Economia y finanzas - Cluster Family Office

The abuse of bricks and mortar in Spanish wealth

It is very curious to see how in Spain there is a very different mentality regarding the allocation of household assets to that of American households. As you can see in the interesting chart published by Inbestia and reproduced below, approx. 80% of Spaniards' assets are allocated to real estate, i.e. the main residence and additional real estate. Therefore, less than 20% are allocated to financial assets, such as shares (listed or unlisted), investment funds, pension funds, life insurance, deposits, etc.

If we compare the allocation between Americans and Spaniards, we will see that the preference for companies in the world's leading economy is much greater than in Spain and most other countries (although it would be interesting to know the figures for the north of the EU, which we suspect must be closer to those of the US). The entrepreneurial culture of North Americans is much greater, and half of their assets are invested in both listed and unlisted shares (mostly in their own businesses or with partners), investment funds, pensions and life insurance.

Why are Americans more inclined to allocate their wealth and savings to companies in general? Do we in the rest of the world not like our money to work for ourselves? Haven't the real estate bubbles affected Americans as much or more than Spaniards? The answers are not simple, but rather an accumulation of factors that make up the difference between one financial allocation and the other. Let's look at some of these reasons:

The financial culture in which American society is growing up has an entrepreneurial tradition and the majority of the population is clear that the only engine that moves the country and that can lead them to well-being is to participate in one way or another in the creation of wealth achieved by companies. Either as employees seeking hierarchical job progression or as small entrepreneurs (franchisees or with small personal businesses). They expect little more financially from their state. By contrast, in Spain and much of the rest of the Western world, there is less of an entrepreneurial culture, and more reliance on state-dependent labour activities, which are generally a little less liberal and a little more interventionist than in the USA.

Another aspect that makes Spaniards more inclined to accumulate our wealth in real estate than Americans is precisely the unpleasantness that the financial sector has been giving us in recent decades. For our banks, even today, volatility is the demon from which they recommend their clients to flee. To this end, they offer them all kinds of products and structured products with the obsession to reduce volatility, a concept that they mistakenly consider to be synonymous with risk. And of course, when volatility is confused with risk, it is much easier for the banking sector to sell low-volatility products than high-volatility ones. What customer will not try to avoid a high-volatility product if they are told about high risk?

Therefore, the general opinion of Spanish savers is that it is much riskier to invest in the stock market than in less volatile banking products or in real estate. And here we come to the second derivative: How have the low-volatility banking products sold by banks in recent years been performing? Well, in the best of cases they have been mediocre, and in the worst of cases they have been abused or have been directly sentenced to court, as in the case of the preference shares. This unhappy end to many of the low volatility products has exacerbated Spanish investors' appetite for real estate, reaching the extremes in Spain that we have seen in the graph: almost 90% in real estate and assets of their own personal business, such as self-employment, etc.

The right balance of wealth should moderate real estate and boost financial investment to levels similar to those seen in the USA (not for nothing is it the society with the leading wealth and GDP per capita on the planet). Families should enjoy financial investments that work to generate wealth for their old age, as the state pension is not going to do this sufficiently (and even less so in Spain). In addition, the US regulator limits more and better the access of retail investors to structured products and other nonsense that Spanish banks sell with impunity to any retiree without financial knowledge. This limitation on the sale of complex products to retail clients in the USA also channels a good part of these small savers to ordinary equity funds, which are less afraid of volatility and more inclined to buy the idea of investing in companies.

And what about real estate - does it not also guarantee the generation of income for our old age? The answer is yes, but with some additional risks that need to be highlighted: By massively concentrating our assets in real estate, we will be at the mercy of geographical risk, local economic risk or country risk, and the risk that the real estate cycle will no longer be favourable to us when its growth becomes saturated. Not to mention the risk of non-payment, maintenance and rising taxes on property owners. The diversification and freedom of movement that comes from acquiring shares in good companies all over the world, creating wealth in the most diverse sectors and countries on the planet, is hard to achieve with real estate investment. And the capacity of the business world to adapt and overcome whatever the future circumstances of the economy may be in the coming decades will never be able to be achieved by the inert brick.

