems, etc. Nor are they people who have lost their jobs and ended up on the streets. The profile consists of people who are in work, but whose wages go almost entirely, or in their entirety, towards paying mortgage instalments and various loans that have been desperately consolidated, with terms they will be unable to repay no matter how many years they live and work. How have these families ended up in this situation of debt, inability to pay and financial ruin that plunges them into social exclusion? Essentially for three reasons: the banks’ encouragement of debt, society’s encouragement of consumption, and the incompetence and recklessness of the people at the heart of these distressing statistics. The economic crisis and the difficulty in maintaining sufficiently high wages (far removed from competitive productivity) has done, is doing, and will continue to do the rest.

In addition to these families who have jobs and an income but are unable to cope with their debt, we must also include those who have lost their jobs and are unable to find alternative sources of income. And, of course, there are also the traditional marginalised and excluded groups, whose numbers are also rising, fuelled by the desperation of the unemployed who are falling into a spiral of marginalisation and crime.

In short, we are seeing aid that is entirely inadequate and overwhelmed by massive, exponential and global demands, which will also undermine the ability of NGOs to address the needs of the developing world in favour of the increasingly pressing needs of the developed world. Further proof of what we said almost half a year ago: The situation is going to be an unimaginable nightmare for the younger generation who used to buy and own everything, thanks to credit and their ancestors’ savings. An increasingly evident ‘South Americanisation’, but not only at the socio-economic level but also at the state-economic level.

The digital divide In recent years, a distinction has been drawn between the First World and the Third World, but the social divide that is emerging in countries such as Spain – in a technologically literate environment – is leading to a deepening of class differences. This is something we thought we had left behind with the expansion and popularisation of the middle class. Yet it turns out that, in an environment rich in information and telecommunications technologies, that middle class was in fact enriched with money due to, virtual and poor.

He’ll carry on in show business…

Welcome to the wonderful world of the Banking Circus! Come and see for yourselves: here you’ll find a world of thrills. With real wild beasts that will send shivers down your spine with their roars and swipes, magicians who will leave you speechless with their tricks, tightrope walkers, contortionists in impossible poses, and escape artists who will free themselves from impossible traps and, of course, clowns who will make us laugh out loud.

That is how our article from a year and a half ago, entitled «The Stock Market Circus«… And just as we had feared at the time, a few months later …«The contortionists, tightrope walkers, magicians, wild animals and clowns ceased to be a spectacle and became a nightmare surreal.»The same thing has happened to the Banking Circus:

In the summer of 2008, we published this article in which we could clearly see how all the recommendations to invest 30,000 euros made by various organisations in Expansion. It is interesting to read now, almost a year later, the recommendations made by other organisations for investing 20,000 euros. This time, the article is published by Five Days, and it goes without saying that the same colossal, widespread mistake of «coffee for everyone’ is still being made, but this time consciously and from a somewhat more critical journalistic perspective. A year ago, the condition set by the alleged investor/journalist was something as surreal as a generic ‘without taking on high levels of risk«. This time, the reporter’s headline doesn’t even reach the level of the absurd; it reads, verbatim: «”make the most of 20,000′ – €«… It’s a bit like sending an email to the pharmacist saying: «’Give me something to make me better«. Mad.

In reality, the people featured in these articles and their readers do not care in the slightest about their usefulness or about finding out which advice is appropriate for each investor. Among many other reasons, this is because the circumstances of these investors and those 20 or 30 thousand euros are ignored (and anyone who claims that the correct application of the useless MiFID solves the problem is lying for their own gain). Both articles merely carry out research – critical in the case of *Cinco Días* and shameful in the case of *Expansión* – to find out what the organisations they interview are most keen to sell. And anyone who hopes to gain anything more from reading them is sorely mistaken.

