gestion financiera - Cluster Family Office

What to expect when you are waiting for... the QE blackout.

After more than a decade of monetary stimulus and financial repression where the tide of central banks around the world has flooded global debt with liquidity and demand, the music is beginning to stop playing. It is the chronicle of a death foretold but still astonishingly incredulous.

But despite the end of the road to QE, the vast majority of more conservative investors continue to complain about the poor performance of their fixed income portfolios, oblivious to the risk they have been taking for years and also to the scenario their assets will face in the new era of normalisation of rates and stimulus.

Paul Read, The co-manager of the Invesco Pan European High Income bond fund, Invesco Pan European High Income, warns in a surprisingly clear way, as his salary depends on investors continuing to trust the bonds he buys. «There is too much complacency in the bond market. Prices are rising steadily and yields are reaching ever lower lows. On the basis of clearly worsening yields, the euro high yield (or junk bond) market is currently yielding less than 2%. Circumstances are making it very difficult for us.»

And the most curious thing is that despite the fact that the shepherds themselves - at least the more honest ones - warn their sheep that the wolf is coming, the flock continues to demand that the shepherd offer them juicy pastures in which to continue frolicking, as they have done for as long as they have had the use of (no) reason. As Read rightly says, with the European QE tap being turned off: «...the European QE tap will be turned off.«Things become even more complicated considering how expensive fixed income markets are. With yields so low, the risk is much higher (...) Although neither bonds nor equities currently offer investors the best entry point, at current rates, equities have a very easy time beating bonds, both in terms of both appreciation and dividends.»

Indeed, the real disaster looming over conservative portfolios is not just that returns are low but that losses are beginning to take hold of assets that their owners, whether better or worse advised, bought precisely to avoid swings and negative returns. Because the fixed income funds that even today are still nonchalantly yielding precious points are doing so on the back of a wind of demand, trading and favourable interest rates whose days are numbered.

However, rates are not in a position to go up happily either, even in the US. dovish than was to be expected from his latest move at the helm of the Fed. Nor does it seem that economic growth is going to be the one that will pull the developed world out of the debt hole into which it has got itself - we have got ourselves - in exchange for postponing the hunger of insolvency and having hard bread for today.

In the following graphics from the presentation by Jeffrey Gundlach of DoubleLine Capital (via Gurusblog), you can see how the FED has already stopped increasing its balance sheet, the BoJ has softened its growth and the ECB has announced its brake for 2018.

If the forecasts come true, 2019 will not only see the end of money printing but also the beginning of the shrinking of central banks' balance sheets. And most of the developed world's fixed income portfolios are not prepared for that without suffering massive losses from write-downs, insolvencies and potential illiquidity. The relationship between the rise and fall of central bank asset purchases and their direct correlation with bond and equity prices can be clearly seen in the chart below. Imagine now this correlation with a closing of the taps that have watered with huge flows, the likes of which have never been seen before in all of history.

The million-dollar question is: Are there assets that are de-correlated from the end of the QE party and therefore «guarantee» positive returns in this tidal wave pullback scenario? The answer is yes. Unfortunately, however, these are alternative management strategies that are difficult to access for Spanish retail investors, who are condemned to buy the fish, fixed or variable, sold by Spanish banks. The reasons why it is so difficult to access good alternative multi-strategy funds from Spain, in addition to the lack of interest of Spanish banks in offering third-party products that do not share juicy commissions with their main trading platforms, are also regulatory. The liquidity of these multi-strategy funds is not usually daily or weekly, but monthly or even quarterly, which prevents them from being funds that qualify under the UCITS directive, which seems to be the only one that the CNMV considers suitable for Spanish retail investors. This, together with the fact that the transposition in Spain of the AIFMD (Alternative Investment Fund Managers Directive) is still conspicuous by its absence, condemns the poorly advised investor to an obsolete and reckless portfolio distribution based essentially on fixed income and equities.

Alternative management handles a wide range of investment strategies, from bonds linked to meteorological catastrophes, buying and selling mortgages, life insurance, etc., etc. And the right combination of these strategies ensures that the non-stock part of the portfolios gain a few points of return while remaining completely unaffected by the falls that stocks and bonds may suffer in the coming years.

