Creditors Dumping American Treasuries: Good or Bad?

Creditors Dumping American Treasuries: Good or Bad?

Creditors Dumping American Treasuries: Good or Bad?
Ty J. Young Editorial

When foreign governments sell their holdings of U.S Treasury Bonds that’s a bad thing, right?

Usually … but not always. It could represent the free market working as it should.

As the media continues to prove its dangerous bias concerning all things Trump, many in the media have characterized the massive sell-off in treasuries as representing an anti-Trump position by foreign governments, or a fear of what the Trump economic plan will look like.

What they fail to report is the Treasury sales started in 2015, and accelerated to record levels in 2016 … under then President Obama.

As American treasuries are dumped by foreign creditors – What does it mean?

I. It’s a Good Thing When Foreign Governments Sell Their Treasury Holdings:
1. It means the market is functioning properly. A healthy market will show robust sales for U.S. treasuries because buyers can get a better return in the stock market. At some point, interest rates will go up to accommodate, and the selling will subside. The Treasury market was already selling off from 2004 through 2006 … and then the financial crisis hit. As usual, the global investing public immediately shifted to the safest instrument on the planet – the U.S. Treasury Bond. The result was a spike in sales for 3 of 4 years from 2007-2010.

2. It can benefit the American economy because Treasuries are redeemed in dollars. The treasury bond costs the taxpayer when it is redeemed, but Treasuries are redeemed in dollars. At some point, those dollars will be used on U.S. goods and services. The benefit of being the global reserve currency is that ultimately, those dollars come back home.
3. It could discipline Congressional spending because Treasury sales drive up interest rates. After you recover from the laughter, consider this: As bonds flood the market, interest rates go up. They must go up in order to attract investors. This, in turn, drives up the borrowing costs for the government. If it costs more to finance borrowing, theoretically it should slow increases in government spending. Yes, in theory.
II. It’s Usually a Bad Thing When Treasuries Flood the Market:
1. It’s a sign that buyers have lost faith in U.S. creditworthiness. As the primacy of the U.S. role in the global order has shrunk, many have feared the size of our debt could lead to not honoring our future obligations. The more obvious reasons are the ones that are most true – countries need to raise cash, they are re-balancing their portfolio, etc. The idea that a future U.S. government could, or would, renege on debt obligations is improbable. And most foreign debt holders know that.
2. It is a signal that interest rates are going up. In order to make a Treasury more attractive in a buyer’s market, you must raise the rates. That means borrowing costs are going up. Higher interest rates can dampen spending throughout the economy as it drives up the end-user costs of most goods and services.
3. Even when not a bad thing, it’s a bad thing. China is primarily selling to off-set the drop in foreign currency reserves. That suggests not a fear of future U.S. debt payments, but their own drawdown on cash. Simply put, it suggests China is struggling economically. This, from a competitive standpoint, can make Americans feel good – except when reality sets in, and you realize that a struggling China will most likely seek foreign conflict to rally their people. Just like Russia has done. Further, in the last quarter of 2016, it wasn’t just countries selling treasuries, but retail bond holders. (Saudi Arabia is the one major holder of treasuries not selling, and suggests an oil price/foreign policy motivation that is assisting U.S. interests in that regard).

In the end, a treasury sell off has positive and negative impacts, like most market events. The media’s efforts to put a political spin on the subject notwithstanding, treasury holdings remain up since 2008. The treasury market is performing exactly as it should – as the U.S. economy improves, countries seek to invest in Apple, Coca-Cola, and not government debt. It is when things turn south, and countries and people are in trouble, that they flock to the safest instrument on the planet – the U.S. treasury bond. This is a properly functioning market.

As the Trump bounce continues skyward, unabated, it is time to move some of your gains off the table, and consider a principal protection investment strategy. Call now! 877-912-1919

Donald Trump Signing Executive Orders

Trump Trade Deals: Will They Hurt or Help the Market?

Trump Trade Deals: Will They Hurt or Help the Market?
Ty J. Young Editorial

Free trade … fair trade … 20% tariffs on imports … geographic taxation … with Trump’s economic team slowly moving into place, the Trump economic plan will soon be put into motion. If it is anything like his first month in office, we should brace ourselves for one heck of a ride! Voters are excited to see promises kept, while many long-term free traders are collectively holding their breath.

Bilateral trade (country to country), as opposed to multilateral agreements such as North American Free Trade Agreement (NAFTA), is what President Trump promised during the campaign. In Trump’s words, they were “bad deals” that took advantage of America. Many blue collar workers agreed, noticing the decline of their hometowns and blue collar employment over the last few decades. Clearly, “free trade” had not worked for all Americans.

