Cluster Family Office Blog

Throughout our lives, there are times when we have to endure unwanted situations – such as being made redundant, a break-up or a new working environment – which test our capacity for sacrifice and resilience. These journeys through the wilderness are gruelling trials that confront us not only with the world around us, but also with ourselves; yet they offer a light at the end of the tunnel – a way out for those who overcome adversity and manage to reach their goal.

During the journey, the traveller will have to overcome a host of obstacles; they will go hungry, struggle to find water, freeze at night, and be worn down by the scorching sun during the day… but the oases will help them to stay strong and restore their energy.

Ultimately, coming of age is a matter of faith in oneself and in the values that help one to endure whatever life throws at them: order, discipline, the capacity to endure hardship, the ability to wait, and the ability to carry on.

It’s good to cross a desert – or several – in the course of one’s life. The difficulties one has faced have given one time to reflect, to get to know oneself deeply, and, most importantly, to better oneself with each new challenge and ultimately to triumph.

I would like to use this text as an analogy for the period we are about to endure in Spain. Until very recently, we were puffing out our chests and believed ourselves to be at the forefront of Europe, with that spectacular growth of 4-5% compared to the meagre 1-2% of France or Germany, but suddenly, as if it had all been a dream, we have woken up to find nothing but a vast expanse of sand all around us – a huge desert from which it will be difficult to escape, though not impossible. Some, those close to the oases, still believe that everything is perfect.

Spain must come to terms with the fact that the coming years are going to be tough, a situation exacerbated by our low productivity and the demise of the two sectors on which growth was based over the past decade: tourism and construction. Only by accepting that the models of the past were flawed can we lay the foundations for future growth to take place.

Let’s take Italy as an example, as it is our close neighbour, even though it is in a different league. Italy has an export capacity that Spain lacks; it is no coincidence that it ranks amongst the world’s top eight exporting powers, even though its trade balance is also in deficit. Italy’s largest exports can be found in the automotive, petrochemical, defence and electrical sectors, but, without a doubt, what gives Italy an advantage over Spain are its key industries – those that are world-renowned and enjoy international prestige, such as the food industry, the fashion industry and the luxury car industry. In this case, the ‘Made in Italy’ label provides the country with a safety net against potential competitors and a lifeline in times such as these.

Spain, on the other hand, despite having exquisite cured meats, wines that delight any palate, and cheeses and olive oils that win awards worldwide (we’ve always been great lovers of good food here), fails to get its products sold in ordinary shops across half the world, as is the case with Italian produce. It’s frustrating to be in a mid-range restaurant abroad, flick through the wine list and see how, amongst the multitude of Italian, French, Californian and Australian bottles, there are barely a couple from Spain – and sometimes not even that. And this is just one sad example of the lack of clout behind the ‘Made in Spain’ label.

Spain must make the most of this difficult period that lies ahead to lay the foundations for future growth, and make a clear commitment to certain sectors in which it can achieve competitive advantages (as Italy currently enjoys) in the future. If this journey through the wilderness does not serve to open our eyes, help us understand ourselves more deeply and strive to better ourselves in the future, Spain’s growth will be doomed to the emergence of bubbles of various kinds which, each time they burst, will only serve to sink us deeper into the quicksand of stagnation and recession.

The first thing I’d like to say is that I apologise for the length of this article, which we could have split into at least two parts, but I think it will be clearer and more convenient if we read it in one go rather than having to go back and reread the first part once the second is published. So here is the full article:

Recently, through our interviews with potential new clients, we have been noticing a mindset that is hardly compatible with a prospect of recession and depression such as the one we are currently facing. Many families and investors are convinced that now is not the time to sell their properties in Spain, to realise their losses on equities, or to sell preference shares and various structured products – which were sold to them here and there – at a loss.

This strategy, if it can be called that, is the one that used to be adopted during market corrections, where a bull market was followed by a bear market in the worst-case scenario. When cycles followed one another with a well-known irregularity and in a context of economic expansion and growth that has been virtually uninterrupted since the Second World War. In such scenarios, it was sufficient for the more passive and less agile investors to ride out these cyclical corrections and wait for better times to recoup the wealth they had temporarily lost, thereby achieving an upward trend in the value of their property and/or financial assets over the long term. Only those who made disjointed strategic shifts in their investment policy were likely to suffer significant losses in their long-term wealth, and we have already referred to these investors in a previous article as «I’m leaving, I’m off there«Both sides had been grappling, with varying degrees of success, with a cyclical, changing but familiar environment.’.

However, the current situation is recessive and we believe that we are facing a a prolonged global recession. Consequently, these cycles are unlikely to repeat themselves in the way we have been adapting them to our assets. As we have already mentioned, we are faced with an unknown order to which For the time being, we can only call it chaos. Just as an anecdote, I’ll tell you that an elderly friend of mine, who’s a multimillionaire, mentioned to us a few weeks ago: «I’ve enjoyed myself and made a lot of money through every crisis. The worse things got, the more and better deals I did, and the more I enjoyed myself. But this one, mate, no matter how much I think about it… I’ve no bloody idea where to start!»

Against this gloomy backdrop, at present we have only one point of reference: Japan. An economy where property prices have continued to fall and whose stock market index has dropped from nearly 40,000 points to 8,000 over the course of two decades. Today, the country’s largest companies are trading on the stock market at the same prices as 25 years ago. A whole lifetime for an investor, no doubt.

The question one might ask is: Are we in the West going to suffer a recession as severe as Japan’s? No, it’s worse. I sincerely hope I am wrong, but Japanese society’s capacity for sacrifice and productivity is light years ahead of that of the West, particularly Latin America. The Eurosclerosis is endemic, and tackling this and other serious production-related problems is a The Great Depression, the big one It’s like trying to run a marathon when you’re anaemic. That’s why we thought, as we said in USA vs Europe, that the timing of the recovery – or rather, the journey through the wilderness – will be slightly less dramatic for the US than for Europe, although it will be very difficult in both cases.

