We look forward to the Van Mueller newsletter every month. It's chock-full of sound bites, sales tips, and eye-opening statistics. Here are our favorite parts of the October 2019 edition. We're sharing the full introduction, and 2 of the 7 monthly sales ideas. If you like what you read, we encourage you to click here and become a subscriber.
Reprinted with the author's permission.
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October 2019 – 7 Ideas and Views Newsletter by Van Mueller
In August’s newsletter I attempted to explain derivatives because I am very concerned that their use is increasing and the danger to the American people is therefore ramping up dramatically. I feel that I did a pretty good job and I received many calls that were supportive of my endeavor.
The best thing that happened is that I received, from a subscriber named Lester Himel, a four page much better explanation than I had given. I was so blown away and so impressed by what he had sent me that I had to call him and tell him how grateful I was. We had a wonderful, interesting and amazing conversation and I feel like I made a new friend. This is what I told him: His explanation was much better and much easier to understand. Then when I talked with him, I came to understand how brilliant he is. Not only did he understand all the technicalities of Wall Street and the government, he could also explain all the misrepresentations perpetrated by these entities. I will be having more conversations with him in the future. I would like to share with you a section of what he wrote; it’s amazing. This is quoted directly from what he wrote to me albeit a little out of context, however you will get the idea he is sharing with us.
Let’s imagine that these trades have traded (on either side of the buy-sell equation) many, many other named entity contracts, ABC Corp, Kingdom of Sweden, Orange County, etc. Now imagine that one of the trades in these things, at a bank in the U.K., we’ll make up “Castle Tower Bank”, has placed oversized bets on ABC Corp. ABC Corp goes bust. Castle Tower Bank does not have the asset base to cover all bets, and also goes bust as the payment demands are enormous.
But Morgan, Goldman, Merrill, BOA, Citi, and many, many more are awaiting, even demanding payouts on their “Death Claim” as Castle Bank is contractually obligated to pay. But, those firms/traders might also have expectations of payment from additional counter parties…, who knows how many contracts were bought and sold, and to or from whom!
If Castle Tower Bank disappears, no other counter party (or market participant) is there to replace him. Castle’s obligations are theirs alone. If Castle doesn’t pay off, that does not halt demands down the payout chain. It could, however, create a chain of defaults and/or bankruptcies.
And most, if not all, of these firms sold or bought those contracts in turn in the recent past. They want to be repaid and, in turn, they must pay! In their bookkeeping, they could be “flat the position”, but in the counter-party scenario, they must pay or collect, and likely not just in one transaction! Remember this: “Flat the position, but still obligated.”
Think in terms of this: Your uncle Joe needs $10,000 and you have a soft spot for him. You go to the bank and borrow $10,000. You loan $10,000 to Uncle Joe. He is your counter party. If he then sends the money to John Smith in Oklahoma, that responsibility to repay does not transfer to John. Joe then tells you that you can collect from John Smith. Your response would be “I don’t know John Smith, I just know you. I knew you were good for it, now where’s my money?” Then, Joe declares bankruptcy. What do you do? Well, one thing you can’t do is go after John Smith. John has no idea who you are, and has no obligation, legal or otherwise, to pay you. But you must be paid back.
So, now you have chains of payments demands, possibly well in excess of the capital base of some of these firms. And, it could be in more than one direction, or with more than one counter party. But that’s not all…
Morgan, Merrill, Goldman, etc. have also been named as insured entities over the years. There are contracts written on them as “insureds.”
Let’s imagine one or more of them goes bankrupt (think Lehman) and, in turn, creates a chain of payment demands on countless contracts, and then another “insured” goes under, then another. One more tidbit; Lehman, like others, had these contracts off book. We have literally countless non-interchangeable contracts, on countless insureds, without regulations, globally. These are not traded or held only by large financial institutions. The sales efforts over the years to get these contracts distributed and to derive sales profits has resulted in municipalities, non-financial corporations, and who knows where else holding and relying on them as assets, and if they were traded/sold on to others, placing themselves into a chain of payment expectation upon death claim.
It's The Counter Party Risk That Is Immeasurable, Right Behind The Fact That We Have No True Idea What’s Out There.
The idea that Deutsche Bank has exposure, as you mention, of $49 trillion? While that certainly would erase that bank if it had to ante up even a piece of that. But how many more firms, investors, municipalities, corporations would that take down as the chains put their hands out for payment from that bank? And then in turn, bankruptcies would pop on seemingly unrelated demands but related through a new “insured” collapsing due to unpaid demands from Deutsche?
