Cluster Family Office Blog

Having read the latest analysis by Dr H. W. Brock, chairman of Strategic Economic Decisions (SED’s Advisory Services), I think it would be interesting to reflect on the relationship between growth and debt. The table opposite illustrates the explanation that Brock describes the «perfect storm» in which we find ourselves:

We have all heard time and again that the cost of this crisis – of the excesses committed in the past – will result in a huge bill that our children will also have to foot. And that is probably true. But the excessive personal debt that is being passed on to governments (via personal and corporate insolvencies to the banks and from there to the governments) could unfold in two radically different ways in the long term. And The key to whether this development leads to positive results or disaster lies in the ability to generate growth.

It seems that we are going to try to resolve the systemic leverage we have reached by pressing ahead, as the regression, famine and chaos that a clean slate would cause are things that humanity cannot and must not allow. But this headlong rush could lead to two very different scenarios: the one we know as «Banana Republic«, with hyperinflation and constant stopgap measures without substantial increases in GDP; or that of rebalancing debt in relation to growth in the medium and long term. The aforementioned essay by SED highlights the significant link between debt and growth, which he describes as Debt-to-GDP ratio and its medium- and long-term trend. It is precisely the reduction in this ratio that will make the difference between a headlong rush into debt until we suffer irreversible damage; or the light at the end of the tunnel if we manage to achieve sufficient growth to pay off that debt and public deficit:

At a point where public debt may have reached a point of no return, long-term recovery is possible. But only if the policies adopted lead to an increase in the denominator and a reduction in the numerator, in a ratio that must be our top priority in the coming years. To achieve this, of course, we must think long-term; in other words, decisions must be taken with a view that goes beyond a single parliamentary term and a single election. But unfortunately I am not very optimistic about this, either at the political nor at the level of trade union.

As for the measures to be taken, Brock It proposes several, which I will outline below, but all of them are based on the two complementary sources of real economic growth:

«The growth trend is the sum of the growth in productive capacity and the growth in productivity.«

The proposed measures include, for example: fiscal incentives aimed at developing the infrastructure needed for growth, and the promotion of innovation and Venture Capital. And from a much more nationalist perspective, the promotion and education of brilliant minds, both nationals and university students from immigrant backgrounds. He also advocates incentives for investment in the private sector, and regulation limited to capping excessive employee bonuses and drastically reducing widespread leverage. According to Brock, these regulations will automatically rectify the other excesses that have occurred, particularly over the last three years.

As regards increasing productive capacity, it proposes the deregulation of the labour market. It also advocates a fiscal policy aimed at strengthening value-added tax and minimising those taxes that affect labour income, as these distort labour market growth and, consequently, production capacity. And, of course, a re-evaluation of the public deficit so that borrowing is directed towards areas likely to generate greater growth in the medium and long term.

A crossroads with no turning back, an extremely complex one, with two paths ahead: one leads to fruitless hyperinflation and the other to long-term normalisation, though the latter will require a great deal of effort and collective wisdom along the way. The following charts show a projection of the two possible scenarios:

There’s no doubt that we’ve ended up in this grim situation because of our foolishness and our desire to become rich through money alone brought from the future, a misuse of The Theory of Speculation which has led us to financial collapse. And we can only emerge from this successfully through long-term effort, but one focused on the only part of the equation that we can change: growth, since the debt exists because we unconsciously created it over at least the past decade and we cannot simply make it disappear. Indebtedness continues on its grim course: individuals–banks–states. And it is the state itself (or macro-states such as the USA or the EU) that must grow at full throttle for many years to bring the debt-to-GDP ratio under control. If we fail to do so, we will inflict damage upon ourselves from which we will never be able to recover.

The figures are soaring and the news has broken in the headlines. 66,000 families have already lost their homes in the UK since the credit crunch took place in the summer of 2007. The forecast for 2009 is that 75,000 homes will be repossessed by creditors, bringing the total to 125,000 over two and a half years. But the most worrying aspect is not the cumulative figure to date, but rather its upward trend: between January and March this year, the figure rose by more than 50% compared with the first quarter of 2008. And currently, 150 families are losing their homes every day, seven days a week.

This alarming trend has led the UK to draw up a protocol requiring lenders (financial institutions) to demonstrate that they have explored all alternatives to keep borrowers in their homes before proceeding with evictions.