Therefore, although our attachment to Disneyland prevents us from accepting such a harsh reality and such persistently negative prospects, the strategy of holding on to property and portfolios of equities, structured products and preference shares – all of which have seen their prices severely affected – may well be the final straw that causes our wealth to succumb to the global multi-crash we are currently enduring.

No social welfare system can withstand the current crisis affecting the property, stock markets, energy, credit and global liquidity sectors. Therefore, if we focus on property values, selling at a reasonable price now will probably mean selling at a lower price in the future. From our professional perspective, we see on a daily basis how the number of property owners is rising dramatically, even though they do not consider this to be the right time to suitable for sale, have no choice but to put their properties on the market. It is true that many do not yet feel the need to do so because their finances are still comfortable. For some, they have only weeks left; for others, months or even years; but for the vast majority of property owners, it is nothing more than a fatal countdown. Business and/or employment income will be reduced to a greater or lesser extent in this crisis scenario, and rental income used to help pay off outstanding mortgages is also being – and will continue to be – severely affected by the social crisis that is only just beginning. The result will be relentless in the coming years: millions upon millions of multiple property owners will be forced to put their properties on the market for sale, gradually and on a massive scale. And When supply increases, prices can only go one way, few things are as certain as this in the world of economics. Consequently, not only is a recovery in property prices a long way off, but prices are also very likely to continue falling for many years to come, as demonstrated by our sole example of a recession in Japan. At this point, we are reminded once again of the saying: Not selling at a loss today may force us to sell at a greater loss in the future, as our investment career is not eternal, nor are the assets of most co-owners large enough to sustain a The Great Depression, the big one. But we are not suggesting that investors should divest themselves of their property holdings, as we cannot currently envisage a balanced portfolio without them; rather, we should shift our property investments towards areas with better prospects than those in Spain or even Europe, encompassing both speculative investments and wealth protection through prime property holdings.

As for financial assets exposed to risk in equities, structured products or impaired preference shares, we can say something similar, but with the caveat that equity markets are far more unpredictable. Speculative capital flows may return to the equity markets much sooner than to the property markets – even if this is irrational, temporary and occurs against a backdrop of recession. However, if we look once more at our sole benchmark, we will see a chilling historical chart of the Nikkei, particularly towards the end of 2008.

As for the preference shares bought (and sold) as fixed-income securities, whose prices have been hit just as hard as equities themselves, in our view they represent the biggest unknown. We have no previous precedent for a credit crisis of this magnitude. Many investors bought these preference and perpetual issues before the credit crisis broke out at almost par value, as an investment alternative (or simply mistaking them for) fixed-term bonds, for just a few tenths of a percentage point more in annual yield. Since August 2007, some have even been speculating on the sharp falls in these perpetual issues, as if they were variable-rate securities. This is something never seen before, though not necessarily inadvisable provided one is fully aware that the risk inherent in this practice is that of calibration not possible, given that we had never before witnessed such a collapse in corporate and banking finance. Many of these investors – both those who bought at near par before the credit crisis erupted and those who have been buying speculatively since then – have not even done so with a proper understanding of the myriad variables regarding the small print or the circumstances of each issue (cumulative, callable, subordinated, position and value in the event of a credit event, the relationship between the actual issuer and the underlying entity, etc.). It is precisely these variables – which are often overlooked in times of prosperity and mistaken for a simple bond with a maturity date (in addition to other, more obscure and unpredictable variables) – that are leading to the radical difference in the midst of a credit crisis between one Solid corporate debt, a speculative investment vehicle or nothing but a piece of paper. Only time will tell, he says, which is which.

When we hear the explanations given to us by some potential clients regarding why it would be ill-advised to exit the aforementioned markets (equities, various structured products, perpetual debt or preference shares) at this time, it seems to us as though we are hearing the very same words spoken by their respective private banking managers. These are the very same talking points they have been repeating ad nauseam to all their clients for several months now. From 8 am to 2 pm, Monday to Friday, and every other Saturday. «Now is not the time to take losses, as they would be very substantial», «we’ve already hit rock bottom», «now is the time to buy more and better shares (structured products or issues) at very low prices» and other topics of that sort.

The funny thing is that during bull markets they used to tell us: «Now is not the time to realise profits, as capital gains tax would be very high», «Now is the time to buy more and better shares (structured products or new issues) with very good prospects» and other such clichés, accompanied, moreover, by historical results that made the € symbol appear in our dilated pupils.

So, bankers and advisers «free»Generally speaking, They never advise us to exit the market. Not a single one, ever. Obviously to go out It would mean a loss of earnings for those advisers, which they are not prepared to accept. Not them. At most, in a burst of ethical sentiment that should not set a precedent, we might hear something along the lines of: «Wait and see… BUT WAIT INSIDE!», mind you, in correct, friendly and patronising Spanish, that is to say: «Don’t even think about selling at these low prices – we’re in the worst possible situation; bring more cash – everything’s very cheap,», «Take my word for it – I’ve been through this before.». Said by someone in a tie who would never dream of owning even a tenth of our wealth, and as if we wouldn’t lose as much by not selling. The fact is that when people tell us what we want to hear, we make it very, very easy for the commission agents. But if we wouldn’t advise an investor who has remained in cash (and there are certainly some) to enter the market now and buy our equity-based, structured or perpetual financial products at current prices, nor to buy our properties at today’s prices, why on earth… do we hold on to them instead of shifting our assets into those with equal or lower risk that have growth potential in the coming years which is, rationally speaking, far more likely? Let’s look at our risk positions in equities, various structured products and perpetual debt or impaired preference shares, from the perspective of an unprecedented, prolonged depression, and we’ll realise that our assets will suffer greatly if we apply the «Wait & see… but wait inside» approach recommended by those who make a living from our commissions.