Like A Pebble In A Pond? More Like A Meteor In A Pond.
Wow! What a spectacularly simple explanation of derivatives. The danger is upon us. It is not if, it is when.
Thank you, Lester Himel! I will be calling about a couple of other things in the next week or two.
As I am writing this month’s newsletter the Federal Reserve is having to bail out the banks because of a repurchase agreement or “repo” crisis. I would like to explain why this is very serious and proves that the underlying economy has serious problems. On September 24, 2019 all hell broke loose when the Fed funds effective rate spiked to around 10 percent intraday, then after significant Federal intervention the rate settled at 2.30 percent which was still above the Fed target rate of 1.75 percent to 2.00 percent. The system ran short of liquidity. It literally ran out of dollars. The Federal Reserve jumped in, providing $278 billion in cash injections over four days. That was last week. It’s even more disturbing what is about to happen this week. There are more Federal Reserve injections on the way. The Fed will provide four times as much bailout in fact, on Friday as I am writing this; the Federal Reserve announced $105 trillion of additional purchases this week through October 10th. That will take the bailout to almost $1.4 trillion over an 18-day period. This is all being done to keep the effective funds rate within last week’s lowered target range of 1.75 percent to 2.00 percent. Listen to this; that is more than the $797 billion created by the TARP legislation in 2008 needed to start repairing the last derivative catastrophe in 2008. That is more fake money in the span of a few days than the entire U.S. national deficit for the entire year of 2018. Please read that last line again. True, it’s a rollover facility, but a rollover facility with some sense of permanency that can easily grow over time.
That is more fake money in the span of a few days than the entire U.S. national deficit for the entire year of 2018.
So, how long can the Federal Reserve create money and extend debt, as well as bailouts to the banking system? How long can we pretend we are not in full on desperation mode as markets again flirt with new highs? America, we have a liquidity problem. A much more important consideration is that we have a DEBT problem. This debt is now the largest in our history. What will eventually turn this problem into a major economic collapse?
RISING INTEREST RATES.
When rates in the repo market spiked last week due to lack of funds, banks begin charging each other much higher borrowing costs than what the Federal Reserve was artificially setting from Washington D.C. Think about this; the market suddenly and quickly stepped in and nearly ended the Fed’s over 11 year fake stock market party by raising borrowing costs to the moon for other banks. This meant the banks would have to spread those rising costs to corporations and even Wall Street hedge funds, who survive off low borrowing costs and debt rollovers to stay in business – i.e. buy back their own stocks and fill their own pockets. The Federal Reserve’s guiding roll is to benefit the markets, not the real economy which is you and me. Thus, when the market stumbled last week, the Fed came in and dumped an absurd amount of money into these repo markets to keep Wall Street rising while Main Street continues to decline. If all this information angers you and it should, the Fed continues to keep this most recent bailout hidden. You must understand this relationship between the Federal Reserve and the markets are now transparently rigged and as more of us catch on while the Federal Reserve runs out of manageable excuses and funds. This relationship is rigged to fail. For now, market survival hinges exclusively on the Federal Reserve’s ability to keep rates artificially low. Central banks are powerful, and accomplished this for years, as we’ve seen since 2008. Think about the interest rates prompted by the Central Banks of Japan, China, England, The European Central Bank, forcing rates to the floor and avoiding an eventual catastrophic moment is no more possible than forcing hurricanes from landfall with a really big electric fan. In short, low rates gave us the biggest market bubble in history and a corporate bond market that is essentially at junk status. Rising rates, in turn will give us the biggest market collapse in history.
I hope I am getting you to understand what a huge mess this all is. Let me explain just a few more things about why this repo mess was so revealing.
A staggering amount of U.S. dollar liabilities have been issued off shore in recent decades and the Federal Reserve not only doesn’t control them but can’t measure them with any degree of accuracy. Even worse, the bank’s financial statements don’t accurately reflect their financial health. No one really knows how solvent or insolvent the financial system is. Auditors can’t help here, and the accounting profession bears some of the blame for this problem. In June of 2014, FASB updated the U.S. GAAP (Generally Accepted Accounting Principles) accounting rules for repos.
A staggering amount of U.S. dollar liabilities have been issued off shore in recent decades and the Federal Reserve not only doesn’t control them but can’t measure them with any degree of accuracy.
