Cluster Family Office Blog

Regular readers of this blog know that we never like to talk about politics, but rather about the economy, and this article should be read from an economic perspective, as we do not wish to engage in debate over political or trade union positions.

The other day I read some comments by Jose Mª Álvarez, General Secretary of the UGT in Catalonia which left me absolutely stunned. And I can’t have been the only one, given that a few hours later, on television, this man reiterated his views in an interview in an even more vehement and crude manner.

The source of the controversy is the redundancy plan that Sony is set to announce for its factory in Viladecavalls (Barcelona), which will affect 275 of the 1,600 people who work there. Furthermore, these redundancies confirm once again the policy of cutbacks and redundancies affecting more than 8,000 jobs, which the company announced months ago. But however unfair and unexpected this may be, a trade union leader cannot threaten the company or attempt to turn public opinion against it. At least, if I put myself in the shoes of the workers who have been lucky enough not to be on the blacklist of the 275. If I hear such threats from the General Secretary of the UGT, who is supposed to be defending my job, in a global crisis such as this, I’d feel like covering his mouth and telling the Sony executives, «Forgive him, for he knows not what he says.» Here’s an excerpt of what the trade unionist spouted:

«If they push things too far, they could face retaliation from their customers.". We’re right in the middle of the Christmas shopping season, and Sony needs to realise that it has a brand—and that it’s a brand that sells well in this country. And that »If he keeps rubbing people up the wrong way, they might switch brands."

Jose Mª Álvarez, General Secretary of UGT Catalonia.

Just a few weeks ago, this same union leader led several protests demanding «more work quotas» for the Nissan factory, which was set to announce another redundancy plan affecting 1,680 workers. They called them «gangsters» and demanded that the redundancy plan be withdrawn because he considered it a «threat» prior to negotiations. Aren’t threats to boycott brands and withdraw redundancy plans against those who must drastically cut production and costs just to survive far more typical of low-life gangsters? Making things difficult for those who must cut costs to maintain some level of activity is tantamount to begging them to cease operations entirely and relocate their business (whether residual or not) to other countries that make fewer demands, hurl fewer insults and issue fewer threats. It is not a question of trade union or social justice, but of job security in times of severe crisis.

I find it extremely dangerous that someone like this should be defending the interests of the few workers who will continue to work in these companies. The economic outlook is devastating, yet the General Secretary of the UGT in Catalonia continues to treat business leaders as if they were stealing money from the workers. Just as vehemently, if not more so, than at the height of the economic boom, when he had to defend pay rises and reductions in working hours to offset the billions in profits that companies were making.

The fact is, this union leader continues to in Disneyland, in the welfare state, and hasn't realised that the world has changed radically.

But for heaven’s sake, can’t you see that the business situation—and consequently the employment and social situation—is extremely serious? It is telling and paradoxical to «demand more working hours», but for this to come from someone who has spent their life demanding cuts in working hours is simply unheard of. The fact is, Mr Álvarez, the world has changed – and for the worse, in case you haven’t noticed. Whereas you used to demand (a curious concept, that of ‘demanding’) fewer hours, you now demand more hours (even more curious). At least enough to be able to earn a wage. But business conditions are radically different, and multinationals are no longer striving to maximise their profits but to survive as companies through cuts in production, costs and relocations. Only a few will succeed, because many will fall by the wayside and their redundancy schemes will affect 100% of the workforce. And if the proportion is significant, governments will face a serious problem that they will pass on to all of us, both those who have lost their jobs and those who have kept them. As long as the trade union leaders who are supposed to defend workers’ interests fail to realise the world we have been living in for almost two years, they will continue to make fools of themselves. In this new global and economic landscape, we need new trade union policies and arguments. Otherwise, the global crisis and the severe recession we are only just entering will sweep away those foolish trade union leaders who remain wedded to concepts that were valid in times of economic expansion, but which today are not only useless but also extremely dangerous to the interests of workers and the local and regional economy.