But it is not enough to open an account abroad for an international bank to agree to buy good alternative funds from us and accept their relative illiquidity. It should be borne in mind that most multi-strategy alternative funds are designed for institutional investors and require minimum investment amounts prohibitive for retail investors, with figures of €500,000, €1,000,000 or even more. In addition, Spanish taxation penalises funds not marketed in Spain (purely for the protection of the sector and not the investor), while those registered with the CNMV are rewarded through the deferral of capital gains and the transferability that every investor would like to see. Here it is worth remembering the need to have a personal investment vehicle such as the Luxembourg, The investment is suitable for investors starting from as little as 250,000 or 300,000 euros, thanks to which we obtain the deferral and transferability of any fund in the world, whether or not it is alternative or not, and whether or not it is registered in Spain for marketing.

All this means that in many cases, even within the Luxembourg vehicle itself, we have to resort to funds of funds of alternative management, which in exchange for their corresponding commission fee allow us access to a diversified portfolio of strategies, truly decorrelated from the financial markets, with amounts of 125,000 euros. A real treasure in these current and future times.

The advantages of investing from Luxembourg

Although we have been writing about it for many years now, it may be worth updating for those who do not know about it, some of the advantages of having our investment portfolios deposited in banks in Luxembourg. For most, the most obvious advantage would be to be able to hold the money while avoiding country risk or the risk of insolvency of Spanish banks, with Luxembourg being the EU Wall Street par excellence, once London ceases to be so due to Brexit. However, there is a much more powerful reason to manage most of our financial wealth from Luxembourg. And that reason is access to any investment fund, private equity, real estate fund, etc. in the world, even if it is not registered for marketing in Spain.

This freedom of access is no trifle when one realises that only 10% of the existing funds worldwide have this registration with the CNMV in order to be marketed in Spain. Therefore, investors who do not have adequate advice will never be able to access a 90% of funds, which logically include some of the best managed funds in the world. Furthermore, no bank in Spain, not even to its private banking clients, offers just that 10% registered with the CNMV in its entirety, as the sales catalogues are usually limited to 2, 3 or 5 thousand funds, with the excuse that they belong to different trading platforms, etc. Therefore, the opportunity cost of magnificent investment options that the local investor cannot access is enormous. In fact, this condemnation of mediocre investment is one of the main reasons for the the causes of brick abuse in Spain, although we have already discussed it extensively in other articles.

The question many of you will ask is why most funds are not registered in Spain for marketing, or at least why the star funds managed by some of the world's leading managers do not do so. There are several reasons: among them are funds that do not consider marketing in Spain because it is expensive for the small volume they would achieve in our country. We must not forget that marketing in Spain, through the network of financial institutions and platforms that operate here, in many cases involves a cut of more than 50% of the commissions charged by the fund manager. In fact, some fund managers, such as Carmignac, decided at the time to create an ad hoc class in their funds for marketing in Spain, with higher fees than those applied to the rest of their classes, in order to satisfy the voracity of local financial institutions. At Carmignac, these classes were shamefully labelled with the «E» for Spain.

However, the marketers' bites are not the only reason that many international fund managers have for not registering their funds for sale in Spain. Another important reason is that the only doors that registration in Spain would open for them is to access Spanish retail clients, since larger or institutional clients can access funds that are not registered in Spain without great difficulty. Investors with a few million and who are well advised already have their own investment vehicles in banks abroad that allow them to access all types of funds beyond the CNMV's list of marketable funds. In other words, fund managers not registered in Spain do not need to register or pay any bribes to attract these Spanish millionaires.

There are also other reasons for some managers to disdain the Spanish retail investor market, such as specialisation in institutional clients or geographical remoteness. It is common that some managers from China, Thailand, India, etc., whose investors are essentially Asian, Middle Eastern or North American, do not prioritise attracting Spanish retail clients at all. And they usually focus on marketing in Europe through the British or German market, either for retail or institutional investors, but with higher volumes and lower bites than in Spain.

The consequence of all this is that the Spanish retail investor is condemned to a very limited portfolio of funds that have previously agreed to pay juicy commissions to the financial institutions that market them in Spain. And for these investors who do not have tens of millions, the fact of being able to invest much more modest amounts from Luxembourg, with exclusive personal vehicles that open the doors to any fund in the world, means the difference between mediocrity and brilliance of investments in terms of quality and results.

