Obama Claims Credit for Making America Great Again

Nothing like the stench of dirty politics polluting our every breath. Yes, it's election time again and the Cabal's machine is running at full power. When the Fake Media promotes an idea, we know that reality resides somewhere geometrically opposed to what they say. Believing what they say is akin to eating the CIA's koolaid in granular form.

Recently, Obama tried to argue that it was he who Made America Great Again. This despite the fact that he will soon face military tribunals for treason for his involvement in Iran's manufacturing of a nuclear head that was to be detonated within the continental US. Yes, the Cabal continues to lose ground.

Following is the transcript from a presentation by Chairman of the Council of Economic Advisers, Kevin Hassett, to the press at the White House. As expected, the 4 AM memo from the CIA gave the media their talking points the following day. All, tried their version of 'debunking'. Unfortunately, anyone following my blog knows that capital spending is at the core of economic growth and that it had gone to zero during Obama's terrible tenure. 

And then there is the fact that dozen's of Cabal-controlled pseudo-economists had claimed for eight Obama years that the era of economic expansion had come to an end and that we would only now experience the 'New Economic Reality'. Following the Cabal's agenda, we were made to believe that higher than 1% growth would be impossible in the future. Well, the future came quickly thanks to Trump and growth blew all their mechanized prognostication. 

Enjoy the charts.

CHAIRMAN HASSETT: 

You know, one of the hypotheses that’s been floating around about the economy lately is that the strong economy that we’re seeing is just a continuation of recent trends. And, you know, since we’re the nerds at the White House, we decided that this is a testable hypothesis. And so what we can do is we can go out and we can estimate recent trends — that is, trends that ran in the economy up to the point of the last election — and then compare the latest data to the recent trends.

In most cases, by the way, the estimates of the trends that we present to you here are very statistically significant, as are the deviations from the trend.

And so now I’m going to, as I always do, show you a few slides. Could I have the next slide, please? That’s the first slide again. There we go.

So the first slide that we’re looking at is small-business optimism. And this is basically — for parallel construction, you’re going to see that each of the slides we go through is going to look a lot like this. And so the blue part to the left of the slide is what happened from the 2012 election through the 2016 election. And the dotted blue line is the trend that President Trump inherited from the previous President. And the red line is what actually happened with the data.

And so, I think that if you look at this chart, you can see that the first thing is small-business optimism. The middle chart is the percent reporting now as a good time to expand. The last one is the percent expecting higher real sales in six months. I think if you look at any of those, you’d say, “Gee, that doesn’t really look like the continuation of a recent trend.”

The next chart is something that, in my first presser here, way back last fall, we talked a lot about. It’s business investment, which is more than $300 billion over the trend. Again, if you look at the blue line on the left, the first chart is nonresidential fixed investment. And the dotted line is the trend and the growth rate to that, that President Trump inherited.

For the middle chart is structures, or buildings. And that, as you can see, the dotted line is something that is headed straight down.

And then, the final chart is equipment investment, and that went straight down before President Trump was elected.

And I think that if anyone were to assert that the capital spending boom that we’re seeing right now was a continuation of the trend that President Trump inherited, then, well, you know, they wouldn’t get a high grade in graduate school for that assertion.

Durable goods orders, capital goods orders — it’s a key part of the economy, and it’s one of the factors that we look at most closely because it characterizes, basically, the good-paying jobs, the jobs that affects normal Americans — blue- collar Americans.

And the first chart is core capital goods orders, and the second chart is core capital goods shipments. And if you look at it, the blue again shows a clear downward trajectory and billions of dollars. And then that trajectory reversed itself completely when President Trump was elected.

If you were going to assert that the current good news is just the extension of a recent trend, then you’d just simply be factually incorrect.

Here we’re looking at the ISM purchasing managers index, which is a survey of people who are purchasing managers for manufacturing firms. And so they’re the folks that, you know, as the title suggests, manage the purchases. And so it’s a really great indicator of the economy because you can survey them and say, “Hey, have you been buying lots of stuff this month or have you not?” And the index shows what their responses look like.

And you can see that the trend on the purchasing managers index was pretty much flat when President Trump took office. And the red line shows you what happened since, that there’s a clear inflection right at the election and a clear break in the trend.

Now, one of the things that I can remember at the American Enterprise Institute talking a lot about before I came in here was the fact that entrepreneurship in America was falling off. And one of the ways we can measure entrepreneurship is that, if you start a new business, that you have to apply for an ID number — a tax ID number — for your business.

And so, in this chart, we’ve plotted the EIN applications for new businesses. And if you look at the blue line, they were heading up because we were at a recovery, but there’s clear upward trajectory way above the trend at the end.