It seems that a second wave of repossessions is looming over the UK, just as it has in the US. The question we must ask ourselves is: What will happen to Spain’s bloated mortgage market against a backdrop of record (Western) unemployment? It is easy to guess the answer (though not for everyone): We will see a very serious social impact, and the much-vaunted strength of the Spanish banking sector will be laid bare. When? Soon, very soon. And the a flood of properties The market that the banks are already starting to create, combined with the desperate sales by those trying to avoid repossession, will be just the beginning of the real price collapse that we have yet to see.

Meanwhile, absurd measures are being taken such as this one, which will be impossible to fulfil in 2011. For in two years’ time the situation will be so precarious that the current tax breaks will not only be impossible to abolish but will have to be increased to the extent that the Spanish state’s bankruptcy allows. The only way to avoid such a bankruptcy is for wealthy Europe to support poorer Europe, or else the traditional measures adopted by those states whose economies are far less competitive than those of their neighbours will have to be implemented. But that would merit a lengthy article, which it is not appropriate to write in the countdown is in full swing. The fact is that this measure is just as absurd as saying that in two years’ time it will be much more expensive to take on staff, and expecting that to reduce the current level of unemployment. Unbelievable.

We will repeat ad nauseam what we have already pointed out in «Investing during a recession and a depression»: It’s better to sell at a loss today than to sell at an even greater loss tomorrow, and it’s time to raise cash for the past two years. Let’s take out the top of the hole and our heirs will be grateful for it. But beware: the terrain is still fraught with danger, and it won’t be at all easy to safeguard our cash reserves in the coming years.

The rate at which Spanish workers are becoming unemployed is staggering. But if, instead of comparing monthly figures, we were to do so as they do in Slate, we would realise what is happening to the Spanish economy and society.

In the interactive chart on this «whiteboard», you’ll see how job losses are affecting the US month by month. It feels as though I’m watching, in real time, the explosion of multiple nuclear warheads in North America’s major cities in the latest blockbuster film Hollywood-style in true style Armageddon. These are job losses that will take decades to recover from (even if the previous rate of growth is quickly regained) and yet are mounting by the month, leaving an ever-deepening and more intense red stain at the economic heart of the US:

The chart is based on data from LAUS (Local Area Unemployment Statistics). Let’s now imagine that someone were to produce (perhaps they already have) the same map, but for Spain, using domestic unemployment figures for the same period. I’d rather not see it, as it would be spine-chilling.

Despite everything, some people are still confused and see these dramatic figures as a sudden attempt by employers to exploit workers. A trade union movement denier the global financial collapse and the illusory virtual wealth we have experienced, which will recklessly hamper the productivity we need to try to emerge from the economic depression. Meanwhile, it continues the countdown for many, and soon for most.

P.S. Just to have a bit of a laugh at ourselves after such a pessimistic post, here’s Nintendo’s latest invention:

Watch out, because it doesn’t take much for people to call you a sexist! 😉

It’s been more than two years since we wrote Citisoluciones: Networking at the service of Citibank. May Kiyosaki’s financial independence rest in peace. An article that has, over time, attracted an increasing number of comments from those affected and from anonymous individuals who have felt deceived and wronged by this company and his underhand tactics, some of which have even been published as blog posts. But this time we have received one that is particularly heartfelt, exquisite, honest and sincere. It contains some final reflections that are not to be missed, and which we did not want to let fade into obscurity as just a simple comment on an article from two years ago. I shall therefore leave you with the text of this PFI:

«Gentlemen,

It’s such a pleasure to read your posts. It’s delightful, to say the least.

Let’s take it one step at a time.

I am a PFI from what remains of Citisoluciones. We signed (and I say ‘we’ because of the partnership) our commercial contract some time ago (just over three years ago).

Everything was rosy, spectacular, gorgeous… well, I bought EVERY CD under the sun, in duplicate… no. I bought at least five copies of each CD. If there was ever a CD-buying fool, it was me. Same went for the books and all the other bits and bobs at the stall.

The first order was fine, but with the second one, all those little extras you’re so keen on at the start of the «business» were missing… only the cards arrived. That’s when my first question arose, and after two complaints, I realised there was nothing to be done. I couldn’t understand how «the world’s number one company» could be so shabby. Not to mention the RVP, who played dumb, just like the one in Madrid… I mean… it was small change… but it was my small change. If you don’t respect me over a few pennies, what would happen when we got to the «millions»?

