Cluster Family Office Blog

In the following graph from dshort.com We can see how the four most devastating crashes in the modern history of the global economy have unfolded over time. The chart shows four colours corresponding to the downward trends of:

1. The Oil Crisis from 11 January 1973 to 3 October 1974.
2. This is the dot-com crash, which lasted from 24 March 2000 to 9 October 2002.
3. The Crash of '29 and the Great Depression, from 3 September 1929 to 8 July 1932.
4. The collapse of the current credit bubble, from 9 October 2007 until an as yet undetermined date in the future.

It should be noted that the graph shows, on the vertical axis, the percentage decline from the benchmark index’s previous high. Meanwhile, the horizontal axis shows the duration of these falls, with the figures corresponding to trading days. It should also be noted that the Crash of ’29 is based on the Dow, whilst the other three are based on the S&P 500.

What conclusions can we draw from this chart? For example, we have now seen a 50% decline in as few trading sessions as occurred during the Crash of ’29, whereas the other two declines took many more weeks to unfold. In other words, the steepness of this fall is, so far, only comparable to that of 1929.

On the other hand, we must also bear in mind that the cause of the current crisis is not confined to a specific sector, as was the case in 1973, namely the energy sector (an interesting article from 1975 on the subject), or in 2000, technological (El Mundo’s 2000 Year in Review). As we have mentioned on previous occasions We are facing a multifaceted crisis involving deleveraging and a liquidity trap on an unprecedented scale. Moreover, in a world that is more globalised than ever before, and of course in no way comparable to what happened in 1929.

We should also bear in mind that the chart of the 1929 crash only depicts the main bear market cycle from 1929 to 1932. Under no circumstances can we limit the effects of the Great Depression to the 800 trading sessions covered by the chart, as we must remember that it represents the percentage decline from the previous high. But the harsh reality of the Great Depression lasted right up until the US entered the Second World War following the attack on Pearl Harbour. Therefore, if we compare the current situation with what we see in the 1929 chart, the current depression could last far beyond the 800 sessions shown. And I am not suggesting that we will see a continuous market decline like that of the 1929–1932 period (although we are well on the way to it), but rather that even with intermittent, slight and fleeting price recoveries, the period during which we will be traversing a desert of bullish financial investments may be even much longer than what we see in this simple chart.

Our current economic downturn is without parallel, and so this comparative exercise is highly speculative; however, we should bear in mind that the 800- or 1,000-session period shown in this chart represents nothing more than a single phase of the Great Depression of 1929. And as we have already said, the current crisis is underpinned by unprecedented factors that could make the depression even deeper and longer. However, the current wave of globalisation may have harmful effects by amplifying and prolonging the crisis, as has been the case so far, or, conversely, it may play a decisive role in bringing about a much swifter and more remarkable recovery. Only time will tell.

In the meantime, we should be highly sceptical of predictions of an imminent recovery based on absurd cyclical statistics, drawn from the past and/or recent times, from when the world was capitalist. Today we still do not know what to call the direction we are heading in, but it is something else, a new era where liquidity seems to be the only currency in circulation so far.

Traditionally, the currencies of economies under strain have depreciated against those of stronger countries facing fewer problems. This monetary policy has often come to the rescue in economic situations where countries were on the brink of collapse. It has served as a safety valve inbred when the pressure had become unbearable or highly dangerous. It was an unwritten rule for countries that had not behaved themselves, had not done their homework, or had simply been unable to keep pace with the growth and economic discipline of their neighbours, whose economies were more advanced and sound. Economy ministers have always known that: Before you go down the drain, you lose value but keep playing. In other words, what we would call today a downgrade of a country’s entire economy, but with a certain Outlook positive.

But that was in a bygone era, when every state had its own currency, its own ammunition to be detonated at the whim of its government. The rest—the real powers—heard the explosions in the distance, notched another mark on the handle of their economies, and carried on with their own business.

Today, globalisation has led us to a fully interconnected world, where there are only two major currencies (USD and EUR) and a couple of secondary ones (the yen and the pound). The rest are mere speculative sideshows (with apologies to the CHF or the Yuan and their artificial exchange rates). In this modern landscape, moreover, finance is more interconnected than ever. And we have seen this play out disastrously with the global spread of toxic assets. The global credit crisis has spiralled into a liquidity trap that it seems we will only be able to alleviate by inflating against the clock amidst a crushing depression.

