Cluster Family Office Blog

The US Financial Accounting Standards Board (US FASB) met on 13 March to discuss the possible adjustment of the valuation criteria Mark-to-Market (MTM or M2M) in illiquid markets such as the current one. In other words, a euphemism for allowing asset valuations to be manipulated to suit the balance sheets banking, which is what really gets under the System’s skin.

For a company, however large and influential it may be, to go into technical default due to a fall in the value of its assets is a sustainable crisis, since, after all, «only»It wipes out jobs. But when a major bank does this, it not only leaves its own employees out of work but also drags down other banks linked to it in this financial house of cards. Furthermore, these failed strategies undermine confidence both within and outside the banking sector, thereby making it impossible for the entire system to continue functioning.

It’s now been a year since we explained in this article the recipe for Paul Craig Roberts to put an end to what was then known as the subprime credit crisis. Simple, yet at the same time as effective and dangerous as we care to believe. Valuing assets at the desired market price virtually solves the problems posed by scenarios such as the current one. On the other hand, if we value them at real market prices, the cascade of bankruptcies is so extensive and affects such vital institutions as those that make up the core of the banking system, which could bring down the capitalist system itself. But beware, This virtual path takes us away from reality, perhaps never to return for generations.

The dangers of departing from real market prices in turbulent times are obvious and very serious. That is why, until now, there has been a reluctance to value assets at a price higher than that indicated by the market. The preference has been to maintain accounting rigour, the principle of prudence and the mark-to-market. The decision has been made to to intervene and/or rescue through massive cash injections to stabilise the balance sheets of those whose collapse would be unacceptable and dangerous. But what happens if the markets continue to fall and the book values M2M of the assets mean that even the bailouts most scandalous in history? Well, it seems we’ll have to review and make some allowances in our assessment criteria: On 10 March, Ben Bernanke he said that Regulatory practices and accounting principles should be reviewed to ensure that they do not lead to excessive volatility in the financial system and the economy. And let us remember that Bernanke was one of those who opposed the suspension of the M2M or MTM criteria, but he is now prepared to «improve them»and to develop new, reasonable methods of asset valuation that mitigate the harmful effects which in turn exacerbate market illiquidity. In short, it is a «No, but maybe yes»which is considering lifting the ban on a one-off basis and in a very controlled manner (let’s hope so).". Wherever a vital bailout cannot reach, the books will be balanced by force.

Is it a good solution? Certainly not. But as we haven’t been in a position to demand anything for a year and a half now, it may once again be a lesser evil, such as the socialisation of losses or the partial nationalisation of the financial system (and, paradoxically, we are not referring to the latest bluster (under Chávez). Such leniency will be a lifeline for many macroeconomic balances that are doomed to collapse unless a miracle occurs. But it means setting out on an extremely dangerous path, albeit one that has been familiar since 1938, when Franklin Delano Roosevelt It suspended the aforementioned valuation criterion. In 2007, the M2M was reinstated in the wake of the Enron scandal, which prioritised transparency over rigour. No one could have imagined that what we have witnessed over the past two years could happen, and that today the M2M could stifle the system. Are not the following also extremely dangerous? bailouts at everyone’s expense?

Here’s a «A history lesson on mark-to-market» from the Financial Times’ Alphaville blog. The most regrettable thing is that the debate over whether or not to maintain the M2M is being exploited for political ends at such a delicate time for the world as this.

Personally, I find it hard to guess how investors will value a company which has been allowed to record its assets on its balance sheets without reflecting their market value. But as we have already said, we may be in such a precarious situation that this might once again be the lesser of two evils. Come to think of it, if we nationalise banks, bail out governments and central banks buy up debt, why on earth should we be shocked if balance sheets do not reflect market prices? After all, there are few absolute truths left in the world as we knew it.

We can see it all, we can accept it all, we can believe it all. But we will never be the same again. There was a ‘before’ and there will be an ‘after’ to this global Great Depression, even though many people are concerned only with whether the stock market charts are more or less severe than the historical charts of the 20th century.

