Crisis - Cluster Family Office

Year 2007: An olive tree plus one...

It is almost 10 years since we left the age of financial innocence. That time when indebtedness was not, as it is today, a vital necessity to avoid bankruptcy, but an abused tool to grow and make money out of nothing recklessly. The mirage of bonanza began to fade as early as 2007, although for most mortals the collapse was not evident until the stock markets crashed in 2008. Thinking back to that pre-crash era, a real estate deal we came across in 2007, shortly before the systemic disaster, came to mind. Of course, when we look back at the transaction we are now recalling, we could not have ended up in any other way than plunging into the financial abyss:

The real estate transaction in question was a plot of land to be developed in Andalusia, of very considerable size and price: 58 million €. The negotiation was already focused on the mere interest to be paid for the 50% of the agreed 3-year deferred payment. Up to this point, everything was normal and the previous contacts between buyer and seller were made with the intermediary on duty, an expert professional, one of those who, if you are careless, sells you the Palacio de Versailles as chateau and with a discount for early payment. However, at a certain point in the negotiation, we were able to deal directly with the sole owner of the land, whom we did not yet know: A middle-aged man with a rustic and prudent appearance. But when we started to get down to business, he told us very seriously that the deferred €29 million had to be paid «...".«at the same interest rate as the bank, olive tree plus one«.

We must admit that although we have fought in many bullrings (I would say in almost all of them), it took us a few seconds to react. This was not irony or a joke, or even a metaphor. I was reluctant to believe that someone who confuses the Euro interbank offered rate (Euribor) with the oil yield plus a unit of something I don't even want to imagine, is going to become overnight the owner of 58 million euros: 29 million euros in cash and 29 million euros in 3 years with their corresponding e very interesting olive trees plus one. Comical as well as alarming and scandalous, although many of us envy him from our modest backgrounds.

What will have become of this man and his family after 10 years? Unfortunately we were not able to keep in touch, as his banker-friend (sic) took over, at least for a while. Based on our experiences as asset advisors, I don't think they were any happier than they had been up to the time of the sale. Especially now, after 10 years of covering the mistakes with money that was apparently never going to run out. During these years they will have been manipulated, robbed, swindled, flattered, and squandered in the broadest sense of the word. They will have been the fodder of all those around them, whether they are part of the family or not. Cross hatreds that, with their poor training, have possibly ended or will end tragically. The best thing that could have happened to them was to sell land worth no more than a few million euros. In this way they would have tasted the sweetness of abundance but with fewer enemies, and probably in a few years everything would have returned to «normal», at most some residual and usable property for their children. I hope they have been able to realise their dreams, at least temporarily. But paradoxically They will not have had an easy life after the sale, unless they were just robbed by an honest law firm that took pity on their limitations and cleverly insulated them from their fortune.

At that time (spring 2007) we wrote the following: «It is an aberration that a farming family's land, which has served to feed their ancestors with more than dignity, should overnight be turned into a fortune for which no one has ever prepared them. Perhaps this is an aberration comparable to that which the purchasers of the houses to be built on this land will have to suffer, with mortgages that their children will inherit if they are not repossessed. In the case of the farmer it seems to me to be a creation of wealth against all the laws of capitalist economics. And in the case of the buyers of these flats it is a creation of poverty, curiously enough at the same interest rate: olive tree plus one».

Unfortunately, the financial system could no longer withstand such aberrations, and the nouveau riche rural nouveau riche, the new owners of flats, the construction companies and the banks that financed that nonsense, were caught flat-footed. And the worst thing is that, seen in a decade's perspective, the jungle of the markets and the economy of that time seems like child's play compared to the scenario we face today. Because the collateral effects of dynamiting the price of money to save the unsalvageable have only just begun.

Abróchense los cinturones de seguridad…

Es obvio que la irrupción de Trump en el escenario mundial cambia las reglas de juego en las que bancos centrales y euroburócratas nos habían aletargado. Y su acceso a la presidencia coincide en el tiempo con otros puntos de inflexión que por sí sólos ya merecerían centrar nuestra atención como inversores. Así, Trump potencia y acelera procesos como el Brexit, la subida de tipos del USD y la consiguiente venta de deuda soberana norteamericana, con las consecuencias que ello implica para las reservas monetarias de las mayores potencias mundiales.

Y si por si fuera poco, detrás de Trump está Steve Bannon, que deja la vehemencia de Trump a la altura del betún. El cargo creado ad hoc para Bannon, Estratega en Jefe, le confiere un carácter de hombre fuerte, fortísimo en el entorno del Presidente. No en balde inicialmente debía ser nombrado Chief of Staff, el cargo más influyente de la Casa Blanca, pero por presiones del partido republicano se acabó descartando Bannon en favor de Priebus.

