Protecting Against the Federal Stimulus

My predictions in May of this year were correct when I said that the federal stimulus would continue and volatility would be the norm.  In September of this year the Federal Reserve announced Quantitative Easement III (QEIII), which was designed to keep pace with Mario Draghi and the ongoing Euro crisis; promising continuous monthly injections of $85 trillion in order to protect our nation from an economic collapse.  There is no way to know how long this will go on for, however; Fed Ben Bernanke stated unlimited printing.  Why?  Why not, the total known federal stimulus was at $3.6 trillion prior to QEIII.  So when additional stimulus is announced, it is then shrugged off as old news.  Investors are numb to this phenomenon, and have now become conditioned to expect Uncle Sam to cut a check.  The rules are now set in total opposition to a bull market, meaning that investors are now counting on Uncle Sam to help offset their losses.  With respect to financial preservation, the next few years are crucial and how we approach the Federal stimulus will determine what our financial fate will be. 

In September of 2013 the total Federal stimulus will exceed $5 trillion.  QEIII will add another trillion dollars to the printing press each and every year.  When you take into account that’s the cost per year for the Federal Government to run the country, the thought becomes overwhelming.  Even worse, we are at the tip of the ice burg.  Why?  Because QEIII was announced at $85 trillion per month, indefinitely, moving forward.

So the question is how do you think the market will react to this news?  My guess is it will likely react to QEIII the same way it did over the last 5 years.  We will likely see a roller coaster in a downward trend. This is where the opportunity lies.

When the market is having its ups and downs it seems pointless to try and beat the market.  This is why investors are looking to protect financial interests they can control.  Interests that will protect your money from all future market downturns with a guarantee of lifetime income.  For example, think of it as taking your 401k and knowing that even if you never added one more penny to the account you would have a secure income steam for life at any time in the future; while knowing your eligible income will increase each and every year.

We know that volatility will be the norm moving forward, especially with the continuation of QEIII.  Just like we all know of the losses due to the stimulus in the last 5 years.  The question is; if you could go back and protect all of your financial interests prior to the fall of Lehman Brothers, or the Financial Collapse of 2008, would you?  I know most, if not all of my clients would have, or did, taken action to protect their money.  Honestly, why wouldn’t you protect your money? Especially knowing $85 billion each and every month will be continuing for quite some time.  At what point will it be too late?

Understanding How Annual Reset Avoids Volatility

Annual reset is the ability to eliminate the market downside (volatility), in exchange for a portion of the market upside. Depending on what cap or spread (the maximum amount of interest you are able to receive) is set in your contract will depend on how much of an upside you can participate in.

The reason why you cannot lose a penny of your principle, or principle lost due to market volatility, is that your money is not participating in a security. Instead, your interest crediting method is linked to a general index of the market, such as the S & P 500. Since your money is not in the stock market you will not experience a loss of your principle due to market downturns. The strategy being, “If I can eliminate all the market downside to my portfolio, I won’t need to be concerned about maxing out my returns to offset future market losses”. Pretty much every financial professional out there will tell you that the key to achieving your financial/retirement goals is to eliminate the big drop offs in the market. On my radio show, “Safe Money Austin”, I often compared this concept to a batting average. If you only focus on hitting singles and doubles, instead of trying to hit a home run, you can increase your batting average in the long run.

Many investors I come across are shocked to find out that you can participate in a portion of the market upside while eliminating all of the market downside. I am often asked “How can you do that”, or they will say “That sounds too good to be true”. My response is always the same “You will only be recommended what the financial institution, or financial professional, is able to offer”. If you invest with an Investment Bank, or a Wall Street firm, they are probably leveraging assets to promote their financial services. When you leverage your assets, your liabilities will exceed your total assets, making it almost impossible to eliminate your market exposure. When your liabilities exceed your total assets, you cannot guarantee the products you offer.  In fact, this is one of the main reasons why Lehman Brothers collapsed in 2008. They were leveraging their assets by over a 30: 1 ratio. Which means that for every 30 million dollars of securities offered, Lehman Brothers was backing it with 1 million dollars. Because most Investment Banks leverage their assets they do not have the financial strength to back all of their financial products.  This is the reason why banks have to purchase FDIC insurance when they are offering guaranteed products like a CD or a checking account.

The financial institutions that we work with are prohibited from leveraging their assets. In fact, the state makes it mandatory that their total assets always exceed their total liabilities. Truth be known, all of the companies we work with have a minimum of a billion dollars above and beyond their total liabilities. Because these Institutions have assets that are able to back all of the financial products on a 1:1 basis, they can recommend products that are exempt from market volatility. In short, the reason why you may have never heard of annual reset is probably because the financial institution that you invest with is in the business of hedging against risk, not protecting against risk.