The Insured Portfolio

Your Gateway to Stress-Free Global Investments

Erika Nolan, Marc-Andre Sola, Shannon Crouch

• Publisher: Wiley
• Year: 2010
• ISBN:
  9780470875681
• Edition: 1
• Topic: Personal Development
• Subtopic: Personal Finance

How to safely, easily, and as tax efficiently as possible diversify and hedge against the dollar's fall

It's no secret–the U.S. economy is in crisis mode, threatening everything from personal savings to our overall prosperity as a nation. Panicking is not the answer. Having a clear game plan is. In this environment, investors must protect themselves from the immense financial uncertainties they face as a saver or an investor in the 21st Century. Investors need solid information about ways to recession-proof their retirement and investment portfolios.

The Insured Portfolio offers that guidance revealing the major financial threats the 21st Century Saver and Investor faces and showing them how to build a strong portfolio and protect their assets. Written in smart, engaging prose, the book:

• Details ways to invest overseas, and specifically–how to use international private placement policies as a way to protect assets and reduce taxes
• Provides investors with the tips and tools needed to profit overseas with insurance, including how to bypass the international restrictions often used to keep investors from seeking opportunities in other countries

For those seeking customized asset protection, a dollar hedge, global investment diversification, tax privileged growth and estate planning, there is not another single solution on the market today that can achieve all of these objectives at once better than The Insured Portfolio.

CHAPTER 1

WELCOME TO THE TWENTY FIRST CENTURY

The Lessons of the First Decade and the Historical Precedent for Today’s “Unprecedented” Crisis

It was a crazy year.

In 12 short months, the world’s ruling empire saw a widespread mortgage crisis, shocking the financial system and sending interbank lending rates through the roof. Complex financial instruments collapsed like a house of cards, and overleveraged businesses suffered. If their short-term loans came due and they couldn’t refinance, that was it. Locks appeared on the doors, and the windows were papered.

Through it all, however, a handful of new countries shone. These nations were growing thanks to lower wages, cheaper commodities, and looser regulations. Financial supremacy started to shift as the world looked for a new center of power. Across the ocean they found one.

We’re not talking about 2008, by the way.

We’re talking about 1873, at the beginning of what some historians call the real Great Depression. And that promising new center of power was the United States.

HISTORY MAY NOT REPEAT . . .

. . . But it certainly rhymes.

And in this case, it’s rhymed pretty closely so far. The similarities are staggering, even though the participants may have changed. And while the Great Depression brought about a revolution in big government and interventions, the Crash of 1873 embodied the end of an era—something we’re almost certainly witnessing now. Let us explain.

In the decade leading up to 1873, Europe saw the rise of the Austro-Hungarian Empire and the unification of the German states. Combined with France, it was believed that these countries would help Europe retain its status as financial center of the universe.

In reality, the continent’s financial system was already overstretched.

Thanks to the amiable political atmosphere, new lending institutions were sprouting like weeds. Much like the decades leading up to 2008, these lenders relaxed terms and issued obscene amounts of mortgages, leading to a building boom and soaring prices in residential and municipal real estate. The capital cities of Berlin, Paris, and Vienna were at the center of the boom.

Fast forward to the United States, 2008. For many years prior, mortgages were readily handed out, and as home prices began to skyrocket, speculators began to use other houses—some even yet unbuilt—as collateral for more loans in the years leading up to the correction.

In both 1873 and 2008, the panic was touched off by a rash of bank insolvencies.

By May 1873, the Viennese stock market had crashed. British investors started pulling back their funds, for fear that any or all of these continental banks might themselves soon be insolvent. Entire markets for complex, principal-guaranteed derivatives collapsed overnight. Interbank lending rates soared to impossibly high levels, and the world’s financial markets became a ticking time bomb.

American railroad companies, much like the overleveraged private equity firms of today, were the first to feel the pinch. Their dependence on the short-term credit markets, now frozen by the crisis in Europe, meant that it was only a matter of time before the cash would run out for many firms. In September of that year, the bankruptcy of Wall Street mainstay Jay Cooke over a failed railroad bond auction was all it took to send America’s stock market crashing.

WHY THE EVENTS OF 1873 REALLY MATTER

You see, the developments and events of 1873—and their striking similarity to 2008—are merely quirky anecdotes compared to what followed.

It had vast implications. The panic would lay the groundwork for America’s global dominance in the twentieth century.