Luxembourg, as a good «EU friendly» financial centre, has various types of investment vehicles that adapt to the needs of each size and type of investor. But for the smaller investor, who is the most disadvantaged by the restricted range of funds to which he has access in Spain, there is a a personal and exclusive Luxembourg vehicle from which you can invest your portfolio with complete flexibility, from as little as 250,000 euros. Obviously not all retail investors have a minimum of 250,000 euros, but it is a huge step for the average investor to be able to put their investments on a par with those of any institutional investor with 10 or 20 million from as little as 1/4 million. And these vehicles not only allow access to any fund in the world, but also to any fund in the world. also allow for the deferral of capital gains generated within these vehicles indefinitely., The tax is only levied on the proportional part of the capital gain when it is decided to redeem part or all of the investment. In other words, once we have this minimum of 250,000 euros in our own investment vehicle, we will be able to buy and sell any fund, share or whatever we want, without paying tax on the capital gains until we need to withdraw all or part of our money. Taxation is exactly the same as when we buy any fund registered in Spain that is sold to us by the bank on the corner, but without the need to jump from one transferable fund to another within the limited list of funds registered with the CNMV, but with total and absolute freedom in the world universe of UCITS, non-UCITS, AIFMD, Private Equity, Real Estate Funds, shares and other financial products. This is why we chose a Luxembourg vehicle, totally «friendly» with the taxation and transparency of EU countries.

These vehicles are logically deposited in banks in Luxembourg, although as mere depositaries, it matters little that they are more solvent than Spanish banks, since we will only use them for the safekeeping of the vehicles and the portfolios with the fund units or shares that we are going to buy and sell in them.

As for costs, we have been able to fine-tune them over the years due to the growing volume of clients. And currently the total cost of a Luxembourg unit-linked vehicle for a small investor (minimum 250,000 eur) can be around 0,6-0,7% annual, The volume of vehicles in the market is significantly reduced as the volume increases. Furthermore, in certain circumstances, these vehicles also avoid the payment of Wealth Tax, which in some Autonomous Communities does not have a rebate.

Obviously, as Luxembourg is the financial centre of choice for the EU - replacing the City of London - any capital to be invested in such vehicles must have a justified origin, be fully declared and transparent, as Luxembourg's tax haven connotation is now completely behind us and definitively buried by the EU's own imperative.

In short, in 250,000 can access vehicles that cost less than 0.6-0.7%, that efficiently defer Capital Gains, that can save Wealth Tax, that allow access to investing in the best investment fund managers on the planet rather than just 10% of them, and with the banking and legal security of a world-class financial centre in the heart of the Eurozone. That is nothing, in these times of uncertainty, insolvency and disguised risks.

For those who see the remoteness of having their money in Europe as a handicap, I would like to remind you that, in addition to being able to manage it conveniently, swiftly and closely through Spanish advisors and professionals, having a Luxembourg investment vehicle is not exclusive. In other words, most investors combine a (more or less majority) part of their assets in Luxembourg with a part held in banks in Spain, as a temporarily invested treasury, which will be consumed or used over the coming quarters, semesters or even years.

Elite athletes and their money. The simple lesson of Shaquille O'Neal.

In the following video we see a Shaquille O'Neal in his maturity, giving advice that is as simple as it is important to other professional colleagues, i.e. elite sportsmen. Logically, his advice is only useful for sportsmen, artists or any other person who has a sudden fortune (lotteries, technology entrepreneurs, heirs, etc.) large enough to never have to worry about their future or that of their children and grandchildren. Watch the video of this tweet and then we'll give you some thoughts:

Shaq has a simple piece of advice for NBA players who don't want to lose their millions pic.twitter.com/tAFwvbQ89m

- Business Insider (@BusinessInsider) November 20, 2017

Surely following this simple advice, for which every human being is potentially qualified, would have prevented the vast majority of sportsmen and women from going bankrupt in the course of their busy lives. Notice that neither education nor knowledge is necessary to avoid disaster when a certain level of million-dollar contracts is reached. All that is needed is common sense and rigour. Unfortunately, most elite sportsmen and women, uneducated and from humble origins, drunk on fame and money, often lack both virtues.

However, most mortals do not reach those income levels, obviously, and need to fine-tune much more than the simple norm of Shaq their wealth progression throughout their lives. Every wealthy life is different. Circumstances in terms of professional income, income from financial and real estate investments, necessary or desired expenses, family burdens and, in short, the lifestyle that each person or family chooses, together with the uncertain future that each human being faces (separations, illnesses, deaths, disabilities, addictions, fraud, accidents, etc.), make each case practically unique. And logically, some tool is needed that allows a glimpse of the wealth projection that can be expected in the face of a more or less prolonged life. This is where everyone can make their own «old-age account», or go to a wealth management professional to get an idea of the progression they may have in the future, and adjust or modify any calculation or lifestyle errors they may be making accordingly. Here is an example of a wealth projection table that we use with some of our clients at Cluster Family Office:

In projections such as those in the image above, we try to incorporate some of the variables that can be intuited from the data and knowledge of our Clients' circumstances. In the projections we make at CFO we handle data such as professional and non-professional income, expected length of working life, present and future income consumption, inflation, financial and real estate yields, personal taxation, taxation of the investment vehicles that each family has in Spain and abroad, etc.