At this point, I hear (read) some voices nostalgically calling for the peseta to be devalued, just as we used to do in the old days when things took a turn for the worse. The very Paul Krugman laments in his NYT blog that Spain cannot devalue. But doing so during a recession is not the same as doing so during an economic boom; it is not the same to devalue when debt levels are moderate as it is to do so unilaterally under the current circumstances M3, not at all (Note that the following chart covers the pre-crash period, i.e. up to June 2006). Who would want to invest in Spain by buying debt that could depreciate in an environment where that is not possible? And if that funding drain were to occur, Spain would be unable to finance itself at a critical moment. Improving our export capacity would be of no use whatsoever, because our economy would already be dead in the water.

Even so, some people recklessly lament the flexibility that a national currency offered in a 20th-century economy. But I don't think so, dit would no longer be feasible to assess, and not just because the euro has replaced the peseta or because it would deter investment. But also because if the EU as a whole were to devalue the euro, it would only make sense to do so against the $. Let me explain: to devalue a currency, it must be done in relation to others that serve as benchmarks – the currencies that lead the economy of the region. Nowadays, globalisation means we can no longer talk in terms of zones, regions or states; we must now adopt a global economic perspective. Therefore, when considering devaluing a currency, we must first identify at whose expense we are going to devalue it. And here we face the big problem: Which are the global benchmark currencies, the benchmark against which to devalue? Who is the dominant power, the driving force of the world today? We would never have thought that these questions might cause us to doubt, would we?

To those who believe that the world’s number one currency is the US dollar, and that the US economy remains the leading one, I would say that there are probably no better options than that, but that we arrived too late. The gradual devaluation – if we can call it that – that we have seen in recent months (and years) is that of the $ itself, particularly against the euro (and even cUsing the yuan as a strategy). And yet the US economic figures are still in freefall. The pound is also plummeting in the City, whilst the yen is paying the price for having been the whipping boy of the carry trade globally, particularly among investors in North American markets.

At this point, it is clear that both the USD and The GBP is depreciating de facto against the euro and the yen, thereby devaluing their currencies in the eyes of the EU. A Europe adrift economically in a scenario where its engine (Germany) has stalled and its transmission (Britain) has broken down; and also a Japan that is shedding a battered yen in a deflationary environment it has known all too well for two decades, and in which it knows how to navigate better than we do.

To speak, therefore, of devaluation, as this concept has traditionally been used, it is now obsolete in a world where The economy is supranational. Today, perhaps we should consider the ability of economic regions (as opposed to states) to devalue their major currencies at will. And in a situation as critical as the current one, we are faced with a kind of «foolish the last«. Others will prefer to see these falls in the USD and GBP as the fallout from the deteriorating state of the US and UK economies, as a form of collateral damage. But in reality, it is more a case of collateral benefit: a covert, new-generation devaluation underpinned by the EUR and YEN. And its effects are no longer as soothing as they were in the Era of Devaluations—far from it. But they will certainly be very harmful to the «the last fools» in this gloomy scenario.

The American Patient continues with prognosis uncertain whilst we Europeans remain at the foot of their bed. And some Spaniards look back fondly on those days of currency devaluations, when being the ‘tail-ender’ (Spain/Peseta) allowed us to make a reset in our beloved currency when we were up to our necks in water. But not now. Now we’re at the tail end of a lion (EU/€) that drinks from saucers of milk and licks the wounds of the American patient. The era of devaluation is behind us; today, it is the world that is losing value in a global ‘Corralito’.

No, BHO isn’t an acronym for any bank that’s been bailed out, nor for the latest scam or bankruptcy. We’re referring to Barack Hussein Obama.

It is rapidly turning into a storm. The whole world is pinning its hopes on the first black president of the US to pull us out of the economic mess we have got ourselves into. He is so much more than just the new president Made in the USA. It is the New Black Hope, multi-ethnic, part of a global and diverse world that strives for sustainability but lacks resources and is in freefall.

Even in his earliest decisions as president, he is encountering very little opposition. He has all the credit in the world (a paradoxical notion) to perform miracles that will likely prove disappointing in the long run, but which, for now, represent Hope with a capital H for countries rich and poor alike. Criticism, discord and conflict will come, but his enemies and natural opponents do not yet dare to tarnish his immaculate aura. In other words, Barack has not yet disappointed anyone. And he hasn’t, not only because there hasn’t been time, but because fans and opponents (both domestic and international) see in this man a different kind of US president, one who has had to govern under unprecedented and extremely difficult circumstances for the world. Logically, the first to shatter this global harmony will be, and indeed are, the fundamentalists: Islamists, Republicans and even Catholics (in fact, the Vatican has already been quick to criticise the decision to allow stem cell research, one of the first decisions taken by Obama’s administration), as well as other relatively marginalised minorities.