We carried on with business as usual, turning up at EVERY single one of the shambolic events organised by our pathetic hierarchy. When we said we couldn’t go to the European Championships due to personal matters (money, let’s not kid ourselves – not a penny to be made from it), that’s when the sour faces and the nonsense started.

On several occasions I received calls from the RVP, telling me off for not having the right attitude and that I wasn’t making any money because I wasn’t pulling my weight… Let’s see, this business – if you can call it that – has a silly little rule which goes: «Follow your RVP and do what they tell you without contradicting them»… If I rebelled against my parents when I was young… wasn’t I going to do the same with a stranger?

Then there’s that whole »we’re off to the RVP lunch» business – just RVPs… odd. After every shambolic event, there’s a feast paid for by all of us who signed the SACI, which is only enjoyed by the Founding Ranchero with his Mercedes van, SpongeBob 745i, the Monopoly Chiripitiflautico and his boat, the Olvera Freak (raking it in, with a 1995 A8 that’s clocked up more kilometres than the roads themselves) and the rest of the acolytes. Incomprehensible but true—that’s just how it is.

Training courses… excellent methods based on constant, machine-gun-like repetition, with very little NLP – and, for heaven’s sake, the NONSENSE you have to put up with from certain people. As El Zorro says, let’s get talking. And this is going to get properly heated – it’s going to be a real treat.

Let’s talk about the RVP (I don’t know if it’s still called that). Zero communication. Just those annoying 45-minute Sunday sermons. I stopped going to church because of the priest’s nonsense… you can imagine. Zero education. I don’t think he even finished school. I’m not judging him for that, but I do recognise that to talk about certain things, you need to know what you’re on about properly, rather than just learning it off by heart, repeating the CDs as if you hadn’t listened to them enough already. I mean, he even went so far as to tell me to take the music CDs out of the car, saying they were just distracting me… I attended several of his «meetings» with the higher-ups. They were a right bore. He ended up with a glass in his hand at every single one. A proper bar-crawler. His wife is a prime example of how to envy others without even trying to hide it. What’s more, at every gathering she stood out for the way she let rip. The thing is, whenever she got on a first-name basis with someone from her husband’s ‘fantastic team’, she’d start slagging off whoever it was. A lady to be reckoned with, and one whose tongue is to be feared.

Let’s talk about our upline. A special person, beyond reproach, a genuinely nice bloke like few others, with a big heart, but weak-minded and easily influenced. His wife supported him for a while, until she went her own way career-wise and stopped supporting him. I hope they’re still together as a couple and that «this business» hasn’t put an end to their marriage. And it’s funny, just like my RVP, he’s someone I didn’t know at all before Citisoluciones. I really do hold him in very high regard. And he is, and always will be, welcome in our home; he’s shown he’s got what real people are made of. And that’s what counts.

Let’s talk about our experience.

We had a Regional Sales Manager who NEVER knew how to be a leader. What’s more, he didn’t even respect our work. He would introduce himself to our contacts as the VICE-PRESIDENT of the company, handing out his business card and stepping on our toes. Needless to say, all his attempts ended in failure, with the excuse that he had no experience as a field coach and that he’d already been through it all… as if we were complete idiots. We’re in our early 30s, with a few businesses under our belts, and employees… but as far as the ‘coach’ was concerned, we didn’t know how to lead.

We had a team that was doing well until the manager stepped in and completely ruined it for us. With all that talk of pruning, brain-eaters and fantasies from Merrie Melodies and Looney Tunes, we went from one month to the next without scoring a single goal.

Then came the washing machine… and the realisation that we had to go to Atlanta. By then, we didn’t have a penny to our name; I remember I handed in my notice (and I was the only one working at home), which is when things went pear-shaped. But then again, you can’t live on hopes alone, though they do keep you going a little. By then, my wife was starting to show signs of mental exhaustion regarding the business, even though I remained positive and enthusiastic.

We pulled out all the stops with Santiago and the money turned up for the trip to Atlanta – money for accommodation, food and so on. I remember leaving just four coins at home – a total, absurd and utter blunder worthy of the biggest idiot of them all. In the end, the RVP, in all his ignorance, with a bit of help from his team, got me to Atlanta. That just goes to show I wasn’t as clever as I thought I was.

