Every night, it seems that the media cannot wait to tell us how bad it will be when it happens – and whose fault it will be. One talking head tells us the sky is falling followed by a response from another talking head telling us that it is not likely that we will let the sky fall all the way – because no one in their right mind really wants to see that happen.

So, rather than spread the doom and gloom, the Annuity Guys® look to answer the questions that really matter to people who are getting ready to retire and those considering annuities for a portion of their retirement.

Watch as Dick and Eric discuss:

• What is going to happen to your retirement if the political wrangling in Washington continues?
• How would a federal government default affect bonds and annuities?

**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

Obama Says Real Boss in Default Showdown Means Bonds Call Shots

By David J. Lynch and Cordell Eddings | Bloomberg

President Barack Obama knows who is the boss: the bond market.

“Ultimately, what matters is: What do the people who are buying Treasury bills think?” the president told reporters this week, when discussing measures he could take to end the threat of a historic default on the nation’s debt.

Even with the U.S. budget deficit down by more than half since 2009 as a percentage of the economy, the Congressional Budget Office says the government this fiscal year will need to borrow an average of almost $11 billion each week. That’s why Obama is so sensitive to what investors will tolerate.

“The market is the final arbiter of any policy, the ultimate barometer and enforcement mechanism,” says Russ Certo, a managing director at Brean Capital LLC in New York. “The market holds risk-takers and policy makers accountable.”

After weeks of confidently expecting a resolution of the standoff in Washington over the government shutdown and the debt ceiling, bond investors this week began to betray nervousness in their approach to short-term government borrowing.

The yield they demanded at the Oct. 8 auction of four-week Treasury securities almost tripled from a week earlier, Treasury Secretary Jack Lew highlighted in testimony before the Senate Finance Committee yesterday. The government was forced to pay 0.35 percent for four-week borrowings, up from 0.12 percent.

Endorsing Deal

The White House yesterday endorsed a short debt-limit increase with no policy conditions attached, signaling potential support for a Republican plan that would push off the lapse in U.S. borrowing authority through Nov. 22 rather than Oct. 17. Rates for all Treasury bills maturing through Nov. 14 fell in response, while those with due dates between then and Jan. 2rose. At a meeting with Republican leaders later in the day, Obama neither accepted nor rejected the party’s plan. The two sides will continue discussions.

Obama’s deference to bond investors is reminiscent of the last Democratic president, Bill Clinton, whose economic agenda in 1993 was eclipsed by demands for deficit reduction. The belt-tightening was followed by four straight budget surpluses later in the decade, prompting Alan Greenspan, the then-Federal Reserve Board chairman, to predict the end of the Treasury market. Bond buyers’ clout ebbed.

More than a decade later, surpluses are a fading memory and the bond market has regained its swagger. Yet unlike in the Clinton era when the danger of rising yields kept government spending in check, the market now is exercising discipline only after several years of record federal outlays and borrowing.

‘2008 Event’

“The one market that is behaving more as if a 2008 event is around the corner is the T-bill market — one must wonder if this is the proverbial canary in the coal mine,” David Rosenberg, chief economist at Gluskin Sheff in Toronto, wrote to clients this week.

Investors’ sudden awareness of the danger in Washington also can be seen in the difference between what banks pay to borrow from each other and the yield on one-month U.S.government debt. This so-called TED spread turned negative this week for the first time since Bloomberg began collecting such data in 2001, meaning investors regard banks as a better credit risk than the U.S. government.

Jack McIntyre, who oversees $44.5 billion at Brandywine Global Investment Management LLC in Philadelphia, said slow economic growth, low inflation, and accommodating central banks explain why 10-year Treasury yields are little changed from Obama’s first month in office, even as federal borrowing has soared. […Read More at Bloomberg]

Transcription:

Eric: Hi, I’m Eric.

Dick: And I’m Dick. We’re the annuity guys. And Eric, big government shutdown.

Eric: Government shutdown. We’re talking about right now obviously the United States is kind of imperil I guess where the people is like threat… the looming…

Dick: We’re on the threshold… we’re on the brink of disaster…

Eric: That’s right. Here comes the default, we’re all going to the heck of a hand basket. You know, we’ve already seen what happened in Greece and all of Europe over the last couple of years…

Dick: Which is very real and stronger markets into total mess and we’re feeling a little of it.

Eric: Yes. So, the threat of default a lot of times we go through this political pressure in the economic market and what we see is how they react and they keep on trying to anticipate what they think the government is going to do…. and I think we finally saw the first the market is kind of blink just here recently and it’s like they said “I don’t know if I want to own your death?

