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.)
Friday, November 28, 2008
Thursday, November 27, 2008
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 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.
Wednesday, November 26, 2008
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.
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.
Monday, November 24, 2008
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.
Separately, within our commodities allocation, which has been at zero for most of this year, we expect to buy an agriculture ETN.
Wednesday, November 12, 2008
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).
Deflation vs Inflation, and Our Changed Long-Run "Policy Allocation"
The mother of all questions: will deflation or inflation be the major U.S. and global trend in the next 5, 10 and 20 years? Having the right calls will lead some investors to drastically outperform others, save their investments from ruin, and live far more comfortably. (For example, investors who saw the '00s inflationary trend coming multiplied their net-worth many times over, while deflationary worry-worts saw their investments decrease in value. Investors who saw the declines in inflation coming this year made money in treasuries instead of losing enormous sums in equities.)
The question of deflation-or-inflation has become super-heated. The world's central banks and government treasuries fear economic crisis and deflation and thus are putting trillions of currency units into circulation. Meanwhile, a growing contingent of economists and investors see the money-printing binge as massively inflationary within the next couple of years, despite the global deleveraging that is taking money out of the economy. One of the more successful (and famous) investors with the latter view is Jim Rogers; a quick summary of his views is here.
We think the answer is worse than the question: We expect moderate deflation for the next year or two, and then a shift toward inflation as the lag-effect of the current monetary stimulus (which is likely to remain policy for too long) takes hold. In actuality, we see the market worrying most now about deflation while worrying a little bit now about inflation, and over the next year or two we expect the proportion of worry to shift toward inflation. There will be be many "watershed" moments along the way when inflation fears crystallize and U.S. government bonds sell off significantly owing to the inflation fears and concern about the implications of the $12 trillion U.S. debt, which could rise at about $1 trillion per year. We believe the resulting rise in interest rates as potentially the ultimate end to the U.S. consumer's power and its role in "global imbalances," which are today enabled by emerging economies' artificially low currencies.
What We're Doing:
(1) Adopting value investing disciplines that have been out of style since the early-mid-'80s. Compare dividend yields on asset classes and within asset classes, and gauge value in relation to long-run historical ratios. For instance, equities are still expensive around 3% yields, versus buying opportunities of 5-6% yields earlier in the 20th century. Trading equity momentum and P/E multiples will be difficult in the rolling bear/value market we expect for the next 5+ years.
(2) Raising long-run "policy allocation" of secure yield & cash equivalents to 30% from 10%.
(3) Raising trading allocation from traditional 5% of allocation to 10%. Use trading allocation to favor short positions.
Our long-run "policy allocation" now looks like this:
30% secure yield and cash equivalents
25% real estate (projected equity in our residence)
15% U.S. equities
15% emerging equities
5% treasuries
10% trading -- favoring short positions
The question of deflation-or-inflation has become super-heated. The world's central banks and government treasuries fear economic crisis and deflation and thus are putting trillions of currency units into circulation. Meanwhile, a growing contingent of economists and investors see the money-printing binge as massively inflationary within the next couple of years, despite the global deleveraging that is taking money out of the economy. One of the more successful (and famous) investors with the latter view is Jim Rogers; a quick summary of his views is here.
We think the answer is worse than the question: We expect moderate deflation for the next year or two, and then a shift toward inflation as the lag-effect of the current monetary stimulus (which is likely to remain policy for too long) takes hold. In actuality, we see the market worrying most now about deflation while worrying a little bit now about inflation, and over the next year or two we expect the proportion of worry to shift toward inflation. There will be be many "watershed" moments along the way when inflation fears crystallize and U.S. government bonds sell off significantly owing to the inflation fears and concern about the implications of the $12 trillion U.S. debt, which could rise at about $1 trillion per year. We believe the resulting rise in interest rates as potentially the ultimate end to the U.S. consumer's power and its role in "global imbalances," which are today enabled by emerging economies' artificially low currencies.
What We're Doing:
(1) Adopting value investing disciplines that have been out of style since the early-mid-'80s. Compare dividend yields on asset classes and within asset classes, and gauge value in relation to long-run historical ratios. For instance, equities are still expensive around 3% yields, versus buying opportunities of 5-6% yields earlier in the 20th century. Trading equity momentum and P/E multiples will be difficult in the rolling bear/value market we expect for the next 5+ years.
(2) Raising long-run "policy allocation" of secure yield & cash equivalents to 30% from 10%.
(3) Raising trading allocation from traditional 5% of allocation to 10%. Use trading allocation to favor short positions.