That’s where we saw «the grandeur of business». Come on, Carmele, that’s where there’s a proper business. Here, we’re just selling life insurance and hypothetical investment plans. And that’s it, no matter how you dress it up.

We spent a week during which I slept very little, ate poorly, drank lots of water and spoke to loads of people. I signed up for everything to do with Hispanic events and a few in English as well – that language isn’t a barrier for me. It was an experience like few others, and one from which I gained a great deal, particularly in terms of perspective.

I came back raring to go. With a clear goal in mind and ready to take on the world. But in my beloved Spain, the harsh reality was that people don’t want something unless they need it. And Spain is different – as the posters with the bull say.

As you might expect, my expectations were sky-high. As the days went by, the initial euphoria gave way to the harsh reality I’d been talking about. And I had to make a decision which, looking back today, I do NOT regret. We put the business on hold, as it was unproductive. We started taking on extra jobs, especially me. When the cart’s already hurtling downhill, with no brakes and out of control, it’s bound to crash. And it didn’t crash thanks to the wonderful partner in our daily lives, who always looks out for the family’s safety and sees what I can’t. Whenever we’ve done things her way, we’ve got it right. Out of a hundred times, I’ve only got it right once. Statistically speaking, and based on experience, if she thinks it’s a good idea, we go for it, as far as we can.

As things stand, we still haven’t managed to get our economy back on its feet… that thing they used to call «the status quo»… for us, it’s enough just to live in peace. And as for the rest, we want that too, but it has to be realistic.

Whilst we were «forced to walk away» from this magnificent opportunity, «the higher-ups» got in touch with us on a couple of occasions. The upline was a true gentleman. As for the RVP… I’m lost for words.

We’ve refreshed our «knowledge». An «exam» designed to keep you sitting on your arse in a chair for two and a half hours, whilst they can’t even get the projector to work, we have to wait for more people to turn up, and in the end, one of the RVPs ends up shouting out the answers so as not to lose «members» (people who pay their way).

What can I say to you, a newcomer, who’s been infected by this spirit of helping others – something so beautiful and humanitarian, yet which hides other intentions behind it? If you want to help, the Red Cross is always looking for volunteers. And if that’s not quite enough for you, any NGO would be happy to welcome you into its ranks.

Take a cold, hard look at whether you’re pursuing your own dreams or, on the contrary, being made to live someone else’s dream as if it were your own. I might sound bitter, but I’m not. I think the business opportunity is brilliant, as long as it really is an opportunity. And if it were like the one I saw in the United States, it would be amazing. In fact, I’d give up what I’m doing now to do what they do over there. But no, this is Spain; here, things don’t arrive when they’re needed, but only when it suits someone.

I always wonder why there’s only one life insurance policy and four bits of investment nonsense, when any other company puts ALL the products it has right in front of you, because let’s cut the nonsense and the brainwashing – a business is there to make money. And if it doesn’t make money, it’s no good. A people-based business… let’s see, it’s not going to be a business based on animals, plants or machines. People are the ones with the money… even though it seems obvious, it took me quite a while to realise that. And that’s despite the fact that this wasn’t my first multi-level marketing scheme, although it was certainly my last.

We spent nearly 20,000 euros whilst we were in business. Between the money we had and what we spent on our credit cards, we ended up bankrupt. I haven’t seen any of those «friends» – the ones with their effusive hugs, pats on the back and interesting stories – knock on my door to ask if we’ve got anything to eat. When that tough moment (the one about food) arrived, it was just us as a family, each of our parents, and nothing else. No recriminations, no nagging, no asking why – just offering us the little that retired parents can. And there you are, after infecting everyone with your dreams and fantasies of becoming a millionaire, sad, poor, wishing you could vanish off the face of the earth, wanting to leave your city to start from scratch somewhere else, with a very unpleasant feeling in your stomach and cursing the day you discovered the «business» that led you to ruin, when the «business» isn’t to blame. The problem is you – you failed to realise that you were lining someone else’s pockets, whilst you were left with the crumbs, if they even let you have those.

That’s how I felt. Thank God my wife – whom I’ll never tire of admiring and trying to understand – is there to tell me just how wonderful our life together is, and that she married a winner. Add to that the support of your whole family – the real one, the one that’s there for who you are and not for what you have – and you’ll realise there’s absolutely no need to jump through anyone’s hoops.