Free trade does require “fair trade”, which is essentially the idea that access to the American market must be combined with equally free and therefore fair access to the foreign markets. But, could unraveling the global free trade system, and replacing it with bilateral agreements that change the nature of our alliance system and international relations, in turn cause a market reversal here at home?

I. Why Trump Trade Deals Could Hurt the Market:
1. Could mark the end of dollar dominance – which could crash global markets. It would not be just U.S. markets, but if existing trade relationships are upended, some countries may respond by opting out of using the dollar as their primary trading currency. The dollar’s position as the global reserve currency has never been tested or questioned throughout the post-World War II era. Even the collapse of the Soviet Union, and the financial crisis of 2008, did not move the dollar’s position as the primary unit of global exchange. But, unravel the current free trade system and many will question why they should continue to support the “exorbitant privilege” the dollar maintains.
2. Trade war with China will scare everyone … the markets included.: No one wins in a trade war, but we are inching closer to one with China. So, we stop Chinese currency manipulation? China has been devaluing its currency precisely because it is over-valued as compared to the dollar. Steel dumping? China does dump low-cost, inferior steel products on the U.S. market. But China could retaliate to changes in the World Trade Organization (WTO) or the existing U.S.— China trade relationship by cutting off access to rare earths. This was an Obama-era give-away that made us 100% reliant upon China for all of the metals that make up our phones, TVs, and more importantly, defense-related equipment. Bilateral trade with China, thanks to decades of creating this relationship, will require much more discretion than negotiating by tweet.
3. Talk of border adjustment taxes will SCARE the market. Most analysts believe the “Trump bounce” in the stock market reflects the belief that tax cuts and regulatory reform are coming down the pike. But withdrawing from some trade deals, negotiating new ones, and perhaps losing existing markets in a competitive bilateral environment does not provide the certainty that markets prefer. Most notably, discussions of tariffs and “border adjustment” taxes will most likely scare markets, as the tax will enrage trade partners and ultimately hurt the purchasing power of the U.S. consumer, since they will be the ones who ultimately pay it.

II. Why ‘Trump Trade’ Will Help the Market.
1. More winners than losers in Trump ‘fair trade’ policies. While free-market followers are bracing themselves for the correction, the reality is Trump was right: foreign corporations and foreign countries do not have a right to sell into our market without the same rights existing for a U.S. producer to sell back into the foreign market. Virtually every multilateral trade deal since NAFTA has resulted in damage being done to a domestic U.S. company, and therefore lost jobs for U.S. workers. While Trump may benefit (as well as the public) from some twitter restraint, his policy beliefs are responsible and needed. The market, rightfully, sees more winners than losers in revisiting global trade.
2. Companies already bringing back US jobs. Believing corporate tax rates will change under Trump, and a minimal tax is coming for cash repatriation, US companies are publicly announcing job hiring, plant construction and more. Part and parcel of the Trump Trade policy is bringing jobs back home to America, and that started happening even before the inauguration. Companies are now realizing the benefits of an “America First” economic policy.
3. Multiple Key industries will benefit from ‘fair’ trade. Textiles, steel, and soft drink companies all benefit from bilateral trade agreements as opposed to multilateral trade deals. That means stocks in those companies should be going up. As former House member Dan Burton once stated, “You go to the first country, they take a little bite out of ya’, you go to the second country, they take a little bite out of ya’, pretty soon, you don’t have much left, and everyone else got rich.” Redrawing the global trade map will have winners and losers, but most of the winning will be here since everyone wants and needs to do business in America.

The market has been reaching record highs almost weekly since Trump was elected, proving the pollsters and the elite media wrong about everything … again. Trump Trade has huge risks and rewards, and it is a departure from standard Republican orthodoxy of the last 50 years. But, the market seems to be saying that it likes—it really, really likes—the proposed Trump economic plan.

Markets go up and down – there is no straight line in the investing world. Yes, the current trajectory remains fixed upwards and we are looking at the potential of a Trump economic plan driving the economy forward. However, now may be the best time to analyze your current investments and understand the amount of risk you are taking. Whether you are preparing for the inevitable downturn, or simply seeking to move all your gains into a safe place, we may be able to help! Call now to speak with your Ty J. Young Inc. advisor. You will learn how you can protect your retirement assets from stock market fluctuations and earn a reasonable rate of return. Call 877-912-1919 or visit www.avoidmarketloss.com!

