{"id":22901,"date":"2008-11-10T07:35:00","date_gmt":"2008-11-10T07:35:00","guid":{"rendered":"https:\/\/clusterfamilyoffice.com\/blog\/?p=442"},"modified":"2008-11-10T07:35:00","modified_gmt":"2008-11-10T07:35:00","slug":"invertir-en-recesion-y-depresion","status":"publish","type":"post","link":"https:\/\/clusterfamilyoffice.com\/en\/invertir-en-recesion-y-depresion\/","title":{"rendered":"Investing during a Recession and Depression."},"content":{"rendered":"
The first thing I\u2019d like to say is that I apologise for the length of this article, which we could have split into at least two parts, but I think it will be clearer and more convenient if we read it in one go rather than having to go back and reread the first part once the second is published. So here is the full article:<\/div>\n
Recently, through our interviews with potential new clients, we have been noticing a mindset that is hardly compatible with a prospect of recession and depression<\/span> such as the one we are currently facing. Many families and investors are convinced that now is not the time to sell their properties in Spain, to realise their losses on equities, or to sell preference shares and various structured products \u2013 which were sold to them here and there \u2013 at a loss.<\/div>\n
\"\"<\/a>This strategy, if it can be called that, is the one that used to be adopted during market corrections, where a bull market was followed by a bear market in the worst-case scenario. When cycles followed one another with a well-known irregularity and in a context of economic expansion and growth that has been virtually uninterrupted since the Second World War<\/span>. In such scenarios, it was sufficient for the more passive and less agile investors to ride out these cyclical corrections and wait for better times to recoup the wealth they had temporarily lost, thereby achieving an upward trend in the value of their property and\/or financial assets over the long term. Only those who made disjointed strategic shifts in their investment policy were likely to suffer significant losses in their long-term wealth, and we have already referred to these investors in a previous article as \u00abI\u2019m leaving, I\u2019m off there<\/span><\/a>\u00abBoth sides had been grappling, with varying degrees of success, with a cyclical, changing but familiar environment.\u2019.<\/p>\n

However, the current situation is recessive<\/span> and we believe that we are facing a a prolonged global recession<\/span>. Consequently, these cycles are unlikely to repeat themselves in the way we have been adapting them to our assets. As we have already mentioned, we are faced with an unknown order to which For the time being, we can only call it chaos<\/a>. Just as an anecdote, I\u2019ll tell you that an elderly friend of mine, who\u2019s a multimillionaire, mentioned to us a few weeks ago: \u00abI\u2019ve enjoyed myself and made a lot of money through every crisis. The worse things got, the more and better deals I did, and the more I enjoyed myself. But this one, mate, no matter how much I think about it\u2026 I\u2019ve no bloody idea where to start!\u00bb<\/span><\/p>\n

Against this gloomy backdrop, at present we have only one point of reference: Japan<\/span>. An economy where property prices have continued to fall and whose stock market index has dropped from nearly 40,000 points to 8,000 over the course of two decades. Today, the country\u2019s largest companies are trading on the stock market at the same prices as 25 years ago. A whole lifetime for an investor, no doubt.<\/p>\n

\"\"<\/a>The question one might ask is: Are we in the West going to suffer a recession as severe as Japan\u2019s? No, it\u2019s worse.<\/span> I sincerely hope I am wrong, but Japanese society\u2019s capacity for sacrifice and productivity is light years ahead of that of the West, particularly Latin America. The Eurosclerosis<\/a> is endemic, and tackling this and other serious production-related problems is a The Great Depression, the big one<\/a> It\u2019s like trying to run a marathon when you\u2019re anaemic. That\u2019s why we thought, as we said in USA vs Europe<\/a>, that the timing of the recovery \u2013 or rather, the journey through the wilderness \u2013 will be slightly less dramatic for the US than for Europe, although it will be very difficult in both cases.<\/p>\n

Therefore, although our attachment to Disneyland prevents us from accepting such a harsh reality and such persistently negative prospects, the strategy of holding on to property and portfolios of equities, structured products and preference shares \u2013 all of which have seen their prices severely affected \u2013 may well be the final straw that causes our wealth to succumb to the global multi-crash we are currently enduring.<\/p>\n