However, it is obvious that the further out in time the projection is made, the less reliable the predicted data will be, as deviations multiply over time with a greater effect on the result than compound interest itself. But despite the impossible accuracy, this tool is always a great help in resituating the lifestyle of families and, above all, in opening our eyes to the uncertainty of living a long wealthy life in the ever-changing world we face. And the uncertainty of progression is particularly revealing. when the proportion of real estate is abused in equity or when the era of conservative fixed-income portfolios is more of an asset trap. potential losses from which very few will escape.

The evolution over time of an unbalanced estate that makes the wrong decisions, compared to the evolution of a balanced estate of financial, business and real estate assets, with the correct optimisation of each of them, is totally different after 5 years. But if we project the errors with respect to what would be the correct distribution of assets and liabilities and their management, beyond 15 or 20 years, the difference is abysmal. What today may appear to be a minor imbalance or inefficiency, a minor deviation, over time is the key to success or failure in our old age and for the well-being of our children.

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.

Stop-loss in actively managed funds?

As Machado said, only a fool confuses value and price. From the point of view of the long-term investor, who buys shares in good companies at attractive prices relative to their present and future earnings multiples, it would already be absurd and foolhardy to buy and sell these shares in the short term without associating these decisions with the value of the respective businesses. But it would be even more absurd to do so. short term trading in a portfolio of actively managed mutual funds, The investor can also set up tempting automatic buy and stop-loss (sic) orders, with portfolios at the free will of their respective managers.

That is what ING offers to their clients, with the consequent benefit to the bank for this service, obviously. But as it is not as simple operationally to automatically buy and sell a fund at a pre-established price as it is for a share, what they offer their clients is a «warning» service when the fund's price reaches the marked price. It is then that the client will decide whether or not to sign a buy-sell-transfer order for these funds, which will usually take a couple of days to execute. Oh, and of course, this «service» is only available for ING brand funds, which means that everything stays at home.

In a review of the practice of share trading (including stop-loss), we have to say that it is the usual modus operandi of savers who are less qualified as investors. In other words, those who move away from long term investment by buying businesses whose good value/price ratio they know, and instead approach the mere bet on any ticker listed, regardless of the good or bad performance of the listed company's business. They are even oblivious to whether there are prospects and an adjusted valuation of a company's business, a commodity, an index or any derivative behind that ticker. For most of them, it is enough to have a ticker or a changing price to bet on more or less frantically, conveniently dressing up this practice with all kinds of trading courses, technical analysis and macros that disguise their gambling with a patina of expert investment.

However, generally speaking, an investor who knows the value of the companies in his portfolio will be more interested in buying them the more the price of their shares falls. Conversely, the more expensive the shares are in relation to the value of the company, the more interested he/she will be in selling them. In contrast, short-term stock trading is associated with completely ignoring the real value of the company. This is why technical analysis and other trading methods usually recommend buying stocks when prices are rising and selling them when they are falling. (Here we could make the exception of the very few quantitative hedge funds that have been making money for decades, but they would be the exception that proves the rule and would only be the exception that proves the rule. accessible to well-informed investors and with capital in excess of 300.000′- euro).

As we said, ING is now tempting its clients to carry out this trading practice also in their portfolios of actively managed funds. Active management is so called because the manager of each fund actively makes decisions by buying and selling stocks or bonds. From there, the net asset value of the fund will be the -usually- daily quotation of the entire portfolio at market price, after deducting the commissions and expenses of the active management itself and of the fund (on active and passive management you will be interested in the article that Cluster Family Office recently published on the website of COBAS AM, the manager of Francisco García Paramés: «Passive Management, Active Management»). Therefore, it makes even less sense for the saver to make decisions to buy or sell the fund when, not only does he not know the value of the businesses bought, he does not even know which businesses he has bought and sold. The manager of such a fund or the liquidity it accumulates on a daily basis. It would also not allow you to benefit from one of the key investment drivers that every value manager strives to achieve: co buy low and sell high, since such trading and stop-losses would completely detract from good active management.. Moreover, as fund trading is an absurd and rare practice, the saver would not even have the possibility to benefit from the self-fulfilling prophecy that technical analysis sometimes offers.

In short, yet another brainstorming strategy of the Machiavellian marketing department on duty, whose priority has never been and never will be the customer's benefit, but that of the financial institution itself. More wood to keep savers away from the right investment path.

Adapting our investments to the new economic era.