All these hardline voices that have been attacking—and will continue to attack—the Obama administration from the very outset and in a systematic manner, and who fail to see in this leader the only driving force capable of pulling the global economy out of a long depression, are irresponsible and short-sighted. They are unable to look beyond their religious beliefs, racial hatreds and political animosities, and/or are incapable of distinguishing the Bush era from the new world that is taking shape with this involuntary re-founding of capitalism. Fundamentalism, in all its diverse and harmful forms, is incompatible with the Big Picture, with a global and tolerant vision of humanity. Sadly, that is the way it is. That is who we are.

However, I am certain that the Barack Hussein Obama phenomenon will prove disappointing in the long run. It cannot be otherwise, since today he embodies the hope of a new world that we are unlikely to be able to reconcile with a global economy that has been dealt a fatal blow. But facing the bleak future that lies ahead of us without the hope, faith and enthusiasm for the Obama phenomenon would be far worse. Because the chances of getting through this with bearable suffering depend on believing, hoping and fighting for our future alongside a different kind of world leader, like Barack. I am not talking about the merits of Democratic policy over others, nor of the merits of the the American way of life with regard to European or non-Western lifestyles, not at all. I’m not even talking about politics. I just want to point out that globalisation has also reached the realm of global political leadership, and it has done so at a time when we need it most.

One indication of the scale of the Obama phenomenon is that his supporters in Facebook At the time of writing, they have over 4,442,988 followers. But what is truly spectacular is that this figure, growing at a constant rate, increases by more than one and a half followers per second whilst the US sleeps, and reaches almost 2.5 new followers per second when it is daytime there… Spectacular. Even its name Barack Hussein Obama, ... inherently embodies the global nature and diversity that it generates debate and controversy. The Obama-Facebook relationship is an example of concepts that did not exist until very recently, and further proof of the exceptional nature of the Barack phenomenon.

We are, regrettably, living through historic times in the financial system and the global economy. We are the only ones to blame. The road to recovery will be long and arduous, but the best way to set out on it is by drawing on whatever hope and conviction we have left for the near future. The BHO Effect It is something we should all be promoting, whether out of conviction, for the common good, or simply out of a basic instinct for survival. And, of course, by convincing ourselves that, even though many will fall by the wayside, we can achieve recovery and it is not a pipe dream: Yes We Can.

P.S. Just for fun: During the Bush era, the White House was living in the technological Stone Age, despite wanting to rule the world. As the saying goes Dans in his article: «…if the boss (Bush) doesn’t set priorities in that regard because he’s technologically illiterate, nobody takes any action…»

Ahí va otro artículo anónimo que nos ha llegado como comentario y en él vemos un caso real de un cuchillo cayendo. Lo que a nuestro juicio merece una reflexión es la posición del gestor/asesor a lo largo de todo el proceso de caída del valor:

«Llevo todo el día queriendo escribir un post sobre Cintra después de ver el castigo de los últimos días. Hoy ha cerrado con una caída del 9% y al final me he decidido a compartir con vosotros lo que pienso del valor. En realidad llevo hablando más de un año de Cintra a mis amigos. Empecé a seguirlo cuando en Diciembre de 2007, en una reunión de inversores organizada por Credit Suisse, el banco recomendaba invertir en bolsa y en especial recomendaban Cintra como valor «seguro». Aún conservo el papel con la recomendación del valor cuando cotizaba cerca de los 12 euros. Lo guardé por que estaba convencido de que se acercaba un ciclo bajista y quería comprobar las predicciones del banco. Desde entonces seguí preguntando regularmente a los gestores de CS por el valor. Cuando en verano el valor tocó los 6,5 euros, pregunté con tonillo sarcástico, si el banco todavía lo recomendaba. El gestor desplegó todas sus armas de buen vendedor para convencerme de que era un valor segurísimo, que el banco lo había recomendado en todo momento. Las palabras textuales fueron «lo recomendábamos cuando estaba a 8,5 y ahora que está a 6,5 mucho más». A partir de ahí empezó toda una disertación del gestor sobre lo bueno que es el negocio de Cinta, lo estable de los ingresos (yo esto no lo comparto pero bueno) y la conclusión era que la bolsa se estaba comportando de forma irracional y que Cintra volvería a su valor objetivo de 13,5 en breve. Mi contestación es que nunca le he pedido a la bolsa que se comporte de forma racional por que nunca lo ha hecho; y que prefería esperar otro año a ver que pasaba. Hoy Cintra ha cerrado a 3,76?. Si en Diciembre del 2007 hubiera hecho caso al banco perdería un 70% en un valor que era «seguro». Menos mal que apliqué mi criterio y no el del banco. Nunca me he alegrado tanto de no comprar una acción. Acabo de recibir un mail de Renta4 que proyecta caídas teóricas hasta los 2,3. Puestos así el suelo claro es el 0, pero seguro que se para antes.

