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Why This Crisis Differs From the 2008 Version- Great Wall Street Journal Piece

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This tumultuous week brings an excellent piece of commentary from the Mr Guerrera of The Wall Street Journal on the origins of the current financial crisis. 

Isn't it depressing that we have yet another crisis to contend with?  That may be a topic for another post, however…

With market gyrations in overdrive, it's a great time to read a bit and re-assess you own risk tolerance and ask yourself, what if there was a way to lock in guarantees and just sidestep the whole traumatic mess?  That's what we're here to assist you with.

This article's point that the origins are different is well taken, yet speaks to the deep issues we're facing as a nation. 

The two crises had completely different origins.

The older one spread from the bottom up. It began among over-optimistic home buyers, rose through the Wall Street securitization machine, with more than a little help from credit-rating firms, and ended up infecting the global economy. It was the financial sector's breakdown that caused the recession.

The current predicament, by contrast, is a top-down affair. Governments around the world, unable to stimulate their economies and get their houses in order, have gradually lost the trust of the business and financial communities.

Government has lost the trust of business leaders, and seems to be spinning wildly out of control, spending and not functioning on any sort of plane of reality.  There is a lot of downsizing to do in Washington, and little if any political will to do it.

 

The Journal article can be found here and is quoted below:

It is a parallel that is seducing Wall Street bankers and investors: 2011 as a repeat of 2008, the history of financial turmoil playing in one endless loop.

As a big fund manager muttered darkly this past weekend while heading into the office to prepare for a tumultuous Monday, "The sense of déjà vu is almost sickening."

Those who think of 2011 as "2008—The Sequel" now have their very own "Lehman moment." Just substitute Friday's historic downgrade of the U.S. credit rating by Standard & Poor's for the collapse of the investment bank in September 2008, et voilà, you have a carbon copy of an event that made the unthinkable happen and spooked markets around the globe.

They got the last part right. Investors looked decidedly spooked on Monday with Asian and European bourses down sharply and the Dow tumbling 643.76 points, or more than 5%.

But market turbulence alone isn't enough to prove that history repeats itself.

To borrow a phrase often used to rationalize investment bubbles, this time is different, and the bankers, investors and corporate executives who look at today's problems through the prism of 2008 risk misjudging the issues confronting the global economy.

There are three fundamental differences between the financial crisis of three years ago and today's events.

Starting from the most obvious: The two crises had completely different origins.

The older one spread from the bottom up. It began among over-optimistic home buyers, rose through the Wall Street securitization machine, with more than a little help from credit-rating firms, and ended up infecting the global economy. It was the financial sector's breakdown that caused the recession.

The current predicament, by contrast, is a top-down affair. Governments around the world, unable to stimulate their economies and get their houses in order, have gradually lost the trust of the business and financial communities.

That, in turn, has caused a sharp reduction in private sector spending and investing, causing a vicious circle that leads to high unemployment and sluggish growth. Markets and banks, in this case, are victims, not perpetrators.

The second difference is perhaps the most important: Financial companies and households had feasted on cheap credit in the run-up to 2007-2008.

When the bubble burst, the resulting crash diet of deleveraging caused a massive recessionary shock.

This time around, the problem is the opposite. The economic doldrums are prompting companies and individuals to stash their cash away and steer clear of debt, resulting in anemic consumption and investment growth.

The final distinction is a direct consequence of the first two. Given its genesis, the 2008 financial catastrophe had a simple, if painful, solution: Governments had to step in to provide liquidity in droves through low interest rates, bank bailouts and injections of cash into the economy.

A Federal Reserve official at the time called it "shock and awe." Another summed it up thus: "We will backstop everything."

The policy didn't come cheap as governments world-wide poured around $1 trillion into the system. Nor was it fair to the tax-paying citizens who had to pick up the tab for other people's sins. But it eventually succeeded in avoiding a global Depression.

Today, such a response isn't on the menu. The present strains aren't caused by a lack of liquidity—U.S. companies, for one, are sitting on record cash piles—or too much leverage. Both corporate and personal balance sheets are no longer bloated with debt.

The real issue is a chronic lack of confidence by financial actors in one another and their governments' ability to kick-start economic growth.