Finally, the common characteristic of new clients who come to Cluster Family Office has always been the overload of properties in their portfolio. A lack of diversification that many paid dearly for with the bursting of the real estate bubble after 2007. And one of the first things we do for new Clients is to replace real estate and rentals with financial investments through versatile and fiscally efficient vehicles. They should make their money work for the family, either by generating alternative income to rents by buying good alternative funds or by seeking to grow portfolios by buying good equity funds from around the world. The volatility - not risk - that can be assumed by each family and professional circumstance in the financial portfolio should determine the proportion of investments in company shares or in alternative strategies that generate more stable income.

To make the 2-speed omelette, the Euro shell must be broken.

The euro is rising. It has now recovered by almost 5% from its lows below 1.04 against the dollar. It would appear that the strength of the German economy is outweighing the weakness in the south and east of the EU. It is as though the very fact of having acknowledged that progress will be made at – at least – two different speeds has allowed the single currency to leave its uncertainties behind.

It is as if the figure published by the IFO German (112.3) – higher than expected (111) – could serve to reinforce and accelerate the rise in interest rates in Europe, in true American style. It is true that this and other figures confirm Germany’s economic recovery, but these trees of unambiguous optimism must not prevent us from seeing the forest in which the currency is mired unique. And that forest is none other than the very unworkability of its quality as unique. In other words, the euro is still shared by many countries that are a world away from even imagining a relaxation of the quantitative easing measures with which the ECB is flooding the economies of the South. And this makes an interest rate rise impossible – a rise which, paradoxically, the market is already pricing in with the euro’s recovery against the dollar.

Where does this paradox lead us? Well, it leads us to the conclusion that The more the market prices in a rise in euro interest rates and a scaling back of quantitative easing by the ECB, the closer we will be to the emergence of a two-speed Eurozone, and therefore to the breakdown of the single euro exchange rate. Since either the euro will cease to be the single currency and begin to trade at different rates across the eurozone, or a rise in interest rates will be impossible, in which case the price of the euro against the dollar and the rest of the hard currencies The risk of the eurozone itself imploding (to use the term employed by EU leaders themselves to justify this ‘two- or multi-speed’ approach) should be priced in once again and fall back to record lows.

If the euro exchange rate remains fixed, it is impossible to raise interest rates, as we in the South simply cannot afford it. Here we need zero interest rates and high inflation to gradually erode the debt. However, in the German core, what they cannot and will not allow is for interest rates not to rise and for their much-feared inflation to surge beyond desirable levels. Therefore, faced with such a dichotomy, either Mr Market is heading in the opposite direction, or the already-announced ‘two-speed’ Europe is just around the corner.

Nor is the strong reaction from Dijsselbloem, which suggests that many northern Europeans no longer feel obliged to show even political correctness towards those they consider to be, de facto, no longer part of their European core or hard centre. Their apologies – forced, perfunctory and belated – betray that sense of detachment and disconnection which we, the inhabitants and investors of the South, do not yet seem to have grasped. The curious thing is that the average investor in the South has accepted the ‘two-speed’ model without realising that this implies two different exchange rates and two distinct interest rates. Not for nothing Guy Verhofstadt (yes, the very same person who is overseeing the Brexit negotiations on behalf of the EU) has already stated publicly that it should be set up a second central bank in Brussels. Two speeds, two monetary authorities… It’s as plain as day, and we have to to be prepared for that scenario.

To create the «two-speed» omelette, the euro’s shell must be broken. The ‘single’ currency must be split in two. And although they will share the same name and have virtually the same initial exchange rate – to avoid panic – they will have different valuations and different interest rates within a short space of time. These differences in interest rates and exchange rates will be in line with the needs of the various economies – as is only to be expected. And the most curious thing is that even some institutional investors, who do manage to envisage the emergence of these two speeds and two monetary policies, are surprisingly confident that Spain will be in the first speed! Why? Well, because the Spanish government has said so, touting the highest GDP growth in the Eurozone, whilst ignoring the budget deficit, the debt and the appalling, endemic unemployment. And as we all know, governments – especially those on the European periphery – are always spot on with their forecasts, aren’t they?