Yo pienso que el suelo de Cintra está cerca aunque no sé decir dónde y creo que nadie lo puede calcular. Aún así todavía no me atrevo a comprar. La sombra de absorción por parte de Ferrovial es el principal motivo. También pienso que no hay que comprar un valor en caída libre pensando que se va parar por ciencia infusa. El caso es que la colocación de Cintra me recuerda demasiado a la salida a bolsa de Terra. No dudo que Cintra, a diferencia de Terra, tiene activos reales. Pero hoy por hoy lo que mas tiene Cintra es DEUDA! Creo que Ferrovial va a esperar a que Cintra caiga todo lo posible para reabsorberla y en esa operación dudo que se pueda ganar dinero si no tienes información de dentro de cuando y a que precios. Que alguien me diga que ganó dinero con la caída de Terra a los infiernos o en la absorción por parte de Telefónica.

Vosotros que pensáis? Seguro que muchos de vosotros a esos precios quiere comprar «activos tangibles» a buen precio. Por esto es un claro ejemplo de que la bolsa no se comporta de forma racional, ¿verdad? «

Independientemente de los comentarios que surjan sobre el valor en concreto, este texto me pareció un claro ejemplo de lo que es hoy el mundo del asesoramiento. Posiblemente las proyecciones de Renta4 sean tan inseguras como las que hicieron en su día los gestores de Credit Suisse, aunque su nivel de acierto sea distinto circunstancialmente. ¿O acaso pensamos que los asesores de Renta4 son más competentes que los de CS? Simplemente esta vez, en este caso concreto, les ha tocado a ellos acertar, y habría que ver qué recomendaban acerca de Cintra cuando estaba en 12 €. Y viceversa, porque lo mismo podríamos decir de los asesores de CS. Pero no debemos ver en estas recomendaciones un afán exclusivamente recaudatorio de comisiones (que también lo hay), sino que los asesores, brokers y gestores de entidades financieras, que se pasan el día frente a unas cuantas pantallas, que se acuestan y se despiertan con cotizaciones en la cabeza, realmente creen en la solidez de valores determinados. O sea, que no todo es prostitución de la recomendación (comisiones), también hay otros componentes como la incompetencia, the mala gestión del riesgo, the inexperiencia (juventud), la gambling addiction, etc…

Por supuesto, los mismos defectos podemos encontrar en la gestión propia de inversión en RV, suponiendo que podamos aislarnos de la influencia de asesores externos (amigos y conocidos, prensa, radio-tv, blogs financieros, etc…). Pero con una excepción: La prostitución de las decisiones de inversión a cambio de comisiones. La gestión Juan Palomo, no obstante, en muchos casos compensa fatalmente la ausencia de dicha prostitución con un incremento de la incompetencia. La autogestión tampoco está libre del resto de los peligros mencionados, pero en algunos casos como el de nuestro anónimo, ha conseguido presevar la inversión contra viento y marea.

No me resisto a recomendaros releer el artículo que publicamos en Septiembre 2007 y atención a los ilustres nombres citados: Alberto Espelosín (Dtor. de Análisis de Ibercaja Gestión) y Gustavo Trillo (Dtor. de Gestión de JPMorgan Asset Management España y Portugal) entre otros. De todos ellos dependen (dependían?) gran cantidad de vehículos e instrumentos de inversión que muchísimos ahorradores compraron a pies juntillas.