Here is an example. Let’s take a look at the books of three parties when a bank (party A) sells collateral to a third party (Party C). Party A owns a particular U.S. Treasury Bond, showing an asset of $100. Party B borrows the bond, showing a liability of $100 ($100 of securities sold, not yet purchased. Party C shows an asset of $100. If you add up the positions of all parties, economically there is no problem because the net of the two long positions and one short position adds up to $100. The problem arises when you aggregate the three U.S. GAAP financial statements. Both Party A and Party C report that they own the same asset. The balance sheets balance because Party B records a liability, so auditors don’t catch the problem. Now, can you imagine what happens when that bond is reused over and over and flipped throughout the system hundreds of times. It will become such a massive mess that becomes virtually impossible to measure beyond any reasonable doubt. What does this mean for markets in the short term? No one really knows. This repurchase agreement (repo’s) market is flashing all kinds of bad signals. Runs on repo’s can be stalled in two ways. Banks can raise new equity capital, or the Federal Reserve injects more dollars into the system. Isn’t that printing more money? Yes, it is very true that a run in the repo market is serious, since the big banks are still overly reliant on it and if they drop the ball one time, they might not be able to fix it. That could quickly turn into a financial catastrophe. The Fed will do what it always does. They will print more money which will socialize losses among ALL U.S. dollar holders.
The federal reserve is solvent. THE FINANCIAL SYSTEM AS A WHOLE IS NOT!
The federal reserve is solvent. THE FINANCIAL SYSTEM AS A WHOLE IS NOT!
I have much more I want to talk with you about next month. The financial catastrophe is no longer an if, it has become a when. We must show our customers options. We must share with them that they can stay in control.
Please remember, it is actually easy to get appointments with anyone and everyone. Wouldn’t people be interested in all the questions you can ask them. You must follow a process with everyone you come across.
First, ask them if they are aware of all the issues Americans will face in the future. Some examples are higher taxes, lower benefits, inflation, deflation, volatility and longevity. Then ask them if they would like to develop a strategy to keep them safe from those issues.
Finally, declare this isn’t good enough and that you have a surprise for them. What if you could actually take advantage of all those occurrences with a pre-determined strategy?
It is obvious that the government, Wall Street and the banks are not being even close to honest with the American people. We must work to inspire our prospects and clients to prepare so they can win rather than lose.
It is the most exciting time ever to be an insurance and financial professional. Let’s get started with this month’s ideas.
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Idea #4: Reasons a 401(k) May Be the Worst Account to Have in Retirement
Here is a list of reasons this article explains why 401(k)s are not good retirement choices going forward. I will list them, and the article will give you an explanation for each reason.
1. Every distribution you take will be taxed at your highest rate.
2. Double taxation is often the norm.
3. Mandatory withdrawals required at age 70½.
4. It’s absolutely the worst account to leave a surviving spouse.
5. Your account is fully exposed to tax law.
The article continues on by explaining why it is much better to pay your taxes now than to defer them to a future date. You could actually make sales right from this article. At the very least, it will teach you the language you need to inspire people to give consideration to paying their taxes now when they are historically low and transfer lots of tax-free money to the future for retirement.
Title: Reasons a 401(k) May Be the Worst Account to Have in Retirement
https://www.kiplinger.com/ (Kiplinger, August 21, 2019)
Idea #6: Develop Relationships with Children and Family Members
Use this article as a reminder of what a terrible calamity it is when a breadwinner dies and no one else in the family knows anything about the financial affairs of the breadwinner.
It is even worse when the breadwinner tells us they don’t need planning because they are good at stocks or real estate or have a fabulous enterprise that generated wonderful gains and financial success. We try to compete with them and tell them what a “good investment” cash value life insurance is. They already believe they are highly skilled at what they do. They do not need us to help them make money. For the most part, they are right. So, I do not compete with them; I praise them. I even ask if they would be willing to invest some of my money. Then I ask if I can ask a question. Is there anyone in their family or business who is as good as they are? If they were not there to do what they do best, what would happen to these great investments they made? And, couldn’t the people they love be taken advantage of by people who were almost as good as you?
I don’t want to compete. I want to be a resource, an advocate or an advisor. A person who does what they do successfully is NEVER thinking about not being there. It is your responsibility to make sure that they do give that very idea the consideration it deserves. If you stay in the area where you have a competitive advantage, you will win many more times than you will lose.
Title: Sorting Out Financial Wreckage When A Breadwinner Suddenly Dies
https://www.fa-mag.com/ (Financial Advisor, September 18, 2019)
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