Dick: And political will tends to waiver very quickly and we were reading an article on that this morning; but political will is very quickly dictated to by the markets and politicians think that somehow they’re going to dictate a policy just based in a vacuum of what they want and they realize real quickly that they can’t do that.

Eric: Well, and I guess we should get a little bit history when we start talking about annuities and how annuities are impacted by bonds, it’s kind of a mixed bag really because you would toy to think when bond rates go up so do the rates on annuities which is generally because you have insurance companies are buying bonds to basically pay off their annuity holder.

Dick: Yes.

Eric: but when you have annuities that are ricocheting up and down and you have instability in the market, that’s really what makes a lot of people nervous.

Dick: Right. Well and the annuities, generally speaking Eric, what they do so well is they insulate against the volatility of the market and the risk in that is in most portfolios, and as you well know when you go back to the just the standard portfolios that we’ve all been recommended is generally everywhere all over the internet… you need a mix of bonds, you need a mix some stock, and just talked about it regularly.

Eric: Yes, just a rule of thumb – it’s all based of your age, you take your age and subtract if from a hundred and there’s your mix of bonds and equities. I’ll be honest. I’ve been having conversations with people telling them that they may want to consider eliminating some of their bond possessions – maybe all of them – and replacing them with annuities for the very reasons you’re just mentioning. That when you look at you know, you can eliminate the market declines in this kind of pingpong effect… you don’t have to worry about default risk because you own the annuity, you’re not worried about the bond defaulting or the federal government not paying its debt… and they got couple bonuses like for life…

Dick: Oh yes, that will be nice, why not?

Eric: And how about not having initially pay a management fee to somebody that’s managing a bond portfolio.

Dick: Well case in point Eric, go back to when the market took the big nose dive or 2008 the Great Recession, well, what do we think? We thought that based on conventional wisdom if we have at this stock bond mix, then sure the stocks are going down but the bonds are going hold us up!

Eric: Right.

Dick: What happen? It all went down. So now, here we are in probably the most vulnerable position potentially in all of history but at least in recent years – the last century, where the bond markets are facing this inverse relationship to interest rates were interest rates have nowhere to go… but straight up and what’s going to happen to the bottom market, to the yield?

Eric: Who wants to own a one percent bond when all of the sudden they’re going start to pay two percent or 3 percent? Nobody’s going to be able to get rid of those bonds!

Dick: Yes, it’s a hot potato. And why not let, you brought it up… why not let the annuity companies manage that risk because that’s what insurance companies do best. They manage risk and they basically hire the cadre de army of managers that’s needed to manage bond risk.

Eric: Right. They’ve done this for hundreds of years.

Dick: And they do it long-term, they’re not in it for the short-term treasury.

Eric: It’s just not for your lifetime which sounds a little funny but they have managed it for multiple lifetime. So, they look much bigger much larger…

Dick: Some of these companies, one in particular I’m thinking of, survived over the last three hundred years and it’s a rated A company today…

Eric: Couple World War and…

Dick: France take over… Napoleon Bonaparte… and the list just go on and on… So, the truth of the matter is that government shutdowns; rather they’re perceived, they’re real; the austerity measures we’ve seen in Europe, they have a dramatic effect on interest rates and interest rates have a dramatic effect on annuities; and interest rates have a dramatic effect on volatility in the market.

Eric: So, let’s put this in summary, I guess. Is it a good thing to hold an annuity or being an owner of annuity when there’s a government shutdown?

Dick: I think that that would be where I would want my portfolio to be; a portion of it anyway in annuities – a foundational portion – so that when these kind of things happen, which they’re going to or something new that we’re always blind sided with something new…

Eric: That’s something that’s never happened before…

Dick: We think we’ve got it all figured out, we’ve got all the stress tests then low and behold the next crisis comes along that blind side us… that’s why it make sense to have a portion of the annuity – a foundational portion, so that when these things happen you can weather the storms without stress… sleep well at night…

Eric: Some safety, some security, some annuities.

Dick: Agree.

The post Government Shutdowns Affect Annuities appeared first on Annuity Guys®.

**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

Tony Robbins Video on The National Debt and Federal Budget Deficit.

Annuity Guys® Video Transcript:

Dick: Today, we want to talk about a lot of the things, Eric, that we hear from all over the nation; folks are concerned about Social Security. Will Social Security be here? They’re concerned about this economy and what if it continues and isn’t a strong economy? How would an annuity fit into that scenario?