Dicho esto, hablemos de CINTRA…

Many are predicting that global rate cuts, even to zero, will do little or nothing to pull us out of imminent deflation. In fact, Japan's benchmark has shown that in its specific case this has been, and indeed is being, the case. And it should be borne in mind that Japanese deflation has taken place in an environment of global expansionary economies. In other words, it has been a persistent deflationary island in a global inflationary sea. This will certainly make a difference with respect to what can happen in a globalised deflation and depression (with the emerging countries' permission), where it will be even more difficult to emerge from the depression without growth benchmarks throughout the West. So if selling money at 0% has proved incapable of pulling Japan out of recession when it had the rest of the world on its side, growing and inflating strongly, it seems even more difficult to grow in a global recessionary environment. Yet some wonder how Japan's economy would be today if the yen rate had remained at the same level as the $ or €? We will never know... or we will.

Turning to the West, evidently current monetary policy is extrapolating the Japanese strategy to the rest of today's recessionary world, with the $ rate already below 0.25% and the € rate already at 2% and falling. At this point several scenarios could be expected:

1. That the near 0% cost of money reactivates world economies towards higher consumption, inflation and eventually positive growth. This scenario would of course be a long way off, and the main difference with respect to the Japanese failure would be the global recession. Common sense would tell us that if Japan has not succeeded in an expansionary environment, the West will be even less likely to succeed in this global multi-crisis depression. However, it is true that we are repeating the same failed strategy but in a different scenario. Worse. But even so, there is hope that some imponderable or butterfly effect could lead to a better outcome than the Japanese evolution.
2. That lending money for almost 0% not only fails to revive economies, but also harms and deepens deflation. Some theories are already out there (I recommend reading Marc Vidal) who argue that a lower cost of money will do little or nothing to improve consumption, while it will bring down costs. This lowering of costs will be passed on to selling prices, thus contributing to a further deepening of deflation. Thus, we would enter a dangerous vicious circle, which could only be stopped by a very strong constant growth in consumption (as a consequence of lower prices/recovery of purchasing power) and excessive public inflation. Note that in this scenario the post-deflation scenario would also be extremely complicated.

In addition we don't seem to be in a position to do so either to implement other strategies that, at present, we are not even able to theorise with any criteria. There is little described, empirical and referenced basis for deflationary developments, margins for manoeuvre and policies to be followed to correct a depression. There are no consensual resources, despite the fact that we have theorised at length about it. Nobody taught us to live in deflation. Capitalism was invented to grow, to overheat and correct excesses cyclically. With the misalignments we have seen in the last century. But a post credit-abuse liquidity trap multi-crisis in a globalised world goes beyond the macroeconomic fiction of the textbooks. the most imaginative eminences. A kind of Double-dip recession has come and no one knows how it happened.

Most of us probably remember the tales of yesteryear told by our grandparents, and even those our parents still tell us today. These stories often involved great hardship and difficult lives that shaped who our ancestors are or were. However, despite everything, the usual answer to the key question is that those times were also very happy. A happiness found in many ways but based on simple, austere things which, nevertheless, lit up their lives and still form part of the indelible memories they pass on to us.

Some of us listened intently and remember those heart-warming stories as a glimpse into a bygone world, very different from our own. Others may have forgotten most of those tales, or perhaps never even wanted to listen to them properly, probably out of sheer disinterest in an ancestral way of life that was unlikely ever to return for anyone. Ours is a world that is now globalised, modern, technological, interconnected, fast-paced, opulent, international, excessive, and so on… We can describe it with countless adjectives, all of them a world away from the tales of our ancestors.

These current, excessive conditions have pushed us to the limit. To the limit of capitalism in the First World, and yet to economic ostracism in the Third World. Nevertheless, it has also spurred the rise of emerging nations, which may well prove to be the West’s salvation in this Great Global Depression into which we have plunged through our own folly. But focusing on the First World, where we are fortunate enough to live, we may well have to endure a certain regression that would be all too familiar to our grandparents. We may once again see a homeowner as a wealthy family, just as in those days when everyone lived in rented accommodation, except for the rich or those from «good families». A time when the middle class was known as the working class and was the norm in a society where everything was in short supply and the future lay ahead.

Setting aside the differences in time and technological and other forms of progress, what is clear is that the consumerism that existed in the developed world until just a few months ago is now a thing of the past. It was unsustainable, at least within the current form of capitalism. And it was not sustainable for the class that, for the first time in Western history, has become the largest: the middle class. Never before had the developed world seen a majority social class that not only had no shortage of resources but also possessed such purchasing power. Perhaps because society has never had such a high capacity for borrowing, and perhaps also because the economies of developed countries broke historical records time and again, in a cyclical pattern, during the second half of the 20th century and up until 2006/2007.