It is now official: Eurozone 1 and Eurozone 2

It is now official. In the covers The inevitable news of a death more than foretold by a few, who branded us as quasi-aliens for predicting the break-up of the Eurozone five years ago, has already been published all over Europe. Hollande and Merkel have chosen the pompous Palace of Versailles to announce that the EU of 27 has no future and that the Eurozone of 19 should at least go at two speeds. And so as not to panic the markets in the face of such an official statement, the announcement was staged with two guests of stone. The two guests with the largest - and therefore most dangerous - economies in the Eurozone: Italy and Spain.

In this way, the statement manages to give the desired image of North-South coordination. I mean coordination as such, not as an image of unity in any case. After all, it would be strange if the announcement of a two-speed Eurozone were staged exclusively with representatives of the first speed, wouldn't it? Moreover, as if the announcement were not already a hot enough potato in itself, it has been taken up by four presidents, three of whom are in precarious positions at the helm of their countries. Hence the precariousness also of the only apparent control of the situation.

Nor is the tone and vocabulary chosen by Hollande in the the interview a chorus of journalists from the media chosen ad hoc to cover the Versailles announcement (Le Monde, The Guardian, La Stampa and Süddeutsche Zeitung). When the journalists asked the French president why he was staging the announcement together with Merkel, Gentiloni and Rajoy, his answer was precisely scripted: «...the French president's answer to the question was: 'I am not a Frenchman, but a Frenchman.«Angela Merkel and I consult each other regularly. Before all European Councils and on all issues. It is in Europe's interest. But it is not an exclusive relationship. With the 60th anniversary of the treaty being celebrated in Rome on 25 March, it seemed logical to us to associate Italy and invite Spain«. In other words, Hollande and Merkel are managing the decisions, and for the staging (to be in the photo) willingly and graciously associate themselves with Italy (as a gesture of respect and recognition of a historical partner of the EU since its creation) and invite generously to Spain. Both as representatives of those of us who do not belong to the hard core of decision-making or to the high-speed economies. A gesture to reassure a periphery that might otherwise reject such a statement outright as totally alien to it if «someone of its own» is not included in the photo.

We are undoubtedly facing the official recognition of the opening of a melon that no one is even remotely sure how to handle. But whose staging, with representatives of the two speeds hand in hand and in apparent agreement (as it could not be otherwise), should open the eyes of all of us who seem condemned, due to our bad head/economy, to the 2nd speed. At this point we must insist once again on the warnings (here, here y here) that we have been making to investors in order to avoidance of asset depreciation (both financial and real estate) that such a broken Eurozone and 2nd speed inherently entail.

Now that it is no longer taboo or politically incorrect to talk openly about a two- or multi-speed Eurozone, political and financial analysts around the world have begun to publish its possible scenarios. Particularly surgical is the analysis of Wishart, Rojanasakul and Fraher from Bloomberg, in which they present 3 scenarios involving the break-up of the Euro. And 3 other scenarios that would allow maintaining a single Eurozone and a status quo as it is today for some time to come. In any case, we are already in a Europe that is somewhat more realistic and very different from the one that has been simulated for so many years. The 2017 ballot boxes will largely decide when the Eurozone breaks up and the future of today's Europe, which is much better than what happened in the old Europe whose destiny has historically been marked by wars. In the meantime, investors in the south should take safety measures and prepare to live in 2nd gear but enjoying 1st gear assets.

Fasten your seatbelts…

It is clear that Trump’s emergence on the world stage is a game-changer in a landscape where central banks and Eurocrats had lulled us into complacency. And his rise to the presidency coincides with other turning points which, in their own right, would already warrant our attention as investors. Thus, Trump is fuelling and accelerating processes such as Brexit, the rise in US dollar interest rates and the resulting sell-off of US sovereign debt, with the consequences that this entails for the currency reserves of the world’s major powers.

And as if that weren’t enough, behind Trump is Steve Bannon, which makes Trump’s vehemence look like a drop in the ocean. The position created specifically for Bannon – Chief Strategist – lends him the air of a strongman, a very powerful figure within the President’s inner circle. It is no coincidence that he was initially due to be appointed Chief of Staff, the most influential post in the White House, but pressure from the Republican Party ultimately led to Bannon being passed over in favour of Priebus.