We cannot blame the current economic situation on the 35- or 40-hour working week, not at all. But what is clear is that, to avoid zero-hour contracts, the way forward lies in a massive increase in productivity. And not even that solution has managed to pull Japan – a country as productive as they come – out of a depression lasting more than two decades. Personally, I find the 65-hour working week that Europe rejected a couple of weeks ago excessive, but the answer cannot be the Eurosclerosis as we know it today. The labour policies needed to tackle the challenges ahead are going to be very tough. Perhaps comparable to those our grandparents experienced, because economically – but above all socially – the regression is going to be tremendous. Nor do they guarantee success, but it is clear that, faced with such a scenario, trade union leadership must also be rebuilt, or it will be highly detrimental to the interests of workers and the economy. After all, dissociating the two – workers and the economy – leads to an absurd collapse that is obvious to almost everyone.

Prosperity in 2009 is something we all hope for, but it will not materialise, barring a few notable exceptions. Therefore, those who seek happiness in material things will, for the most part, feel very unhappy. And it is possible that not even the coming years will bring a substantial improvement in the great difficulty that families will face in growing their wealth. For many, it will be a pipe dream to even manage to maintain their current level of wealth, and indeed many fortunes, large and small, have already suffered severe declines in 2008.

Those who will succeed in 2009 are, naturally, those who know how to make the most of the opportunities that arise. And as in any crisis and times of change, the opportunities are and will be substantial, but difficult to spot. Only a privileged few, those who know how to discern where did the value go, finding it and making the most of it will be possible. The future belongs to them. And for the rest of us mere mortals, this crisis will have wiped out—and will continue to wipe out—the efforts of many years, even of generations: Cash invested in the markets, business losses, a sharp fall in the value of their properties, etc. All of this forms part of a grim calculation that we can all make if we really want to take the red pill that makes us see the reality of the current and future development of our heritage. However, many, on the contrary, will prefer to take the blue pill y look to the future with confidence immediately right at the heart of the global financial matrix.

I wish you all happiness for 2009, but most of you shouldn’t look for it in career or financial advancement, because both will come at a high price this year and probably for years to come. It would be better for many of you to shift your mindset away from consumerism towards a more spiritual outlook; otherwise, the fall will be too harsh. The hard times our grandparents knew are already here and are set to stay for a few years. Either we adapt by working hard, lowering our expectations and finding happiness and value in new places and ways, or we’ll have a very hard time of it. Even if we rediscover courage or seize opportunities, it will be a good exercise to view the world and the modern economy in a different light. After all, we create it ourselves, day by day.

Happy 2009, but prosperity is a given for most people for a few years. We’re squandering our future over the past few years, and we’ve written off loss-making investments in securities and property, impulse buys and luxuries that should have taken years (or a lifetime) to pay for, and corporate debts that rely on that frenzied cash flow to prop up their credit pyramids. Unfortunately, we cannot return to the future from which we draw the wealth we have lost today, but we will have to cross the desert of 2009, 2010, 2011, 2012… who knows. And just as in life itself, we must enjoy the journey, even if it is through a desert.

My very best and most sincere wishes to those on the blue pill who cling to the illusion of an imminent prosperous oasis. To those on the red pill, I also offer my solidarity and admiration; see you in the desert – I’m getting by.

A promise is a promise, and here is our account of the unfair treatment that exists between various autonomous communities regarding inheritance tax, with Extremadura and Catalonia being the worst affected compared to others that benefit far more, such as Madrid, the Basque Country, Valencia, Navarre, etc. Tax relocations will be the order of the day as long as the differences remain substantial. The gap is enormous, and from here we humbly join the claim brought by Putabolsa.

http://www.tv3.cat/videos/913359

Abracadabra, goat's leg…

Now that the worst of the credit crisis is believed to be over, many people have been quick to recommend investing in the stock market because «prices are very low and there are plenty of opportunities». It should be borne in mind, however, that most of these generous voices are the same people who, a few months ago, in the midst of a bear market, were still suggesting equity allocations that ranged from high to downright excessive. Obviously, the incentives driving them at that time were recommendations (and now) are very different from the objectives and circumstances of the vast majority of estates, which is why one must, at the very least, be sceptical about this sort of well-meaning advice.