And, you know, Sarah — like John Roberts — is a calculus geek. And so she looked at that one, and said, “Jeez, that looks like a very strong second derivative to me.” (Laughter.) And then, I said, “I didn’t know you did calculus.” And she said, “I like calculus better than talking to these guys.”

The next chart is prime-age workers reentering the labor force. And again, if you look at the trend, one of the things people said when we put out our growth forecast that said that we’d have 3 percent growth was we said that President Trump’s policies are going to bring factories back to the U.S., give you the capital spending boom that you saw in the previous chart, and that was going to bring people back into the labor force at precisely the right time. Once again, you can see that there’s clear break in the trend.

And so, if you see a break in the trend in the capital spending, the new plant formation that gives blue-collar workers their jobs — go to the next slide, please — then maybe we see a break in the trend in blue-collar workers employment as well. And so this is employment for people in goods-producing industries.

If you look, again, at the blue part on the left, you can see that there’s a clear downward trend going on in the growth rate of that for President Obama, and then a clear inflection timed almost precisely, once again, at the election. And the notion, again, that somebody might defensively attempt to assert that this is a continuation of the trend is almost laughable if you look at this chart and, you know, look at the rest of them.

Now, somebody might say, if you’re showing a bunch of charts, well, gee, maybe it depends on when you estimate the trend. And I’m sure that if you went back and began your estimate of the trend at the Civil War, and then thought about, well, what trend do we get then — well, then, maybe we’re not — yeah, well, you would get a different answer from what we see.

But another way to sort of test whether the data that I just showed you is a fair representation of what a trend looked like when President Trump was elected is just to compare it to what nonpartisan bodies were saying.

So if I could have a look at my final chart here. I know — guys, I heard this sigh of relief when I said “final chart.” So if you look at the final chart, you’ll see that the black line is, in June of 2017, what the CBO — Congressional Budget Office, a nonpartisan agency that has a job, really, of looking at recent trends and projecting it — what they said would happen to capital spending back in 2017. The blue line is what they said in April 2018. And the red line is what’s actually happened.

And so, I would assert that if you look at the collective body of evidence, the notion that what we’re seeing right now is just a continuation of recent trends is not super defensible. And I think that — I know that we’re in a political time and passions are high. But, as geeky economists, one of the things we have to do is think ahead to what historians will think when they look back at this time. And I can promise you that economic historians will 100 percent accept the fact that there was an inflection at the election of Donald Trump, and that a whole bunch of data items started heading north. They will, of course, argue for a long time about why that happened.

But my final thought for you is just this: That when they do that, and when you watch people do that in the media going forward, with op-eds and so on, that you should watch out for ex-post theorizing. As an economist, one of the things I most care about is an ex-ante theory — something that happens before, and then let’s watch the data, and then see if it agrees with a theory. That’s how you test a theory.

You might recall that I came back here last fall, and I told you that if we had the tax cuts that President Trump advised that we have, that he pursued — if we passed them, then there would be a boom in capital spending this year.

In fact, we provided estimates at the time last fall that said that capital spending this year would go up about 11 percent because of the tax cuts. So far, in the first half of the year, capital spending is up 10 percent.

And so you don’t have to really reach far for a theory of what happened. President Trump deregulated the economy; we’ve talked about how that affects growth. The tax cuts have had exactly the predicted effect on the economy that’s brought businesses back to the U.S., factories back to the U.S., and created jobs for ordinary Americans. It clear in the data that there’s been a trend break.

Following is a video edit that includes the above White House presentation. 

Tax Rhetoric Hides Real Issue

Media Noise on Tax Reform

Talk about tax reform is everywhere in the news these days. The media tells us that the proposed changes are bad for us. Understandably, those proposing the changes disagree. So what does all the noise mean to you and your business?

The problem with the subject of taxation is that it poses special difficulties to those attempting to forecast outcomes. It's possible for diametrically opposed tax plans to promise the same positive outcome, for example. Therefore, the subject lends itself to manipulation by unethical politicians and news people alike. The natural complexity also serves to hide what's really important to all of us. So, let's understand the effects of tax changes. Then, let's consider the real threat to the wellbeing of our nation; a subject no one is talking about.

To understand why tax reform outcomes are so difficult to interpret we need to look at how complex systems work. Complex systems act in a seemingly random fashion as participants within the system change their behavior in response to other participants.

Let me explain with the following scenario. Assume that we get together a thousand of the smartest PhD's in the country. We'll call them the Federal Reserve or FED for short.

Federal Reserve Board, 1917

This FED has the responsibility to ensure a better economic future for all of us. The FED will study the economic market; a flexible group of players following their self interest. Then, when it sees trouble ahead, the FED will intervene to prevent any negative outcomes. Ironically, the FED will thus become the largest player in the system.