Well, Steve Bannon, contradicting Vice-President Pence’s official version, discussed the matter with the German ambassador in Washington, the the need to strengthen bilateral relations between Germany and the US whilst bypassing European dialogue. Sources at Reuters revealed the content of these conversations, and they claim that Bannon and the German ambassador spoke of the EU as a failed project with very little future. Needless to say, this view is entirely in line with that of the German Finance Minister, Wolfgang Schäuble.

Furthermore, Trump and Bannon will take Brexit to levels that would have been unthinkable until now. And capitalising on the US President’s excellent relationship with the British Royal Family, The possibility is even being considered that the USA joins the Commonwealth. An unprecedented show of support for this union of states, most of which were once part of the British Empire. And, of course, a further blow to the ailing EU, which is steering the pre-Brexit negotiations towards a climate of threats and hostility – perhaps in a rather unstrategic manner.

And against this backdrop, the impending rises in US interest rates are already triggering massive sell-offs of Treasuries by central banks which, until now, had accumulated vast quantities of them. This marks a radical shift from the situation over the last decade. And the consequences are unpredictable, particularly given that one of the largest holders of US sovereign debt is China. Yes, that very same giant (among many others) against which Trump intends to wage a trade war that is nothing short of reckless. This is particularly true given that the Chinese have the power to open or close the tap on their massive reserves of Treasuries, depending on strategic requirements regarding USD/RMB exchange rates or the political threats that we are bound to see in the coming months.

Furthermore, another political bombshell could go off in May and Le Pen could come to power. This is a much greater possibility than the most prominent markets (the stock market and bonds) seem to be pricing in, at least That is the forecast being made today by Bloomberg: «If tail risks are to be believed, the risk of a Frexit is greater than is currently assumed«. And let’s not forget that Germany is also set to hold unpredictable elections in the coming months.”. Fasten your seatbelts and take safety precautions. Particularly those investors who believe that the Eurozone will remain the Eurozone, and those who are confident that the euros in their current account will continue to be worth the same as those held by Germans.

Front National: The future monetary policy of France and the EU

Yes, yes, we know that Marine Le Pen's proposals are often extreme and even dangerous, at least as far as the model of society advocated by her party, the Front National, is concerned. But any analyst with two fingers of economics in his or her forehead should recognise that the current EU, with its single monetary policy and its North/South divergences growing beyond the point of return, is a dead end. A real cul-de-sac, in spite of the Europeanist financial denialism suffered by Eurobureaucrats, who by the way increasingly defend the current EU with less and less conviction and monolithism. We would therefore do well to recognise that, as far as monetary policy proposals are concerned, Marine Le Pen seems to be handling the drift of the Eurozone more realistically. Her proposals are thus more transgressive but at the same time more courageous, and time will tell if they are also more beneficial for the French and other EU neighbours. Let's see what he proposes in this article of Bloomberg:

Essentially what Le Pen is promising is the takeover of French monetary policy. A return to monetary sovereignty by restoring the powers of the Bank of France and issuing new francs anchored, albeit to a basket of European currencies, as was done for a time with the ECU (European Currency Unit), Do you remember? This basket of currencies set the value of the ECU according to various parameters such as GDP or the weight of the respective countries in European trade. And from its creation in 1979 until the definitive freezing of its value in 1995, various adjustments were made according to the needs of the diverging economies of the member countries. Logical, isn't it? The problem came in 1995, when the intention was to fix this relationship between the ECU and the other currencies immovably (later the real currency, the EURO, was introduced as a 1:1 parity with the ECU). Obviously, since that freeze, the seams of the single currency have only cracked and have been stoned by seas of freshly printed money, suffering all the economic divergences that the North/South reality has shown over the years.