Furthermore, the fact that, for the time being, the system’s collapse has been contained The current financial situation must not mislead us into losing sight of the fact that the looming recession is going to be a long one and, for many companies, difficult to overcome. For the time being, there is no light on the horizon; quite the opposite, in fact (scandal Madoff, possible new waves of unpaid, this time from commercial properties, etc.), so it is advisable to proceed with caution and humility.
This is not to say that, in the current climate, there aren’t good opportunities to buy high-quality companies at prices we would have only dreamed of a year and a half ago, but—beware—all that glitters is not gold. When selecting stocks that may be of interest, it is very important to thoroughly analyse the company’s balance sheet, its ability to generate cash, its competitive position in its main markets, as well as the competitive advantages that shield it from its rivals; steer clear of companies with high levels of debt relative to their assets, and even then, to err on the side of caution and apply a discount to the target price we arrive at, to provide greater security for the investment, whilst always taking our personal circumstances into account, so that we can ultimately decide whether that investment suits our needs and those of our financial situation.
I’m reading a consensus portfolio on the Spanish stock market, comprising 10 stocks and compiled by 25 analysts, in which I’m not surprised to see the usual big names: Telefónica, Santander, BBVA, Iberdrola and Repsol (another day I’ll discuss the incentives that drive analysts to always recommend the same «big-cap» stocks). This is what I mean by keeping your eyes wide open and knowing how to distinguish between an opportunity and a trap. Does the fact that Santander’s share price has fallen so much represent an opportunity? What if it doesn’t maintain its dividend at the same level? Will Telefónica be able to sustain its growth given the current bleak outlook in Spain and Argentina?

As a proponent of value investing, I am convinced that there are still undervalued companies that go unnoticed by the general public, but that does not mean that simply because a company has a ridiculously low P/E ratio or a high dividend yield (projections based on past data that can change overnight), it is automatically a candidate for inclusion in our portfolio. As an example, a button. In a situation as volatile as the one we are currently experiencing, what appears to be an opportunity can turn into a trap in the space of just one quarter. Similarly, when we look at the unemployment figures in Spain (and in other things) we cannot envisage any future economic scenario other than a depression; when analysing a company, it must be viewed within the context of the economic climate and assessed on the basis of its quality and its prospects at present, decide whether it is a good investment. And, as we’ve been saying lately, the best opportunities are probably on the other side of the pond.

2009 has come and gone, and no one knows how it went. Whilst some watch in astonishment as it collapses first-round inflation to make way for deflationary depression, whilst others dismiss those who mention the word ‘crisis’ or ‘crash’ as exaggerating. There will even be a few who continue to based at Disneyland. But the dark cloud is hanging over us, both for those of us who sense it and for those who buy a flat because it’s a bargain…

The lottery will plug the gaps At the end of 2008, more than ever, because almost everyone’s finances are in a shambles. Nevertheless, that sudden wealth will come to nothing in record time. The economic and social crisis, of which we are seeing only the beginning, will ensure that those lucky winners of the Gordo and the top prizes lose their fortunes within a few years. The same old story will repeat itself, both now and in the future, with even greater ferocity.

In short, a world that bears no resemblance to the one we left behind in the summer of 2007. I would even go so far as to say that we left it behind on 11 September 2001. How we long for the end of the 20th century at a time when our main concern was international politics.

The multi-crisis we are facing is so serious that it has overshadowed the oil crisis we were experiencing just a year ago. Here is the article from last Christmas. It seems like only yesterday that we were sending you our best wishes, saying:

Merry Christmas and a Happy New Chaos.

We wish you a Merry Christmas and a Happy New Year. And in that order: good health and money.

Last weekend I read an article in *Expansión* which made me feel both sad and angry. Sad because the same fundamental mistakes keep being made time and time again; and angry because a prestigious publication like *Expansión* allows investment advice that is so far from objective – to put it politely. I’d recommend you have a look at it, comments included, so that I can then share a few thoughts with you.

Miquel Roig and Daniel Badía, whom I have not had the pleasure of meeting beyond their articles in that publication, tell us about the benefits of investing in corporate bonds. Just like that. And do so through investment funds to ensure proper diversification, leaving it in the hands of experts (sic): «With a minimal investment, they allow for significant diversification and entrust management to investment professionals in these markets.» Another appointment eminent: «In our view, prices as low as they are at present represent an ideal opportunity for fund managers to invest in corporate debt, whether or not it is investment grade«, and who says so?” Adam Cordery, that is, a manager (seller) Schroders’ fixed-income funds. Both sides seem to be saying that the issuer’s creditworthiness and ability to repay are of little consequence if the purchase price is low enough.