If you need any proof of that, just look at the problems in the "plumbing" of the financial system—from the "repo" market to interbank lending—or ask S&P or buyers of Italian and Spanish bonds, how confident they are that politicians will sort out this mess.

The peculiar nature of this crisis means that reaching for the weapons used in the last one just won't work.

Consider Wall Street's current clamor for intervention by the monetary authorities—be it in the form of more liquidity injections (or "QE3") by the Fed or the European Central Bank.

So 2008.

Even if the central banks were inclined that way, pumping more money into an economy already flush with cash would provide little solace. These days, large companies are frowning all the way to the bank, depositing excess funds in safe-but-idle accounts, as shown by Bank of New York's unprecedented move last week to charge companies to park their cash in its vaults.

As for jittery investors, a few more billions minted by Uncle Sam or his Frankfurt cousin are unlikely to be enough to persuade them to jump back into the market.

In 2011, the financial world can't go cap in hand to the political capitals, hoping for a handout. To get out of the current impasse, markets will have to rely on their inner strength or wait for politicians to take radical measures to spur economic growth.

A market-led solution isn't impossible. At some point prices of assets will become so cheap that they will reawaken the "animal spirits" of both investors and companies.

As Warren Buffett once wrote to his shareholders, "we have usually made our best purchases when apprehensions about some macro event were at a peak".

The alternative is to hope that politicians in the U.S and Europe will introduce the fiscal and labor reforms needed to reawaken demand and investment growth. But that is bound to take time.

As often, the past looks a lot simpler than the present. But the reality is that, unlike 2008, governments' money is no good in today's stressed environment.
 

The article originally appeared in the Wall Street Journal by Francesco Guerrera, the editor of the Wall Street Journal's Money & Investing section.

Financial Threats In Retirement

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Welcome back to the second installment in the pension income series where I plan to name the threats to your portfolio while drawing retirement income.  It is very important to understand the various challenges you’ll face over the long run and plan accordingly so your retirement years are smooth sailing.  For the most part these are things you already understand but haven’t yet figured out how to check them off the list.

Last week this series began with a brief introduction to the value of pension income- a steady, guaranteed stream of cash flow through retirement.  Guaranteed income is the shield you’ll carry into battle when you face the threats we’ll talk about this week. 

Any of these individually can wreak havoc on a well-intentioned retirement strategy so it takes careful planning and calculated decisions to beat them all.  If you are just joining us follow the link at the top of the page to read last week’s post.

Without further ado, here we go… The biggest challenges to maintaining a certain standard of living in retirement are longevity risk, market volatility and inflation.  Sounds like a nasty list, doesn’t it?  Recognizing the problem is the first step and the first step is always the hardest.

Longevity Risk- Of all the ways this can be defined, in regards to you and retirement income, longevity risk simply refers to the risk of outliving your assets.  While this could be the scariest issue of all it is probably the easiest to problem to solve and will lessen the impact of all other threats.  This directly relates to last week; if you have guaranteed lifetime income you know you’ll never outlive a paycheck.  As I wrote last week, “without guaranteed income, you could be relegated to constant worry over appropriate spending levels.”  Negative investment performance could be devastating to your lifestyle, but can be eliminated by a guaranteed source of income.

Market Volatility Risk- Market volatility can mean the difference between a happy retirement and a stressful retirement.  Market volatility can have devastating consequences, especially when it hits a portfolio when you are close to retirement.  One IRA statement I reviewed the other day showed a meager 1.76% annual yield after more than 20 years of saving and investing.  This is dismal performance, especially when it’s just a few years from retirement.

In my post on “Reverse Dollar Cost Averaging” I detail how the market fundamental of steady incremental investment helps while accumulating assets, but works against you while distributing assets.  How do you escape this trap?  Guaranteed lifetime income.  Converting accumulated assets to pension-like income is essential, because the income stream provided is consistent and future market corrections have no impact on current spending levels.  When you have the security of guaranteed income, you put yourself in a position of strength and can wait to withdraw extra cash when markets recover, and reduce the immediate effects of volatility.
 