»Thanks to my wife and my family."

The trade unions still haven’t realised what is going on. And the worst thing is that they are manipulating public opinion amongst workers in the worst and most damaging way possible. They neither know nor want to know that this time – and without this setting a precedent – their enemy is not the employers. Nor is it the right wing, nor the banks, nor anyone else to insult or whose image to tarnish in an organised street riot. This time, the enemy of society as a whole – and not just of the working class – is the global crisis we have got ourselves into and from which everyone We are responsible – and so are the workers.

Let anyone who is free from blame for the credit bubble that has led us to this situation cast the first stone (but not at a McDonald’s shop window in any Spanish capital). The entire upper-middle class, middle class and also the lower-middle class (in other words, almost everyone) has been squandering the future over the last decade. As we said last summer:

«…the financos abused the inversopaths; but also the creditors abused hypophiliacs without investor status, which in turn abused their inefficient welfare.»

A inefficient wellbeing (because it fed on rightful wealth) and unrealistic standard of living that we have achieved over the last decade for the majority of the population in the West. We made a upgrade massive from the working class, turning them into the middle class, and from the middle class into the upper-middle class. And to do this, we used money brought in from the future, based on a credit bubble that has now burst in our faces.

But the trade unions (I’m referring at least to the Spanish ones, which are the ones we see every day in the media) haven’t got the message. They still believe that the prosperity we used to enjoy was real. They have believed it just as naively as the majority did, but what is truly serious is that they still fail to react to the harsh reality. «Workers» basic rights«, »the red lines that employers will not be allowed to cross’, etc. are phrases that give them away. Unfortunately, we are not – and will not be – in a position to defend those rights, nor to set limits on the unrest that looms over us all. To think that the companies they work for are going to use the crisis as an excuse to increase their profits in an exploitative and greedy manner is not only ridiculous, but also betrays a very serious and worrying narrow-mindedness and incompetence on the part of trade union leaders. Anyone with half a brain can clearly see that this ‘Mother of All Crises’ is sweeping away a large part of the business fabric of the developed world, and especially in countries such as Spain. It’s proving to be devastating. And the macroeconomic figures that are coming to light, in the wake of events as they unfold, are so shocking that the trade unions should be fighting for redundancy plans of less than 100%, rather than 0%.

In difficult times, it is understandable that the working class – with its limited capacity for analysis and education – might lash out and direct its anger at those who pay their wages. It has always been this way, and not all of us are expected to be able to understand what is happening around us. But trade union leaders must analyse the situation correctly. It is their duty and responsibility to do so and to explain it in a way that is understandable to their members and to everyone within their sphere of influence, which is considerable.

Trade unions are necessary in a growing economy because they must demand improvements rather than allowing corporate profits to rise excessively. And as he rightly said Pau A. Monserrat, they also do a good job in the areas of health and safety and legal advice. But in a downturn such as the current one, amidst the destruction of global wealth, their work must focus on raising awareness amongst the working class, in order to join forces with a business sector that is in grave danger of collapse. To do otherwise is extremely irresponsible and We should be ashamed of the role our trade unions are playing in these difficult times.

We were, and still are, the enemy, and all this kicking and screaming and empty promises – such as a general strike (which we’ll see very soon) or absurd power struggles with employers’ organisations and the Government – are only going to make the situation worse. We’d be better off if we gritted our teeth and stopped looking for bogeymen and enemies amongst business leaders and politicians. The Depression is here to stay, and will remain so until the excesses committed by everyone have been sufficiently purged, and productivity, through time and a great deal of effort, outweighs the destruction of wealth. The burden that the trade unions are placing on society in these times of recession is, and will remain, historically unforgivable. The world has changed, but they have not.

There are still many people who believe that this crisis is nearing its end. Fewer and fewer, it is true, but there are still many who honestly consider the economic forecasts to be accurate. And I am not referring to those of Zapatero, Brown or Berlusconi (whom almost no one believes anymore), with their unspeakable yet undeniable political interests, but to those of the International Monetary Fund IMF, who is currently acting as Jiminy Cricket of the global political class. But the reality—and above all the prospects for the future—are, unfortunately, far bleaker. So much so that they cannot be made public by official bodies such as the IMF or the various central banks. And that is a good thing, since the responsibility borne by certain organisations is far greater than that of governments, and a globalised sense of doom would do little or nothing to aid recovery (or public order).