Eric: I guess, let’s start with what led us to this topic.

Dick: Okay.

Eric: We were watching . . . we got an email sent to us, had a Tony Robbins video, the motivational speaker Tony Robins, and he took a little time to reflect on the state of the economy, and really, the state of the national debt.

Dick: He really takes quite a bit of time; almost 20 minutes.

Eric: Long by our video standards even. He did a very interesting analogy of . . . when you think about the national debt, you think in terms of trillions, and really, what really what a trillion is.

Dick: How do we fathom $1 trillion?

Eric: How do you wrap your head around it? He starts out by saying, “If you think about a million seconds . . .” we’ll use time in here. If we were to say, “What happened a million seconds ago?” How long ago was that?

Dick: Since I already know the answer; about 12 days.

Eric: 12 days. All right. Then he takes the next step, 1 billion seconds. If you want to go back 1 billion seconds . . .

Dick: You’d think if it was 12 days for 1 million.

Eric: A couple of days, a couple extra months.

Dick: Maybe extra few years or something?

Eric: 32 years. There’s your . . . all right. 1 billion seconds is 32 years.

Dick: That’s huge.

Eric: Jimmy Carter was the president. We were waiting in line for gas then, too. You have this national debt that’s in the trillions of dollars; now trillions of seconds. This gets . . . 1 trillion seconds. How long ago was a trillion seconds?

Dick: If a billion is 32 years, then we maybe think it would be, maybe if we were stretched out, 320 years?

Eric: Keep going.

Dick: 3,200 years?

Eric: How about almost 32,000 years ago. See, when you start to put that in proportion . . .

Dick: That’s just 1 trillion.

Eric: That’s just 1 trillion. We’re in multiple trillion.

Dick: We’re in debt how much?

Eric: Is it $3 trillion?

Dick: $15 trillion. Our national debt . . .

Eric: As you say, just one year.

Dick: Our budget is, I think, $3.9 or something, and then about $1.2 million of that is borrowed money.

Eric: Right. That kind of put the whole what started this topic for us in perspective. There you have it, 32,000 years of seconds.

Dick: Let me just say, folks, we’ll make the video available. We’ll give you a link out to our website with the video on it, and I do think it’s worth your time to watch this, it really puts things in perspective. We wanted to put some things in . . . I can’t quite say perspective.

Eric: I’ll critique it: The first couple of minutes are very good. After that it kind of gets . . .

Dick: It’s a little long-winded, but it’s a good exercise to understand just what we’re really up against. Then from there, Eric and I want to put a little perspective on annuities and investments that people are considering in this day and age.

Eric: Right. When you take into consideration what’s going on with our economy, what’s going on with the world; how many times have we had to sit here and go, ‘What’s Greece doing today?” Are they going to pay their debts? Are they not going to pay their debts?

Dick: How’s that going to affect our market?

Eric: Then all of a sudden the trickle-down is, how many of our banks own bonds in Greece or in Euros? If the European Union falls apart . . . all these things, all this uncertainty into today’s global economy, because we’re no longer . . .

Dick: We look at Greece, how Greece is affecting all of this, and Greece is one of the smallest economies on the earth. Not the smallest, but it’s a very small economy in relation to industrialized nations.

Eric: I don’t want to say this wrong, but I believe someone once told me that if you took all the cash Apple had on hand, they could actually pay off Greece’s debt.

Dick: There you go.

Eric: It gives you a proportion of what Apple is in relation to Greece. Yet, all this turmoil globally is caused by a nation the size of Greece.

Dick: I think that the big question here is with all of the headwinds that we are going to be facing with our country and its debt . . . because we said $15 trillion of deficit, and the other estimates for the unfunded liability such as Social Security and Medicare go as high as $120 trillion; somewhere between $90 and $120 trillion that we owe. We have to decide carrying this kind of debt forward, not just in the United States, but all of the European nations, a majority of the European nations have similar problems. It takes time to deleverage; it takes a long period of time. It’s a sacrifice, its difficulty. If we look at how this might affect the economy over the next 10 or 20 years, how will an annuity work in a person’s portfolio? How much of their portfolio should be in annuities?

Eric: Obviously, we’d always say you have to divide and conquer here. Nothing should ever be all in one spot.

Dick: Correct.

Eric: You have multiple spots for your allocation.

Dick: A good portfolio is well-balanced.