Or does anyone actually think that the same approach should be taken with the €20,000 or so held by various investors? Well, apparently – and sadly – the answer is yes, given that such nonsense is written, published and read, and almost never with a critical eye, as in this case with *Cinco Días*. And what’s worse, it influences the behaviour of less well-informed investors. To give a few examples that everyone can easily understand: You should not invest €20,000 – which represents a pensioner’s entire life’s savings – in the same way as the €20,000 of a young person with a brilliant career ahead of them and a strong, growing capacity to save. Nor should the €20,000 of an heiress with the means to educate herself financially be invested in the same way as that of a housewife who has come into money from a lottery win. Nor should the €20,000 of a mediocre young professional be invested in the same way as that of a middle-aged business owner. Nor should the €20,000 of someone with assets of 50,000 or 1 million… We could go on with countless other examples, because every investor is a world unto themselves and must manage their wealth in a way that suits their circumstances. Do you now understand why the only information these stupid and/or dangerous financial press articles reveal to us is the type of investment that best suits the financial institutions’ own interests at that particular moment? The problem is that most readers indiscriminately seek (and find!) in them advice that serves the interests of their families (sic).

It’s also interesting to see how financial institutions still wanted to sell last summer equity funds (our own, of course) and «alternative investment«. However, this year They are content to desperately attract deposits by offering all manner of structured deposits to boost their Tier 2 capital, and preference shares to shore up their Tier 1 capital. Gone are the days of eagerly selling funds that generate commission. The bank’s profits are no longer the priority; rather, the vital thing now is to cover up the technical bankruptcy in which the Spanish banking sector finds itself. That is why preference shares are being sold whilst lying to anyone willing to believe that they are an alternative to the IPF, amongst many other commercially effective tall tales.

In this piece of journalism deforming, it transcribes conversations typical of encyclopaedia salesmen who shamelessly exploit families’ finances. Based on our experience, we can assure you that the lack of transparency and the lies perpetrated by staff at these organisations are usually directly proportional to their victims’ financial illiteracy and to the sales pitches they have been given depending on the severity of the institution’s technical insolvency. Both of the articles mentioned also show that the organisations always make recommendations in their own interests exclusively. And also that they have long since given up on making a profit and are only concerned with surviving at our expense. We would be satisfied if, after reading this article, people were to take a different view of the investment recommendations that are published left, right and centre. Let’s see if, together, we can put an end to the widespread sensationalism in the ‘salmon-coloured’ press.

At this interview in Canadian Business at Michael Lewis, when asked about the main consequences of the financial crisis we are currently experiencing, his response was as follows – and it is well worth reading:

We’re still in this. If you took all the losses in the system and deducted them from the equity of banks worldwide, you would end up with a dramatically negative figure. What we are witnessing is the global nationalisation of the financial sector. The political implications are extraordinary. Take the European Union. Spain, Italy and Ireland are all in a right mess. According to opinion polls, the German public would rather leave the European Union than have to cover these countries’ debts. Sovereign credit is set to come under attack. And the multi-trillion-dollar elephant in the room is: will the United States fulfil its obligations?

In the following video, we can see a short BBC report from almost two years ago (with Spanish subtitles). Unfortunately, its worst fears have come true:

In a recent study carried out by Variant Perception, the reflections on the situation in Spain are far harsher. We shall endeavour to translate them as faithfully as possible:

«As we have said on other occasions, Spain is heading for a long and painful period of deflation, which will become evident through spectacularly high levels of unemployment, the collapse of the property market and widespread bank insolvency. Consider this: the value of the bulk of loans to property developers rose from 33,500 million to 318,000 million between 2000 and 2008. That is an 850% increase over eight years. If we also add the debts of the construction sector itself, the total value of the debt rises to 470,000 million, almost 50% of Spain’s GDP. And many of those loans will ultimately prove to be irrecoverable.

Spanish banks are facing a truly grim outlook. Unemployment has now exceeded 17%. That is to say, there are 4 million unemployed people and 1 million families in which every member is out of work. Spain and Ireland have created the two largest property bubbles in the world. Spain, for example, has the same number of unsold homes as the US, even though the American property market is six times larger than Spain’s.

Why aren’t Spanish banks insolvent yet? Well, because they are not reflecting the true market value of their property on their balance sheets. We often wonder why the property and industrial collapse in Spain has not claimed more victims. The answer is simple, according to an article published in *Expansión* (the Spanish equivalent of the *Financial Times*): Banks and building societies carry out one in every two property valuations.