This game really begun in December of 1913. So far, the super smart people at the FED have never anticipated a single economic downturn. In fact, the FED now accepts that they are 'data dependant'; they admit to being myopic. Without visibility past their nose, they utterly 'depend' on where 'data' is right now. To make matters more confusing, other players follow every action by the FED as a sign of what's to come. It's a real case of the blind leading the blind.

At times, complex systems follow a single general direction. For example, we know that more people in a market will make the number of transactions grow. While the relationship between number of players and number of transactions is not precise, the general correlation is positive. As population has continued to grow, the number of transactions has done the same in what looks like limitless duration.  

Complex System

But then there are times when these systems periodically return to their base or mean. Market risk is a good example. The risk faced by market players alters direction because it can't continue to increase or decrease indefinitely.

The problem with complex systems is that they represent the total combination of many of these two types of movements. At times, linear movements dominate only to suddenly give in to reversion to the mean.

Think about it. It's even possible for the same participants to act differently when faced with the same circumstances. Their actions could be altered by their memory of recent success or failure, for example.

All these facts make it impossible to establish rigid expectations. So don't be surprised when the smartest scientist can't guess the path of a hurricane a few days before it makes land or when the Federal Reserve makes a catastrophic mistake with the economy. Both, the economy and the weather are complex systems. Likewise, do you really expect the TV host to be able to correctly determine what will happen after a new tax structure is implemented? No chance.

Here, please pardon the fact that I took way too long to elaborate my point; I really wanted to make it very clear. News people are as clueless as any of us. Don't waste your time listening to their opinion disguised as a news fact. For a more productive outcome, read a fiction novel instead.

Still, the media will try to convince you. And since most of the media has a left bias, they'll generally argue that paying more taxes and a bigger government are better.

Government Skeptics

Now that if you see big government with skepticism, don't distress. You are not alone. In fact, you are in great company. Our nation's forefathers shared the same skepticism. This is why our constitution was written to limit government power.

Our constitution has served us well for close to 230 years; resulting in the most successful nation in history. Our system is in fact so great that countries all around the world voluntarily adopt many of its characteristics. Subsequently, billions of people have left poverty behind.

Yes, before Europeans started to brag about their young and relatively untested socialist system of big government and heavy taxation, they needed our help rebuilding after their past mistakes. So, when the left leaning media tries to tell you that European's pay more taxes and manage to live better than we do, remember that their opinion isn't so correct.

Look at Holland. To get all the extra goodies dished out by their government, the land of public sex displays has severely mortgaged their future. To revert path, Holland will have to cut national expenditures by 10% and then endure 10 years of doubling tax rates to 100%. Their debt is so humongous that it can only be solved with 10 years of complete slavery to the government. Now you see why their politicians are so happy. There is more than cannabis behind their smirk.

Historic Tax Rates

Another strong argument the media exploits to defend their position is that higher post-WWII taxes resulted in a better economy for the US. Here again, they are missing about half of the complex system's picture. Yes, the US had tremendously high taxes in paper after WWII. But no, people didn't actually pay them.

Does anyone recall that business schools were nonexistent until much after the big war? Before universities found a way to educate future business leaders most CEO's were attorneys. Back then, being a lawyer was essential for guiding a company around government regulation.

Tax rates down; tax revenue up.

When looking at government tax receipts on a per capita basis and adjusted to inflation, it's sad to see that we pay much higher taxes today than we did after WWII despite having a lower rate. The chart clearly shows how tax rates have gone down while tax collections have gone up.

Reagan found that tax evasion eased when taxes were seen as reasonable. The inverse of this fact is why Greece collects no taxes at all. When taxes are unbelievably high, people will do anything not to pay.

In the economic complex system, players will be more willing to increase their activity in an environment of fair taxation. Then, higher player activity will conceivably result in tax receipts sufficient enough to compensate for the loss by rate reductions. This is when politicians use the term "revenue neutral". Nonetheless, don't believe them when they use it. Both sides can easily claim revenue neutrality from clearly opposing plans.

Yet, tax receipts won't be enough for our present government expenditures. Right now, our government borrows an additional 48 cents for every dollar in taxes we pay them. It's clear we can't afford our present government. We would need to cut government spending by 32%¹ to get back to break even. This will do nothing about paying off our debt. We would simply stop the bleeding.

US Total Budget, 2016

Look at the pie chart here and tell me what part of government would you cut to get the 32% reduction? I bet you can't. We are accustomed to the good stuff even when clearly insolvent.

Then, to compound our challenges, we spend the equivalent to little less than half of our massive military budget on interest payments alone. We are buried under a pile of debt.

Do you want to experience real fear? Consider the fact that our debt pays close to zero percent in interests. Think of it, if interest rates go to their 4% long term average, we will be spending double the current military budget on interests alone.