It should not escape anyone's notice that the world of finance and investment as we knew it before the debt crisis - a decade ago now - was very different. Back then it was enough to invest in good, well-priced listed companies (equities) for those looking for reasonable returns over the long term. And all the part of the capital that was not tolerant of high volatility could be «parked» in fixed income by sitting on bonds of developed issuers that paid a few percentage points above the price of money, although not always above real inflation. At that time, money had a reasonable price, and therefore everyone who borrowed it had to make very good use of it if they wanted to amortise that cost and not get their fingers caught in inefficient adventures.

About 7-8 years ago, after the bursting of the real estate and debt bubble, central banks started to muddle through by showering the world with new money. And free money not only generates its inefficient use, rewarding those who owe more and are less competitive, but also penalising those who have it. It is the jungle where the law of the strongest prevails, and with the debt bubble of 2007 that we are still dragging along, the law that has prevailed is that of the debtor.

Unfortunately, most investors - and therefore creditors of the debtor universe - have not realised the radical change in the rules of the game imposed by the central banks with the excuse of «saving the financial system». And they continue to invest their money under the old rules and guidelines of obsolete bankers and advisors: in the stock market the part that withstands volatility and in fixed income the part that does not.

As for the stock market, they are not aware that most listed companies have had access to free money for a decade, and that this allows the survival of inefficient companies that should be extinguished under normal money price conditions. This leads them to find an infinite number of companies in bad shape, in very bad shape and trading at high, very high prices. But the unconscious investor continues to buy mediocre equity investment funds (as he always did with acceptable results), mistakenly thinking that the managers of these funds will know how to discriminate the interesting companies from the uninteresting ones. Just as in a fishing contest when the lake is full of fish (good companies in an economic environment with money at a fair price), where both good and not so good fishermen get a decent haul. But what if the fishing contest takes place in a place where the waters are polluted and the fish are scarce? Then the mediocre fishermen will be left in the lurch, and if you want to dine on fish every night, you will have to trust only the best fishermen in the area and make do with more modest catches than in the old days, when the waters were crystal clear and teeming with life.

This is the current situation for stock market investors. They will only achieve acceptable returns if they rely on the best managers who know how to select the few good companies at good prices in the polluted waters of expensive stock markets and inefficient and unhealthy companies.

If this scenario depresses you, I regret to announce that what is happening with fixed income is even worse. Zero or negative interest rates and the intervention of the world's major central banks, with their quantitative easing as never before seen in human economic history, have turned fixed income into a debt dump from which one can only emerge stinking and wounded. Most of the debt in circulation is insolvent - a direct consequence of free money - and also trades at stratospheric prices, crushing its yield to ridiculously low or even negative levels if there is any solvency in its issuer. There is no way to invest in traditional fixed income without taking a risk of permanent losses, i.e. not recoverable in less than 5-7 years without the help of inflation. As we said in «The Silence of the Conservatives».» last year, investors have traditionally conservatives are taking risks they cannot even imagine. Many have followed the guidelines of managers and advisors who simply do not know of conservative alternatives beyond traditional fixed income. Others, however, knowing the risk of global insolvency, have continued to buy assets subsidised directly or indirectly by central banks for fear of going against the grain, of going against those who have the power to make money. All of them have taken, and are taking, a fundamental risk that combines insolvency with political (in)decisions. It is true that so far the gamble has worked out well for them, as the bonds of insolvent countries and companies have risen in price to aberrant levels. And this has brought them additional profits on top of the coupons, which the central banks have religiously ensured that they can pay. But this investor profile, drifting with the currents of central banks and the market in general, cannot be described as conservative simply because they do not invest in the volatile stock market and have done well so far. The lower volatility of traditional fixed income does not imply lower risk, proving once again that volatility and risk are very different concepts, although much of the financial sector confuses them.

It is true that we have been in this situation for several years now and that reckless traditional bond and expensive stock market investors have had reasonable returns and little unpleasantness to date. But we should not confuse bets, which may temporarily be winners, with investments. to grow our assets over the long term, without permanent losses along the way.

Adapting our investments to the new era of equities is not easy without the right advice. Investors need to refine more than ever the selection of international investment fund managers and embrace more exotic markets where economic growth still has a long way to go (which is easier said than done). There are some that are marketed in Spain, but not in the bank around the corner, unfortunately, and the range is very limited. On the other hand, adapting our investments in non-equity, i.e. the equivalent of traditional fixed income, is even more complicated: we have to dig into very diverse strategies and hedge funds that are not marketed in Spain, not even in UCITs format in most cases. You have to look for them in international banks and underwrite them from personal investment vehicles. which are only accessible to well-informed, medium-sized or institutional investors. (from 300.ooo or 400.000 eur).