Inflation Risk- This one is tricky.  As they say, a dollar just won’t buy what it used to.  Now I don’t care what anyone says, there is no action you can take today that will protect you from inflation tomorrow.  Even laddering strategies with any type of financial vehicle subject you to giving up potential interest while waiting to invest or draw income from the next tranche of assets.  In economic circles that is called lost opportunity cost.  The key to beating or at least mitigating inflation is to remain flexible.  Lock in what you need now and let your money grow for tomorrow so it is available to provide what you need in the future.

This all fits together and comes back to one simple theme:  guaranteed income protects you and allows you a choice in retirement.  No one knows how long each of us will live, which makes it difficult if not impossible to determine appropriate spending levels.  No one wants retirement income to be subject to the whims of Wall Street.  No one has a clue what a dollar will buy in 20 or 30 years.  That’s why everyone needs and should want a stream of guaranteed lifetime income.  The major benefits are knowing you’ll never run out of money, you’re not dependent on market performance, and additional assets are accessible when you realize that paycheck doesn’t accomplish what it could years ago.

In the next part of this series I’ll examine the traditional approach to the subject of retirement income to talk about the stark differences between management for asset accumulation vs. asset distribution.  It’s time to unlearn everything you’ve been taught.
 
Thank you and have a great week!
 
Bryan J. Anderson
800.438.5121

[email protected]

 

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How to Design Your Own Private Pension

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"View in Wall Street from Corner of Broad...

Over the previous pages, we’ve taken an up-close look at how pension income is the central core of a retirement income plan.  The purpose of the series is to highlight the important considerations to address when crafting a plan to convert a lifetime of savings into an income stream that will fully sustain you in the years ahead.  I’d like to revisit the main points of this series before we jump into the specific proactive step.

So, here’s a snapshot of what we covered based on excerpts from the series.

Part I:  The Value of Pensions

Why is a pension such a good thing?

Guaranteed lifetime income from a pension ensures stable cash flow across all years of retirement.

A stable base of income allows more flexibility with your other assets.  With a guaranteed baseline income secured, you can focus on growth with the other assets to overcome any financial obstacle you meet in the future.

The importance of guaranteed income is further reinforced when you take into consideration the various challenges that make retirement planning difficult.  So we continued with…

Part II:  Financial Threats in Retirement

There are definite threats with a poorly crafted plan.  When planning to overcome longevity risk, market volatility, and inflation, the actions you take now must be calculated and deliberate for the following reasons…

No one knows how long each of us will live which makes it difficult if not impossible to determine appropriate spending levels.

No one wants retirement income to be subject to the whims of Wall Street.

No one has a clue what a dollar will buy in 20 or 30 years.

This is why everyone needs and should want a stream of guaranteed lifetime income.

The major benefits are knowing you’ll never run out of money, you’re not dependent on market performance, and additional assets are accessible foe emergencies or for when you realize that paycheck doesn’t accomplish what it could years ago.

The importance of planning for these threats is apparent, and traditional asset management has long been considered to be capable of meeting the challenge.  In the name of prudent decision making, a critical examination of that line of thinking is mandatory, which led us to the following post.

Part III:  Tradition Asset Management Doesn’t Work for Retirement Income Planning

I’ll never ask you to take my word for it.  In this installment several studies were offered as a reference that allowed me to conclude with this statement:

The biggest problem to this [Traditional Asset Management] approach, in my opinion, is the fact that a single strategy is applied to planning for the major financial threats we’ve talked about, namely:

Longevity Risk

Market Volatility

Inflation.

Your income therefore all depends on the mood of the market, and not just now but every day for the next 20 or 30 years.

If you had a choice, when would you like your retirement income to be reduced? I vote never.

I’ll repeat myself: the traditional approach to retirement income planning does not work as it has absolutely no guarantee of success.

There is a stark contrast between the methodologies, risks, and benefits of asset management, and the needs of income planning.  That requires an individual to approach each of those targets from a different angle, which led us to the solution in the next post.

Part IV:  The Pension and Annuity Answer

Again, several academic studies were provided to give you a solid base of knowledge to use in this important decision making process.  Here’s what they had to say:

These studies combined speak directly to the central point of this ‘Pension Series’ which highlights the benefits and the necessity of guaranteed income.1) Cover your basic expenses with a source of guaranteed income you can’t outlive.