Nobel against blah, blah, blah… That’s how some people on YouTube see it:

This time it is the CHF that is depreciating against the other currencies, particularly against the long-suffering EUR. The movement has been so dramatic that the political decision behind it seems clear. Perhaps it is the Swiss government’s retaliation against the EU for having forced them to relax banking secrecy time and again; or perhaps it is simply the sheer necessity of an economy under pressure from this brutal crisis, which seems almost endless.

In any case, this is a clear statement of intent from the CHF, which is effectively devaluing the currency in full view of the public. Whether the market will allow this to continue in the future is another matter.

And so another one is added to the list of the clever ones in the new The Era of Devaluations. As we said in that article, the counterpart is always the same inflatable doll: the euro. A dirty, well-worn doll that’s been over-inflated. It would be highly advisable to deflate it properly to ease the strain on its peripheral seams, which are already threatening to burst.

The pound sterling has been taking a more low-key (yet highly effective) approach, but Switzerland has made its move loud and clear. Any political retaliation from the EU and/or the US will be minimal, if there is any at all. But such blatant moves provide ammunition to those who have systematically intervened in their currency on political grounds, disregarding market forces. We are referring, of course, to China, which we can hardly accuse vehemently and effectively of something that Switzerland itself is carrying out. Yet another name to add to the list of ‘clever ones’, providing interventionist and protectionist arguments to anyone who needs them to justify economic, political, nationalist and unilateral moves.

And what about the USD? Will it continue to act as a reliable counterpart, or will it return to the list of the clever ones at 1.65 $ per euro? Many would say that the euro cannot hold its own on its own, come what may. Anyone’s wrist would eventually give way….

It is interesting to track the trend shown in the chart depicting the four most significant market crashes of the last 100 years. As we mentioned in Poker of the Best Players, in the following chart from dshort.com we can see how these four most devastating moments in the modern history of the global economy have unfolded over time, or Four naughty bears. In it, we can see four colours corresponding to the downward trends of:

As we can see, We followed the path faithfully towards the elephant graveyard of the Great Depression of the 1930s.

Furthermore, the chart below shows that the current price of the S&P 500 has already fallen back to levels last seen 12 years ago.

But worst of all is that the current situation in the US is one of deep recession, as we can see from the following chart:

It shows the number of US states experiencing economic growth. In other words, virtually all states are in recession. Obviously, the rest of the Western world will follow the lead of the American economy, and against this backdrop of deep depression, the foreseeable trend indicated by the first two charts in this article is chilling. And we must not forget this exercise in analysing the economic environment, as it is very different to analyse current and future macroeconomic figures and forecasts for a foreseeable scenario expansive than for one person depressive.

We have all been born and raised in an environment of economic expansion, with its downturns, but expansionary nonetheless. Not even our parents and grandparents lived through essentially recessionary economies (except for the 1930s, which ended with the outbreak of war). We must therefore make a special effort to analyse the present and the future without forgetting that the breeding ground – the world before us – is unknown Apache territory which will severely hamper the known prospects of recovery.

In keeping with the original idea of Unience so that we financial bloggers can put questions to President Zapatero. Here’s ours:

As an additional guest at the meetings of the G20, Do you sincerely believe that the leaders of those countries, together with the various representatives of the economic bodies that make up the group, have the capacity to coordinate effective responses to the global financial collapse? Or, on the contrary, do you believe that an effective response will come solely from those countries that have the inherent capacity to recover? Perhaps we are simply faced with yet another ineffective political and economic bureaucracy. Although I would prefer to believe that the G20 meetings could give rise to the embryo of a future global governing body for the economic system – one that is far more dynamic, effective and capable of decision-making than the UN or the IMF.

I’m sorry for the delay, Vicente.