»We haven’t even begun to see the worst in Spain yet.'

Clearly, the fact that half of the valuations are carried out by companies in which the banks hold a stake – and which are, in turn, their main clients – means that these valuations lose all independence. If we add to this the banks’ desperate need to keep their balance sheets and credibility afloat, the combination is explosive, and turns the previous chart into a highly dangerous fallacy. The reality is that it is in the interests of no official Spanish body to shine a spotlight on the solvency of the Spanish banking sector (further evidence of the difference between global leaders and local politicians).

Given that we can avoid it, we do not think it is a good idea for our money to form part of their balance sheets, neither to safeguard our assets nor to avoid a possible devaluation that many voices of a strong Europe (A) they demand. From abroad, the situation appears much clearer and more realistic. Who would have thought that we would once again have to look to the foreign media for the truth, just as in the days of the dictatorship. In Economic Euroscepticism We could have said it more loudly. And we could have said it much more clearly before, too, but we didn’t think it was responsible to do so publicly whilst it was nothing more than a highly unlikely hypothesis. But perhaps it is now pointless to ignore a reality with an outcome that is difficult to avoid. Even the very Expansion, when discussing the continuity of the Union’s membership, he makes the following politically incorrect statement:

«…In this regard, Schroders maintains that Spain and Italy are the favourites to be the first to break away, although Ireland, Portugal and Greece have recently joined this group…»

The fact is, whether we like it or not, we’ve got a nasty one the elephant in the room of a Europe that is more divided than ever.

Spain strikes fear into the hearts of our neighbours who are better equipped to weather this crisis. And this is only to be expected, given that in the recent past they have made fewer mistakes and committed fewer abuses than countries such as Spain, Ireland, Greece, Portugal or even Berlusconi’s Italy itself. Economically speaking (since, politically and emotionally, we are just as European as the other southern countries to date), we Spaniards have been playing at being ‘first-class Europeans’ (A) over the last decade. But we have lost (B).

This crisis is like taking part in a relay race where we Europeans are all on the same team. Some are wearing the most advanced trainers and they battle athletically against a relentless stopwatch (the crisis). However, some of us on the relay team are feeling sluggish and hungover. And when the better-prepared European athletes rightly criticise us Spanish runners for our poor form and lack of training, we reply: «Don’t step on me, I’m carrying flip-flops«, and we sang this song to them:

What’s going to happen to this team in the future if it doesn’t want to make a fool of itself and wants to keep fighting for a podium finish (A)? It’s as plain as day…

Most people have a short-term memory and tend to forget the past very quickly. This is often seen in football, where last year’s victories count for little if the team fails to perform at the same level this year, and the manager is quickly called into question, only to be ruthlessly sacked later on if the situation does not improve (except in England, where, fortunately, they allow for long-term projects).

In the world of finance, this is even more true, if that is possible, as selective memory is compounded by the envy aroused by investors who, year after year, outperform the market, whilst the majority flounder in a sea of mediocrity. Numerous studies indicate that, over a 10-year period, more than 80% of funds prove unable to outperform their benchmark index.

Just a year ago, numerous voices were raised criticising the heavy losses suffered by funds whose managers are guided by the principle of ‘value investing’ developed by Benjamin Graham and David Dodd, pointing to their inability to stay out of the market during periods of sharp decline. Many columnists in prestigious newspapers, but above all second-rate bloggers, did not hesitate to call this investment philosophy into question, perhaps driven by that unhealthy envy so prevalent in the Spanish character, or perhaps because it sells better to criticise and kick a man when he’s down.

This is not the first time comments of this sort have been made. In fact, as far back as 1984, Warren Buffett pointed this out in an article entitled “”The Superinvestors of Graham-and-Doddsville", noting how many academics and investment professionals argue that there may be inefficiencies in share prices since, in their view, the market is efficient because its participants have access to a vast amount of information that ensures these prices are fair. Mere luck is used to explain the superior returns of investors who beat the market year after year. Without going too far back, during the tech bubble, the prestigious magazine *Institutional Investor* published a cover story with the following headline: “Value Investing: Can it rise from the ashes?” and even the *New York Times* asked “What is killing value fund managers?”