Annuity Critics EXPOSED 2.0

“Annuity Critics EXPOSED 2.0”
By Ty J. Young

What should you do when a product that you choose to invest in is subject to questionable negative advertising by competitors?
As we know, there is a consistent drumbeat of negative advertising against the value and benefits of an index annuity. Most of which are inaccurate, if not downright deceptive. One of the things you can do is get fully informed on the issues.

Our blog today will share with you “The Myths of Annuities 2.0” – a title taken from a famous dinner seminar of mine years ago, but one that accurately describes how the consumer can miss out on the right choice of investment because members of the financial industry perpetuate myths that prove to be, to the astute investor, untrue.

Not all members of the financial community. In 2009, in the wake of the 2008 financial crisis, many in the wealth management profession who had protected the principal of their clients were being lauded as “brilliant” in their investment strategies. You can find such a panel of experts on CNBC with the host claiming that “….your principal is protected,” and one of the guests stating “….you should be thanking the person that sold you that index annuity” and for putting you in that product! (watch here) The point being that growth, with protection, was a strategy even Wall Street money managers were extolling when the banks collapsed.

So why the negative vibe? Shouldn’t all investment strategies be considered, and then you choose the one that best fits your long-term objectives?
Some of the advertising about annuities completely misses the point. We are going to look at some of the ways the advisory community gets the index annuity wrong, and to help arm you with information when you face such questionable advertising.

1) “Payments from an annuity come as an income stream…” When that is all the information you are given, it is factually inaccurate. An index annuity can be disbursed as an income stream, but also as a lump sum along with several other methods of payment delivery, including lump sum to your beneficiaries. It is a great way to achieve real growth, with real protection, and get your money out in the manner you see fit. SOME annuities disburse funds only through an income stream, but not all, and not the products we recommend. The statement above is not wrong, just incomplete, a way of presenting you information without giving you all of the information, but it is technically not lying.

2) Some advertisements suggest annuities can be quite complex and require “investor due diligence” and that “terms and conditions” can vary widely among companies. This is another marketing ploy. The language chosen is designed to sound “scary” to the investor, to make you feel like the product is overly complicated, or that it is somehow different than other investment options.

But what is left out is the fact that all investments require due diligence by both the advisor and the client. Brokerage investments, stocks, securities, they all have complexity that require due diligence, and/or advisor input. Should you invest in something that you have not studied, reviewed, or asked questions about? Of course not, yet when you read lines like you see above, it can suggest something is different and more difficult. We advise all of our clients to learn, study and come prepared with lots of questions when we conduct our new business interview. The idea that only index annuities require “investor due diligence,” on its face, is factually inaccurate.

3) “Ongoing regulatory changes may also impact annuities.” This is what I like to call the “Master of the Obvious” advertising strategy. I want to say, “…no, really, I never thought of that.” Advisors who use this line are purposely leaving out that the entire investment industry is regulated, changes occur daily, and that is a constant occurrence in our profession. To suggest, not state verbatim, but suggest, that this is solely for index annuity products is again factually inaccurate on its face, and highly deceptive. More importantly, index annuities have received less regulatory change than the securities industry, which was hammered by the Dodd-Frank Law in 2010 (although thanks to the 2016 Presidential election, unnecessary regulation may be reversed). To date, most index annuity regulation is found in your State.

Regulation is important to protect consumers from the worst actors in the marketplace. But suggesting index annuities receive special attention would simply be wrong. Bernie Madoff wasn’t found guilty of scamming investors by using annuity products – but rather he was found guilty of securities fraud, the same business as many wealth managers are in as well.

4. You have liquidity in annuities “…for some withdrawals, however, if the distribution amount is greater than what is specified in the contract, the investor could pay steep penalties.” Annuities are completely liquid, subject to a surrender charge. There are of course surrender charges for withdrawing early. Any advisor you speak to should disclose this up front. Early withdrawal, or exceeding the 10% penalty free withdrawal you are allowed in the contract, can generate a cost or a penalty. But the good advisor will remind you of the fees that are charged to manage your brokerage account, as compared to no fees in the best index annuity accounts. Advisors who market against annuities may sometimes fail to disclose that when the market goes down, or goes in half as it did in 2008, you lose your money! Does the advisor offer to return his fees when that happens? In a good index annuity, you would have lost nothing. In a good index annuity, the only way to lose money even if the market goes down 50% is to take your money out early, and even the worst case is most likely a 10% charge. In 2008, many investors lost money AND were charged a fee. This doesn’t have to happen to you.

In the case of the advisor who wants you in risk associated assets, he’s getting paid no matter what happens in your account through the fees he/she charges – whether you have gains or losses, they are taking their cut. In the index annuity, the only way to be charged on the account is for you the owner to take out more than you have agreed to, or to take it out too early. In the former case, no matter what you do, the advisor is getting paid from your account. In the latter case, the only charges that can be applied are for actions you take which go against what you agreed to in your contract.