Let me make my opinion clear. Talking about taxes is important. But the real conversation to have is about debt. We are broke. We have to tighten the belt and figure how to get us back to balance sheet health. We can argue the best way to solve it. But there is no escaping the subject. Your business' future and that of your family are at risk. Let's redirect the conversation as soon as possible.

¹ Take one dollar plus 48 cents. Then calculate it's inverse. Then subtract 1 to come up with the 32 cents or 32% needed in lower government expenditures to bring us back to a point where we are not borrowing any more money.

The Citi-Fed-Barry-Arab-China Cycle Begins

Say that I am shamelessly speculating. Fine! Yet, like passers by who can't help but to stare at a car crash, let's take a look. 

Janet Yellen

On Monday April 11, The Federal Reserve called for an unusual meeting. Both President and Vice President of the United States were requested; thus increasing the odd nature of the meeting. After said meeting, all we heard was cheers for a job well done. Obama couldn't stop the accolade shower over Fed Chairman Yellen's job on the economy. So, aside from the love fest, what was all the fuzz? Why a meeting with so many important people?
Then, more internal Fed meetings took place. Again, it is unusual to have so many top level meetings during such a short time. Even the Europeans' central bank participated. It all had the feeling of a war game session.

King Salman

And now, the President traveled to visit his least favorite king. "Obama will meet King Salman and will attend a summit on Thursday with leaders of six Gulf Cooperation Council (GCC) countries, at which he will be joined by US Defense Secretary Ashton Carter and Secretary of State John Kerry." wrote Aljazeera, who described the meeting as a "potentially tense visit". Could Barry's visit to Saudi Arabia have anything to do with the Fed's meeting? If so, what's the connection?
Despite the unusual nature of a Presidential visit of the Fed, we are still left without any sense of direction over what could be happening.
We know that this is an election year and that any economic issues would most certainly affect the results coming November. Still, not much to go on other than the fact that things are probably serious enough. But what could be so serious as to demand the President's involvement?
Well, how about things being in such dire straits that Barry, our fearless leader, has to make an unpleasant house call. We know he hates to share smiles with those he dislikes, which is pretty much anyone who wouldn't vote in favor of his Nobel Prize.We also know that the Saudi royal family has previously skipped a meeting with our President as a sign of their discontent with his footsie sessions with the Iranians.

Michael Corbat

So let's try to see what could be at the core of this soap opera.
What if the Saudi's sent an important message to say Citi's CEO. We all can remember that the Saudi's bought large positions in the bank and that they were responsible for its rescue during the 2008 liquidity crisis. Surely Mr. Corbat, Citigroup's CEO, would have an open door policy for such important stakeholders. Then, as a 'too big to fail' institution, any message from Citi would find no resistance on its way to Fed Chairman Janet Yellen's desk.
And what exactly could the message be? Well, how about one that would make Citi, the Fed and Obama jump off their seats. How about a suggestion that perhaps the Saudi's will dump their fat collection of US bonds? Can you imagine? What would you do if your credit card company calls and says that they are ending your loans. What if your loans are so big that finding willing lenders may be  near to impossible?

Xi Jinping

Then let's throw in another interested party. What if the Arabs, who are selling lots of oil to China, commented in passing to Xi Jinping that the country's extensive national reserves will probably shrink in value over night? If the Saudi's sell even a portion of their US bonds, sellers will probably pile on trying to make a move before the Chinese do. The profits for any fast moving trader awake at just the right night could be in the billions of dollars. The losses for those caught sleeping could be disastrous. Threatened by a sell off of their reserves,. the Chinese would probably join the selling frenzy hoping that many bottom feeders show up to the carnage. It could all turn nasty very quickly.
To clarify, if large lots of US bonds suddenly come onto the market for sale, it would be a very bad thing for all of us Americans. The Treasury would have to print large amounts of money in a swift and uber-inflationary move. The Federal Reserve would then take the newly printed money and would have to use it to lend money back to the institution that just printed it. Crazy!

Barry Obama

Buying US bonds in this way would certainly start a vicious cycle. After the selloff begins, existing bonds would lose value every minute of the day. As the Fed buys a bunch of bonds, their money will literally evaporate faster than premium spirits after a truck full of Dom Perignon bottles with their corks popped sits idle right in the middle of a summer day. The faster they lose value, the lower the chance that others will jump in to buy them, thus leaving the Fed as the only loser. As the Fed's balance sheet collapses, the need for their participation as buyers of last resort will only increase. Meanwhile, the Treasury will face having to pay much higher interests for any new bonds issued. To prevent hurting the Fed, the treasury may have to call back the bonds sold by the Arabs and China in an attempt to try to reissue them at a higher interest rate to potential market buyers. Unfortunately, these sort of events may push interest rates to unreasonable levels over just a couple of days.
And what do you think could happen if Barry gets an interest bill much higher than he has been accustomed to? Well, Barry will probably have to announce that we are broke. That we can't spend on the kinds of goodies he likes to dish out. Things like food stamps may become a luxury.
And if this was not enough, most of the 'too large to fail' institutions like Citi will also fail. You see, the Fed has been forcing bank owners and savers to carry the risk of an out-sized investment in US bonds. In essence, the government used their mighty power to force its citizens to lend it money. So when the Arabs and Chinese stop lending to our government, we are all sure to lose our shirts and our beloved food stamps.