Now it’s time to weed out the excesses, overheating, bubbles, fraud, inefficiencies, speculation, incompetence, abuse, debt, squandering, reckless consumption, and so on and so forth… We will return, albeit partially, to the hard work of our grandparents (let’s forget about the 35- and 40-hour working weeks), to massive rents, and to seeing the owners like the privileged minorities they once were. A a middle class that has been scaled back in favour of an expansion of the lower-middle class, or what our ancestors always called the working class. It will no longer be common for the middle class to go on holiday to the Caribbean, spending a year’s wages—which may well turn into unemployment benefit; or that any young person on a thousand-euro-a-month wage will buy a brand-new car with plenty of horsepower and air conditioning using the salary they will no longer earn over the next four years. But the problem is not losing one’s job and being unable to travel or buy a car (though that is part of it). The problem we have failed to identify during these years of expansive blindness is that we have consumed the wealth produced in the past (savings), present and future. We’ve squandered our future, wasted, I'd say. In the coming years Consumerism will come back to haunt us.

If we are optimistic, we might think that we are perhaps beginning the process of overcoming systemic problems (let us hope so), but society is only just beginning to feel the corrective effects of the destruction of wealth that accompanies every depression. A virtual wealth that we have foolishly consumed over the last couple of decades in pursuit of a deeply misunderstood pseudo-happiness. We may therefore, in the coming years, return to what the States of the pre-welfare, the pre-American dream. And let’s hope that this time we won’t have to wait for a world war to end before we can lay the solid foundations for new excesses.

A fool who recognises his own folly is a wise man. But a fool who thinks himself wise is, in truth, a fool.

Siddhartha Gautama ((563 BC–486 BC) Founder of Buddhism.

En las últimas horas he leído algunas noticias en prensa norteamericana que muchos no querrán creer o preferirán no haber leído nunca. Otros las leerán y simplemente pensarán que no van con ellos. Pero la cruda realidad es la que es y nos afectará a todos más bien temprano que tarde. El queso ya no está o se va a acabar para muchos, y así está el patio pese a los informes de la banca y las previsiones de la clase política:

Elegí un mal fin de semana para leer la prensa norteamericana. Creo que debo dejar de leer los, cada vez más numerosos, periódicos sensacionalistas. Así no hay forma de centrarse en las oportunidades que surjan, aunque si no los leo quizá vea oportunidades donde no las hay…

Menos mal que en Europa las cosas van mucho mejor.

Bueno, me voy a ver el partido al Bar de Manolo y a echar unas risas. A ver si me deja acudir a su ampliación de capital, porque ¡eso sí que es una buena oportunidad!

«The optimist proclaims that we live in the best of all possible worlds; and the pessimist fears this is true.«

James Branch Cabell (1879-1958) Escritor norteamericano.

In our section of comments received worthy of being published and commented on as articles, and baptised in its day with the name of the first one published (Boquerones Fritos), we copy below an anonymous one that we have received which I think is worth commenting on publicly in the form of a post and which we copy verbatim below:

«I read this publication, what do you think?

Greetings:

The crisis of the Spanish economy will be longer, but less deep than the one suffered in 1993, estimates the research department of La Caixa, which calculates the average fall in Gross Domestic Product at 1.3% this year and forecasts that the unemployment rate could reach 16% in the final stretch of the year. The experts of this entity consider that the number of unemployed will slightly exceed 3.7 million at the beginning of 2010, without reaching the four million mark.
Social coverage and measures to boost the economy will push the public deficit up to 5.5% of GDP in the current fiscal year. And the upturn will be gradual, because in 2010 the increase in GDP will be limited to 11 Q3GDP on average for the year. In conclusion, the acute phase of the crisis will last for five to six quarters, starting in the summer of 2008.
Jordi Gual, head of the savings bank's analysis department, insisted, during the presentation of these projections, on the need to combat excessive pessimism. «We are facing a recession, not a depression,» he said, going on to explain that an economy has its own mechanisms of ‘natural adjustment’ that both puncture the excess of expansion and encourage activity in times of contraction. For this reason, together with the factors that converge in the generation of the economic crisis in Spain - global financial crisis, generalised international recession, adjustment of the real estate sector, high levels of household and corporate debt - he identified the mechanisms that will play in favour of recovery.
If the price of oil falls, as seems likely, from an average of 90 dollars a barrel in 2008 to an average of 60 dollars this year, this factor will allow the fall in gross domestic product to be half a percentage point lower. The reduction in interest rates in the euro zone, which the research department of La Caixa estimates at half a point at next Thursday's meeting and another half a point at the ECB's next monthly meeting, will have an impact on the mortgage Euribor, and will help to reduce the cost of buying a home in the first year - including tax deductions - from 37% of household disposable income to 25%. Inflation will fall from an average of 4.1% in 2008 to 1.2% in the current year.»