What many did not bother to mention – probably out of ignorance – is that, unfortunately for value investing, and this is one of the main criticisms levelled at it (and rightly so), when all the indices experience such sharp falls as we saw last year – in this case, moreover, triggered by a multi-crisis from which we are still trying to recover – the market does not distinguish between good and bad companies, and everything falls regardless of whether it was overvalued – as was the case with banks, insurance companies and property firms, to give a few examples – or whether its price did not yet reflect the company’s true value.

It is very difficult these days to remain untouched by the destruction of wealth. But it is by no means impossible. Over the past year, with the exception of the few enlightened individuals who have managed to invest systematically in the handful of sectors and types of investment that have come out on top, only those with entirely liquid assets – with virtually no property or business holdings – who have stuck to and made do with sovereign fixed-income securities and/or very high-security investments, have escaped the fallout.

However, whilst many issues with sound fundamentals will reach maturity without incident, others will be subject to credit events with unpredictable outcomes, and some estimates suggest that 20% of the total will experience some form of credit event in the coming years. The worst part is that investors will not be able to know whether their corporate debt portfolios will be affected by such an event until maturity, even though many boast about the potential nominal returns over the life of the issue. These days, with fixed-income investments, it’s not how they start, but how they end.

It seems logical to assume that the most challenging years for the creditworthiness of these corporate (and government!) issues will be 2009 – the year we are in – and probably 2010 as well, or even 2011. Why? Well, amongst other reasons, because one of the root causes of this multifaceted crisis – the sub-prime mortgages that are causing so much damage to the financial system – is set to reach its peak in terms of defaults and repossessions over the next three years. And this, like the wider crisis, will lead to a credit crunch, falling profits and financial distress amongst companies, banks and governments. If the Mistrust If we factor in the resolution of credit problems over the next 2, 3 or 4 years, the remaining outcome will be the economic and social crisis itself – which is no small matter. It is impossible to predict how long the economic crisis itself will last, as we have entered a depression for which we have no historical precedent. The The Great Depression which began with the Crash of 1929 lasted a decade and required a world war to bring it to an end, and is the only point of reference, alongside what Japan has been enduring since 1990 (two decades). It is therefore clear that comparisons are difficult and dangerous, as the world today is a very different place.

However, we want to offer a glimmer of hope in the midst of Perfect Storm. During the second half of 2007 and throughout 2008, we were faced with the unknown: the collapse of a credit and financial house of cards on an unprecedented scale. This was accompanied by desperate bailouts from the world’s most powerful nations (and also from the less powerful ones, which are doing what they can within the limits imposed on them), in a display of unity and recognition of the gravity of the situation unlike anything seen before. Now, in 2009, we are fully aware of what we are facing, with the exception of a few unprofessional and political figures who have yet to realise the true extent of the situation. And this realisation that a dramatic immediate future lies ahead makes us less vulnerable, whereas over the past year and a half there were still many who were caught off guard.

The financial desert will be long and hard, and the economic desert – which is already beginning to cause serious social hardship – will be even worse. Unemployment, redundancy schemes and business closures will continue, and as benefits are phased out over time, the decline in consumption – and therefore in the economy – will become more pronounced. But now that we are in 2009, having braced ourselves and gritted our teeth, we stand a much better chance of reaching the light at the end of the tunnel, with our assets shielded from the minefield we first entered back in the summer of 2007. Financial uncertainty and mistrust are probably already subsiding, or will do so shortly, but the economic crisis and social hardship are set to last a long time.