Eric: That’s exactly right. It’s looking at things that are market related and things that are not market related. If you cannot stomach the ups and downs, find your investments elsewhere; that’s the secret. It doesn’t have to be in annuities necessarily; CD’s, money markets, life settlements, whatever that other bucket may be.

Dick: Something that’s a little less correlated with the markets. I do find that when we’re putting together portfolios and balancing portfolios, that the annuity becomes more of the foundational portion. It’s usually more slanted towards the income, future income need, or the potential income need; sometimes, it’s an immediate income need. That is where the annuity seems to be well-suited. Sometimes safety in growth of assets, but less in that area.

Eric: One of the reasons we particularly like an annuity in this kind of market, we believe we’re going to have a boom and bust.

Dick: A lot of volatility.

Eric: Ups and downs. It’s the stair-step approach. If that annuity locks in your gains . . . and here, we’re talking about fixed indexed annuities, we’re not talking about variables. If you lock in a gain, and then the market goes up, you relock in the game at your anniversary date or whatever that period is.

Dick: Typically annually, sometimes further out.

Eric: Bi-annually. Then all of sudden if the market goes down, you’re still on that step.

Dick: You still held where you were that prior year.

Eric: Right. Then we move straight across on that level step. If the market comes up, even though it’s down here, you’re going to step up with market.

Dick: Correct. It’s possible in a flat market, or even a down market, to have increases in an indexed annuity or what’s called nowadays a lot a hybrid annuity. It is a way to have safety, have some growth, and be able to function in a market that really could take a drastic turn for the worse, unexpectedly. I think I’d like to just say, folks, from Eric and I’s point of view, we’re not doom-and-gloom or pessimistic on the economy that we’re going to go into anarchy or everything’s going to fall apart. We do take the outlook just to make it pretty straightforward that we see things being somewhat flat over the next decade or two, maybe up a little, maybe down a little; but somewhere in that area.

Dick: My personal perspective right now is until the economy recovers, people start getting more jobs; rising tide lifts all the boats. In this case, there’s nothing out there. I see the market gaining without a reason for it to be gaining, and it’s the ‘irrational exuberance’, is what I kind of term it. Everybody wants the market to go up, so we’re all kind of wishing and hoping.

Dick: The emotional tide. It’s time for the recovery. There’s been a lot of money pumped into the economy and into the markets, based on quantitative easing and that type of thing.

Eric: Exactly. We’ve pushed it that way, but I don’t see a reason for it to keep going. Unfortunately, that’s my biggest fear right now. I’ve got a lot of people in the market, and my biggest fear is there’s no hope for where we’re going to go future, in the next couple of months, the next couple of years; I don’t see that continuing. Obviously, the election is going to have some kind of bearing as to which direction we go in the economy, but my biggest fear in the meantime: We’re doomed. We’re set for a fall. I don’t want my retirement people that are very close to retirement to experience that. How do you protect their foundations?

Dick: That’s where we do use annuities in that area. I think what you just described is a very good picture of what we’re going to see over and over again, over the next decade or two. That is we’re going to see the market have a rebound, we’re going to see it up, then we’re going to see it drop. What’s the net effect, maybe over a period of 10 to 20 years? We don’t like to think it’s going to be that 50-year history of the market, or 60-year history of 8% average gains. We’ve seen one decade, from ‘99 to 2009, we call it ‘the lost decade’.

We’re just saying that we feel that if this happens, no one can really predict it, but if this happens that we have a pretty flat market, down market, or slightly up market, that a portion of your portfolio could be well served to be in annuity.

Eric: Secure the foundation. With whatever vehicle you do, make sure you’re protecting your retirement. Put it in some place that’s not subject to market risk. If you can’t afford to lose it, don’t put it someplace where it can be lost, and that’s the simplicity of the planning stage here. We’re not saying the stock markets your only other alternative besides annuities. There are lots of options out there. Do your homework, and make sure you’re picking the pieces that’ll basically serve you best for where you want to go.

Dick: I think an answer to our question that we’ve got up on the monitor today: Are annuities best in a struggling economy? I think for a portion of your portfolio in many situations, not all, but in many situations, a portion of your portfolio, it would be best to have in annuities.

Eric: The strange thing is annuities are going to perform better than typical equity-based options in a struggling economy.

Dick: Correct. We haven’t even talked about the contractual **guarantees of income riders. Maybe we’ll save that for another session.

Eric: There you go; a reason to come back next week.

Dick: Thank you.

Eric: Have a good day.

The post Are Annuities Best in a Difficult Economy? appeared first on Annuity Guys®.