In all likelihood, the text is taken from the presentation of the Monthly Economic Report of La Caixa whose news in La Vanguardia you can reread.

I will say that in general I find the text excessively optimistic and that I would therefore be delighted if they were right in their predictions and I were the pessimist who was wrong. I would like nothing better, of course. And this excessive optimism is understandable and can be perfectly explained by its banking origin: the Research Department of La Caixa. Nevertheless, I agree with them on some points, but let's start at the beginning:

In my opinion, the text confuses the Spanish crisis with the global crisis, and at present they cannot be dissociated in any way. The global crisis is so serious that neither the acceptable state nor the shallowness of the crisis by country matters little, with the exception of the emerging countries to some extent. The credit crunch, the energy crisis (in short, the multi-crisis) drags along with it all those countries or areas that enjoy a better local and/or temporary situation. Therefore, supposing that it is reasonable to think that «The crisis in the Spanish economy will be longer, but less deep than in 1993.«The global tsunami will also sink Spain below the depth of its 1993 crisis, which I would place perhaps a year earlier, and probably prolong it well beyond what happened in those years.

As for the unemployment figure, it is a simple dance of local numbers which, as we have already said, will matter little as soon as the world, globally, emerges from the murky depths into which we are plunging. But it seems to me that this 16% can be exceeded by at least two more points with chilling ease. As for the public deficit, it will also depend on the great volatility we may experience in the oil/gas price, but I would probably correct that figure upwards as well. Regarding GDP, growing 1% or below, will be a matter of pure macroeconomic statistics that will only serve to keep some distinguishing between technical recession and non-recession in the midst of depression, something that is vital for the recovery of confidence and optimistic sentiment so necessary for banking. According to the report: «The 5 or 6 quarters that started last summer would therefore last until the last quarter of 2009 as acute phase of the crisis«. But while it is possible that we may see the worst over the next 12 months, I would be cautious to think of the whole of 2010 as a year of severe macroeconomic crisis. From then on, the depression would continue but with perhaps alternating between periods such as those 8 or 10 quarters and some quarters of mild recovery, as happened in the 1930s.

Regarding the recessionary and not depressive opinion of Jordi Gual, chief economist of La Caixa and PhD in Economics from the University of California (Berkeley), with all my respect and sincere admiration, I am afraid he is wrong. We are not facing a one-off recession but a full-blown depression, with its possible known (Great Depression) or probable unknown (without previous references) phases. However, I agree that the economy has its own natural adjustments to weigh up both the excesses of prosperity and to bail out when the water reaches the eyes (above the neck and nose). And especially this phenomenon has occurred in recent years, when we see how globalisation spreads viruses such as subprime, but also how it can amplify and globalise the anti-depressive effects that may emerge in the coming semesters in emerging countries.

Obviously, tax and rate reductions are a condition for the sine qua non to survive this multi-crisis any longer, and a moderation in the oil price to levels of 60 $ will make the difference between life and death for the sick. But it seems to be clear to the producing countries that, like God, they must squeeze but not choke, for if they overdo it they will starve the very demand. Of course, inflation will already be at rock bottom and we may even see it periodically go negative in the purest deflationary style.

To conclude, I would like to make a final reflection. Notice that in this article and every day in more and more opinions and statements, long-term solutions, sustainable solutions or Solutions in capital letters are being completely neglected. And the focus is on short-term survival, the bread for today. We talk about reducing rates to zero so that debt can circulate and revive, about oil at levels low enough to continue burning it massively, about a longed-for inflation that will pull us out of the clutches of depressive deflation, etc... And I am not saying that this is not the right thing to do now, since we are not in a position to improve the world we left behind a year and a half ago, but rather to seek survival. When we have achieved this, we will talk about sustainable economic policies, the re-founding of capitalism (which we must begin to outline and apply in an incipient way), alternative energies and expansionist models, Austrian or otherwise. But now we just have to try with all our might to keep Darwin away from us in the coming years. That's how bad we are, in spite of all the brainy, eminent and biased reports from a banking sector whose future depends on the recovery of confidence. Perhaps the bad thing would not be for readers to believe it, but for the authors themselves to do so.