Below is a letter recently taken from lacartadelabolsa.com. It strikes me as an account of a situation that may be more common than we care to believe. At the end of the letter, I’ll share some interesting thoughts, and I look forward to hearing your views and comments. Here is the letter from Iñaki in Pamplona:

This is not about debating whether Mr Iñaki is right or wrong, or whether he will lose more or less as a result of his fund manager’s decision. What strikes us as telling is the radical shift in tone being adopted by some equity fund managers. These are changes typical of an impending stock market collapse, but we must approach them with the caution of someone treading on unknown and unexplored territory: the Great Depression of this century and a radical overhaul of the global financial and economic system. It is also curious to see how the manager’s rhetoric changes radically whilst the investor remains, at the very least, anchored in scepticism, a victim of the accumulation of so many optimistic statements from this manager and others who live off the commissions generated by trading Iñaki’s assets. For months on end, they have sought to justify the losses with optimistic and positive visions of the future. Then they continued with the wait and see… but wait inside. To many of us, these arguments seemed unbelievable and damaging, because so many investors believed them—and continue to believe them. To the point where they have acted in line with what they have been told over and over again, only to end up angry and confused when their fund manager gives in—not to the market, but to honesty. The anger is the least of it, because at the end of the day, Iñaki could buy back his entire portfolio today at even better prices. But what really outrages him, and rightly so, is feeling disoriented and duped when one suddenly realises that he was the only one who truly believed the arguments of his «trusted manager».

We don’t know what the stock market will do in the future, of course, nor whether that fund manager will get it right or not, having sold the equity portfolio to Mr Iñaki. To err is human. But at this point, it’s clear that their relationship hasn’t been transparent or honest enough. That’s why, all of a sudden, their paths have diverged completely, and the ground is shifting beneath the feet of an angry Iñaki. What do you think?

A few days ago, a comment was posted on our article entitled «Banking instructions»which, given its content, we have chosen to publish and respond to in the form of an article. It is a comment that may well reflect the views of many of our readers. And that is why we wish to give it prominence – both the comment itself and our thoughts on the matter. This is the text DJ sent us:

«A very interesting post – perhaps because of the increasingly clear and numerous clues you’re giving us, and the points you’re drawing our attention to so that we can take them into account when designing our strategy and our ‘life balance’, as you put it.”.

If I may, regarding your criticism of the banking sector, I don’t think there’s any need for your constant attacks on the sector or your staunch defence of independent advisers. Generalisations have never been a good thing and, in the end, the innocent end up paying for the sins of the guilty. In my view, there are good and bad professionals everywhere, both within and outside the banking sector; you need only look around you, wherever you go. Or were all your classmates equally good? Or are all family offices equally trustworthy? Or have all the teams you’ve been part of been exemplary? If that were the case, there would be no room for differentiation, nor for specialisation, nor for the highly personal contribution that some professionals make.

Having said that – and I hope you haven’t found this a chore to read and that you’ll take it constructively – I would focus more on your strengths – which you do have, and which you are sometimes keen to show us – rather than on criticism and the shortcomings of others, in this case the banking sector and all those who work in it or have worked there at some point and have been looking for work for the past few weeks, like so many others. By the same token, we could also talk about the property sector and those who still work or have ever worked in it, and so on with all the sectors where we have at some point witnessed or directly suffered from difficult situations, whether personal or professional. Mobile telephony, perhaps? Rest assured about customers – both current and potential – whether acting on their own or with help from others, in the exercise of their freedom; and especially now, given the state of the economy, they surely know how to choose where to go and what sort of adviser is best for them, should the need arise.

And let one thing be clear. I don’t work in banking, nor have I ever done so, nor do I intend to in the future. It’s simply that I sometimes miss a more constructive attitude, building on what you’re good at, on the contributions you can make, on the value you can add to what already exists and is within the reach of many, and which you’re willing to share selflessly through your blog, as you told us, without needing to pay so much attention – just the right amount – to what, in your view, and sometimes quite rightly, others are doing badly. It’s just my opinion.»

DJ

First of all, I’d like to thank you very sincerely for your comment, DJ. Those of us who write in public forums such as this one need those feedback to take a step back and assess whether our readers are actually receiving the messages we intend to send them and believe we are sending. This is not always the case, of course. Sometimes, as in this case, we mean one thing but are understood to mean another. And if the misunderstanding is widespread, there’s no doubt that the error lies with the sender, and rather than a misunderstanding, we should call it poorly explained.

