Total Protection Within a Stimulus Enviornment

Who would’ve thought the DOW Jones could creep above the 14,000 mark? Does this mean that we’re out of the woods and that our economic woes are behind us? Not likely. The numbers never lie, and across the board, several economic indicators are pointing to the contrary. Numbers on unemployment, gross domestic product, and housing, seem to reflect what constitutes a struggling economy, which is not typical of a 14,000 mark. Yet here we are.

Market optimism is stemming from austerity measures or financial bailouts, which can be argued as presenting an illusion of a healthy economy. Currently, Quantitative Easement III (QEIII) allows the Federal Government to pump $35 billion per month into bonds and mortgage backed securities indefinitely, until the unemployment falls below 6.5%, which is something that is easily several years away from happening. Year to date, since 2008, we have spent well over $4 trillion dollars in federal stimulus. This massive amount of federal spending has been necessary in order to battle the greatest volatility has encountered since the Great Depression. Unfortunately, the only weapon available to battle the challenging market conditions is the Federal Reserve’s printing press. Personally, I feel investors have become complacent in regards to the Federal Stimulus being a status quo to the market; a temporary solution at best. However, the last five years have shown us that this is an unlikely trend.

Throughout our global economy, it is no secret that austerity policies totaling several trillion dollars, has been the saving grace to a global meltdown. The numerous bailout measures, courtesy of the central bank, are the only things keeping the Euro from collapsing. Not surprisingly, there are even more drastic measures (other than government printing presses) being put into place, that contradict every known law of economic prosperity. For example, within the last couple of years, Spain instantaneously “erased” billions of dollars of debt obligations off their balance sheet. This was possible through collateralized debt swaps aimed at bettering their market conditions. Domestically, Freddie [Mac] and Fannie [Mae] still continue to struggle with the housing sector even with continuous support from Quantitative Easement III, and our GDP doesn’t even come close to supporting this recent surge in the market. Does this sound like a financial environment worthy of a 14,000 mark? The writing is on the wall. We are in a financial environment where the rules are literally set in opposition. Whether you are for or against austerity measures is insignificant. This is the reality and it is here to stay. The question is how do you protect against an unrealistic complacency in a struggling economy?

One way to protect your money from anticipated volatility is through a concept known as annual reset. Annual reset is a closely regulated concept that has protected hundreds of billions of dollars from volatility since 2001. This is the only financial concept around that can avoid volatility while locking in a portion of the market upside, year in and year out. Annual reset was first launched in the latter part of the 1990s, and has since evolved into a preferred way of business for some of the top financial institutions nationwide. Investors are warming to this concept after seeing some financial products averaging, and exceeding, a 6% [average] rate of return since 2001. One vehicle that has achieved this rate of return while providing total market protection is an indexed universal life (IUL) insurance policy. These over-funded life insurance contracts come equipped with favorable conditions with respect to cash accumulation. This, paired with annual reset, provides a perfect remedy to an unpredictable economy. Furthermore, if properly structured, IUL can include both tax-deferred growth, as well as tax advantaged withdrawals exempt from federal income taxes.

We know that the Federal Reserve has promised to intervene with aggressive austerity measures in order to avoid another financial collapse. What the final toll will be remains to be seen. I am in the opinion that the more we spend, the more we are obligated to repay. Once again, over the last five years, we have printed over $4 trillion dollars just to offset a financial collapse. This amount is over one-third of what the total US deficit was prior to 2008. I see the federal stimulus continuing for several years to come, which will increase this number substantially. Of course, this will not be without consequence. Today, our highest federal tax bracket is at 35%, which is well below the average marginal tax rate of 63% since 1913. An IUL policy can help protect against the threat of rising income taxes by allowing an investor to withdraw funds in the form of a loan against the cash value, exempting a taxable event on the policy’s gains for life. The loan (principle and interest) only becomes payable upon the death of the insured, with taxes then being paid through the cash value and accelerated death benefit of the policy. This strategy gives the investor piece of mind by ensuring that their quality of life will not be hampered by rising federal income taxes.

It is no secret that austerity measures used today are for short-term solutions only aimed at offsetting another financial collapse. Although the market topping the 14,000 mark on the Dow Jones is quite impressive, the past five years have shown us that this rally is not likely to last. The only way to protect your money with a moderate return exempt from all volatility is through vehicles such as IUL that uses annual reset to bypass all future market downturns. Without putting measures in place to protect your long-term retirement or financial goals, your end result could easily prove to be more unpredictable than our bailout ridden global economy.

Adaptation to an Evolving Market

In the latter part of March 2012, despite the growing concerns of a debt ridden Euro, the Dow Jones Industrial Average has been able to keep itself above 13,000.  Even with the market rally, the struggling mortgage industry lowered the 30 year fixed mortgage below 4% again.   With legitimate foreign concerns and a troubled housing sector, the stock market has been able to sustain higher numbers thanks to both the watchful eye of Bernanke and the Feds promise to hold interest rates low through 2014.  What does that mean for the financial future of the United States?  We don’t know, and what’s even scarier, we have no way to even begin to understand. 

Why?  Simple, this has never happened before.  Historically, stock analysts have been able to gauge the financial climate by referencing similar time periods in the past.  That is not the case today.  With 5 trillion dollars added to our national debt in order to “sustain” a globally feared financial correction, there is no past financial time period to reference anywhere near this magnitude. 

I believe that the market is evolving and no one has any idea of the end result.  Just as species or landforms evolve over time, so does the market.  With the Federal Stimulus that started in 2008, all of the past rules of diversification went out the window.  This has caused the market to respond unpredictably, sprouting a new branch of financial evolution.  Most financial professionals are of the opinion that because of the financial crisis in 2008, volatility and Federal spending will continue for the next several years in order to stabilize the market.  Finance 101 says that you can never spend your way out of debt.  Evidently, some people need to review the basics.   

I think that the market will continue to present conflicting data; and, this constant conflicting data will eventually evolve into the norm.  For example, the top US pension servicing corporations just recently announced that the total pension fund deposits fell $320 billion short in 2011.  The common sense reaction is “if the Dow is over 13,000, how can total pensions be underfunded by that much”?  What do you think any financial planner prior to 2006 would say if you told them that by 2012 approximately $5 trillion would be added to our national debt due to Federal stimulus aimed to protecting our markets?  Then you were to add that the bad debt with Greece was going to be “forgiven” by a general consensus of the Euro Nations.  I’m sure we both agree that it wouldn’t be good.

For these reasons alone I feel there will be even a greater need for financial products utilizing annual reset and indexing.  Products such as indexed annuities and indexed universal life will allow investors to take a cautious step forward without worrying about falling off of a cliff (taking a big hit in the market).  With an evolving market, you should hope for the best, but always be prepared for the worst.  Today many surveys are showing that the general population is skeptical about our financial sector.  This skepticism can be interpreted as mounting confusion that is causing many investors to stop trying to understand, which means their money will likely need to be protected more than ever.   I feel as time goes on investors will increasingly start exploring financial products that have laws in place to protect their money from leveraged assets, thus being able to avoid market volatility.  Financial guarantees and lifetime income will likely be sought after more than ever before.  Moderate returns can very easily be a remedy from taking a step backwards; helping insure that the investor’s timeline will be met.  Investors know one thing for sure; another lost decade is not going to cut it.