Christine Lagarde

Now that there may be an alternative to all this mayhem. Christine Lagarde of International Monetary Fund fame may come to the rescue. By deploying trillions of dollars in SDR's they may create the illusion of bond buyers. This may explain why she participated in the Fed talks. But don't be mislead, the IMF's SDR's are no more than paper funds. The reason why they may be useful in our situation is because there is no real balance sheet to worry about. Since there are no assets backing this funny money nor any ability to collect taxes from anyone, they are a dream come true for lovers of fake accounting. The problem will then be that we would be in essence exporting inflation at a massive level. We would therefore finally see all commodities spike in price after the US economic borders are bridged. No more internal deflationary pressures as the dominant force over our economy.

The SDR vs. the Dollar

In any case, inflation is just as vicious on people as a balance sheet collapse. These are both ways to force pain on citizens.
But wait a minute. All these thoughts are sure to be no more than fear-mongering on my side, right? Well, perhaps.
But even if I am wrong, it is still worth considering how close we are to a scenario similar to my fictitious narrative. Our debt is out of control. Our international presence has also deteriorated at the exact time we need our former partners to hang on. Our future is at stake like never before. Moreover, the pain during the process may be unbearable. The question is not whether this will happen but when. Let's hope I am wrong on timing and that we will have a second chance to correct our spending addiction.

Capital Misallocation DuJour

Let's polish your financial and accounting skills. What price would you put on the stock of the following Fort Lauderdale based company? 
Their Investor Relations web site reads as follows (minus a few crossed-out words to keep the suspense going):

"The Xxxxxxx, Inc. is an American entrepreneurial “emerging growth” company with a brand and xxxx that is widely followed throughout the nation. We believe that xxxxxxx is the “new xxxxx”.  The Xxxxxxx is a fast growing, early mover in the xxxxxxx industry. Management believes that we are one of the most followed xxxxxxx on Facebook, and we believe we are the only known xxxxxxx verified by Twitter.

Many quality xxxxxxxxxxx go into every xxxxxxxx we make which is what we believe elevates our xxxxxxxxxx above the rest and why people line up in front of our xxxxxx sometimes for over an hour to get one of our xxxxxxxxx creations. Our goal is to make people happy with our xxxx.

Our xxxxxxx have received numerous accolades, including being listed as one of the best xxxxxxxxxx in the country."

Don't let their "Management believes" and "we believe" statements throw you off. Clearly, both were made by the same person (natural or legal). Let's remember that the speed of growth associated with start-ups often results in simple message mistakes like this one. Now that you can call me old fashion, but I am not sure of the bragging value from being "verified" by Twitter.
And in case you doubt it, the company is real. It's even publicly traded. Their latest 10Q shows revenue at just over $995K, That's "K" as in Thousands.
COGS show at over $920K, and Total Operating Expenses at $959K.
Like with any other up-and-coming company, their 18 million shares-outstanding trade with some volatility. The recent market correction pushed this company's stock down by 29%.

Key assets are deployed in LA and Phoenix

Their key assets are deployed in two important metropolitan areas: Los Angeles, CA and Phoenix, AZ.
As for their balance sheet, liabilities equate to 280% of their assets; thus leaving them with a stockholder's deficit rather than the usual equity. Translation, their founders either blew up all their money or have no skin in the game. Both are bad, if you wonder.
But the market is nonetheless quite confident. That much is evidenced by their rich valuation. How rich, you ask? Well, have you guessed how much capitalization do they deserve?
Say you give up.
Wall street has valued their shares-outstanding at a whopping $71,000,000; which is down from their recent valuation in excess of $100,000,000.
What? These guys are insolvent and losing money by the boat load. Why would anyone give them more funds? Their negative Cash Flows from Operations amount to about 250% of their revenues. Are investors off their tree?
But wait, something important must be missing among all these facts. Why else would financial experts dish out such rich valuation for what amounts to garbage, right?
Let's see, their President / interim CFO has an MBA from the University of Miami. Meanwhile, the CEO has an undergraduate from Jarvis Christian College. Could their pedigree be the reason for so much market good faith?
If you haven't taken a look at the company's name by clicking on the 10Q link above, let me share that the special product they tout is a cheese sandwich... Well, a "gourmet" cheese sandwich. So their main assets deployed are food trucks. To be exact, we are talking about four (4) food trucks.