Let’s see if I can put our feelings into words. We don’t want to bash the banks or launch constant attacks, let alone defend independent advisers. Among both groups there are good and bad professionals. And some absolutely dreadful ones too. We’re not dealing with a dichotomy between the good (independent advisers) and the bad (bankers) at all. We’re not even aware of having consistently defended the advisers freelance.

We should not confuse independent advisers with multi-family offices, as the former tend to meet only some of the needs associated with a portfolio (financial advisers, estate agents, tax advisers, solicitors, administrative managers, consultants, etc.). As for the multi-family offices, I must say that there is a great deal of distortion and many pseudo-professionals who are simply jumping on the bandwagon of simplistic and empty marketing. We have never succumbed to corporatism and have never hesitated to engage in constructive self-criticism. MFOs originating from the banking sector mostly fall prey to the same errors and shortcomings as private banks: a lack of independence and a disregard for, or failure to provide competent attention to, non-financial assets, as well as non-banking services. For their part, MFOs originating from law firms tend to suffer from the opposite shortcomings, namely: an overemphasis on legal services with unnecessarily large and expensive, bloated structures; and a lack of competent attention to other types of assets such as corporate, property or financial assets, although the latter are often pseudo-covered by recruiting staff from the banking sector, to which they remain closely tied and spiritually Most of them are linked. Personally, I prefer MFOs that have evolved from SFOs (Single Family Offices), that is to say, multidisciplinary professionals who have previously managed the wealth of a single family and who have now extended their activities and services to a professional firm that accepts and serves multiple clients with medium and lower levels of wealth. This background means that commercial considerations can, in certain circumstances, be set aside in this type of firm. We are aware of a few such firms in Spain, and we count ourselves amongst them. In our specific case, we also offer the creation ad hoc from Single Family Offices «turnkey’ »on an ad hoc basis' for larger estates that do not yet have their own SFO.

As for the banking sector, I’ll tell you that there are some truly outstanding, ethical and honest professionals working there. But we mustn’t forget that they work towards one overriding and primary objective: The commercial interests of the organisation that pays their salary and will help them progress financially and professionally over time. Good, competent and honest professionals can never put their clients’ interests before those of the organisation they work for. We could say that they will only look after their clients’ interests in a wholly secondary manner, always subject to the bank’s interests. The greater the satisfaction provided to the customer, the more customers the bank will have, but without in any way neglecting the operating profit per customer. In other words, there is no point in having many customers if they do not generate profits for the bank. And it is under this fundamental principle that all the corporate structures and commercial mechanisms within a bank operate. The benchmarks The minimum sales targets that bank staff are required to meet have been, and continue to be, stifling, and are never compatible with the customer’s interests. The question is: what can a banking professional’s ethics and honesty achieve under such pressure? A lot. In other words, it can either maintain its integrity or succumb to indiscriminate commercialisation and the pursuit of personal career progression within the organisation. If a banking professional generates greater profits and achieves better results than their colleague, the bank will reward them with higher financial incentives and they will rise further up the organisational hierarchy. It is a perverse system (like so many others) in which management positions are attained by those who have been able to generate greater profits for the organisation, and the cycle repeats itself and feeds into a negative feedback loop It is clear. We do not wish to criticise any banking professionals; we simply wish to highlight that, in most cases, their interests only coincide with those of their clients by pure chance. And from our position as Multi-FO, we see the terrible consequences suffered by those who have placed their trust solely in them, particularly in times as difficult as these.

We will rarely find a relationship win-win between banks and their customers. And the proof is that, whenever we intervene – and I mean whenever – this relationship improves in the customer’s favour in the short term. In the medium and long term, a genuine relationship is usually established as well win-win, since when the bank accepts that it will earn less from that customer, it is usually compensated by an increase in volume. In other words, the bank will change «mass-based rates«, as our clients see their wealth grow and/or transform, leading to an increase in their financial assets, even in the short or medium term. When banking professionals come to understand this – and also our role as financial advisers – they relax, and working together becomes much more pleasant and productive for both parties: the client (financial adviser) and the bank. In many cases, they open up off the record enviing our work in a healthy sort of way. Hats off to these honest and competent banking professionals – there are plenty of them out there. It’s a pleasure to work with them, despite the insurmountable barriers that separate the nature of their work from ours.