Pues bien, dicho Steve Bannon, contradiciendo la versión oficial del Vice-Presidente Pence, comentó con el embajador alemán en Washington la necesidad de potenciar la relación bilateral Alemania-USA obviando la interlocución europea. Fuentes de Reuters filtraron el contenido de estas conversaciones y aseguran que Bannon y el embajador alemán hablaron de la UE como una construcción fallida y con muy poco futuro. Huelga decir que esta visión coincide totalmente con la del Ministro de Finanzas alemán, Wolfgang Schauble.

Por otra parte, Trump y Bannon potenciarán el Brexit hasta puntos impensables hasta hoy. Y aprovechando la excelente relación del Presidente norteamericano con la familia Real británica, se está planteando incluso la posibilidad de que los USA se unan a la Commonwealth. Un espaldarazo jamás visto a esta unión de Estados que en su mayoría formaron parte del Imperio Británico en el pasado. Y por supuesto, una puntilla para la moribunda UE, que está llevando la pre-negociación del Brexit al terreno de la amenaza y la hostilidad, quizá de manera poco estratégica.

Y en medio de este panorama, las subidas de tipos usd en puertas ya están generando ventas masivas de Treasuries por parte de bancos centrales que hasta hoy habían acumulado cantidades ingentes de ellos. Un cambio de escenario radical respecto a la última década. Y de consecuencias imprevisibles, sobre todo si tenemos en cuenta que uno de los mayores tenedores de deuda soberana norteamericana es el China. Sí, el mismo gigante (entre otros muchos) al que Trump pretende declarar una guerra comercial más que temeraria. Sobre todo pensando en que los chinos tienen el poder de abrir o cerrar el grifo de sus masivas reservas de Treasuries según las necesidades estratégicas de tipos de cambio USD/RMB o las amenazas políticas que a buen seguro veremos en los próximos meses.

Además, en Mayo puede detonarse otra bomba política nuclear y Le Pen puede llegar al poder. Una probabilidad mucho mayor de la que parecen descontar los mercados más visibles (bolsa y bonos), al menos así lo vaticinan hoy mismo desde Bloomberg: «If tail risks are to be believed, the risk of Frexit is larger than what is currently assumed«. Y sin olvidar que Alemania también va a tener en los próximos meses elecciones imprevisibles. Abróchense los cinturones y tomen medidas de seguridad. Especialmente aquellos inversores que creen que la Eurozona seguirá siendo la Eurozona, y los que confían que los euros de su cuenta corriente seguirán teniendo el mismo valor que los de los alemanes.

The beginning of the end of the debt bubble... and its consequences.

News, Crisis, Finance
12/14/2016

It seems that Trump's victory, coinciding in time with the start of rate hikes by the US Federal Reserve, has - at last - given the starting signal for the bursting of the debt bubble we have experienced over the last decade - and this is paradoxical, given that Trump has always been the king of debt with his real estate and business empire - However, this bursting is only visible where the economy seems to be emerging from the hole of deflation and anaemic growth, namely in the US.What happens is that when the Treasury sneezes, long-term debt in Europe and Japan gets pneumonia. And that, the unwary fixed income investors of the last few years should have been well aware of.

So we are already seeing how portfolios of pure fixed income (bonds) that had been promised so happily with the infinite debt rally served up on a plate by the central banks, are beginning to incur losses that surprise their long-suffering and poorly advised owners. The losses they are going to suffer are and will be directly proportional to the greed for yield they have sought, since the vast majority of advisors have preferred to increase maturities rather than reduce the rating of issuers. In other words, in order to obtain a meagre 2% yield, they have preferred to buy long-term bonds from issuers with investment grade ratings rather than to look at shorter-term issuers that are more solvent but less well regarded by the rating agencies (yes, they have been able to buy bonds with a higher rating than those with a lower rating), those same prostitutes who, obeying the voices of their political-financial masters, led us to collapse in 2007).

The consequence of buying debt durations at such an exorbitant price, now that the bubble is starting to lose air, is none other than the devaluation in the price of that debt. This buying frenzy has reached such an extreme that the holder of Belgian government bonds with a maturity of 100 years (yes, yes, a century) is today losing a whopping -30%! And this with a black-leg (AA) rating and only a sneeze from the US Treasury Bond, as the US 10-year bond is still only at 2.5% interest, and therefore still has a long way to go before it normalises at levels of 4-5%. A death trap if ever there was one, where the poor deceived investor will not live long enough to recover this blow to his wealth. It should also be remembered that we are talking about fixed income (sic), i.e. investments that are invested in this type of asset because their owners do not want/cannot/should not suffer huge losses without putting their physical and mental well-being at risk. Moreover, this death trap has become gigantic in the last 10 years, since it has doubled to 45 trillion (45 Tr) dollars! You can read this article of Gurusblog in which they talk about this disaster announced by few.