5) “The variable annuity advertised as ALL annuities.” Advisors love using the example of a variable annuity as representing ALL annuities, you’ve probably seen this recently on TV. It would be nice and easy if it were the case, but comically, and as those placing the negative ads KNOW, variable annuities are one of many forms of an annuity, but which an index annuity it is certainly NOT. Variable annuities can have fees, and perform like a hybrid of an index annuity and a brokerage account. That makes it the worst of both worlds – high fees for the advisor and limited options for the account. We rarely if ever recommend a variable annuity, and once a client knows all the facts, they rarely if ever want one. To use the variable annuity account options and imply they are the same as an index annuity is quite deceptive. Be sure to call out any advisor who attempts to conflate these two as one and the same.

6) The infamous “hypothetical” graph. It is the easiest method for advisors to compare “hypothetical” products over equivalent periods of time. If it only was that easy. When you are comparing a specific Index Annuity with the stock market, it can be a fair generalization of an index annuities performance, if you have the details of how the product was supposed to perform, and it was a comparison to an actual product used. But that would of course still remain arbitrary. However, that is not what is happening in much of the promotional material that attacks index annuities. In many cases, you are being given a graph which is presented as compelling evidence, but which is again factually inaccurate. The “hypothetical graph” I am describing uses a hypothetical brokerage account. But you can’t have one of those – either you have an actual brokerage account, or you use the market itself, but you can’t “make up” an account and therefore “make up” its performance. There are less polite words to describe this method of marketing. Indeed, in a court of law, the judge would disallow such evidence because it deceives the jury. This is deceptive advertising.

This hypothetical brokerage account is then compared with a hypothetical index annuity account. Sadly, this faces the same dilemma – you cannot have one hypothetical compared to another. In both cases the account is made up, there are made up rates of return, and made up fees. Our savvy clients know to combat such marketing by pointing out such factors, but a lot of the investing public misses out on protecting some or all of their money because of the questionable advertising practices of many in the advisor community.

7) “Fees, fees, and MORE fees!” You name it, and the Wall Street advisor will charge a fee for it! Our clients know that there are many companies that offer index annuities, but only a precious few do it well, and there are all different kinds of annuity accounts. We do not recommend accounts that have fees, but to show what you might see from other advisor advertising, you could have these fees and more charged to your account:

* Mortality and expense fees (variable annuity)
* Operating and administrative fees (variable annuity)
* Sub-account expense ratios (variable annuity)
* Guaranteed Minimum death benefit (variable annuity)
* Variable annuity lifetime benefit (again….variable annuity)

Any investor should immediately confront such misinformation, by pointing out that the best index annuities do not charge fees. Fees are not in the accounts my company nor our advisors recommend.

8) “Only the strength of the insurance company will insure that you get your money back.” By law, Index annuity funds are segregated into accounts subject to state-required reserving rules. It was the banks, NOT insurance companies, that needed bailing out in the banking collapse of 2008. It was the Wall Street investment, and the Wall Street investor – NOT the index annuity account holder – who lost money in the market downturn of 2008.
Many advisors will refer to AIG needing a bailout in 2008. AIG insured the derivatives trading market, and their losses were in that market. In a famous scene from “Too Big To Fail,” Timothy Geithner, our former Treasury Secretary and at the time the head of the New York Fed, asked the CEO of AIG why he didn’t just use his insurance accounts to cover the losses. The answer was straight forward – insurance accounts are segregated and reserved by state law….”I can’t touch them.”

It should be a calming experience for an investor, safe in the knowledge that your investment IS protected by the strength of your insurance company, and not the wheeling and dealing of Wall Street.

A famous quote about Christmas goes like this: “If ifs and buts were candy and nuts, we’d all have a merry Christmas.” Unfortunately, many advisors don’t bother with the “if” or the “but,” they just throw their denunciations into the media, hoping something sticks. Not every advertisement regarding index annuities will be wrong, or misleading. Most of the advisors you meet work diligently to understand the products, and be prepared to recommend something that works for your investment objectives. But for most companies and advisors, the strength of our investment advice does not require misleading marketing strategies. It only requires a commitment to getting your money into a protected place, believing in a reasonable rate of return, and not charging you any fees to do so. So the next time you see an “anti-annuity”, “Annuity Myths” or “I wouldn’t sell an annuity” advertisement, you know these ads are at best highly subjective, and at worst – attempting to deceive you.