Organisations such as those mentioned above make up the systemic tissue. Far more than just a head of state, whose government team usually aims merely to see out a term of office with enough influence to stand for re-election. That is why these international organisations lie less than politicians, yet their high responsibility The international situation also prevents them from publicly painting a picture of the harsh reality of the situation.

In today’s globalised world, with its extremely serious financial problems, national governments are not up to the task and are merely playing a supporting role. And the best part is that they are fully aware of this, giving in de facto the overall management of the greatest crisis in the modern economy. In fact, politicians only appear in photos at high-profile summits and little else. The real governance of this global economic collapse is being carried out by: on the one hand, what we might call the major central banks (FED-ECB), the IMF (and perhaps some other economic governing body), second-tier central banks (BOJ, Official Gazette BNS); and on the other hand, the Obama team and the G20. The vast majority of finance ministers, with a few honourable and very rare exceptions, merely watch and learn (some do not even do that).

It is worth noting that politics plays a significant role in these governing bodies, which steer the planet de facto In such a critical global situation, it is minimal. The G20 is more of a framework for apparent decision-making through which the actions of the world’s financial elite are channelled. A mere (though, from the emerging economies’ perspective, extremely interesting) forum with a certain degree of influence. And I don’t think that’s entirely a bad thing, given the state of the political class, despite Sarkozy’s efforts to assume the role of statesman for the EU. Obviously Obama is the exception that proves the rule and the essential (though perhaps insufficient) dose of hope, as he and his political team seem to be the only ones capable of governing in a manner befitting the financial institutions. Perhaps this is because his team is largely made up of people from senior positions in the financial sector, and he has wisely set aside politics as we—those of us who do not lead the world—understand it. That is how it should be, at least during the parliamentary term in which the world fell apart.

If we were to try to govern with a collapsed financial system, we would do ourselves a great deal of harm. And although, hierarchically speaking, governments are supposed to lead the world, in times of crisis we have managed to relegate politicians to a secondary role. Perhaps this is to no one’s credit and they have simply been shown up. Some of you will say that the people have not elected those who de facto they’re steering the ship through a crisis, and that’s true. But the thing is The democracy we have managed to devise is not only unable to to exist without it Not only is it unable to support the system, but it is also incapable of sustaining it. Until we learn to create a form of democracy different from the one we know, it requires a system to underpin it and keep it safe. A system that has collapsed and must be rebuilt by great figures and specialists who will make history behind the scenes and whom, with a few exceptions, we would never find amongst the modern political class.

It has been criticised ad nauseam the stress test for Geithner. The reasoning was that a «litmus test» could only harm the US banking sector and its share prices: if the results showed a general pass, it would highlight the test’s futility and lack of rigour, and the markets would therefore punish this charade. If, on the other hand, the test singled out banks unable to withstand a worsening of the economic situation (which was both inevitable and imminent), these banks would plummet on the stock market, triggering extremely dangerous panic, amid fears of further Lehman Brothers-style collapses that could hardly be tolerated. But this prediction overlooked the fact that transparency also has a price – and a significant one at that.

The projected figures for the worsening of the situation, used in the stress test, are set out in the table below:

We note that, in the least negative scenario, the US economy is projected to contract by -2% in 2009 and to grow by 2.1% in 2010. In the most negative scenario, the economy is projected to contract by -3.3% and recover by 0.5%, respectively. Another variable is unemployment, which affects the general ability to service debts: between 8.4 and 8.9% in 2009 and 8.8 and 10.3% in 2010. We also see the projected fall in property prices (houses): between -14% and -22% for 2009, and between -4% and -7% for 2010.

Some also question the forecasts themselves, but in general the criticism centred on the futility and/or danger of publishing the results. Well, as things stand today (tomorrow is another matter), the effects of publishing the stress test are clear: greater transparency and confidence, which is translating into increased investor support for the major US banks. And that boost in confidence is a godsend for the world’s largest banking system.

As we mentioned last April in The Banking Crisis II and speculation in the US banking sector, the Obama’s bailout plan dispels the possibility of the major banks going bankrupt. The fact is that this possibility of Chapter 11 Until very recently, it was trading at the share prices of the most high-profile US companies. The credibility of that rescue plan, as well as the publication of the results of the litmus test credible and apparently rigorous (despite widespread criticism), have shed light on the future of the major North American banks.