\"\"<\/a>No social welfare system can withstand the current crisis affecting the property, stock markets, energy, credit and global liquidity sectors. Therefore, if we focus on property values, selling at a reasonable price now will probably mean selling at a lower price in the future. \"\"<\/a>From our professional perspective, we see on a daily basis how the number of property owners is rising dramatically, even though they do not consider this to be the right time to suitable for sale<\/span>, have no choice but to put their properties on the market. It is true that many do not yet feel the need to do so because their finances are still comfortable. For some, they have only weeks left; for others, months or even years; but for the vast majority of property owners, it is nothing more than a fatal countdown<\/span>. Business and\/or employment income will be reduced to a greater or lesser extent in this crisis scenario, and rental income used to help pay off outstanding mortgages is also being \u2013 and will continue to be \u2013 severely affected by the social crisis that is only just beginning. The result will be relentless in the coming years: millions upon millions of multiple property owners will be forced to put their properties on the market for sale, gradually and on a massive scale. And When supply increases, prices can only go one way<\/span>, few things are as certain as this in the world of economics. \"\"<\/a>Consequently, not only is a recovery in property prices a long way off, but prices are also very likely to continue falling for many years to come, as demonstrated by our sole example of a recession in Japan. At this point, we are reminded once again of the saying: Not selling at a loss today may force us to sell at a greater loss in the future<\/span>, as our investment career is not eternal, nor are the assets of most co-owners large enough to sustain a The Great Depression, the big one.<\/span> But we are not suggesting that investors should divest themselves of their property holdings, as we cannot currently envisage a balanced portfolio without them; rather, we should shift our property investments towards areas with better prospects than those in Spain or even Europe, encompassing both speculative investments and wealth protection through prime property holdings.<\/p>\n

As for financial assets exposed to risk in equities, structured products or impaired preference shares, we can say something similar, but with the caveat that equity markets are far more unpredictable. Speculative capital flows may return to the equity markets much sooner than to the property markets \u2013 even if this is irrational, temporary and occurs against a backdrop of recession. However, if we look once more at our sole benchmark, we will see a chilling historical chart of the Nikkei, particularly towards the end of 2008.<\/p>\n

\"\"<\/a>As for the preference shares bought (and sold) as fixed-income securities, whose prices have been hit just as hard as equities themselves, in our view they represent the biggest unknown. We have no previous precedent for a credit crisis of this magnitude. Many investors bought these preference and perpetual issues before the credit crisis broke out at almost par value, as an investment alternative (or simply mistaking them for) fixed-term bonds, for just a few tenths of a percentage point more in annual yield. Since August 2007, some have even been speculating on the sharp falls in these perpetual issues, as if they were variable-rate securities. This is something never seen before, though not necessarily inadvisable provided one is fully aware that the risk inherent in this practice is that of calibration not possible<\/span>, given that we had never before witnessed such a collapse in corporate and banking finance. Many of these investors \u2013 both those who bought at near par before the credit crisis erupted and those who have been buying speculatively since then \u2013 have not even done so with a proper understanding of the myriad variables regarding the small print or the circumstances of each issue (cumulative, callable, subordinated, position and value in the event of a credit event<\/span>, the relationship between the actual issuer and the underlying entity, etc.). It is precisely these variables \u2013 which are often overlooked in times of prosperity and mistaken for a simple bond with a maturity date (in addition to other, more obscure and unpredictable variables) \u2013 that are leading to the radical difference<\/span> in the midst of a credit crisis between one Solid corporate debt, a speculative investment vehicle or nothing but a piece of paper. Only time will tell, he says, which is which.<\/span><\/p>\n

When we hear the explanations given to us by some potential clients regarding why it would be ill-advised to exit the aforementioned markets (equities, various structured products, perpetual debt or preference shares) at this time, it seems to us as though we are hearing the very same words spoken by their respective private banking managers. These are the very same talking points they have been repeating ad nauseam to all their clients for several months now. From 8 am to 2 pm, Monday to Friday, and every other Saturday. \u00abNow is not the time to take losses, as they would be very substantial\u00bb, \u00abwe\u2019ve already hit rock bottom\u00bb, \u00abnow is the time to buy more and better shares (structured products or issues) at very low prices\u00bb<\/span> and other topics of that sort.<\/p>\n