It is prudent to wait and see until we can make out a clear strategy in times like these, but this must be done outside in the markets. And although it goes without saying, it is surprising to see how many holders of property or high-risk financial assets are holding on to their positions. But worst of all is that not only does their wealth remain 100% correlated with falling markets, but they are also likely incurring a significant opportunity cost by failing to invest these assets in property with far greater potential, and also in financial assets with much lower risk that would turn our negative returns into positive ones, even within a «wait and see» strategy. We simply need to position ourselves financially outside these markets and relocate our property holdings to countries with better prospects than Spain or Europe. Implementing such strategies is not only psychologically complex for a family, but also requires logistical and professional support to ensure it is done in the best possible way, following a roadmap that must be tailor-made for the client. A Family Office must accompany the family on this journey and resolve any issues that arise as the wealth is adapted to the strategy and the specific needs identified.

If, on the other hand, you think the crisis will be short-lived or temporary, like so many before it, then forget about this article.

«The future isn’t what it used to be.»

Arthur C. Clarke (1917–2008)

It was only 75 days ago that we published the article: «Have a little juice to my health». As you may recall, in that post we analysed the strategies recommended by no fewer than eight financial institutions, namely: Inversis, Dexia, Atlas Capital, Tressis, Banif, Abante, Unicorp Heritage y Lloyds TSB Spain.

Perhaps it was the effects of the mid-August heat and the Summer Red between one screenshot and the next, but as we put it so elegantly at the time: «»Everyone, without exception, is blatantly looking out for their own interests’. Let’s remember that EVERYONE recommended a minimum of between 30 and 45% of stock, with the sole exception of Atlas, which proposed 20%. It would be interesting if Expansion be reissued today the article in question, based on an approximate recalculation of the losses that everyone would incur potential clients who might have followed the advice of those eight organisations. In fact, their published recommendations (and even more so their day-to-day advice) undoubtedly influenced thousands of investors, given the reach and prestige of that newspaper and of the organisations in question.

Some of those names already sound to us like nationalised bankruptcies, such as Dexia or Lloyds. Could it be that, because of their precarious situation, they recommended investing in the stock market when the world was already in tatters? I’m afraid not. Their recommendations – and those of everyone else – were always geared towards profit-making, regardless of stock market cycles. Some organisations have gone down fighting, even though the State brings them back to life on the third day; but what’s more, the rest continue to fire at will. They’ll never learn, neither the financiers nor the speculators. Well, these last ones have certainly learnt their lesson: Losing out. But they will soon forget their mistakes and return to the arms of those who have squandered their wealth. Whether it is the power of their ties, the pompous air of the institutions, or even the greying temples of some of them who are merely awaiting early retirement, the reality is that any banker enjoys enormous, surprising and outrageous credibility amongst their clients. Even from those long-suffering clients who are saddled with very substantial losses through the bankers’ fault, in a paradoxical Syndrome in Stockholm Finance.

The recommendations made by these eight financial institutions are like eight doctors prescribing, via the press, various very expensive slimming pills (commissions and brokerage fees generated by the asset allocation of the eight institutions), which not only fail to help people lose weight but have actually caused ALL users to put on a great many kilos. Furthermore, the side effects of these extra kilos are incalculable (ranging from a loss of savings for old age, to a drastic change in the family’s standard of living, to depression at having squandered, in just seven weeks, much of a lifetime’s hard work). However, these «medical professionals» They continue to prescribe investment strategies on a daily basis which, whether they prove successful or not, have only one clear and inescapable objective: to generate commission for the firm. Proof of this is that Not even in the height of August, when the outlook and the current situation were already looking very bleak, did any of the organisations consulted recommend staying out of the markets. It’s true that everyone recommended being in moderate liquidity, but through money market funds and bonds, both of which incur fees and brokerage charges that drive returns significantly below 5%!!! The exception – albeit a rather dubious one – was once again provided by Atlas Capital, which recommended a 50%, just a 50%, of the total volume in the form of pure deposits, offering a better return and little or no commission for the institution in question.

In the current dire situation, maintaining liquidity at 1.5 or 2% above monetary policy rates – or short-term bonds (which significantly increase the burden of their brokerage fees) – is the difference between a good strategy and a bad one. Given the current state of affairs (and as is always the case), is the difference between an honest and a dishonest professional recommendation. Furthermore, we must deduct the losses incurred by the ‘RV butchers’, which have meant that, for the most part, they have not abandoned the markets due to their eagerness to collect stock market commissions, including their eagerness to collect success fees and their endless variations. The result: Devastating.

Perhaps some people will learn the hard way for a while, but their memory will still be very short.

P.S. Once again, *Expansión* published an article on 1 November (a terrifying day) an article (a terrifying one, too) by M. Martínez, in which he argues that, due to falling share prices of listed companies, their dividends are more attractive than bank deposits – and even more so when compared with sovereign fixed-income securities. Of course, the sources cited all have vested interests in asset management firms that thrive on the commissions generated by stock market investors. Our madness has reached such extremes that one can now confuse the risk of fixed-income investments and bank deposits with that of equities and publish it in a prestigious newspaper such as *Expansión*… Unabashedly peddling the residual dividends from our recent past of a bubbling boom, whilst we are in the midst of being engulfed by the perfect storm, which will swallow up not only the dividends of these listed companies but the companies themselves, whole and unchewed. ¡Leave, Ladies and gentlemen, a boring deposit at 6% – go and buy me that «Dividendus» hair growth treatment…! Keep it coming, it’s war!… We’re in a really, really bad way.

The number of wrongdoers does not justify the crime.