This difficulty in adapting the investments of small savers to the new era is an injustice that condemns them to leave their 50 or 100 thousand euros in the bank around the corner, assuming enormous risks in the coming years. In other words, it condemns them to buy the products and funds sold to them by commercial banks, investing in expensive and inefficient companies through mediocre equity fund managers, and investing in bonds and fixed income funds full of expensive and insolvent wet paper such as has never been seen in the history of finance. Regrettable and unfair, but they are inevitable fodder for the permanent losses to come in the years ahead.

Banco Popular: In extremis.

Once again, the disaster has come close to happening. And at the last minute, unspeakable pressure from the government has succeeded in getting Banco Santander to take over the huge hole in Banco Popular. Before it got this far, of course, capital was raised with money from unsuspecting new shareholders, bondholders and any other naïve people who believed in the image of security and solvency of characters such as those used by advertisers.

https://youtu.be/xD_4thIw1FQ

Most sports personalities, accustomed to selling their image for publicity, do so to the highest bidder without giving a damn whether they are selling more trainers or helping to wipe out the savings of humble families who believe that what Pau Gasol tells them can be trusted. It is difficult to apportion blame fairly: who is more to blame for small savers losing their money in these bank rescue operations: the bank manager, who is increasing capital or going public (Bankia) knowing full well that the investors he is deceiving are going to lose a large part of their savings? The regulator (BdE) who allows it, also knowing the critical situation of these balance sheets? The person who sells his image of credibility to convince those who without it would not trust that entity with their money? The bank employee who lies vilely to all the prey who sit at his table during the aggressive campaign to attract investment? The investor himself with his explosive cocktail of ignorance and greed? As the saying goes, between all of us the scammed and she alone is ruined...

In order not to be hypocritical, it is worth reflecting on another point. If the final destination of a failed bank is a bail-in, in other words, more debt that will have to be paid for with increases in our present and future taxes, every euro from a private investor that the bank captures - in collusion with the CEO, regulator, employee or publicist - will be one euro less that those of us who have not been duped by the whole gang will have to contribute. Therefore, leaving ethics aside, if other naive people plug the hole a little with their savings, the rest of us will have to pay less with our taxes. A vomitous political-financial jungle in every sense of the word, of course.

In the case of B. Popular, the disaster has been close to the crossbar and has only affected a priori the investors who trusted the institution as shareholders and the subordinated and preferred bondholders, while the depositors and the rest of taxpayers, for once, seem to have been spared another bank bail-in. But the million-dollar question is, in exchange for what? What has the government promised the Botín family to make them swallow such a toad? We will probably never know and it will remain, like the rest of the bail-outs and bank «reorganisations», indecipherably diluted in the tax returns that our children, grandchildren and great-grandchildren will pay for the rest of their lives.

The corporate rescue of Popular is nothing more than another symptom of the coming winter. This time the explosion has been controlled and concealed under the carpet at Santander, which today is at least 7 billion euros less solvent. But the persistent zero rates can already engrave another notch in its hilt of underground financial institutions. The problem is that when Germany can't take any more inflation and decides to raise rates, we in the south will need another central bank to keep them at zero. Then our banks and our prices will be able to lift their heads timidly, but our current accounts and assets in the south will be priced at a lower value than those in the north.

Draghi's NIRP, the Reverse Yankees and the DDO

At the end of last week something unheard of happened, something absurd even among the absurdities of this New Normal that Central Banks have put us in: The average yield on junk bonds (the riskiest and most insolvent of corporate bonds) denominated in Euros fell to record lows of 2.77% per annum.

Already on 26 April, the absurdity of the ECB's negative yields policy hit a milestone, with yields on the most insolvent debt falling below 3% for the first time in history.

Comparatively, the most liquid and safe debt in the world, the 10-year US Treasury bond, yields 2.33% per annum, and the 30-year Treasury yields around 3%.

The following chart of the BofA Merrill Lynch Euro High Yield Index shows the madness in the Eurozone:

And it is not that these ridiculously low yields are the result of rampant deflation, despite the alarmism created in the last few months, no. The official annual inflation rate has been at 1.91 PPP3T and, as we can see in the following chart, it does not seem to be going away any time soon. Official annual inflation has been running at 1.9% and as we can see in the graph below, it does not look like it is going to disappear in the short term.

In other words, the real average yield on junk bonds, net of officially recognised inflation, as seen in the two indices above is now only 0.87% per annum! That is the return that bond buyers/investors get for lending their money to companies with junk ratings and manifest insolvencies for years, with risks of defaults (recognised by Fitch, Moody's and S&P) on the horizon more than considerable.