Let’s take a look at a few charts relating to the US property market. And although we may feel detached from what is happening to US property and its toxic subprime mortgages, we Europeans (and Spaniards in particular) must follow this market with great interest, as it foreshadows what will happen to all of us a few months down the line. The fact is that, paradoxically, the New World foreshadows the future of the Old Continent.

The first graph illustrates the dramatic shift in home ownership trends in the US. The latest figure stands at 67.91% for the third quarter of 2008, which is on a par with the summer of 2001. Leaving aside those who are homeless or crammed into relatives’ homes (and there are more and more of them every day), this decline in home ownership is inevitably offset by an increase in the proportion of people living in rented accommodation.

The following graph provides an interesting insight, as it shows the percentage of vacant properties – that is, those that have been unoccupied – over the last 50 years. In the first two decades, we can see that the average stood at around 1.51%, whilst in the last 20 years and up until approximately 2006/7, the average remained at 1.71%. Since then, the percentage has soared to almost 3% today.

But why are there more empty homes now, when it seems there are more tenants looking for a place to rent? The answer is clear: The owners de facto These vacant properties are owned by financial institutions. And these do not allow mortgage defaulters to continue living in the property. However, as the mortgage foreclosure process (foreclosure) and is currently under foreclosure, it cannot be let to anyone either. Nor will that be the future intention of the entity that ultimately takes ownership of the property. It will remain vacant until a buyer is found, whether scavenger or end users. Nor are owners of distressed properties—those struggling with financial difficulties who have fallen slightly behind on their multiple debts but are still relatively far from facing repossession (by several months)—willing to rent out their homes. In these cases, only a sale – even at the price of the debt – can get them out of the hole. Sales that, in many cases, will never take place before foreclosure, and even if they do materialise, they will not prevent many multiple property owners (whose properties and mortgages are worth more than their current market value) from falling into widespread household defaults.

So far, it matters little that the wicked Mac & Mae have set off as we reported back in October 2008:

«Over the next two, three or four years, we are likely to see the worst of it. In other words, these will be the worst years for the governments that will have to absorb the loans, which are now turning into foreclosures that cannot be liquidated; but there is an aggravating factor that will make them radically different: Unlike the lending institutions that sold the loans, the state or the ad hoc quasi-public bodies will not be able to afford the mass repossession and eviction of their population. Social solutions may be adopted to keep tenants in what were once their own mortgaged homes in exchange for rents well below market rates. They may also have limited options to buy in the future. But what seems unthinkable is that the enforcement of mortgages by public bodies would create a social and human problem for millions and millions of people. A genuine housing subsidy in the truest popular style (that of the Chinese Communist Party, not the PP). »Against a backdrop of lean times and rising arrears, the number of vacant properties is rising steadily, despite the increase in demand for rental housing.»

And finally, a chart showing the number of properties to let. Occupied spaces are shown in blue, and vacant spaces in red:

As is clear to see, over the last four years the number of units has risen, reversing the trend that began in 1995. More than 3.5 million units have thus been added to the US market; however, only 1 million have been built for the rental sector. In other words, 2.5 million homes have shifted from the owner-occupied market to the rental market. And among them we find a variety of motivations: investors buying properties to let and generate rental income (a risky practice in falling markets 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 converted during construction due to the foreseeable inability to sell, individuals less burdened by debt who are entering the rental market whilst waiting for sale prices to reach the value at which they have mentally anchored themselves, etc. If all these properties had gone on to swell the supply of properties for sale, the collapse in property prices would have been far more severe.

In short, we are likely to continue to see falls in property prices, rises in the vacancy rates for owner-occupied homes and, to a lesser extent, increases in the vacancy rates for rental properties as well. Looking on the bright side, we might expect that forced owner-occupier vacancies will generate sufficient rental demand to offset the migration of owners into the rental market. But personally, I believe we won’t see this for another three or four years, with rental prices remaining fairly stable or even falling slightly in the short term.

Despite what some optimists or politicians might say, the outlook for property owners is cautious. And we've been saying for a long time. The anxiolytics They’ve always been bad travelling companions if the recession drags on. Welcome to the Depression. Cheer up.