«In Spain, you can see a light at the end of the tunnel… but it’s a lorry coming straight at you»

Xavier Sala-i-Martin

The word which, in our view, would best sum up the whole of last year – and, more specifically, the second half of 2008 – is Mistrust. A lack of confidence in the banking system which is creating a liquidity trap (Liquidity Trap) which is set to have very significant and dramatic consequences for the real economy, society and everyday life. The consequences of mistrust lead to a freeze in the flow of money, and as a result, investors are gripped by terrible doubts: Who are we going to lend our money to so that they can put it to work, whilst ensuring we have sufficient guarantees that they will be able to repay it on time and without the dreaded credit event (Credit Event)? Secondly: For how much money, profit or interest are we going to lend it? And finally: For how long is it sensible to lend our money to the lucky chosen one so that they can put it to work?

The answers to these questions are, of course, difficult and complex. But above all, we must always bear in mind that they must be tailored to the circumstances of each investor or wealth holder. And within each of these, there will be portions of assets that should be allocated in one way or another. Thus, a portfolio should always be allocated across a range of investments tailored to the needs, objectives, preferences, etc. of each individual. What is certain is that, at present, it is prudent to adapt the ‘Vital Balance Sheets’ to investment returns whose risk-return ratio has changed drastically, whilst not losing sight of the possibility of hyperinflation. despite the doubts.

Speaking of fixed-income investments, the flight to quality in 2008, or the flight to safety in terms of the quality and creditworthiness of investments, led to a fall in the returns on the (a priori) safest investments, such as the sovereign debt of developed countries and large, highly creditworthy companies. The simple reason is that when many people want to buy the same thing, its price rises, thereby reducing its yield. Now, almost halfway through 2009, following the mistrust generated by the fact that most companies are facing serious difficulties due to their inability to refinance their debts with financial institutions, many are once again lending their money almost indiscriminately by buying corporate debt issued by these firms. Demand for corporate fixed-income securities has soared over the last couple of months, particularly in recent weeks. And The lack of criteria in the selection process is leading to companies with very different capabilities when it comes to tackling their emissions being priced at very similar levels. Every day we see how large asset management firms and their respective advisers, are recommending programmes that we might call blue-chip companies and which are selected on the basis of criteria as outdated and dangerous as credit ratings or grandiose names. With a few honourable exceptions, issues are selected by financial institutions as suitable for their clients’ investment portfolios, based on nothing more than a very superficial analysis: news, credit default swaps, ratings and little else. And there are very few advisers who take the trouble and the time to study the balance sheets of the issuing companies in order to ascertain their financial capacity, and thus be able to repay the debt without the dreaded credit event. Furthermore, if that selection takes the form of a fixed-income investment fund, we will find that it contains a wide variety of intrinsic risks and lacks any reliable criteria in the analysis used. The result of all this is that, nowadays, bonds from issuers with very different financial situations are trading at the same price. And that distortion has been caused by the abuse of indiscriminate demand in a very difficult environment for safeguarding financial assets.

(To be continued…)

The speed and severity of the economic downturn during this crisis are truly staggering. It does not bode well. In the previous charts from the Federal Reserve Bank of Philadelphia, We can see that virtually the whole of the United States is already falling by more than -1% on a coincident index which is based, verbatim, on the following calculation criteria:

«The coincident indices combine four state-level indicators to summarise current economic conditions in a single statistic. The four state-level variables in each coincident index are non-farm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary payments adjusted for the consumer price index (U.S. city average). The trend for each state’s index is aligned with the trend in its gross domestic product (GDP), so that long-term growth in the state’s index matches long-term growth in its GDP.»

If you’d like to look further back at the monthly maps, you can view all the historical ones here. But to give you an idea, the following chart is from just a year ago:

A picture of such widespread declines in this index demonstrates that the misnamed ‘recession’ is in fact a full-blown Depression. If we review the macroeconomic charts for any sector – including those covering periods of recession – and interpret them in the context of a prolonged depression, the foreseeable economic and social deterioration is overwhelming.

We may be facing a new stock market crash that could see new lows; there is no shortage of reasons for this. The ground had given way beneath the financial system’s feet, but the Systemic Thaw It’s obvious. Perhaps the reclamation of that land beneath our feet This may be a good reason for optimism in the equity markets and for society as a whole, but even so, a chasm seems to be opening up on the ground winding staircase into the darkest economic and social dungeons.