To illustrate this, the article uses an absurd example: the investment involved in the Chicago Bulls signing Michael Jordan for 35 million a year, and how bad that signing would have been if the price had been 100 times higher (sic). They extrapolate this to today’s depressed corporate bond prices, and the conclusion is that now is the time to buy. But buying low-rated or sub-prime corporate debt at a bargain price is actually like the Chicago Bulls signing professional players with serious injuries – which will prevent an unknown number of them from succeeding – for half of what Michael Jordan earns. And to think that, because they cost half as much, they’ll still be competitive and, on top of that, they’ll make a fortune by selling them off as top-class players in their prime. What’s more, the Perfect Storm we’re heading into is going to exacerbate those injuries beyond measure. Dangerous, isn’t it?

To begin with, it is completely ignored the circumstances surrounding that investment, and they simply limit themselves to classifying it as good or bad based on the purchase price. But as we have said many times, the risk-return ratio is just one of the variables we must take into account before classifying an investment as good or bad, suitable or unsuitable for our specific circumstances. In the aforementioned article in *Expansión*, not even something as basic as the proportion of the investment relative to our total assets is taken into account. It simply spews out the slogan in large letters: «Experts recommend gradually building up a portfolio of corporate debt. Demonstrating their analytical skills and prudence, they recommend doing so gradually: «It is advisable to spread your purchases over several weeks or months (2,000 each week or 5,000 each month, and so on). Mickael Benhaim, Global Head of Bonds at Pictet Funds” (another salesperson), states that the time has now come to start building up a corporate debt portfolio, particularly in high-yield bonds, although he advises entering the market gradually.«

Here are a few more gems:

«The key to this type of investment is to have a portfolio that is sufficiently diversified so that any default by one of the issuers can be offset by the interest and the return of the capital invested in the remaining companies.» I’m afraid I must correct you, but the return on capital invested in the surviving companies will not cover defaults or credit events arising from investments that go wrong; it will only cover the interest. However, between the normal repayment of the issue and a default, there may (and will) be various credit events that turn such issues into a financial nightmare, even if they do not default.

«The economy will contract, demand will fall, and corporate debt defaults will rise from the current 2% to beyond 15%. The good news? Current prices already factor in the worst-case scenario..» Gentlemen, we cannot base the success of an investment strategy on the assumption that future defaults or credit events will not exceed 15%. Not in a liquidity trap scenario such as the current one. But the fact is that the recommended investment horizon isn’t even mentioned, and corporate debt with a maturity of more than a couple of years could face difficulties that are entirely impossible to predict. «The worst-case scenario»For most analysts, this has been systematically contradicted by the harsh reality that has been proving them wrong day after day. Why should we now trust their «worst-case scenario» calculations?"

Neither investment circumstances, nor asset allocations, nor portfolio compositions, nor investment timing… absolutely nothing. The Unbearable Lightness of the Fund Manager or the seller in their purest form.

I have no intention of offending the authors of the article in *Expansión*; I do not even know them. However, I have been unable to find in their text – or in the references to fund managers and salespeople included therein – a single rational analysis of risk, return and the circumstances that would safeguard the interests of potential investors. Just Slogans and more slogans.

What a daunting concept Deflation. Something that only the Japanese have managed to get to grips with, whilst for the rest of the world it remains a Beast unknown. But beware: deflation now appears to be a global phenomenon, which means it is far more serious than what Japan experienced in a global context of economic growth.

As he rightly says GurusBlog, the US Treasury is already lending money for nothing. 3-month Treasury bills (T-Bills) at 0.005%. Even with negative interest rates, there is significant intraday trading on the secondary market. According to some, this is the effect New Year's Eve, which requires cash investments in sovereign debt at any price, even if it means paying for it. According to Chris Ahrens: “Everyone wants to be on the books as the year draws to a close. Buy now while the opportunity is still there.”

And now we’ve reached the end of the year with $ rates at almost zero. A historic milestone, and yet perhaps not enough. Our sins require further penance.