Against this backdrop, of course, it is not only European companies that want to raise fresh money. Like flies to honey, American companies are also flocking to the euro in search of euros from unsuspecting European investors in exchange for ridiculous interest rates. These are the so-called «Reverse Yankees», or issues by American companies in euros, eager for almost free credit. But why are European investors offering their money to insolvent debtors in exchange for so little? Have European investors gone mad? I'd better not answer you...

The answer lies in Draghi's efforts to implement his now reduced QE of 60 billion euros per year, which includes sovereign bonds, covered bonds, investment grade (IG) bonds and ABS. In addition, Draghi cut rates to negative -0.40%, thus intensifying the rise in debt prices and compressing yields on all debt, both sovereign and corporate (financial repression). What the ECB does not buy directly are junk bonds, but that does not mean that it does not end up with them in its cabinets (balance sheets), as it has bought and will buy paper that has become junk over time. And no one will be able to say that this was a misfortune that no one could have suspected, since much of this debt was already junk before it was bought and was given a rating upgrade by hammer and tongs to fit in with the politically correct requirements of the ECB.

As a result of this QE and NIRP (Negative Interest Rate Policy), many corporate bonds are now trading at yields below zero. For example the German 5-year bond is at -0.33%, which subjects investors to a very deep -2.23% after deducting official inflation! Obviously investors who want to achieve positive net (inflation-beating) returns, must either jump into the arms of much more insolvent and risky junk debt. Or they must fly into other currencies, such as USD debt. These are the NIRP Refugees, who «migrate» elsewhere to avoid the devastating effects of their indigenous debt.

The million-dollar question is why those affected by NIRP are risking so much for so little. Many are institutional investors who are obliged to buy euro bonds, such as insurance companies and euro fixed income funds. Moreover, with rising US rates, it is no longer even almost free to hedge EUR/USD currencies, as it was a couple of years ago. As a result, these institutional investors are condemned to buy wet paper at exorbitant prices and in exchange for ridiculous yields. Nor should we forget that these institutions are managing other people's money and not their own, what we will call DDO (Other People's Money), making it easier to take on bread for today and hunger for tomorrow, when this debt defaults or its price returns to more reasonable prices and generates huge losses for the unwary investors. The fact is that the managers of these institutions are paid to place these gigantic flows of DDOs, and they do so in line with the rest of the institutions. Because when collapse and losses, They will not be alone, as the rest of the institutions will suffer just like them. DDO that will blow up in everyone's face, in a very distributed and not very inculpatory way.

The more debt the ECB buys, the lower yields are in a perfect fish-bite, as well as other damage of incalculable consequences. Flooding the bond market with money is the perfect flight forward, satisfying the yields and capital gains needed by those who bought yesterday or last year. Play the game while the music is still playing, and no institution is going to stop before disaster strikes.

In addition to institutional investors, junk bonds are also sold at the price of gold to retail savers, unsuspecting investors who put their money in the «safe» and «guaranteed» funds sold to them by their corseted, sympathetic and trustworthy bankers (sic). And what has happened in the last few years, in which the music has continued to play non-stop, proves them right! Who hasn't made money buying this wet paper (sovereign or corporate) in the last 5 years? Why can't it continue to be like this for the next 5 years? Something like this thought the turkey the day before Christmas...

But the reality is that more and more issuers are turning to the European open bar. From runaway Spanish banks to the Mexican oil company Pemex, which placed 4.3 billion euros just a couple of months ago.

But bonds are not like shares. Bonds pay off (if you hold them long enough) at par. If you come to maturity, with these compressed rates, you can only make money if you have previously bought them at a discount. But in the current scenario, far from that, bonds are being bought in the secondary market above par! So what is the hope of all holders, traders and hedge funds of overpriced euro bonds? To get them out of the way early enough to gain a few pips before it is too late. But for institutional investors who have to hold them to maturity because their business model demands it, there will be no happy ending. Unless some clever institutionalist passes the hot potato in time to other, less experienced and more innocent hands, in the form of banking products that offer three times as much as a deposit, «with total security».

Via wolfstreet.com

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

El Euro sube. Y lleva ya casi un 5% de recuperación desde sus mínimos por debajo del 1,04 respecto al dólar. Pareciera que puede más la fortaleza de la locomotora alemana que la debilidad del Sur y el Este de la UE. Como si por el hecho de haber reconocido que se avanzará a -al menos- dos velocidades, ello permitiera que la divisa única dejase atrás sus incertidumbres.

