In search of cashflow: perpetual bonds

A perpetual bond is a bond that only pays coupon, it will never return the principal. Some people call them "perps". As it has no maturity date, you can consider it equity.

There are 3 main considerations when we consider buying a perp:

1. How safe is the issuer. Government bonds from important countries should theoretically be safe (not so sure anymore). Also big reliable companies in defensive sectors. Beware of banks, though. Under the Basel-III requirement, an international capital standard, perpetual bonds or AT1 securities are more of a quasi-equity obligation. If an issuing bank incurs losses in a financial year, it cannot make coupon payment to its bondholders even if it has enough cash. Moreover, if the equity capital of the issuer falls below 6.125%, the entire investment of bondholders would be either written down or converted to equity.

2. Currency. You want to receive the payments in the strongest currency possible. Avoid emerging market currencies.

3. Interest rates. The price of these bonds strongly depends on interest rates. To calculate the price we just divide the annual coupon by a discount rate. For example, if a bond has a coupon of 8000 USD a year and we use a discount rate of 4%, the price of the bond should be 200000 USD. However if interest rates go up to 8%, the bond price is half the previous one.

It seems a very risky investment, but it doesn't have to be. If the coupon is high enough and the issuer is a reliable company that pays in dollars, in a few years the coupons will pay for the initial investment, and after that the investor and his inheritors  just receive some nice cashflow forever.


A little bit of macro. Countries

Which countries are cheaper to invest in the stock market? And sectors? Thanks to StarCapital we can rank countries and sectors. In the long term and in general, the lower the entry price, the higher the future returns. Check out the following:

We can see that Russia is extremely cheap, so it might make sense to place some small amount of our investing money in a Russian ETF, such as RSX. As you can see this ETF as biased towards the energy sector. Another option could be RSXJ (Small caps) and less oil and gas, obviously. 

Russia is a risky country and its currency has suffered a huge decline in the latest years, therefore only expert investors who know how to manage their risks should think of this market. But also, remember, that buying stocks of a "safe" country at desorbitan prices can be as risky, if not more, as Russia.


Japanese yen or gold, the same?

Check the following chart, gold in yen terms:
Since 2011, the chart moves in a horizontal range, which, taking into account the huge volatility of both products, is very curious.

The explanation many analysts have found is that yen and gold are considered safe havens. However yen has not proven to be good at keeping value over the years. Other analysts think the reason JPY and gold move together is because both depend on real interest rates in USA. And that might be true if no other factors are involved. When the oil prices shake, gold moves, but not necessarily the yen. Same thing happens when a big collapse or a war is foreseen beyond the horizon.

If the above is true, that doesn't mean that we can take practical advantage of this correlation, unless we happen to understand the driving forces of gold besides interest rates.


EURUSD, window dressing

At the end of 2016, the euro fell to 1.04, breaking the last support. However this downward pressure remitted fast and started a recovery to 1.09 today. Some traders see here what they call "window dressing" o technical trap, in this case a bullish signal.

We agree for the short term. The EURUSD is probably going to go up during this year and beginning of next one. However, the situation for the euro some analysts think might be doomed. Fiat currencies are going to suffer, but what matters is the order of the fall. We think the euro goes first.


Peter Sloterdijk

German philosopher who rejects the existence of dualisms, but believes in spaces of coexistence. He has written about the main issues our society cares about: globalization, sex, taxes...

In The Revolution of the Giving Hand (Part 1, Part 2) and in Kleptocracy of the State, he states: Left ideology defines property as theft, but the biggest taker is modern taxation. We live in a massmedially animated, tax taking semi-socialism - and nobody is calling for a fiscal civil war.

One of his solutions is to encourage voluntary taxation which amazingly has been proven successful through philanthropists all over the world.


Floating cities, again.

In 2014 we wrote an article about Seasteading (link here), the future of cities over the sea, spaces of freedom, efficiency and innovation. In 2015 it was organized a Floating City Project-Architectural Design Contest. You can check the most interesting projects on seasteading.org, but just as an appetizer, see the best two:

Protection against storms, solar power, water treatment... and freedom.


Edipo, Thomas y la profecía autocumplida

Edipo, tras consultar al Oráculo de Delfos que le previene de que matará a su padre y se casará con su madre, marcha de su casa para evitar la tragedia sin saber que era adoptado y que precisamente por partir hará que la profecía se cumpla (aquí tienen un enlace a la historia completa).

El sociólogo de origen polaco, W. I. Thomas, formuló el teorema que lleva su nombre de la siguiente manera: Si las personas definen las situaciones como reales, estas son reales en sus consecuencias. Esto quiere decir que las personas actuamos en base a percepciones no necesariamente realidades. El financiero Soros definió su teoría de la falacia fértil (ya expuesta en nuestra web en el 2008: enlace) basándose en el mismo principio. El teorema también explica el gran interés por controlar los medios de comunicación.

Abundando en la misma idea, el brillante sociólogo, Robert Merton, desarrolló el concepto de la profecía autocumplida por la cual, aunque un acción se base en un postulado erróneo, el hecho de creer en él, hace que a la postre el postulado inicial termine siendo cierto. El clásico ejemplo es el de la quiebra de un banco sano por rumores infundados sobre su solidez que hace que los clientes comiencen a retirar sus depósitos hasta, al final, efectivamente, hacer quebrar el banco.


Our benchmarks

We track a portfolio that combines gold and stocks. But what are our benchmarks? 