I fear, however, that the Three Kings will not bring us liquidity, but rather coal in the form of systemic dysfunction. Symptoms of deflation, no doubt about it. There are only two weapons to combat it: monetary and fiscal policy, although many minds must be searching for another. And God willing they find one, because we’re going to need it. What’s more, liquidity has already dried up and we’ve fallen into its trap. In a recessionary scenario, monetary policy is unlikely to encourage saving over investment, as it did during periods of economic expansion.

I recommend a bit of theory and a insightful reflection by Marc Vidal. The clear definition of the liquidity trap It seems to condemn us to financial paralysis, where not even the hoarding for those with liquidity, this will be easily feasible, as the global banking sector is being saved from bankruptcy by the governments themselves. Or rather, by the central banks, through an increase in cluster M1 as we mentioned in that article.

The cash has been tied up and won’t see the light of day for years. The million-dollar question (or thousand-dollar question, to get us used to the idea) is where his stash will be.

Meanwhile, some people are still carrying on with their Head-in-the-sand mentality (despite the sensitivities that article touched upon). The very same mindset that yielded such mediocre, albeit positive, results in an expanding economy will—in a recessionary environment, complete with a liquidity trap—amount to financial ruin in far less than a decade. What will happen to the RF in general, given its interdependence with and vulnerability to the liquidity trap? In our view, this is the great unknown at the moment. What is clear, however, is what is causing us to lose asset value, and which is likely to continue over time. But we’ll discuss that in a future article.

«It isn’t so much about buying as cheaply as possible as it is about buying at the right time.»

Jesse L. Livermore (1877-1940)

Even in the midst of deflation and Liquidity Trap, Mr Livermore. Isn't that right?

This phrase could well sum up the global situation we are currently facing. If we were to engage in a sort of soul-searching, but instead of taking stock of our sins, we were to take stock of the value of our heritage, few, very few will rise above the mediocre benchmark not to lose. Just a few Chosen for Glory.

Many have already seen a significant drop in the value of their pre-crisis assets over the last 6, 12 or 18 months. But those who have so far escaped the fallout will find it very difficult to avoid losses in the bleak outlook that lies ahead of us all. And when we refer to impairment We use net asset value as a commonly used valuation method, the optimism of which has now given way to a more realistic approach.

So let’s have a a sound and clear-sighted assessment of our entire heritage at the end of 2008. Let’s make a note of this and compare it with the figure we calculated for the end of 2006 and 2007. And once we have regained our composure and stabilised our vital signs, let us do the same in the future, at the end of 2009 and 2010, to name but a few examples.

Before we begin, I recommend that you familiarise yourselves with a key concept for this exercise: Rigor. As for the final result, everyone can add whatever dose of wishful thinking, distortion, optimism and spin they feel is necessary. Here is a simple guide to classifying the assets:

1. Movable assets: They are easy to assess, as financial institutions are required to provide daily figures on losses or exceptional circumstances.
2. Corporate assets: These are more complex to value. This category includes family-owned and non-family-owned businesses, where applicable. But we also include holdings in various companies and partners in the form of shares that are generally unlisted (we will exclude the purchase of listed shares, as these must already be accounted for as marketable assets and will form part of the balances and valuations of the financial institutions with which we work).
3. Real estate assets: They are also relatively easy to value, although in the current climate we should be more precise and, above all, apply rigorous market criteria to these valuations.
4. Miscellaneous assets: This category covers all our tangible assets that cannot be included in the three categories mentioned above. For example, works of art, vehicles or machinery that do not appear on the balance sheets of corporate assets, and various other assets of significant value that are liquid.

From here on, it’s a simple calculation. We take a deep breath and compare it with the same assessment criteria used a year or two ago. Even if our memory fails us, we will manage (if we really want to) to obtain approximate figures, which must always adhere to criteria of rigour and moderation, steering clear of a very dangerous optimism in difficult times.

Please note that we are talking about the valuation of assets, not the quantification of income or expenditure. In this exercise, we are looking at the loss, maintenance or increase in value in our heritage. As we have already said, everyone should add to this final assessment whatever measure of enthusiasm, bias, optimism and embellishment they feel they need, whether for practical or emotional reasons.

Many – indeed, the majority – will already be worse off by the end of 2008 than in previous years. But if we carry out this analysis in 12 to 24 months’ time, I fear the results will be largely dramatic. The question many will be asking is whether it is possible to grow one’s wealth in an environment where property prices are falling, stock markets are crashing, and company turnover and profits hang in the balance due to redundancies and unprecedented levels of current and future debt.