No one can say that we have not been warning about fixed income risk in recent years. Warnings to which many other advisors in the sector are now beginning to add their voices. SocGen: «The decade-long party in the debt markets is over (...) Prepare for a serious hangover». S&P: «Trump's unanticipated rise has let some of the air out of the bond market bubble». Bank of America Merrill Lynch: «It's a «stampede» out of bond funds», etc, etc... Needless to say that the fall in bond prices will force many to sell their portfolios, exacerbating the falls, which are no longer bleeding thanks to Draghi and company continuing to maintain a demand that is as astronomical as it is unrealistic.

Expectations of an economic revival in the US brought about by President-elect Donald Trump's idiosyncrasies are fuelling and accelerating economic growth and inflation expectations. For example wages have clearly rebounded in the US labour market. For all these reasons, the fall in debt prices around the world, dragged down by the price of the Treasury, seems to have only just begun. And the worrying thing about this new scenario is how far the seams of hyper-indebted countries with public deficits (i.e. with growing debt) such as Italy, Spain, Portugal, Greece... will hold up before winter arrives...

Against this backdrop, the trillion-dollar question is where to find income when the bond market bursts its bubble? There are some, but certainly far from the traditional fixed income fund circuit, as they have to be sought through alternative strategies that neither commercial nor private banks usually have in their sales catalogues. And of course, no one should confuse dividend stocks with fixed income, as let us not forget that stocks listed in developed markets are not cheap enough to take on such risk.

But let no one get depressed, for it would be a far worse scenario for everyone if the debt bubble burst were to be aborted. For that would signal the failure of the economic recovery and the now desperate pumping of central banks to postpone an inevitable collapse. In other words, we should pray that the debt bubble bursts to reasonable levels even if it brings significant losses to poor, ill-advised savers/investors.

Oh, by the way, Merry Christmas!

Steinmeier se enfrentará a Merkel en Febrero: Auf Wiedersehen EU

Merkel no ha tenido más remedio que aceptar a Steinmeier como inminente Presidente alemán. La noticia tiene un calado político aún subestimado por muchos. No en balde Frank-Walter Steinmeier es el Ministro de Exteriores que firmó el documento de 9 páginas con su homólogo francés, en el que se sentaban las bases de lo que será el nuevo Superestado Franco-Alemán. Cabe recordar que en dicho documento oficial ya se rompían lo que hasta hace poco eran verdaderos dogmas en el seno de la UE, con frases como: “We need to recognise that member states differ in their levels of ambition member state when it comes to the project of European integration”. O la inequívoca y demoledora frase en la que sentencia la ruptura de la política monetaria: “The current architecture of the euro is not sufficiently resilient to external shocks or internal imbalances»…»Surplus and deficit countries will have to move, as a one-sided alignment is politically unfeasible”. También el representante de la UE para negociar el Brexit (y ex-primer ministro belga) Guy Verhofstadt, definió 6 puntos sobre los que se debe basar el nuevo Super-Estado Franco-Alemán. A destacar el punto número 4, que dice ni más ni menos: «Set up a central Brussels Treasury», lógicamente independiente del BCE de Frankfurt. Ahí es nada.

Volviendo a Steinmeier, el Ministro de Exteriores que firmó un documento tan inequívocamente «franco-alemán» con su homólogo galo, como decíamos será el nuevo Presidente en contraposición de la canciller europeísta Merkel a partir del 12 de Febrero (dentro de apenas 3 meses). Además, Steinmeier se ha declarado totalmente contrario a la idiosincrasia de Trump, que prefiere hablar con Farage antes que con May, por lo que el cóctel explosivo está servido.

A partir de aquí, los posicionamientos políticos internacionales que parecían monolíticos, se han comenzado a parecer más al caos que se apodera de un hormiguero después de pisotearlo: Francia y Alemania aceleran su organización militar (técnicamente aún bajo una cierta supervisión de Bruselas) ante el previsible adelgazamiento de la estructura de la OTAN. Bulgaria elige a un ex-militar como presidente, que se declara inequívocamente tan cercano a Putin como lejano a Bruselas. Porque esta UE ya no seduce ni a los del Norte ni a los del Este, y pareciera que sólo los del Sur seguimos bajo la anestesia suministrada por los euroburócratas y la liquidez infinita del BCE. Gurús del mundo de la inversión recomiendan ya invertir en el nuevo escenario que se abre ante Putin (Steinmeier también está más próximo a Putin que Merkel). Y ojo, porque algunos hedge funds hablan ya abiertamente de sus apuestas en favor de una ruptura de la UE.

Por el momento, los precios de los bonos se han comenzado a desinflar, a pesar de que los compresores del BCE siguen insuflando en el Sistema dinero y solvencia a destajo para evitar el fin de su coma inducido. Mientras tanto, los inversores que no preparen sus activos y patrimonios para el escenario de ruptura de la unión monetaria, quedarán a merced del invierno que venimos anunciando desde hace mucho tiempo. Alemania desde luego ya se está preparando para ese nuevo escenario al elegir un Presidente como Steinmeier y a un selecto grupo de países económicamente compatibles como compañeros de viaje en los nuevos Estados Unidos de Europa. Auf Wiedersehen EU.