Anything could happen in the markets over the coming months, but the systemic risk posed by the big banks and the spectre of Lehman Brothers are no longer a factor. Now it is «merely» a matter of fine-tuning the valuation of the goodwill and in any capital increases that may take place. However, the irrational and unfundamental value of the US banking system is proving to be the basis for the current share price, as we said last November. All it took was to dispel the spectre of bankruptcy for the shares to trade well above their intrinsic value. We do not see this phenomenon even in sectors as significant as the automotive industry.

The fact is, we are talking about something as vital as money – and the system that manages and creates it. These are such weighty matters that the mere guarantee of the survival of the major banks means that share prices, which previously reflected the risk of these institutions going bankrupt, have now been surpassed. The fundamental value, just like the size… no always It matters.

We are living in times of widespread impoverishment. The collapse of the system, which began in the summer of 2007, is already wiping out most of the wealth of the upper-middle and upper classes. And the worst thing is that It does so to no avail, as this is not a matter of redistribution but rather of a destruction of wealth, of which many of its owners are not even aware.

As we have said time and time again, personal wealth usually consists of three types of assets: Financial, iProperty and business. Well then, The Tsunami of Impoverishment which is beginning to unsettle many wealthy individuals, regardless of the size of their fortunes, is also unfolding at a macabre moment:

1. The first leg One sector of the asset market that has suffered enormous losses is the financial sector, as during late 2007 and throughout 2008, investments in the stock market (including structured products of all kinds) and the misnamed ‘fixed-income’ instruments – such as preference shares and perpetual debt – have suffered colossal losses. In this regard, it is worth noting that investors were unethically pressured by salespeople and intermediaries of all kinds. The greed, a lack of knowledge and common sense did the rest.
2. As far as property is concerned, it is true that prices have already fallen significantly compared with those of a couple of years ago, to which we unconsciously remain tied. However, in our view, we have not yet experienced the sharpest fall in prices. The latent supply arising from the large portfolios of properties that the banks are set to dump onto the market has only just begun. Similarly, multi-property owners, whose income from rents and other sources is being severely eroded, are set to flood the market with properties, a market where demand is – and will remain for many years to come – purely residual. And when that phenomenon occurs and gradually intensifies, we will witness the real collapse in property prices.
3. Finally, corporate profits have also disappeared in many family-run businesses and corporate assets in general. However, the decline in a company’s value is not only due to falling profits, but also to capital losses on its premises and fixed assets in general. Furthermore, the current climate is often forcing companies to make adjustments that go beyond simply reducing staff numbers and costs; we are referring to substantial changes to their business model. And many companies will not be able to achieve this, thereby resulting in a loss of corporate asset value of almost 100%.

The timing of the wealth drain was largely triggered by financial losses, with the slump in property values and capital losses in business assets coming only once the tsunami had hit the coast. In other words, the financial collapse first affected monetary investments, at a time when there was talk that something serious was happening with credit, but society was still only feeling the effects in the bank statements of those who held securities accounts. Instead, it is the severe social decline that will coincide with the massive fall in property and corporate values.

Obviously, if we add up the losses we are going to see (and are already seeing) across the three types of wealth we have defined, the drain on wealth will be overwhelming and will deal a cruel blow to the efforts of a lifetime. However, few will be aware of the severity of their wealth loss because most will only regard the financial loss as such. And that The ‘head-in-the-sand’ approach to wealth management will prevent them from taking the drastic measures needed to stop a lifetime’s work – or even the work of generations – from being destroyed in this major crisis of the 21st century. The ‘heritage haemorrhage’ has only just begun, and the only antidote is the one we have been recommending for the past couple of years: It’s time for cash to prevent a loss of value, and it is also the necessary first step towards taking advantage of the opportunities that the mother of all crises will bring us (and is already bringing us).

P.S. We stand in solidarity with La Bolsa from the Pyrenees against the financial pressure being exerted by Ibercaja to transfer its portfolios to other banks. The worst thing is that these abuses (whether they’re in the small print or not) are condoned by the Bank of Spain. Keep your spirits up, Ramón.

Here’s a puzzle we set you a year ago, and which, unfortunately, has played out in real life time and again throughout 2008 and 2009. I hope you enjoy it and that you’ll point out where our Spanish protagonists’ calculations go wrong.