Is it possible that each of these trucks will deliver value in excess of $17 Million?
I thought long and hard and continue to be convinced that the trucks must be special. Certainly a mission critical project like theirs calls for military-spec vehicles with anti-ballistic features and vertical jet liftoff capabilities...
... and it goes without saying that the cheese used in their splendid sandwiches must carry self-propelled cancer-fighting nano-agents...
... all features that are highly valued by beer guzzling fairground attendees in LA and Phoenix.

At this moment, I feel the need to clarify that I hope no one has been hurt by my sarcasm.

... drum roll please...

The name of the company is The Grilled Cheese Truck, Inc. I think that it vividly illustrates the orgasmic nature of the Wall Street party that is taking place right now; thanks to the keg sponsors at the Federal Reserve. 

Two days ago, I proposed that the presently inflated stock market valuations were not a sign of economic health. 

Even the best marketing guys I know can't come up with this much fluff-ware.
Financial bubbles anyone?

Why would a billionaire need life insurance?

It is generally believed that life insurance is only for those who aren't wealthy. This is because people tend to think of life insurance as a way to cover the needs of a destitute widow and her children. But nothing could be further from the truth.

A life insurance policy is a high-leverage financial instrument like no other. It also enjoys unique tax treatment privileges equal to no none. In a nutshell, there isn't a single financial product that can deliver the power of markets in a single laser-focused product. It can uniquely add liquidity at a time when illiquid assets turn your net-worth into no more than meaningless data noise.
Let me sound the warning bell for those running a successful business, those who are asset rich and those who are passing through the most productive time in their lives. By no means should you assume that there is no place for an insurance policy just because money seems to rain all around you. Last I checked, those who earn big also take on larger bets. And it is these bets that can drain liquidity at the worst moment.
There's a simple way to determine the absolute lowest amount of life insurance needed by an individual; including these asset rich billionaires.

In the video link above, CNBC discusses how even the mega-rich must have life insurance to cover the cash needed for the so called death taxes and for paying off all loans outstanding. Here is the formula in detail:

Min Coverage    =    All Debt    +    Possible Capital Gains    +    (0.45  x   Net-Worth)

The formula is simple. Total all your outstanding loans. They are going to get called after death. If you don't have the cash to pay for them now, how exactly will your family do it then?
Then add any capital gains from the sale of assets that may need to be liquidated. Here, a guesstimate would be preferred to doing nothing. In any case, this is not the biggest factor within the formula.
Finally, add 45% of all your net-worth. It will be owed to the IRS in the form of estate tax; which is often referred to as death tax. Ask yourself: would you be able to immediately write the IRS a check for 45% of all your assets? No? What a surprise.
While an argument can be made that, for many, estate taxes are irrelevant due to the aggregate value of assets falling below the $5.25 Million minimum for 2013, I would like to warn against quick conclusions; especially when a business is part of the estate transfer. Keep in mind that without mark-to-market price discovery it would be difficult to set a price for the business that the IRS would agree with. You may think that for tax reasons, your business is not very valuable as an inheritance. Surely soon after, the IRS will disagree. Would you like to pick a fight with the IRS about how much taxes they should collect based on such business valuation? Would you like to have your heirs take on the challenge without your help instead? With the cost of term life insurance being so low, the risk/reward ratio favors erring on the side of having to pay estate taxes.

Do note the caveat that no part of the resulting amount will be targeted to cover death related expenses, wealth transfer costs or replace any lost future earnings. This calculation will only serve to preserve the value of assets already held. That's it; just asset-loss elimination. As a result, I find that insuring for anything less would be irresponsible since the certainty of taxes and loan calls is always high.
This back-of-the-napkin calculation can simplify the decision of how much to protect as a minimum. Am I then suggesting that this is all the insurance you need? Of course NOT. You should also cover the value of all future productivity and hedge other business and family risks.
My goal here is humble. I want to simply show those who are successful today that their net-worth is not as much of a reliable hedge as they originally thought; that their asset wealth may not be enough to cover everything life brings. Look deeper into it. There are plenty of inexpensive solutions available.



Finally here is the caveat de rigueur:
This material is provided for educational purposes only and is not intended to be legal, financial or fiscal advise. Please seek the advise of a licensed professional in your state.