Unfortunately, other bankers are simply incapable of understanding our work, regardless of whether they make an effort to do so (or not). Their personal background and professional bias are far too removed from the concepts that a financial adviser handles, or ought to handle. As you will appreciate, in many cases mediocrity and/or commercial short-sightedness prevent some bankers from moving away from their tendency to squeeze their clients, and they never come to see us as productive partners or representatives of the clients. It is in these cases – which occur more frequently than would be desirable – that we tend to find dramatic situations. Our firm handles many cases that go even beyond a lack of ethics and honesty on the part of banks. Perhaps it is our own professional bias – the result of what we see on a day-to-day basis – that leads us to write in an excessive, sweeping and even unfair manner, denouncing malpractice and cases that really get under our skin. We apologise for this. We simply aim to ensure that our readers remain vigilant and realise that these things happen every day. We constantly see poor choices being made when it comes to advisers, both within and outside the banking sector (and, of course, people pay for this service; otherwise, the choice is typically made by a third party and is essentially unrelated to, or even contrary to, the investor’s interests – with the exception of purely philanthropic advice, of course). As you quite rightly say, «in exercising their freedom», some made the wrong choice, and as a result the current difficult economic climate has wiped out much of the wealth they had just a year or two ago. It’s by no means easy, and we simply aim to help ensure that the cases we constantly come across are nothing more than regrettable exceptions in the future.

DJ, I’d like to reiterate my thanks for your comment, as it allows us to understand what we actually convey, rather than what we think we convey. I sincerely hope that we have taken this opportunity to clarify matters and apologise for the excesses committed in our eagerness to expose practices that should have been nipped in the bud and which should never have occurred in the first place.

P.S. We wanted to illustrate this article with a few jokes about financial advisers, to take the edge off things a bit and have a laugh at ourselves.

As we mentioned in a comment on the article «Mortgage socialisation and »Bad Owners’’, we recently held a meeting with Triodos Bank. It is a curious bank which, despite being registered like any other bank, has certain distinctive features that set it apart from commercial banking – that is to say, from the rest.

To begin with, it is a bank of Dutch origin with a 28-year history, which works exclusively with and for projects that meet the criteria of promoting:

1. Nature and the environment.
2. Social sector.
3. Culture.

In other words, in order to finance a project using its customers’ money (which has been leveraged, as is the case in the rest of the banking sector), it must meet the following requirements:

1. To identify sustainable sectors in which to support the development and consolidation of innovative businesses and projects, by establishing positive funding criteria.
2. It should select specific initiatives that benefit society, in which the social, environmental and cultural added value is just as important as the financial and commercial value.
3. Ensure that each project, selected on the basis of a positive approach, is checked against the bank’s exclusion criteria.
4. These should be clearly identified activities, projects or assets within each organisation.

Another of the most striking features of this bank is that deposit account holders can only deposit their money to earn interest in accordance with the account types and interest rates set by the bank. In other words, it is not possible to invest in a portfolio of fixed-income or equity securities, nor in any fund or investment vehicle other than those offered by Triodos Bank itself. Why? Because investing in shares, fixed-income securities or any other type of investment managed by third parties does not ensure compliance with the aforementioned criteria regarding business activities, financing and investment.

This phenomenon means that the bank is merely a piggy bank into which money is deposited so that it can be lent out in accordance with the bank’s rigorous, pre-established criteria, thereby reassuring its customers that their money is being used to finance sustainable projects. Investment banking clearly has no place in this institution. But what is truly striking is that it does not even have much in common with commercial banking.

As regards mortgage lending, we were told that, until recently, they only provided mortgages for the purchase of properties that had been built to specific environmental and sustainability standards. Subsequently, they have gradually relaxed this policy to allow loans for any property for those who were already Triodos customers. They also require that a small portion of the funding be used to carry out a study aimed at making improvements to the property. These improvements must make the property more compliant with the sustainability criteria established for property financing. Of course, they have never exceeded 80% of the valuation, nor have they included any other type of financing for mortgage costs or consumer spending.