Charles Dickens (1812–1870)

The worst thing the bad guys do is make us doubt the good guys.
Jacinto Benavente (1866–1954)

45 years after his famous speech, Luther King’s dream has been realised with the election of a black man as president of what is still the most powerful nation on the planet. The Republican bid was doomed from the start due to its historical tensions with Bush. McCain was never a serious contender against Obama. He was there because it was his turn, and there was no way for the Republican establishment to prevent it. Some voices see shady dealings which they claim were necessary for Obama to be elected, but in fact some voices see conspiracies everywhere and all the time. Be that as it may, the costly campaign is now history, and the present and the future belong to a black Democrat.

The situation facing the new president is shockingly unprecedented. Barack Obama will obviously go down in history as the first black president of the US, but also for the times in which he has had to govern. Only history will tell whether or not Obama rose to the occasion. A devastated global financial landscape in freefall is what awaits the new president, who, together with the world’s other leading figures, is expected to devise a new form of capitalism.

The G20 summits and their various offshoots will take place over the coming months. A long and uncertain process that would have been derailed by McCain and the Republicans under the pretext of protecting the free market in a fundamentalist manner. Obama supports the death penalty, is anti-abortion, and attends mass almost daily, yet he is still the progressive option who may be more receptive to the The Reformation of Capitalism. But let us be responsible, G20 leaders: without proposals or agreements that are surprising and groundbreaking, we will not find a solution. And only Obama and his team would be able to accept and work on drastic proposals; McCain would not.

What will these proposals be? There is much speculation, but it is nothing more than that. However, it seems logical to assume that preparations for the forthcoming summits – at least for the first one on 15 November – are likely to be very intense. All the heads of state involved in the G20 in one way or another are set to experience moments of glory for their own self-importance. Unfortunately, some will not be up to the task, but these incompetents can rest assured that no one will ever find out. For the time being, the mere fact of acknowledging that the future of the global economy – that is to say, the future of the planet – must lie in the hands of some twenty countries, including states with per capita income of just 1.000$ is already a great achievement for humanity. This simple yet magnificent organisational success – unimaginable amidst the frenzy of the welfare state – is a sign that our leaders (everyone’s leaders) have grasped the significance of the moment. And the G20 leaders and their respective teams represent us all, even if there are not 21 or 22 of them. Only if we see it this way – those who are included and those who are left out – will we be securing the future of humanity.

Now, G20 leaders, surprise us with your proposals. It won’t be McCain we can blame for the failure of the measures to be taken, but Barack Obama, the first black president in US history. Gimme Hope, Obama, Gimme Hope…

This is the current list of G20 members: Germany, Saudi Arabia, Argentina, Australia, Brazil, Canada, China, the United States, France, India, Indonesia, Italy, Japan, Mexico, the Republic of Korea, the United Kingdom, Russia, South Africa, Turkey and the European Union.

P.S. If, against all expectations, McCain wins, we’ll be writing about it shortly Gimme Hope, Obama, Gimme Hope (Part 2).

A spectacular article by Investorsconundrum: «How much is a bank worth today?». I think it’s worth mentioning, by way of memes, all of us who work in this field and write about it should give some thought to the possibility that the global financial solution may lie in minimising the stock market value of banks. The dichotomy between a capital increase and the state plugging financial holes could be the difference between a fall in value for shareholders or for depositors (customers). But beyond this dichotomy of future solutions—whether viable or not—let us reflect on some factors affecting the valuation of banks in the current situation.

The first thing I’d like to do is congratulate Marc Garrigasait for daring to write an article like this. For being radically consistent with a line of reasoning in which he firmly believes (so much so that he has written off his exposure to Koala Capital SICAV (in banks). Hats off to them, whether you agree or not.

I hope that, following on from Marc’s post and this or other memes, various bloggers will also share their views and discuss the future value of banks and their impact on the crisis. Some have already done so brilliantly, such as Gurusblog. And it would also be very interesting if Echevarri, Marc Vidal, Fernan2, FuturFinances, Unience… (to name but a few who are still active), and a long list of other illustrious figures, both well-known and lesser-known, did the same. Now let’s get on with our thoughts on the matter:

If banks are worth whatever someone is willing to pay for them, then clearly they are not worth zero today. Obvious, yet unsettling. The market – that is to say, we – generally cannot, at present, conceive of a world without banks unless we make the (futile) effort to imagine how our great-grandfathers lived when they were courting our great-grandmothers. And that very difficulty in imagining a world without banks already increases their value, whether calculated on an accounting or fundamental basis. We are prepared to pay more for them than they deserve because of our anchor in a multi-generational system that is inconceivable without the banking sector. Is the value we mentally ascribe to it irrational, or is it irrational to think that its real value is zero?

We can also attribute a different kind of value to them. For example, the fact that always have managed to reinvent their business for as long as anyone can remember (with banks, of course). This argument is literally priceless. To explain what I mean more clearly, let’s watch an extract from the following video: Jurassic Park in which, even though rationally speaking the chances of the dinosaurs reproducing uncontrollably within the park’s controlled environment were nil, as the mathematician played by Jeff Goldblum says: «Life finds a way». In this case, we could say that ever since the financial system as we know it came into existence, and despite the various difficulties, «the banking sector has managed to forge ahead».

For various reasons that are probably beyond our understanding today, traditional banking will be restructured in such a way that it manages to endure over time as a strategic and dominant sector. Therefore, if we agree on this, that resilience – or ability to rise from the ashes like the Phoenix, has an intrinsic value that may keep bank share prices above reasonable levels in the near future.

«When the time came for him to die, he would…’ nest spices and aromatic herbs, he added just one egg, which it incubated for three days, and on the third day it burst into flames. The Phoenix was completely consumed by the fire and, as it turned to ashes, the same Phoenix—always unique and eternal—emerged from the egg. This happened every five hundred years.»