So Le Pen's proposal for a return to the Franc (new French Franc) semi-pegged to a basket of European currencies (new ECU) with a margin of fluctuation makes much more economic and financial sense than the current situation, and it is nothing that those of us of a certain age have not seen before. According to Le Pen, the French state would commit itself to maintaining this fluctuation within a band of +/- 20%. In other words, if the other countries were to do the same, the new Deutschmark would naturally appreciate in value against the currencies of other weaker economies. In other words, the currencies of the South would devalue against the stronger economies of the North. In fact, such a scenario would allow more recessionary and deflationary countries to devalue their respective currencies and revive their economies, generating growth and positive inflation. Et voilà!

The candidate has not yet proposed a timetable for the rest of the Eurozone countries to also adopt the anchoring of their new currencies to the basket/new ECU, but she does warn that if the rest want to continue with the Euro as we know it today, her government would allow the new Franc to fluctuate freely, without even this 20% limit. Warning to sailors north and south,,,,

The Bank of France could issue up to 5% of the money supply annually (similar to the increase that the ECB has been applying proportionally to France, according to Bernard Monot, Le Pen's main economic advisor). About 100 billion new Francs per year, equivalent (just for a start) to 100 billion Euros. This would finance the needs of the French economy and its debt commitments. A sovereign debt that would be redenominated in new French Francs, and which the state would buy back from foreign holders as far as possible.

Monot assures that the French risk premium with respect to the German one would increase but not disproportionately. He believes that the yield on the French 10-year bond would be around 2-3%. France would honour its commitments, as would any other eurozone country that followed in its footsteps. It goes without saying that the French candidate's proposal would make much more sense and reliability if it were applied by the entire eurozone in a coordinated, albeit not simultaneous, manner.

For all those who still think that Le Pen's proposal is yet another of her extremist follies and that the chances of such a future materialising are slim, I am sorry to contradict them, but in Germany there are more and more voices, and very authoritative ones at that, that are increasingly being heard that call for a break with monetary policy in unison with the French policy. And it is not only the «demonic» Franco-German front, but also the Belgian Guy Verhofstadt, The European Parliament's elected Brexit negotiating representative, no less, also calls for the financial break-up of the Eurozone., at least in two parts. Therefore, investors should not forget that, although today our Euro is worth exactly the same as the German Euro, the golden dream of those of us living in the highly indebted and recessionary periphery, i.e. to have the equivalent of Deutsche Marks in our current accounts, is not likely to last much longer. take appropriate measures to avoid such potential devaluations. of southern currencies and assets relative to those of the north.

(+34) 93 626 47 75

(+34) 91 794 19 82

Category: Economia y finanzas

The abuse of bricks and mortar in Spanish wealth

To make the 2-speed omelette, the Euro shell must be broken.

It is now official: Eurozone 1 and Eurozone 2

Fasten your seatbelts…

Front National: The future monetary policy of France and the EU

Winter is coming...

The two-speed EU is here.

Selective debt writedown.

Negative interests and Darwin.

Deutsche Bank: The Big Short.

Shall we help you search?

Cluster Family Office

Do you need help in capital and wealth management?

How can I avoid the negative effects that my fortune may have on my children?

How and when should I talk to my children about family wealth, and what relationship should they have with money throughout their adolescence?

How can I measure the real risks of my investments and protect my assets adequately?

Do I have sufficient liquidity and stable income to cover my needs on a permanent basis?

(+34) 93 626 47 75

(+34) 91 794 19 82

Category: Economia y finanzas

The abuse of bricks and mortar in Spanish wealth

To make the 2-speed omelette, the Euro shell must be broken.

It is now official: Eurozone 1 and Eurozone 2

Fasten your seatbelts…

Front National: The future monetary policy of France and the EU

Winter is coming...

The two-speed EU is here.

Selective debt writedown.

Negative interests and Darwin.

Deutsche Bank: The Big Short.

Shall we help you search?

Cluster Family Office

Do you need help in capital and wealth management?

How can I avoid the negative effects that my fortune may have on my children?

How and when should I talk to my children about family wealth, and what relationship should they have with money throughout their adolescence?

How can I measure the real risks of my investments and protect my assets adequately?

Do I have sufficient liquidity and stable income to cover my needs on a permanent basis?

(+34) 93 626 47 75

(+34) 91 794 19 82

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