Es como si la cifra publicada por el IFO alemán (112,3) superior a la esperada (111), fuera capaz de reafirmar y acelerar la subida de tipos en Europa, al más puro estilo norteamericano. Es cierto que esa y otras cifras reafirman la recuperación económica germana, pero esos árboles de optimismo inequívoco no nos deben impedir ver el bosque en el que está sumido la moneda única. Y ese bosque no es otro que la inviabilidad precisamente de su cualidad de única. O sea, que aún se comparte el Euro entre muchos países que están lejísimos de ni tan siquiera imaginar una relajación de las facilidades cuantitativas con las que inunda el BCE las economías del Sur. Y ello hace imposible una subida de tipos que, paradójicamente está descontando el Mercado con la recuperación del Euro respecto al dólar.

¿A dónde nos lleva esta paradoja? Pues a que cuanto más descuente el Mercado una subida de tipos del Euro y una reducción de la relajación cuantitativa por parte del BCE, más próximos estaremos a la materialización de las dos velocidades de la Eurozona, y por tanto de la ruptura de la cotización única del Euro. Ya que, o bien el Euro pierde su condición de moneda única y empieza a cotizar de manera distinta en cada velocidad de la Eurozona, o bien la subida de tipos es imposible, en cuyo caso el precio del Euro respecto al dólar y resto de hard currencies debería volver a cotizar el riesgo de explosión de la propia Eurozona (según el adjetivo utilizado por los propios dirigentes de la UE para justificar esas dos o más velocidades) y caer de nuevo a mínimos.

Si se mantiene una única cotización del Euro, es imposible subir los tipos, puesto que en el Sur no nos lo podemos permitir. Aquí necesitamos tipos cero e inflación abundante que se coma la deuda poco a poco. Sin embargo, en el núcleo duro alemán, lo que no pueden ni van a permitir es no subir tipos y que su temidísima inflación les repunte más allá de lo deseable. Por lo tanto, ante tal dicotomía, o bien Mr. Market está caminando en dirección contraria, o bien las ya anunciadas dos velocidades están a la vuelta de la esquina.

Tampoco es baladí la ruda reacción de Dijsselbloem, que denota que muchos europeos del norte ya no se sienten obligados a tener ni siquiera corrección política con quienes consideran que de facto ya no forman parte de su core o núcleo duro europeo. Sus disculpas, forzadas, ligeras y tardías delatan ese sentimiento de desapego y desconexión que los habitantes e inversores del Sur parece que todavía no hemos comprendido. Lo curioso es que el inversor de a pie del Sur ha asumido lo de las dos velocidades sin percatarse de que ello implica dos cotizaciones de divisa y dos tipos de interés diferenciados. No en balde Guy Verhofstadt (sí, el mismo que está supervisando desde la UE la negociación del Brexit) ya dijo públicamente que debía crearse un segundo banco central en Bruselas. Dos velocidades, dos autoridades monetarias… Blanco y en botella, y hay que estar preparado para ese escenario.

Para hacer la tortilla de las dos velocidades hay que romper la cáscara del Euro. Hay que partir la moneda «única» en dos. Y aunque aunque lleven el mismo nombre y tengan prácticamente la misma cotización inicial para evitar pánicos, tendrán valoraciones distintas y tipos de interés distintos al cabo de poco tiempo. Serán diferencias de tipos y cotización acordes con las necesidades de las distintas economías, como no podría ser de otra manera. Y lo más curioso es que incluso algunos inversores institucionales, que sí llegan a imaginarse la materialización de esas dos velocidades y dos políticas monetarias, confían sorprendentemente en que España estará en la primera velocidad! ¿Por qué? Pues porque el gobierno español así lo ha dicho, enarbolando el mayor crecimiento de PIB de la Eurozona, pero obviando el déficit presupuestario, el endeudamiento y el paro estremecedor y endémico. Y ya se sabe, los gobiernos, especialmente los de la periferia europea, siempre aciertan en sus pronósticos ¿verdad?

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.

(+34) 93 626 47 75

(+34) 91 794 19 82

Category: gestion financiera

What to expect when you are waiting for... the QE blackout.

The advantages of investing from Luxembourg

Elite athletes and their money. The simple lesson of Shaquille O'Neal.

The abuse of bricks and mortar in Spanish wealth

Stop-loss in actively managed funds?

Adapting our investments to the new economic era.

Banco Popular: In extremis.

Draghi's NIRP, the Reverse Yankees and the DDO

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

It is now official: Eurozone 1 and Eurozone 2

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