A Positive Solution to Frivolous Litigation

—For our purpose here, it makes no difference
if your company was exposed to other risks through
medical, legal or any other services or products.—

Here's a business owner's nightmare scenario. Let's say that your company uses hazardous materials in its daily operations.
Let's also say that despite doing everything right to protect your workers, an employee finds a complaint and gets a hold of an attorney.
But this happens to be more than just an attorney.
This guy is good... I mean, bad; depending on whether he's on your side or is playing against you. This attorney has an astute modus operandi that diverges from the norm and which is quite effective. This guy sues you and your company.
But he has no interest in winning the court-battle. No!
Judicial Harassment is more like torture. Pain is the main factor driving results. The more intense and personal the pain he can exert on you, the better his chances at getting what he wants.
After proving that there was damage to his client, he will ask that the court safeguard the money that could be used to pay his client's compensation. He will ask that your accounts be frozen.
He knows that most small business owners pay personal expenses through their company in an attempting to reduce tax liabilities. Many businesses follow the advice of their CPA's. They create pass-through companies and show no income at the end of the year.
It is therefore easy for this lawyer to show that you have previously taken money out of the company for non-business related expenses. He will next argue that you will certainly be tempted to doing it again; thus putting at risk his ability to properly gain indemnity for his client.
Depending on the case, this hassle will even disrupt normal cash operations in the business. Thus, the risk of crippling the company is very real. Remember that his chances of winning increase as he cranks up the pain.

The net result is always the same. You won't be able to pay your mortgage, your cars or a number of important expenses. Under the circumstances, you won't be able to get an income increase to compensate for your now strained cash position. If you did, the judge would probably respond with strong punitive measures; never a good thing. 

In a nutshell, you could easily lose your property; which is the essential part of the Harassment. Just think of the fact that it always takes a long time for a case to go through the courts. How long could you hold your breath underwater? It may be over a year before you can prove your innocence to the judge.
Inevitably, you will probably give up and settle. He wins!
Yes, you and every small business are just one bad-attorney away from a scenario like this. Perhaps more depressing is the fact that more successful companies make better targets as the bounty collected by the pirates could be much greater. And for those who pay the price once, the chances for a repeat are greater yet, once the word spreads.
Companies may go for decades without experiencing a single frivolous law suit. But this is a case where past experience does not offer a certain view at what the future will bring. Moreover, I find questioning the probabilities that you could experience Judicial Harassment to be misguided.
If a solution was costlier that the problem, I could see why ignore the issue. But since the cure is simple, valuable to you and your family, and may be used for other purposes, the real question should be why not?
You see, this is no ordinary protection. It isn't like liability or car insurance, which expire worthless every year and which serve no other purpose.
Section 7702 of the IRS code allows for the creation of an impenetrable fund where money is protected from dirty attorneys and other predators. They just can't claw their way into the money.
These funds are completely under your control and could be structured to have a high degree of liquidity for these or many other emergencies. They can be structured to benefit from tax deferred growth. Tax free access to the money is even possible when well designed. And perhaps the best part is that in case that you are never under threat of Judicial Harassment, the money continues to grow under your control and available for your retirement or gifting needs down the line. Despite mentioning it before, it is worth writing it again: Unlike derivative options or other types of hedging mechanisms, which lose value every day, these solutions continue to grow their worth over time.
Intrigued? Ask your professional advisers about how to use 7702 for this and other business risks.

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Finding a Buyer; An Owner's Dilemma

Retirement Planning?

You’ve poured a lifetime of sweat, time, and capital into building your business. You’ve begun thinking about retirement. Your strategy is to sell your company for a good price, settle back, and enjoy a financially secure retirement. But, like many business owners, you’ve made the mistake of assuming this scenario will happen, and you haven’t bothered to make any other retirement plans. 

My advice to you? Be realistic. What are the odds there will be a person showing up at your doors at the right time, with cash in hand and willing to buy your business for a fair price? For thousands of small business owners each year, no buyers ever ring the bell.
Perhaps your business is too specialized or is tied too closely to the owner’s unique personality and skills. Then there is the chance that potential buyers may equate a retirement sale with a distressed opportunity; subsequently making only low-ball offers. Whatever the reasons, many owners find that their company has suddenly become a white elephant that nobody wants.
But here is a thought: select and develop a successor. Prime a replacement; someone who will buy your company when you’re ready to retire. You could even look at your current co-owner. Just be careful if she is about the same age as you. Retirement plans may coincide for the two of you.
The, how about your son or daughter? Are they active in the business? Could you look at a younger key employee? Business owners who successfully groom their own replacements leave nothing to chance. They realize that there’s no room for error at the point of retirement.
Be cautious nonetheless; make sure your heir apparent is the right person in terms of temperament, personality, competence, and personal goals.

Nurture a buyer, write a buy-sell agreement
and fund the deal with insurance. That simple!