It seems quite reasonable to me that the near-total collapse in the value of bank shares could be a solution for absorbing the global shortfall over time. But it is not the only solution, and perhaps not the least traumatic one either. That is another possible reason why they might remain significantly above zero. We do not need banks to fall to zero or near-zero value whilst governments – that is, all of us – retain a certain capacity to absorb shocks, deficits and toxic assets, or simply the ability to postpone the problem through inflation (Rescue Me) and «credit revival».

Not only is that scenario unnecessary, but our view of the banking sector is not objective. In other words, most of us are directly or indirectly involved in banks’ balance sheets, either through assets or liabilities. Our assets are their assets, and will remain so for at least a generation. The credit excesses that caused the bubble – which in turn have led us to consider whether the value of banks should approach zero – have left us up to our necks in debt to them, and it could not be otherwise. We can therefore hardly have the objectivity to value them that we might have with any other listed asset, such as a factory (KO o AAPL) or a distribution company (WMT). With these companies, we can indeed aim to determine their intrinsic, fundamental value and compare it with the value currently assigned to them by the market. And even then, only the privileged They make money from it on a sustained basis. In contrast, our money, most of our property and our hopes and dreams depend on the banks. And that could well be worth a subjective overvaluation, whether conscious or unconscious. At this point, we are reminded once again that: If banks are worth whatever someone is willing to pay for them, then clearly they are not worth zero today. Obvious, yet unsettling.

Another possible reason why banks retain a value higher than they might rationally deserve is the fact that they deal in something that the whole of the First and Second Worlds need: Money. Let’s say they sell, market and – I would say – often traffic in an item whose market share is 100% across the entire planet, with the exception of the Third World, where hunger and destitution shamefully take the place of money. Only in that extreme case of poverty are the inhabitants not potential customers of the banking sector. The rest of the world certainly are, without exception. And we become even more dependent the more wealth we create, whether it be virtual or real. That, then, together with the other arguments we have mentioned in this article, is the goodwill by far the largest on the planet («a set of intangible or non-material elements of a business that represent value to it»).

Furthermore, the political decision for us all to work together to revive the financial institutions that are already wandering the globe looking like zombies in the truest sense of the word Thriller, is taken. The damage caused by the death of Lehman Brothers was the catalyst for a firm, global political decision: Never Again. Without that political decision, the price set by the banks – by all of them – would probably be no more and no less than that of LEH, which, in peacetime no Take a breather. That’s half a dozen $ cents per share. The difference between its share price and that of the other banks should not be sought so much in their balance sheets – all of which are infected by the same virus – but rather in political decisions and arguments such as those we are setting out in this post. Intangible, abstract, irrational arguments that are difficult to grasp… call them what you will, but their effects are evident to this day. Would it not be reckless to ignore factors such as those mentioned when assessing how much a bank is likely to be worth in the near future?

It is also worth noting that all these considerations are based on a scenario without panic; for if panic were to set in, bankruptcy would set in even before share prices had time to hit rock bottom in their free fall.

Congratulations, Marc, on your courage. It’s clear that you’ve made us think and write about something that many of us had vetoed on grounds of liability in the subconscious. That’s all I have to say. Now it’s over to you to decide and have your say.

Do your best to keep up appearances, and the world will give you the benefit of the doubt on everything else.

Winston Churchill (1874–1965)

«Feelings, nothing but feelings»—that’s how the song by Morris Albert. And today we’re going to talk about emotions as they relate to economics.

Already during the 2005, 2006 and, above all, the first half of 2007, a sense of unsustainable, effervescent euphoria began to take hold among some investors. These privileged visionaries acted accordingly, exiting the property market and equity markets well before they reached their peak. This minority was vilified by those around them who continued to make money, deluding themselves into believing Masters of the Universe immortal. But this sense of unsustainable easy money, which was evident everywhere—including in the form of credit—became increasingly apparent to many during the first half of 2007. The overheating was already obvious, and a breakdown of any kind was more than predictable.

At August 2007 arrived the evidence that the dysfunction had occurred and the causes were beginning to be explained in an understandable way for the majority who were still living in a fantasy world. Some hysterical voices were proclaiming the end of the world, whilst others of us tried to keep calm in the face of events that, even back then, seemed to us like a black swan with its feet and beak covered in soot. In October 2007 we all already had the details of what was happening and we were aware of the pathological nature of a system that was already a far cry from Wonderland, even though politicians and the public continued to use euphemisms, whether consciously or not. The stock markets remained largely oblivious to the underlying problem, but the feeling For some, it was already a matter of living through something unprecedented and, at the very least, comparable to the crash of '29.

Fasten your seatbelts was the title we used when we published in September 2007 the sudden realisation that some (still only a few) had when they realised that something serious and far-reaching was happening to the economy: «…The global economy is going through a period of turmoil, much like the passengers on a plane when the pilots detect problems mid-flight. The calm of a journey where comfort had made the passengers and crew forget they were at an altitude of 10,000 metres, travelling at a speed of 950 km/h and with an outside temperature of minus 25 degrees, has suddenly been abandoned…»

As early as the the first few days of 2008, our feeling was from a clear and imminent perfect storm meticulously and menacingly orchestrated. We immediately saw a mini stock market crash, which we described at the time as Coitus interruptus, as our feeling The view was that the stock market should have fallen much further than it actually did at the time.

In the month of April 2008 The divergence between bond spreads and equity markets that remain sky-high led us to write: The Unstable Chemistry of the Economic Molecule, which showed that this instability would soon have to find a balance. At that point, our feeling y hope was that the RF would stabilise in favour of maintaining equity market levels, although we noted that the opposite movement was, unfortunately, the alternative. It was clear that the situation at the time was unstable and needed to find its equilibrium quickly. Just six months on, the stock market has plummeted and we still have no indication of when it will bottom out.