Last-minute off-topic comment: It’s a shame that, just hours after the Air France Airbus crash, Boeing’s shares rose by 5% at the opening bell… I suppose that’s just part of the ethics of money.

There are various symptoms that we can see day by day that lead us to a slight relaxation of a collapsed system. A slow but undeniable thawing of the glaciation that has hit the capitalist system since the summer of 2007. Among these thawing symptoms, we will highlight a few, for example, lThe easing of LIBOR and the rebound in the yield on 3-month US Treasury bills.

The first figure has been strained when interbank mistrust gripped the system. Despite massive public efforts to inject tens of billions into the system, both in $ and in € (and even in coordination with other major central banks), the perceived risk premium in the interbank market pushed the spread of real money circulation rates to panic levels.

But liquidity was not flowing into the system even though official rates were buried in a matter of months, as we can see in this interactive graphic. As a result of this unprecedented lack of confidence in the system, the reaction of money was not long in coming and the flight to state quality went so far as to obtain negative yields on 3-month US Treasury bills.

This phenomenon gave great relevance to the TED spread, an indicator that reflects the credit risk of the system, as it is the difference between LIBOR and T-Bills. In other words, the difference between a risk-free investment such as Treasury bills and the credit risk between banks. Therefore, the larger this difference is, the more the system is locked in, as it needs monetary fluidity to function (represented by v in quantitative theory):

We can also mention other indicators such as the LIBOR-OIS, which is nothing more than the difference between LIBOR and Overnight Index Swap. The wider the spread, the greater the stress on the system:

As we can see in this post by The Pragmatic Capitalist, The discount requested by the banks from the miraculous window of the EDF, is moderating a lot. Here is also the graph:

So as not to tire you any more, here are the last two: The spread o the difference paid for lower grade (A2/P2) non-financial commercial paper relative to AA non-financial commercial paper; and the ratio of all paper types, including financials. If we compare this with what was happening six months ago and reported in the graphs we published in The Commercial Paper Eruption, It seems as if it has become daylight.

Today, all the indicators mentioned above, and countless other very diverse ones, indicate a clear improvement in the health of the system. We will never tire of repeating that the economic, business, labour, social, etc. crisis has only just begun. But the vital constants of the financial system are improving. And the indicators confirm this. But this melting of the System is not enough to get out of recession. It is a necessary but not a sufficient condition, and a Japanese button, of course, is proof of that.

The melting of the ice begins in this glaciation, but only that, which is not little.

Today we are faced with a situation where financial crisis in the process of… let’s say self-improvement (USA), since solution wouldn't be the most appropriate word. And as for Europe, not even that. But nevertheless, the economic crisis The global crisis has only just begun, and when financial matters take a back seat (or even a secondary role) and the main fire to be put out is the economic crisis that will lead to a social crisis, the measures to be taken can only be effective if they are drastic or even draconian. The falls in GDP have record figures everywhere and the collapse of economies is now becoming social dramas which are still merely tip of the iceberg from the WWFF which we thought had been forgotten in the West. Particularly in a country like ours, where unemployment is set to exceed 25%, the measures to be taken are particularly urgent, necessary and inevitable.

Although even today there are still many so-called experts who gleefully proclaim the strength of the euro against the world’s other currencies, the reality is that these days the advantage lies with those who devalue their currencies. In fact, this has always been the case during difficult times for a country’s economy. But globalisation has changed the world, including in terms of currency relations, and when macroeconomic difficulties are now global, someone must act as Lesser White-fronted Goose (EU). In other words, at least one of the world’s major currencies must appreciate as a counterbalance to those that are depreciating, thereby boosting the latter’s competitiveness and giving them a better chance of eventually recovering from the Great Depression.