But don't look for yourself. Being compatible does not mean being identical. You are not looking for a twin but for a potential leader who can do things as well as you, but differently.
Set up a probation period so you can terminate the relationship if you find that this person will not work out. During that period, keep everything as informal as possible; strictly verbal. Even when you go to a formal agreement, make sure it contains a termination provision. It's important to reduce your risk's profile while you engage the search.
Offer incentives to ensure that your replacement stays until the baton is passed. An ambitious successor needs and deserves gradually increasing authority and benefits. Options should include deferred compensation or the opportunity to acquire partial ownership prior to your retirement. This provides both parties with something to win by sticking to the agreement, and something to lose if it falls apart.
Create a buy-sell agreement. With the help of your attorney, lock in who does and gets what, spelling out all details and caveats, including how to establish the final valuation of the business. This formal agreement protects everybody.
Build in a funding mechanism. This is of crucial as funding is why most deals fall through despite even the best buy-sell agreement terms. Any plan is worthless without the money.
Under one option, the successor may be able to purchase the company from ongoing profits. Other options include setting up a sinking fund or allowing the successor to simply borrow the money. These options may work but they leave much to chance.

Life insurance is a flexible financial
instrument available to any business owner

Instead, consider a funding vehicle that also protects your family in the event of your disability or premature death, such as life and disability income insurance. You would be surprised what can be done with a properly structured life insurance policy. Your insurance professional or your independent professional advisers can work with you to help you develop a sound business strategy.
Alternatively, have a Plan B. As a business owner, you know that very few things go exactly as planned. What if your business hits tough times or your successor dies, becomes disabled, or leaves because of a personality conflict? Or what if there simply is no heir apparent waiting in the wings? Sometimes, your only alternative may be to dissolve the business. Be ready. It is after all the route most often taken.
Now that, if you dislike the idea of fading your business away, then you have no alternative but to begin mapping out your retirement strategy today. What are you waiting for?

Limitless - US Federal Debt

Are politicians racking up debt that your children will have to pay?

National Debt is Silly!

Anyone who has visited my Blog has probably noted the US Debt counter on the right side of the main page. To me, national debt is a serious issue.
While my biggest concern has to do with what's done with the money borrowed, the overall amount is also hard to ignore.
Whether we pay the money through loosing buying power due to inflation or through income confiscation (taxes), the amount we owe is so large that there is just no way for our present generation to pay for it. As a result, it will be our children who are left with the bill.
But in every family, there is someone who just does not understand the problem of spending. Most of them see government as a kind of deity (God) who has the power to create money from thin air. What they miss is that the problem is not about the creation of the money but the creation of value.

To pay a trillion in debt to the
Chinese, we need about
1,500 Empire Estate Buildings

For example, if the Chinese lend us a trillion dollars, we will have to give them a document that promises we will pay in ten years. Such document is a 10 year treasury bond. Well, in ten years, the Chinese will come back to get paid. But we will have to give them something of value. They will want to trade their bond for corn, cars or famous buildings. Of course that they will be fine with first receiving cash that they can then exchange for the Empire Estate Building and a few other landmarks. But what do you think will happen if the money we give them is not good? They will certainly refuse to accept dollars and would rather get paid with the buildings directly. After all, the money they lend us has value when we borrow it. They expect the same in return.
This is exactly what happened with German money after the first World War. The country was broke and as a result their money was worthless, So, the rest of Europe demanded to get paid with gold and other valuables.
Now think. Would you like the US government to come to your house in ten years and tell you that you have just lost your house to the Chinese as payment for the money Uncle Sam borrowed ten years before? What if they tell you that your house is exactly your fair portion of the total amount owed? Would such fairness make you feel any better? Do you think that it is fair for the Chinese not to get paid instead?
But you may be thinking that the government just prints money that the Chinese can then use to buy whatever they want. But the question is: if the government can just print money out of thin air, why did it had to borrow in the first place? The answer is because they can print money but not value. To pay the Chinese back, Uncle Sam will have to take your money or your goods. It is as simple as that.
If we are a nation that does things right, we need to have a good plan on how we will pay for what we spend before we use the money.

President Obama, in his attempts to take advantage of the public's ignorance, claims that we should raise the debt limit because we should pay what we owe. With this, Obama uses the high moral ground as his argument without explaining how money payments really work. By the time he is done, Obama will double the debt accumulated by all US Presidents combined.
It's not about not wanting to pay. The US has the best credit in the world because we do pay. Instead, it's about making sure we don't default. The best way to prevent default is to spend within our means. Unfortunately, this is at the core of our incompetence. We just can't do it. We love to talk about spending money for fireman and teachers even when it isn't our money we are giving away.
To see how ridiculous this situation is, look at this video.

Rather than making things complex by using national debt, the video simplifies things by putting everything within the context of family in debt. Make sure to share the article with anyone who needs to understand the topic better. Let's be more responsible. Enjoy!