Protect Your Life Insurance from Unfair Taxation

We hear of many individuals obtaining life insurance policies to benefit their families in the event of their deaths, but only a fraction of these people realize that their life insurance proceeds are taxed heavily upon their death, drastically reducing the resources of their heirs.

To remedy this, establish a life insurance trust that contains your policies. You'll pay premiums out of the trust, and the proceeds upon your death will be paid into the trust. Consult an appropriate lawyer to set up the trust for you.

There are many useful links by searching "life insurance trust." A very brief further explanation is here. (We have no connection with the author of the linked blurb.)

China Impacts Your Allocation More Than Ever

What China does is far more important now to our personal finances than even during the '00s boom. If it fails to strongly stimulate its domestic demand, the U.S. and world could remain mired in recession for a decade or longer. If it rolls out a much stronger internal investment program, we'll raise our equity allocation much more quickly. That's why we're watching China's actions more closely than ever.

The crucial article on China is here. A crux of the long-term global problem now is the huge imbalance caused by China keeping the yuan artificially weak in order to export its way to prosperity. But that system can't work any longer because global demand is slumping and the U.S.'s deficits are becoming too huge to service. Now, China's efforts to export its way to prosperity will bring about continued over-capacity in the world, worsening deflation, sharpening U.S. debt-service problems, and intensifying trade protectionism.

So China needs to quickly develop its domestic economy.

What is so little talked about, but explained so well by the linked article above, is that the U.S. today should NOT be learning lessons from the U.S. in the 1930s; instead, China should.

China now, as the U.S. heading into the Great Depression, is heavily export-dependent, has large current account surplus, is highly vulnerable to the global demand implosion, is at risk of trying to export its way out of the current downturn, and is desperately in need of stimulating internal consumption by establishing a social safety net and other large fiscal investments that will give people the courage to spend.

The problem is even more acute when one realizes that China is far MORE export-dependent than ten years ago, and its consumers won't spend more as long as they have to pay cash up-front for hospital care, don't receive real unemployment insurance (or even back-wages) if they're fired, etc etc. And China's apparent unwillingness to face its domestic consumption shortfall puts the entire global economy at bigger risk of a decade-long depression. A Chinese New Deal would help elevate China's internal consumption to balance its export dependency, and establish a more stable society for the long-term health of its economy and the world. U.S. export markets would also grow more quickly, helping it to offset the economic impact of less Chinese investment in its U.S. securities.

Before allocating any capital to "risk-assets" anywhere in the world in the next few years, consider whether China is truly accelerating domestic investment and consumption.

The longer China takes to address the problem of its artificially-weakened currency, the more likely it is that investors will have to muddle through the next decade seeking secure cash yields in an environment of rising trade protectionism and a stagnant global economy.

Preparing for Fallout (from U.S. debt)

We continue to expect the U.S. dollar to weaken and long-rates to skyrocket (as the virtual U.S. sovereign default becomes clearer) once the current flight to "quality"/liquidity dissipates. That could happen as investors begin to see a light at the end of the current deep recession, and shift money out of treasuries. Tremendous additional U.S. and global stimulus packages could start this process.

We may invest in this trend by buying gold (such as ETF: DGL) and the Rydex Inverse Government Long Bond fund (RYJUX), which rises as long-dated U.S. treasuries decline.

There are strong counter-arguments, one of which which goes like this: Non-U.S. economies such as China are slowing down even faster than the U.S. economy, with the hope for recovery even further away than for the U.S. If indeed this is the case, then the U.S. dollar will probably not crater versus foreign currencies, and U.S. rates would not rise sharply in a predictable time frame. Another counter-argument to the long-gold & short treasuries idea is that global economic weakness will continue to overwhelm policy stimulus for a long time, which could result in heavy losses for our trading strategy before seeing any gains.

Considerations like these make us rather frozen with U.S. equities in our long-term accounts, and cash holdings for our 0-5 year horizon. We'll argue this is prudence, and say that we'll commit to non-cash investments once a trend becomes clearer.

Preparations for Trading Allocation

We recently raised our trading allocation given our expectation of continued bear markets (over the next 0-10 years) across a wide range of asset classes. Specifically, we're waiting to a take short US dollar position. Any sign of future economic stabilization will cause us to initiate this position, because we'd then expect investors to flee "safe" Treasuries in favor of "everything else." The underlying view for this position is the same as the view underlying our purchase of an ETF that rises as long-dated US Treasuries fall. We think the U.S. will have significant trouble paying for its accumulated debts, after its "mitigate recession and financial crisis at all costs" policy.

Separately, within our commodities allocation, which has been at zero for most of this year, we expect to buy an agriculture ETN.

Established Long-Term Bearish Bet on U.S. Treasury Bonds

Within our Trading allocation, which we eventually target for 10% of our asset allocation, we established a small, long-term bearish bet on U.S. Treasury bonds. This is consistent with our writings on this blog that the U.S. government is badly undermining its creditworthiness with all manner of stimulus plans, at a time when we think big foreign investors will increasingly look to diversify their holdings away from the U.S. We also think that the massive "flight to safety" of the past year, which has significantly boosted long bonds, will increasingly shift toward shorter-dated U.S. treasuries, which would take away from demand for long bonds. A small datapoint along these lines came this week when demand for a treasury bond auction was weak. We used the Rydex Inverse Government Long Bond fund (RYJUX).