Our long-run "policy allocation" now looks like this:
30% secure yield and cash equivalents
25% real estate (projected equity in our residence)
15% U.S. equities
15% emerging equities
5% treasuries
10% trading -- favoring short positions
Bear Market to Continue; No "Diving Saves" Occurring
We continue to wait for a set of emerging market currency collapses and debt defaults before we consider increasing our equity allocations to our "policy allocation" levels.
But we're always on the lookout for potential "diving saves" that could prevent this disaster scenario. For instance, if investors develop increasing confidence that developed market consumers will start to spend again, a floor would set in many financial markets. After all developed market consumer spending is a hallmark of the "global imbalances" that are unwinding today: artificially low emerging market currencies are supporting over-investment in those countries, lower-than-natural interest rates in developed countries, and ballooned credit and purchasing habits in developed countries.
This "system" of global imbalances has a long way to unwind. But if this unwinding process slows down -- say, if developed market mortgage rates were to decline (allowing a pickup in the housing markets and consumer confidence) -- then markets would rise significantly on the hope that the painful global deleveraging could reverse.
The problem is, banks and bank financing providers show no sign of creating an environment for declining mortgage rates. We're presenting a chart from economists at ISI. It shows that mortgage rates (top, dotted line) are still in an UPtrend, even as Treasury rates (bottom line) continue to slide. When deep recessions were avoided in the past, mortgage rates fell as treasury rates fell.
This situation reflects many aspects of the ongoing credit crisis, which is essentially a plunge in confidence among lenders that buyers will be able to pay them back.
It's worth pointing otu that we don't think certain other "bullish indicators" for consumers will help much this time around. For instance, some economists believe that decline gasoline prices can save the consumer; we don't. Falling oil and gas prices are producing a negative feedback loop for the world's producers of these, many of whom are already the world's most vulnerable credits, such as Russia and, increasingly, the Middle East. Further commodity price reductions would trigger other major negative credit events that would further dampen global credit and demand. What's needed are improving credit conditions within the global financial system, such as with respect to mortgages -- we don't see it happening yet.
But we're always on the lookout for potential "diving saves" that could prevent this disaster scenario. For instance, if investors develop increasing confidence that developed market consumers will start to spend again, a floor would set in many financial markets. After all developed market consumer spending is a hallmark of the "global imbalances" that are unwinding today: artificially low emerging market currencies are supporting over-investment in those countries, lower-than-natural interest rates in developed countries, and ballooned credit and purchasing habits in developed countries.
This "system" of global imbalances has a long way to unwind. But if this unwinding process slows down -- say, if developed market mortgage rates were to decline (allowing a pickup in the housing markets and consumer confidence) -- then markets would rise significantly on the hope that the painful global deleveraging could reverse.
The problem is, banks and bank financing providers show no sign of creating an environment for declining mortgage rates. We're presenting a chart from economists at ISI. It shows that mortgage rates (top, dotted line) are still in an UPtrend, even as Treasury rates (bottom line) continue to slide. When deep recessions were avoided in the past, mortgage rates fell as treasury rates fell.
This situation reflects many aspects of the ongoing credit crisis, which is essentially a plunge in confidence among lenders that buyers will be able to pay them back.
It's worth pointing otu that we don't think certain other "bullish indicators" for consumers will help much this time around. For instance, some economists believe that decline gasoline prices can save the consumer; we don't. Falling oil and gas prices are producing a negative feedback loop for the world's producers of these, many of whom are already the world's most vulnerable credits, such as Russia and, increasingly, the Middle East. Further commodity price reductions would trigger other major negative credit events that would further dampen global credit and demand. What's needed are improving credit conditions within the global financial system, such as with respect to mortgages -- we don't see it happening yet.
Monday, November 3, 2008
U.S. Dollar Still in Terminal Bear Move
We realize more than ever that we'd better reduce our long-term "policy allocation" for U.S. assets, and increase our developing markets policy allocation. Our policy allocation had been 60% equities, consisting of 40% U.S. and 20% rest of world. We'll be reversing that gradually, as opportunities present themselves.
The link (and comments) that give us the raw material for coming to this conclusion are here.
Maybe China isn't the only major nation whose currency will become the world's fiat currency. We could enter a multi-polar fiat....the Brazilian real, the euro, perhaps the rupee could be included. Actually, we'll need to find nations that are thriving and that do not have a ton of exposure to U.S. dollars! China is less attractive by this standard. The point is, we want to get positioned for the bursting of the treasury bond and dollar bubbles.
The biggest risk to our bearish U.S. view is that the government will take decisive action over the next 5-10 years and beyond to dramatically reduce spending relative to revenue. We doubt this is politically possible, because the public won't accept the cost of suffering fewer handouts, as it won't understand that the system is in peril.
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