In short, we thought it was something of a rarity in the world of banking. A bit like a return to the roots of banking: simple, basic, sustainable… and safe?

The slogans have changed. But they’re still just slogans. Whereas they used to say you should invest between 30 and 45% in the stock market, today some have already given in to the pressure and are announcing that the stock market is currently at «casino mode» (or do they mean tiresome?). But I fear that this isn’t even an attempt to find good investment alternatives; rather, they have simply found a way to explain how they are going to replace that now-defunct source of commission. Something along the lines of: What’s selling at the moment? What are customers willing to buy? If they no longer want this or that, what can we offer them that will capture their interest and pull them out of this deadlock? IPF? (pointless for the bank, of course). This is, of course, a far cry from the principle of selecting investments solely in the client’s best interests, which any self-respecting adviser ought to apply.

It is no longer marketable today anti-crisis package (sic) just as It was introduced to us last summer (and it’s only been six months!). Because hardly anyone whose assets are largely concentrated in a single portfolio wants even half or a third of them at risk in the stock market, let alone, of course, a 15% or a 20% in alternative investments, after what we’ve seen in Bernie’s pyramids and others, which, after all, were never anything other than lavish tombs for investment pharaohs Braille. It was therefore necessary to seek marketable strategies that would put an end to the drought in banking income caused by the dominance of fixed-term deposits offering interest rates in excess of 4%. The latest trend is the argument that there are real diamonds in the rough in the RF. And they are not wrong. But there are just as many, if not more, in the equity market, with companies whose book value is double their market capitalisation. And of course, if we are talking about preference shares, subordinated bonds and perpetual bonds as fixed-income instruments, We could also agree that they are in «casino mode«. And on top of that, there’s the added difficulty of the lack of transparency in exchange rates, which are allowing all the banks’ trading desks to make a killing, raking in a fortune.

For all these reasons, Where are we going to find the source code that will help us make sense of the jumble of opportunities that are opportunistically «select»The banking sector, through its slogans? We must look within ourselves for the answer. And I’m not referring to each person’s ability to learn about finance (that expertise (It is true that this can be outsourced, as such services do exist), but rather to the personal circumstances of each estate. Depending on these circumstances, we will devise a wealth management strategy which may or may not incorporate a range of investment types and time horizons. And we will do so without losing sight of two essential objectives: the sound long-term growth of wealth and the creation of happiness for the owners.

As we have said on previous occasions, investment strategies should not be prescribed without taking into account each investor’s individual circumstances: Without knowing whether those financial assets held with a particular bank represent a significant or negligible proportion of their total wealth, whether they hold a large or small amount of property, whether they receive fixed, property-related, corporate or employment-related income of varying amounts, whether their ability to save is non-existent or substantial, whether their household expenditure is substantial or frugal in relation to their assets, whether they make charitable donations, whether their family circumstances involve increasing financial obligations such as caring for the sick and/or the elderly, whether their focus is on wealth growth, in investments of one sort or another, or in the enjoyment of their resources; whether their life goals are achievable given their current financial circumstances; whether they wish to bequeath their assets in one way or another (a whole other world); whether they have a greater or lesser aversion to taxation (yet another world), and a very long etc.. However, bank accounts – whilst being just that, accounts – only take into account the financial standing of their customers within the financial institution itself. They systematically ignore property and business assets, and of course they couldn’t care less about their future growth, unless they might one day be converted into cash and boost the bank balance at the institution they work for.

A few days ago, the regional manager of a private bank told me he was feeling very disheartened because he had just visited a «an 11-kilo customer» (that family probably had a much larger fortune, but that was none of his business), which was only to be held in deposits for a year and didn’t even require significant interest rates. The regional director looked very disheartened; he’s probably being eaten alive by the benchmarks of the profit and loss targets he must meet. And if he fails to do so, the bank may take drastic measures that would not go down well with the branches he manages. He went on to tell me, in a thoroughly dejected tone:

-«He told me that, when it comes to deposits, he doesn’t need any adviser to fill his head with nonsense, and he’s asked me not to ring him to suggest any more investment options. As a family office, you must find yourselves in the same situation, don’t you?».