At this stage, we can say that the balance between debt spreads and stock markets has been restored. We can also say that the most serious social consequences of this global multi-crash are only just beginning to emerge. That the political decisions to save the System and the global banking sector are firm. That the schedule of meetings designed to lay the foundations and regulations for the future of capitalism has already been set in motion, etc. In other words, we have the diagnosis (which remains Forecast: Undecided), the global policy decision has been made, and despite the fact that the recession is already affecting more than 40 countries and the social outlook is extremely bleak, we are beginning to see the feeling that the mistrust it may start to ease off slightly shortly.

We must not confuse an incipient easing of mistrust with an improvement in the situation, or even with a brighter outlook for the future. The road ahead remains bleak, and the macroeconomic figures and the worsening situation are far from having bottomed out. But the mistrust seems to have been largely priced in by now. If this feeling we have turns out to be true, how will it play out and how can we capitalise on it? We come, as usual, to the million-dollar question.

The situation, akin to a house of cards collapsing, is so serious and widespread that it is difficult to predict where we might capitalise on even the slightest easing of mistrust. Perhaps the extremely high volatility near a floor will create a mirage which, between technical indicators and fundamental analysis, will lead us to enter an equity market that is doomed to a flat line for many years of recession. Something akin to what is known as stagflation, but with the concepts of stagnation and volatility: Stagnation, volatility? On the other hand, perhaps a slight recovery in corporate debt liquidity will leave us in the hands of giant companies with a future built on shaky foundations. The much-heralded «credit revival»—perhaps necessary for the survival of the system and of millions of people and businesses—may lead us to mirages in fixed income and equities, fuelled by a slight recovery in confidence. But we must not forget that the fundamentals of this The Great Depression: The Big One There are more films than ever before.

Despite everything, our gut feeling is that mistrust is set to ease, the effects of which could be highly beneficial, but also highly dangerous. We have spent so many months with the ground constantly shifting beneath our feet that we will be inclined to cast aside our mistrust at the slightest sign of improvement. We will therefore be overreacting positively just as we head straight into the eye of the storm. But even as we head into the heart of the storm, doing so with greater confidence provides a great deal of stability. Especially for the financial system, at least as we know it so far.

Our most significant thoughts are those that contradict our feelings.

Paul Ambroise Valéry (1871–1945)

There is a lot of talk about whether or not it is time to abandon liquidity and start investing in the stock market, although for many, it was liquidity that abandoned them some time ago. It is true that today many companies are already trading at a good price or even at a low price. ridiculous prices as my friend Pepe (a great manager if ever there was one) told me a few days ago. Buffet and other greats already proclaim to the four winds their greed to buy good companies. There are also voices arguing over whether the famous claudication has already taken place or not.

Many have traditionally thought, and even more do so in times of crash, about entering or exiting equity markets on the basis of the Switch Mentality. We have given it this name because it only contemplates two radically different positions: On and Off. In other words, we are up to their necks in it o nwe keep you in liquidity. However, we must bear in mind that, even at these two extremes, there are those who remain liquid with small percentages in stocks that were left up there, such as a mountaineering anchor that was put in place with the intention of making progress but is waiting alone for the market to one day approach it and make it useful again as an investment. And at the other extreme, there are also those who are not only up to their necks in the stock market, but also owe mortgages or even loans they took out to take advantage of the bargains with PER's as low as 25 or 50.

Most of them, however, have a Switch Mentality that only contemplates the simplistic patrimonial strategy of in or out of the stock market. As we explained in Circumstances vs Return/Risk, Our wealth is much more than the money in the bank. Moreover, within what is cash, we must be clear about how much of it we can risk in the stock market, and be aware that this money may not only not generate income for us, but may also be lost to a large extent. All this, within the framework of a Vital Balance which is the roadmap of our life and heritage. For all these reasons, the Switch Mentality is not only simplistic, but also extremely dangerous, as it only has a chance of success if we can guess the exact moment of the market floor. And even then, depression can condemn our longed-for liquidity to a despairing market. flat for many years. Most forget that, even in a non-depressive era, the Dow Jones barely rose by 10% between 1965 and 1983.

We must therefore be aware of the need to forget simplistic strategies and of the need for a moreafé for all. Our heritage is complex and multifaceted. And our circumstances are even more so, and very changeable over time. Therefore, our stock market investment strategy must also be complex and multifaceted.

When we think of the timing When it comes to investing the part of our assets allocated to equities, we must also be clear about the extent to which we are doing so. We must be aware that investing our entire stock market buying power in a few weeks is a gamble. Without the capacity to react to a probable error, either because we are wrong at the time or in the specific assets we are buying. Even if we get the tempo We may need this room for manoeuvre due to a sudden change of scenery or a substantial change in our assets, among many other possible reasons.

I know that many of you will say that with very small assets, the amount to be invested in equities allows little room for manoeuvre. And that is reasonably true, even if, depending on personal circumstances, the percentage of total assets that are susceptible to risk is higher. But for the middle and higher heritage, the switch mentality is one of the most serious mistakes that can be made, as it has only one and only one chance of success. as mentioned above.

Obviously this mentality must be incompatible with a long-term investment that seeks value in our purchases. But it is also reckless to rush in and out of the market even for investors who rely on technical analysis, as they still have only one chance of success even if some figures are highly reliable. Mistakes and/or technical exceptions, with this mentality, can have even more serious consequences than for the investor. value.

«If you can't do the time, don't do the crime.»

Investor in Derivatives (1978-2008)

In recent days, the United States and the European Union have proposed a series of world summits on the financial crisis, which began after the US presidential elections on 4 November. The credit crisis that has hit the markets has led the United States and its European allies to seek ways of mitigating the impact on their financial systems. At first glance, it may seem that the recession that is palpable in the air will affect both sides equally, and there are even those who believe that the United States is faltering as the world’s leading power, but we are probably a long way from such a scenario…

It is true that the current crisis will have repercussions and take its toll on the country’s economy, but it is no less true that the United States has all the necessary ingredients to remain a global economic powerhouse – quite unlike the situation in Europe, where crises tend to be more painful and protracted.