Following the principles set in our book Against the Tide:

- For the gold part we have 1/3 GDX + 2/3 GLD (GDX tracks the big gold miners such as Barrick, Newmont or Goldcorp, and GLD the spot price of gold).

- For the shares, the benchmark is 1/2 DTN + 1/2 DOO (DTN is an ETF which gives exposure to U.S. large cap equity with high dividend excluding the financial sector, DOO is a similar one but focused on international stocks).

These benchmarks can be perfectly use to create the portfolio.


For the first time...

...there is a negative flow in the purchase of Eurozone debt from foreign investors since the start of the euro. The total net outflows of investment capital from the Eurozone debt securities amounted to €192 billion in 2016, up from €30 billion in purchases during 2015.

Most of the net sales have been government debt (116 billion euros). The non-euro area investors still invested in euro-equities but much less than in 2015 (from 268B to 126B).



Monthly, down; weekly, down. EURUSD down, stop loss 1.082 (weekly close), target 1.057, entry 1.077. 

In the future we will tweet the information we get from the Kalman filter.

UPDATE (10th April 2017): target achieved. Close 1.057 +200 pips.


Shariah Gold Standard

Islamic Finances are based on the Shariah Law. For instance, riba or charging interests is forbidden. To determine if a financial product is Shariah compliant banks and institutions have to establish a Shariah Supervisory Board (SBB) to make sure that the activity comply with the AAOIFI.

Now the big news: recently the AAOIFI in collaboration with the World Gold Council and Amanie Advisors has approved what will become known as the Shariah Gold Standard. This is a guide to include gold-based products in Islamic Finance. Check out the following infographic. The summary is at the end of the post.

Now it will be OK for a muslim who wants to follow Islamic Finances to invest in vaulted gold, gold savings plans, gold certificates, physical gold ETFs and even gold mining shares.


Tips on real estate investing

Where do we place our money nowadays? Stock market at all-time highs, bonds at 0% rate, cash in fiat currencies?

We could use gold but we don't get any cashflow from it. A good option might be investing in real estate, but we have to do it right.

First of all, we make money in real estate WHEN WE BUY, therefore that is the most important part of the process. Second, we need to focus on solving problems for the people, not on buying and renting apartments. Really, it changes our full perspective. And third, we have to understand the new trends in society and demographics.

Here, you can see a visual forecast of the future of the different real estate markets:

On-line shopping running wild and home working strongly increasing, what can we expect from buying offices or malls? On the other hand, with an aging population, nursing homes and hospitals have a very bright future.

If we professionalize our buying and renting process, managing real estate can become a very lucrative part of our portfolio.


Exciting news

Many readers have asked us about currency trading and if we could help them. Logically, FOREX trading is a very risky task and we are not going to give away our signals which could represent a dangerous tool to most of the investors. However, from some years now we have been playing around with the idea of mean reversion in the EURUSD pair through Kalman filters (link) and we are going to share the information we have gotten purely for didactic purposes.

The idea is once a month finishes we will try to forecast the weekly direction of the pair. First, we won't swim against the tide, meaning we are not going to fight the monthly trend. For instance, December finished with the start of a bullish trend (stronger euro) and during February we only received bearish weekly signals, so no trade was done. Second, we need some "room" to go back to the mean, therefore the price should be a little bit far from the Kalman line. And last, the stop loss range is going to be similar to the initial target.

We hope you enjoy it and learn with us.

Update: February finished with a bear signal (USD stronger).


Hacía tiempo que no seguíamos al yen

Ha pasado mucho tiempo desde la efervescencia de las hipotecas multidivisas. Algunos se pudieron salir a tiempo, otros han resistido en yenes, otros se cambiaron a la libra..., muchos se han decidido a reclamar legalmente intentando eliminar las pérdidas. En cualquier caso, para los que se fueron y tienen curiosidad acerca de cómo les habría ido, aquí tienen el gráfico:
Parecía que el yen se fortalecía sin parar en el 2012, llegando incluso a hacer peligrar patrimonios. Sin embargo el pullback de la caída vertical del 2008 ocurría en diciembre del 2014. Ese fue el momento de irse para los que aguantaron. Parecía que todo lo malo había pasado, pero el 2015 y 2016 nos dejaban de nuevo la sorpresa de acercarse a la gama baja del EURJPY y pese al mini rebote del final del año pasado, la situación no puede ser más confusa.

Para los que se fueron del yen, ¿se imaginan cómo se sentirían ahora de dudas si se llegan a haber quedado?


Up in the Air

¿Qué tienen en común la película de Clooney con una corriente filosófica llamada uprooting o levantar las raíces? Todo. De hecho, el propio actor en sus discursos recomienda vivir ligero, sin ataduras, con una mochila casi vacía.

La idea del uprooting está intimamente relacionada con el concepto del exilio. Para Costica Bradatan, profesora asociada de la Texas Tech University, vivir es echar raíces mientras que exiliarse es levantarlas.

Nosotros entendemos el mundo a través de una cultura y un lenguaje, construimos nuestras vidas con lugares comunes, costumbres, familia, reglas, en definitiva, limitamos el mundo para hacerlo nuestro, creamos una "familiaridad" con lo que nos rodea. Bradatan asegura que esta familiaridad nos ciega y nos impide expandir nuestras experiencias. Cuando nos exiliamos, ya sea formal o mentalmente, vivimos un auténtico terremoto, donde estamos incómodos, pero a la vez volvemos a ver y a desarrollarnos. Es una forma de salir de nuestra zona de confort.