Annuities allow you to do that more efficiently than any other asset class, and frees you to allocate additional assets to optimize portfolio growth over time.

2) Continued portfolio growth with a guaranteed income safety net gives you the flexibility to ride out market corrections and makes additional funds available to provide for financial emergency or inflation.

That brings us right back to the beginning where we looked at the variety of benefits you will receive after securing a source of guaranteed lifetime income.  This is primarily a stable cash flow foundation through your entire retirement, coupled with flexibility and growth in  additional assets.  It’s not only the safest route to take but also the most profitable.

Now it’s time to find the most efficient source of income for your situation.  It’s never as simple as just picking a product.  There are many factors that need to be addressed for you specifically.  This is a serious task and you deserve more than what a basic ‘product salesman’ can offer.

Are you ready for a set of guidelines to follow when designing your private pension, and get on the right path to long-term security?

Click on to the final installment to design your own private pension….

The Financial Threats In Retirement

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Retirement

Retirement Threats

It is critical to understand the various financial threats in retirement that you will face over the long run and to plan accordingly so your retirement years are smooth sailing.  For the most part these challenges are things you already understand, but most likely you do not know how to solve them.

Previously, we looked at the value of a guaranteed, pension-like income.  A steady, guaranteed stream of cash flow through retirement.  Guaranteed income is the shield you’ll carry into battle when you face the threats we’ll talk about.

Any of these threats individually can wreak havoc on a well-intentioned retirement strategy so it takes careful planning and calculated decisions to beat them all.

Longevity Risk

Longevity risk simply refers to the risk of outliving your assets.

While this could be the scariest issue of all, in reality, it is probably the easiest to problem to solve and will lessen the impact of all other threats.

Solution: If you have guaranteed lifetime income, you know you can never outlive a paycheck.  As I wrote previously, “Without guaranteed income, you could be relegated to constant worry over appropriate spending levels.”  Negative investment performance could be a devastating blow to your lifestyle.

That risk can be eliminated by a guaranteed source of income.

Market Volatility Risk

 Market volatility can mean the difference between a happy retirement and a stressful retirement.  Market volatility can have devastating consequences, especially when it hits a portfolio when you are close to retirement or early on in retirement.  One IRA statement we recently reviewed showed a meager 1.76% annual yield after more than 20 years of saving and investing.  This is dismal performance, especially when it’s just a few years from retirement.

In my post on “Reverse Dollar Cost Averaging” I detail how the market fundamental of steady incremental investment helps while accumulating assets, but works against you while distributing assets.  How do you escape this trap? Simple…

Guaranteed Lifetime Income

Converting accumulated assets to pension-like income is essential, because the income stream provided is consistent and future market corrections have no impact on current spending levels.

When you have the security of guaranteed income, you put yourself in a position of strength and can wait to withdraw extra cash when markets recover, and reduce the immediate effects of volatility.

Inflation Risk

This one is tricky.  As they say, a dollar just won’t buy what it used to.  Now I don’t care what anyone says, there is no action you can take today that will fully insulate you from inflation tomorrow.  Even laddering strategies with any type of financial vehicle subject you to giving up potential interest while waiting to invest or draw income from the next tranche of assets.  In economic circles that is called lost opportunity cost.

The key to beating or at least mitigating inflation is to remain flexible.  Lock in what you need now and let the rest of your money grow for tomorrow so it is available to provide what you need in the future.

Mitigating Financial Threats Summary:

This all fits together and comes back to one simple theme:  Guaranteed Lifetime Income protects you and allows you a choice in retirement.

No one knows how long each of us will live, which makes it difficult if not impossible to determine appropriate spending levels.
No one wants retirement income to be subject to the whims of Wall Street.
No one has a clue what a dollar will buy in 20 or 30 years.

This is why everyone needs and should want a stream of guaranteed lifetime income.

The major benefits are knowing you’ll never run out of income, you’re not dependent on market performance, and additional assets are accessible when you realize that paycheck doesn’t accomplish what it could years ago.

In the next page we examine the traditional approach to the subject of retirement income to talk about the stark differences between management for asset accumulation vs. asset distribution.  It’s time to unlearn everything you’ve been taught.

Click To Continue…. See How Traditional Asset Management Doesn’t Work….