Between 1973 and 1982, the United States experienced one of the most damaging periods of inflation in its history. As measured by the Consumer Price Index, prices more than doubled during that decade. In 1979 alone, inflation reached 13.3%, paralysing the economy with the phenomenon that became known as “stagflation”, which led many commentators to doubt whether the United States could compete on the world market. Jimmy Carter delivered a famous speech in which he warned of “the existence of a crisis of confidence that was affecting the very heart, soul and spirit of the national will, and which threatened to destroy the social and political fabric of the United States”. Also during that period, major Japanese multinationals bought some of the country’s most iconic buildings, and it was even thought that the United States would be unable to compete with Japan’s efficient economy. The outcome is well known to all.

One of the factors that should be of greatest concern to Europe in relation to the United States is its lower competitiveness compared with the US economy. Taking the aforementioned crisis as a starting point, the differences that currently exist can be clearly seen. Between 1983 and 1984, the unemployment rate in the United States rose to over 10%, whilst that of countries such as Germany, the United Kingdom and France exceeded 12%. From those peaks, the United States began a rapid economic recovery, with unemployment falling whilst GDP rose, whereas European countries were left severely affected and stuck at much higher levels of unemployment, even as their economies picked up.

There are two concepts – which I shall not dwell on at length – that explain the United States’ rapid recovery compared with Europe and its current competitive advantage. The first, known as Eurosclerosis, discusses the lower competitiveness of European labour markets, due to unemployment benefits, relative bargaining power over wages – which entails higher dismissal costs and higher minimum wages – and lower competitiveness in the goods and services market, which we will address in greater detail later. The second concept is the Hysteresis, which explains how, despite the fact that European markets and their institutions were more efficient during periods of strong growth such as the 1970s (and unemployment rates were lower than in the United States), following severe disruptions, these institutions proved incapable of responding to such shocks and did little to resolve the problem of unemployment, instead acting as a brake on recovery. Thus, a persistently high unemployment rate leads to a rise in long-term unemployment and a loss of skills amongst the unemployed, creating a vicious circle that is difficult to break.

In business terms, the differences between the United States and EU countries are also striking. On the one hand, if we look at the largest companies in various sectors, we can see that US firms occupy the top spot in the rankings, if not the entire podium. Companies such as Google, Johnson & Johnson, Intel, Microsoft, Apple, Oracle, Walmart, Coca-Cola, Procter & Gamble and a very long list of others are a clear example of this.

Furthermore, and even more noteworthy than the fact that it is home to the world’s largest companies, is the large number of small and medium-sized enterprises, on which job creation largely depends, and the much higher proportion of entrepreneurs compared with Europe. Ultimately, those small start-ups that survive will become the medium-sized or even large companies of the future. The well-known ‘American dream’ is not merely a cliché, but has its counterpart in real life.

Finally, although the American public education system leaves much to be desired, the major private universities provide a breeding ground for business start-ups and for training the best leaders – something that is hard for other universities around the world to match. The University of California, Harvard, MIT and Stanford, for example, are veritable meccas of scientific knowledge and technological innovation. By contrast, government control and regulation of universities by European authorities constitute an objective restriction on their freedom of action. It should also be noted that public universities in the United States receive only a portion of their funding from federal and state governments, unlike the situation in Europe. Consequently, the ongoing pursuit of both private and public funding acts as an incentive to maintain the highest standards of excellence by recruiting the best talent, regardless of their background. These individuals subsequently show their gratitude to the university that nurtured their professional development, by substantial donations which enable the school to carry out major projects and continue to attract talent from around the world: Cluster effect in its purest form.

Facebook, a recent mass phenomenon, was invented by a group of Harvard undergraduates, for example.

In short, the United States’ ability to respond to this multi-crisis we are facing suggests that it will be greater than that of Europe – unfortunately for us – and, with that in mind, we prefer to invest on the other side of the Atlantic, given that the investment opportunities are comparable.

The date and venue for the first meeting to «Refund Capitalism» have now been set: New York, in late November 2008. The intention has been to begin discussing the future of the system in the very place ‘where the problem began’, in the words of Sarkozy himself. Coinciding with the rotating presidency, he has established himself as the EU’s leading statesman, despite having to parade Barroso alongside him – a man who is merely asked to smile for the photographers and only open his mouth to read short official speeches written by the French team. In fact, Sarkozy is always accompanied in his duties as saviour of Europe by their Minister for the Economy, Lagarde, whilst Barroso carries their suitcases. And I don’t think that’s a bad thing.

At Bretton Woods (New Hampshire, 1944), the foundations of modern capitalism were laid, following a turbulent Second World War that placed the US at the forefront of the global economy. It was there that the World Bank and the IMF. The International Bank for Reconstruction and Development (IBRD), was set up on an ad hoc basis to tackle poverty and the devastation caused by the Second World War in Europe. The 1944 meeting lasted 22 days, and let us hope that the one scheduled for next month in New York will not be rushed. The participants currently include the G8 plus other selected countries such as Australia, South Korea, Saudi Arabia and the so-called BRIC nations: Brazil, India and China.

Heads should roll there in the most solemn, thorough and far-reaching sense of the word. From highly restrictive regulations to bans on financial practices and products that have been proven – or are merely suspected – to be harmful. And the individuals responsible: those at the IMF and the leaders of those countries that are failing to properly implement the emergency measures adopted to date and those to be adopted in the run-up to the summit itself. I hope, for the sake of us all, that justice will also be done to the credit rating agencies, and that at the very least the «»chemical castration' of the rating agencies that, with a sledgehammer approach, packaged NINJA (No Income, No Job or Assets) mortgages under flashy labels with lots of A’s.