Well, the answer lies in the question itself. The strategy to adopt must be to temporarily steer clear of underperforming assets. But this obvious solution is very difficult to implement in a sufficiently comprehensive and agile manner. What’s more, the main problem is not even the agility required to implement an investment strategy that must completely overturn the one followed during many years of prosperity. Rather, the main hurdle is coming to terms with the fact that we are not facing a familiar cyclical crisis that we can weather without radically altering our original strategy, the only one which many people have come to know and use.

This time we are facing what is likely to be a prolonged depression, characterised by multifaceted crises, rather than a mere bear market in shares or property, or a rise in unemployment or a temporary economic downturn. And therefore, maintaining a strategy that is compatible with or suited to an era of global growth is, to say the least, highly reckless. If we hold on to the same properties in a scenario of sharp depreciation, reduce corporate profits (whether or not there are liquidity, debt or default issues) and fail to eliminate financial risks in our investment assets, this global and macroeconomic downturn will wipe out a very significant portion of our wealth in the coming years. In fact, it is already doing so for most people, although many prefer to focus on valuations and scenarios for the immediate future that suit their own optimistic or pessimistic outlook.

But bear in mind that even if we make the right decisions to steer our wealth in the right direction in this scenario, our agility and room for manoeuvre will depend on numerous factors, both foreseeable and unforeseeable. Some portfolios will be like a speedboat, where a turn of the wheel changes course immediately, enabling them to navigate dangers with enviable agility. But others, even when well-captained, suffer from the inertia inherent in their tonnage. And even if the decisions are correct and swift, they will not avoid certain impacts, simply because their structures and/or size make a change of strategy somewhat slow and complex, with multiple economic and social ramifications.

Just a few Chosen for Glory will reap the rewards of having been able to adapt to the new situation we have found ourselves in—whether we realise it or not—for over a year and a half now. The rest will pay, and are paying, the price. From 2007 until, predictably, 2012, 2017 or 2022 (who knows?), do not lose value in our assets will be the key difference between one group and another. And amongst those who will not only retain their value but actually increase it, we will, of course, find those who have been able to capitalise on the opportunities that arise in any crisis scenario. These will truly be «The Right Stuff», whilst the rest will have to fight tooth and nail to preserve the value of their assets and/or to try to recoup the value lost over the past year and a half.

If we try to extrapolate these calculations to the net worth we know or suspect of people in our social circle, family members or simply acquaintances, we will see that the current and future loss of net worth is, and will be, very widespread. Perhaps this will make some people realise the scale and significance of what is happening to the world, for as we lower the bar for wealth and apply these calculations to the upper-middle and middle classes, the devastation begins to be—but above all will be—dramatic. Let’s change course and, within the financial means of each of us, set a course for the unknown, avoiding the perfect storm as far as possible.

The world has changed, and the value, just like cheese, they’ve taken it away. A wise little book, and more relevant than ever at a time when traditional value creation has, as was to be expected, disappeared for many years to come.

When the operating account and profit margin no longer matter, when the only thing that matters is raising more capital to meet payments and the fictitious returns owed, the end is near. But many hedge fund investors who neither understand nor care about transparency nor understanding the business—they couldn’t care less. All they see is a return that places them among an elite group of «gifted» investors, who manage to turn a profit even in difficult years thanks to cutting-edge techniques, alternative and uncorrelated, which only the smartest can decipher, and these are the ones who don’t invest or those who manage it.

Ponzi, Madoff and many others, both anonymous and well-known trainees, disappeared either before or after the lights came on. However, other vital and well-established businesses are coming closer than is desirable to dangerous practices, at a time when liquidity is drying up and a recession looms. For example, savings banks paying double-digit interest rates to attract funds to plug liquidity gaps, or a National Insurance system striving to maintain the healthcare system at the expense of the pension system.

In the current climate, where money vanishes in exchange for bricks that nobody wants or gets tied up in companies that are closing down, when money is rice, many large, reputable companies are looking more and more like Khufu, Khafre and Menkaure. A dramatic transformation that could prove even more devastating than the Ponzi scheme, only this time it must have been unintentional.