I replied, for the umpteenth time, with all the warmth and tact I could muster:

-«Your work and ours, my dear friend, are not exactly the same…»

When it comes to criteria and vision in wealth management, there remains a gulf between almost all advisers and high-net-worth individuals which, regrettably, in most cases is only bridged when both roles are held by the same person. But of course, they do not usually work in banking. And if they do, they tend to be in offices and suites inaccessible to clients and/or simply have no interest in other people’s wealth. Only the essence of the Wealth Management Advice, in its various corporate forms, can meet this enormous existing need, which in the current climate has become a vital necessity.

What happens to a bank where more than 15% of all its mortgages have gone into nnegative equityIn other words, the outstanding mortgage loans exceed the current value of the properties securing them, thereby creating a huge hole in their balance sheets. The answer may be taboo, but it is also logical: these banks need urgent external assistance to stay afloat.

This is the situation facing organisations such as the group Lloyds and HBOS, although I fear there would be many more than those reported if property valuations were updated rigorously and realistically. Worst of all, this situation will get much worse, as property prices will continue to fall sharply. It cannot be otherwise. The growing number of repossessions won’t be swept under the carpet because the banks urgently need to turn them into cash. They will therefore come onto the market, thereby multiplying the supply of property. And when that happens, prices can only go in one direction. I recommend you re-read this article from last November entitled «Investing During a Recession and Depression», because it is just as relevant as it was on the first day, even though four months have passed.

Despite this evidence (if indeed we can consider any future economic outcome to be evident), there are many property owners who are not under financial pressure and who refuse to sell, thereby avoiding future capital losses. And the official reason they give for not wanting to sell their properties is the current rental income they receive, as almost everyone now agrees that capital gains on property are too far off in the future to influence that decision. If we calculate the return obtained from rental income using the current market value that we would achieve through a sale today, in many cases the returns exceed 8%. On paper, we would say that these are more than sound property investments and that it would not be easy to find financial alternatives safe to achieve those figures. But be careful: we must bear in mind all the risks involved. As we said in «Doctor, I own some property – is that a problem?»: In the current economic downturn, the likelihood of a property standing vacant or of facing rent arrears increases significantly. We will need to tread very carefully to ensure we can rest easy in the medium term with the tenant occupying our properties and paying their rent on time. Their business and/or household finances are also likely to be affected by the crisis, making it difficult for them to continue as a tenant, or at least as a solvent tenant. We must also be aware that the supply of properties to let will increase: investors buying properties so-called bargains properties put up for rent to generate income (a risky practice in a falling market unless the properties are of the very highest quality), second and third homes whose owners need to let them out and which until now had been kept for their own use, property developments that were repurposed during construction due to the foreseeable difficulty in selling them, individuals less burdened by debt who are entering the rental market in the hope that sale prices will once again reach the value at which they have mentally anchored themselves, as well as those entering the rental market following initial bank repossession proceedings.

Of course, the sale price will also fall. And in the future, we will still be able to carry out some profitability calculations, combining the head-in-the-sand attitude and a vision rooted in the Disneyland where we’re coming from, if our tenant continues to pay us rent at current levels, whilst prices fall by a further 30%. Some may well achieve double-digit returns with remarkable ease. But let’s not kid ourselves: this situation will be temporary and unstable, and will seek to rebalance itself through a fall in rents, as we cannot envisage property prices rising whilst the recession is still with us. It is a phenomenon comparable to what has happened with bank dividends (SAN.MC) in relation to their share price. This is somewhat unstable, circumstantial and temporary, although in the case of the banks, the aim is to prolong this imbalance in a desperate attempt to regain the confidence of shareholders.

Even so, some investors continue to buy shares based on past dividends, just as others seek property investments based on rents that are also on the wane. But they should not forget that the market tends to rebalancing and that Darwin will be the judge the survival of their assets without favouring them over others with different asset investment criteria. In the short to medium term, when that rebalancing occurs, those property assets will have declined almost as much as certain financial investments or business assets in times of crisis. We strongly recommend planning your strategy and wealth progression (in its three usual forms: financial, property and business) for the medium and long term. These are very difficult times for those who fail to do so.