Personally, I think the case of these rating agencies is the most blatant. But the most scandalous thing is that they continue to issue ratings shamelessly. Without going any further, just the day after the giant UBS Although it received a bailout from the Swiss government, its credit rating and outlook were downgraded. However, its instability had already been plain for all to see ever since the serious damaging effects of the collapse of Lehman Brothers on its balance sheets were acknowledged. As I said: Chemical castration and a short spell in Guantánamo It would not be a particularly disproportionate punishment, given that most of the prisoners held there have never caused so much harm to the US or to the global financial system like these con artists in suits.

Let’s see how these seemingly robust regulatory measures and the public and private reprimands play out. Let’s hope that Bush’s in-person attendance alone – accompanied, as he will be, by the new president’s team (expected to be a Democrat) – does not stand in the way of far-reaching reforms that are currently facing strong Republican opposition.

There is already talk of the toxicity of hedge funds and tax havens, although the only aspect of the latter that can be criticised is the lack of transparency surrounding the domiciliation of companies issuing securitisations. In other words, it is not the low or non-existent taxation in these havens that is being criticised, but rather their lack of regulation, which allows debt securitisations to be issued under the apparent – and only apparent – umbrella of solvent entities. Consequently, many large companies have issued debt through pseudo-subsidiaries based in tax havens, which, when push came to shove, they have been forced to abandon because these issuing companies had minimal or no legal ties to the multinational that had originally lent them its name and brand. For years, it was not necessary to publicly declare the absence of a firm legal link between the issuing company and the multinational that lent its name and image, as a credit event was unthinkable; but in recent months – and I fear this will remain the case for some time yet – the last one is the fool.

In view of this practice by the duty court, they should condemn the so-called ‘mother organisation’ and, of course, the de facto matrix, rather than tax havens. There is no doubt that improving the legal transparency of these countries will make it more difficult to repeat such underhand tactics. But tax havens, as their very name suggests, will always be beneficial in an environment that is often subject to excessive regulation. Provided that they cooperate in the fight against money laundering and fraudulent securitisation practices, although, as we have already said, that responsibility must be addressed within the multinational Who actually benefits from that issue, which is registered in a tax haven? Will it go ahead? I’ll have to see it to believe it, but we need to trust the politicians who are going to try to save us.

Sarkozy, Brown y Obama have the chance to go down in the history books with a stature worthy of the Great Names such as De Gaulle, Churchill o Lincoln. For those of us from the Bretton Woods era, we always had Paris to fall back on… Let’s hope that from now on we’ll always have New York to fall back on, and that Guantánamo will finally take on a global significance.

Character is the virtue of difficult times.

Charles De Gaulle (1890–1970)

The price of greatness is responsibility.

Winston Churchill (1874–1965)

Almost all of us can cope with adversity, but if you want to test a man’s mettle, give him power.
Abraham Lincoln (1809–1865)

I hope that we will soon begin to see corporate developments in what might in future be known as Sustainable Banking. In other words, newly established entities, most likely backed by traditional banks – or, shall we say, banks from the previous era. Perhaps some large corporations that have so far remained on the fringes of the financial system might also have a stake in these new Sustainable Banks, or even – why not? – some governments.

The question is how these new banks will be regulated to ensure their long-term sustainability. Not only must the institution itself be sustainable as a business, but the overall financing system (for individuals, businesses and even states) must be substantially overhauled. Sarkozy seems to be taking the reins of an EU that resembles a school playground – albeit one with frightened pupils who are more willing than ever to put their mischief on hold. The shock has been such that there is no talk of stricter regulation, but rather of The Reformation of Capitalism, and interestingly We actually published that very same concept a month ago, following the approval of the Paulson plan. At least within the EU, with Sarkozy at the helm and Brown’s support, that is the roadmap. But it now remains to be seen whether Obama shares this view or, on the contrary, whether the lobbies Americans continue to live in Disneyland and are pushing for the situation to change only as much as is absolutely necessary – in other words, more of the same until the next outbreak.

Given our current lack of knowledge about the future, we might surmise that sustainable banking needs to increase its liquidity ratio (2%) several-fold, and that we must return to the very origins of banking. Perhaps we will soon see new sustainable banks that pay interest on our deposits at official rates rather than the Euribor. And furthermore, that they do so at the not that sort of person, rather than to the Euribor plus as is currently being done.

We must bear in mind that the current situation has enabled us to place with arelative normality large sums (€25 or 50 million) under the following conditions: The two major banks, BBVA and BSCH, currently pay approximately 6.75% per annum on these large deposits, whilst second-tier but highly reputable institutions such as La Caixa, Popular, Bankinter, etc., offer rates of up to 8%. It goes without saying that third-tier institutions, such as small savings banks and banks, far exceed that 8% rate for one-year deposits of such amounts.

In fact, large sums of money are remunerated in proportion to the cost of the respective CDSs. But the most alarming thing – if indeed we still have the capacity to be alarmed by anything – is that the spread between the cost of funds paid and received no longer matters at all; that is, the difference between the bank’s asset and liability operations. No bank cares about that anymore, and they shamelessly pay interest on large deposits at rates far exceeding those on the meagre lending they actually carry out. For those who haven’t yet guessed, the reason they do this is that the spread their operations are supposed to generate no longer matters much. core business, all that matters is plugging the holes. Bail out the water in a crude and desperate manner.

That is why sustainable banking must return to its original form, where it would probably be unable to generate the huge profits of recent decades. But there is no doubt that today they would attract a flood of money even if they offered only Euribor minus 1.5% on one-year deposits. Or would anyone with half a brain really prefer to lend their money to Bancaja or CAM at 6%?

Let’s hope we get to see the new face of sustainable banking soon, because personally I’d rather not see the same old familiar faces which, even though they’ve been cleaned up and spruced up by Big Brother, are looking more haggard by the day and are becoming increasingly frightening.