In fact, the whole of the European Union would benefit greatly from a competitive euro that would boost exports and lift GDP figures across the Eurozone. But for that to happen, it would need to lose value against the other major currencies—namely the US dollar—and the other secondary currencies (GBP, JPY, CHF and a few others). In other words, it would require part of the developed world, with economic clout, to have a strong economy capable of supporting those in dire straits. It would need to strengthen its own currencies, thereby allowing the weaker currency to gain competitiveness and thus revive the economy of the poorer country. But no. Today we are all in a bad way, a very bad way. And no one wants or can afford to play the role of a strong country and currency. We all need a devaluation as much as the air we breathe, Americans and Europeans alike (some more than others). The last one is a fool. And the last fool, until now, has been the brand new and strong €, much to the delight of short-sighted Europeans and nimble non-Europeans, with their respective central banks.

At The Era of Devaluations We mentioned several reasons why it was difficult to devalue in order to get ahead. One of them was the inability to secure funding that a country would have the ability to devalue its currency independently, as in the past. But in recent months we have seen how, even within the Monetary Union, the sovereign debt of some states is trading at much higher levels than others, making financing more expensive, even with a single currency. For example, Ireland and Spain, and Germany and France, have been trading at very different levels for several months now. But the reason is not solely the risk premium for state insolvency or bankruptcy, as there are very significant differences even in one-year bonds; it also reflects each country’s greater or lesser ability to overcome the recession in the medium term, and perhaps to some extent in the short term as well. These disparities are likely to widen in the coming months, as the shortcomings of both sides become increasingly apparent. The fact is that, just as happened with the imbalance we detected in April 2008, the economic landscape will also tend towards rebalancing. In other words, either financing costs will converge once again amongst member states of a European Union that is economically moving towards convergence (unlikely, in our view); or the differences will widen and divergence will bring down the Union, starting with its financial sector.

This scenario leads us to the economic Euroscepticism (rather than political), whether voluntary or involuntary. How long will the EU be able to keep rich and poor countries on the same page in such a difficult environment? This global crisis is preventing a competitive currency in an environment of «foolish the last«It may not go so far as to sever the EU’s political ties, but it will destroy an economic union that seemed to balance out the differences between countries. But it only seemed that way. And this collapse will plunge many into poverty, especially those countries that lack the courage and/or the capacity to take such drastic and draconian measures.

«Once the impossible has been ruled out, whatever remains, however improbable it may seem, must be the truth.’.«

Sir Arthur Conan Doyle (1859-1930)

«Dear Editor: The fund manager who sold me the portfolio just as the stock market was already taking a hit (remember that the year’s lows were recorded on 9 March) has not only not been sacked, but has actually had his salary increased. Apart from the financial and emotional devastation this affair has caused me – and mind you, I’ve been through crises and market crashes before, as well as many bullish highs! – which, I’m told, has also happened to many other investors, it has made me reflect on a few things, such as:

*The lack of professionalism among financial managers is directly proportional to the ignorance of most people when it comes to financial matters. We buy when everyone else is buying and sell when everyone else is selling. In the end, there’s chaos all round and we’re left with our tails between our legs.

*The financial services industry continues to treat the world—and globalisation—with utter contempt. Basically, it couldn’t care less. Everything moves so fast that yesterday doesn’t count. That’s why this madman has had his salary increased. He still wears smart suits, drinks water with his meals, doesn’t smoke, and has the build of a shop-window mannequin, a pearly-white smile and a nice scent. That, I’m told, happens all over the world. It’s not unique to Spain.

*What governments and major supranational institutions said needed to be done, and what needed to be learnt from this Great Crisis, has neither been done nor learnt: derivatives continue, toxic products continue, bubbles continue, executives are giving themselves pay rises, companies that should be suspending dividends are maintaining them, creative accounting has reared its head again, propaganda overwhelms us… Nothing has changed

*A property bubble? Who said it had burst in Spain? In Spain, property developers have gone bust, but the flats that reach us consumers are still being sold at outrageous prices. Don’t let anyone fool you with that nonsense about the discounts some banks and building societies claim to offer.

*But unemployment is rising, factories are closing, unpaid bills are piling up, businesses are shutting down, and people aren’t travelling or buying cars

*Once again, the great divide between the real economy and the financial economy. It’s always the same people who lose out.

Best regards from »Iñaki"