\"\"<\/a>The funny thing is that during bull markets they used to tell us: \u00abNow is not the time to realise profits, as capital gains tax would be very high\u00bb, \u00abNow is the time to buy more and better shares (structured products or new issues) with very good prospects\u00bb <\/span>and other such clich\u00e9s, accompanied, moreover, by historical results that made the \u20ac symbol appear in our dilated pupils.<\/p>\n

So, bankers and advisers \u00abfree<\/span>\u00bbGenerally speaking, They never advise us to exit the market<\/a>. Not a single one, ever. Obviously to go out<\/span> It would mean a loss of earnings for those advisers, which they are not prepared to accept. Not them. At most, in a burst of ethical sentiment that should not set a precedent, we might hear something along the lines of: \u00abWait and see\u2026 BUT WAIT INSIDE!\u00bb<\/span>, mind you, in correct, friendly and patronising Spanish, that is to say: \u00abDon\u2019t even think about selling at these low prices \u2013 we\u2019re in the worst possible situation; bring more cash \u2013 everything\u2019s very cheap,\u00bb,<\/span> \u00abTake my word for it \u2013 I\u2019ve been through this before.\u00bb. <\/span> Said by someone in a tie who would never dream of owning even a tenth of our wealth, and as if we wouldn\u2019t lose as much by not selling. The fact is that when people tell us what we want to hear, we make it very, very easy for the commission agents<\/span>. But if we wouldn\u2019t advise an investor who has remained in cash (and there are certainly some) to enter the market now and buy our equity-based, structured or perpetual financial products at current prices, nor to buy our properties at today\u2019s prices, why on earth\u2026 do we hold on to them instead of shifting our assets into those with equal or lower risk that have growth potential in the coming years which is, rationally speaking, far more likely? Let\u2019s look at our risk positions in equities, various structured products and perpetual debt or impaired preference shares, from the perspective of an unprecedented, prolonged depression, and we\u2019ll realise that our assets will suffer greatly if we apply the \u00abWait & see\u2026 but wait inside\u00bb approach recommended by those who make a living from our commissions.<\/p>\n

\"\"<\/a>It is prudent to wait and see until we can make out a clear strategy in times like these, but this must be done outside<\/span> in the markets. And although it goes without saying, it is surprising to see how many holders of property or high-risk financial assets are holding on to their positions. But worst of all is that not only does their wealth remain 100% correlated with falling markets, but they are also likely incurring a significant opportunity cost by failing to invest these assets in property with far greater potential, and also in financial assets with much lower risk that would turn our negative returns into positive ones, even within a \u00abwait and see\u00bb strategy. We simply need to position ourselves financially outside these markets and relocate our property holdings to countries with better prospects than Spain or Europe. Implementing such strategies is not only psychologically complex for a family, but also requires logistical and professional support to ensure it is done in the best possible way, following a roadmap that must be tailor-made for the client. A Family Office must accompany the family on this journey and resolve any issues that arise as the wealth is adapted to the strategy and the specific needs identified.<\/p>\n

\"\"<\/a>If, on the other hand, you think the crisis will be short-lived or temporary, like so many before it, then forget about this article.<\/p>\n

\u00abThe future isn\u2019t what it used to be.\u00bb<\/p>\n

<\/span>Arthur C. Clarke<\/a> (1917\u20132008)<\/a>
<\/span><\/p><\/blockquote>\n

<\/div>","protected":false},"excerpt":{"rendered":"

Lo primero que quiero deciros es que lamento la extensi\u00f3n de este art\u00edculo que podr\u00edamos haber dividido en al menos dos partes, pero creo que ser\u00e1 m\u00e1s claro y conveniente si lo leemos de un tir\u00f3n que tener que releer la primera parte cuando se publique la segunda. All\u00e1 va, pues, el art\u00edculo completo: \u00daltimamente […]<\/p>\n","protected":false},"author":6,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[20],"tags":[],"class_list":["post-22901","post","type-post","status-publish","format-standard","hentry","category-sin-categorizar"],"_links":{"self":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/posts\/22901","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/users\/6"}],"replies":[{"embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/comments?post=22901"}],"version-history":[{"count":0,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/posts\/22901\/revisions"}],"wp:attachment":[{"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/media?parent=22901"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/categories?post=22901"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/clusterfamilyoffice.com\/en\/wp-json\/wp\/v2\/tags?post=22901"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}