There are two things that are infinite: human stupidity and the universe. But I’m not so sure about the latter.

Albert Einstein.

It has not even been six months since we wrote the article «The Broken Bank», which later became a meme which was followed by posts from the leading economic bloggers. At that time, I decided that one day I would write the follow-up that I am publishing today, but I never imagined I would do so after just half a year.

As you may have re-read (I recommend you do this to refresh your memory of what I’m about to discuss), six months ago we were looking for arguments to justify the value of a bankrupt banking system. Of course, these are arguments with no real, accounting or fundamental value; some might even say they have no rational value whatsoever. But six months on, with a modest outlook that we will be expanding upon throughout 2009 and, above all, 2010, the political decision to keep the global banking system afloat with public money is now more than just a political decision. Huge cash injections have already been devised and approved for those whose collapse could prove traumatic. In fact, the ‘state-to-bank’ blood transfusion is already flowing through enormous veins the size of gas pipelines, which have been installed to provide service for longer than we could have imagined or would be desirable.

As we said at the time, this political decision stems from our society’s need for a stable banking system that acts as our banking sector in a Global Monopoly in which we wanted to transform the world. Consequently, the survival of the banks is politically guaranteed by their respective governments. All states have the capacity to bail out some of their banks, but bear in mind that only some states have the capacity to rescue their financial system as a whole. Of course, this requires a central bank of their own and a flexible currency, and the clearest example of this is the US.

In this context, we might conclude that the major banks that make up the core of the financial systems of those powerful and capable states are, in all likelihood, set to survive. In other words, the chances of a second Lehman Brothers occurring are negligible in the short and medium term.

Let’s now recall what we said in «The Broken Bank«: There were too many (perhaps irrational) reasons why the valuations of the major banks in a country like the US would not fall to zero. The risk of collapse has now passed, and the foundations for ridding their balance sheets of the toxic assets that still plague them were laid in a Obama’s public-private rescue plan at the expense of the FDIC (Federal Deposit Insurance Corporation), that is, from state funds. It is true that bids for the toxic assets arising from the bailout plan will be based on private rather than public criteria, but that does not guarantee that the process will be rigorous. Nothing will prevent the banks themselves from, under the guise of independent organisations, act as «private investors» and value those assets at prices high enough to inject sums into their balance sheets that will breathe new life into them. With varying degrees of abuse or discretion, but with a vampiric ability to guarantee the stability of the system. Let’s look at it from the other side: what is not going to happen is that the private entities bidding for the assets will do so at such unreasonably low levels as to cause the failure of certain banks that are meant to guarantee the stability of the system and are the very essence of it. And those private organisations will be as opaque and have such hidden agendas as is necessary to ensure that their proposals are, at the very least, enough to shore up the balance sheets of the major US banks. For every million $, only 3% will actually be at risk from private investment, with the remainder comprising up to 20% in public funds and 80% belonging to the FDIC on a «non-recourse» basis. In other words, the 3% of private capital will bear no liability for the remainder of the money invested should the purchased assets prove to be insolvent.

What we mean by all this is that If we’re thinking of a high-risk speculative investment, perhaps now is the time to buy shares in major US banks which are set to benefit from a pseudo-private bailout scheme, but which will use vast amounts of public funds – effectively as grants – that definitively ward off the risk of bankruptcy. We may well continue to see capital increases that indefinitely weigh down the share price of certain financial sector stocks. But it is also reasonable to assume that the risk to our investment is no longer that the share price will fall to zero, but rather that it will remain undervalued for years. On the other hand, the potential for an upturn, should the toxic assets be sold to a willing buyer – whether genuine or artificially created – is there, more so than ever before in the short history of this financial crisis. And let us remember that the goodwill from the major US banks («a set of intangible or non-material elements of the company that represent value to it»), remains unique amongst those we can find in the listed market. And that very special rescue plan is a intangible asset a real showstopper – and not the only one.

Just six months ago, the ground gave way beneath the global banking system. And today, they are once again standing on ground which, whilst far from solid, might lead us to consider that sector for our more speculative investments. But be careful: this applies only in the US and/or to those institutions whose states meet the requirements mentioned above.

As for RF emissions from those same organisations, if there are any, doubts remain. But that is a topic for another article.