At the time, the cheap grain and kerosene exports coming from the United States were equivalent to the cheap goods from China we depend on today. Thanks to a number of factors, including weak government regulation, low taxes, and some of the lowest wages in the global economy, American producers could undercut domestic alternatives in most countries. In the case of Britain, for example, almost the entire country was dependent on cheap grain exports from the United States.

As the United States grew into its new role as global supplier of basic consumer goods, Americans began building a mountain of savings. This was in stark contrast to the mountain of debt being built in Europe, where the “financial center of the universe” allegedly resided. The difference became more apparent as the years rolled on, though most people only minded the short term, not understanding the commonsense implications of what was playing out in the long term.

When the crash finally came in 1873, it was too late for Europe to do much, if anything, to stop it. In the long term, the continent’s status as financial capital of the world slowly shifted overseas, to where American savings could restore global growth without the aid of fickle credit, and to where an honest, hard-working economy was creating real wealth that would lead the world into a new century.

If history rings true, the same global shift is under way now.

AMERICA’S AGE AS A SUPERPOWER

If history is our guide, then 1873 and 2008 may well be the bookends of America’s story as a global superpower: financially, politically, and militarily. Each historic crisis signaled a much deeper, centuries-long shift in global dominance from one nation to another.

But you will recall that power wanes slowly. The Austro-Hungarian Empire didn’t descend into ruin immediately after the crash. Europe’s fortunes would wane slowly in the wake of 1873, but the continent was never reduced to a global backwater.

In comparison, 2008 saw the U.S. federal government issuing unprecedented fiscal and monetary stimulus that has stemmed the short-term consequences of the recent crash, yet at the risk of making some of its long-term consequences far worse. Indeed, the U.S. government has been so successful—and gone to such great expense at maintaining appearances—that it may for years continue to appear that nothing has changed. But the reality is that the power shift will already be well under way.

THE GENERATIONAL WEALTH PHENOMENON

There is Chinese proverb that extols the reality of building real wealth.

It says, “Wealth does not pass three generations.” The first generation of wealth will be lucky and perseverant, hardworking and diligent in saving for their family. The second generation will not face the same challenges. While it enjoys the fruits of the first generation’s hard work, it will fail to appreciate the work that goes into building wealth. And by the third generation, the wealth will be squandered. This is a phenomenon that is all too common and one that we will focus on throughout the book.

Look not only to the wealthy American families, but to America’s auto industry or even the New York Times, and you will see this effect playing out on an epic scale. But for the purposes of this book, let’s take a quick look at America as a whole, in the three generations between 1873 and 2008. Skewing the usual topics of politics, industry, and the economy from this perspective will help to focus your own long-term thinking, helping you appreciate the appropriate scale and depth of an investment horizon of 30 years or more.

THE FIRST GENERATION: PRIOR TO THE 1920s—LIVING THE AMERICAN DREAM

In the time between 1873 and FDR’s New Deal in 1933, it might appear that Americans were still chasing the American dream. But, in reality, they were living it.

The American dream isn’t about the suburbs, cookouts, and family sedans of the 1950s. It isn’t about home ownership. These things are the trappings of the American dream, the fruits of it. The real American dream is free enterprise.

You see, this generation of Americans cleverly understood the importance of peace of mind. When you don’t have to worry about protecting the spoils of your labor from some other party, you can work that much harder. Free of distraction and impediments, you can truly have full dedication to your pursuits—the unvarnished incentive to be the best you possibly can be. And if your labors are fruitful, you can use the resulting wealth and your own keen insight to contribute to the growth of the economy at large. You can innovate, create jobs, and effect vast changes to the landscape that will ensure your place in history.

That’s the kind of freedom at the heart of the real American dream. And that freedom was alive and well in the years after 1873. Americans saw the invention of the light bulb, the assembly line, the first manned flight, and the first stages of a national energy and communications infrastructure. Its country was a bustling new superpower, eagerly rushing into the transformative twentieth century.

The turn of the century saw the birth of many recognizable companies that still dominate the marketplace today: Eastman Kodak, Firestone Tire and Rubber Company, Hershey’s, U.S. Steel, Monsanto Chemical Company, Ford Motor Company, JCPenney Corporation, and Pepsi.

At the time, the government was receptive to growth and didn’t present any roadblocks. Before the New Deal, government spending scarcely comprised more than 10 to 15 percent of the economy and was vastly overshadowed by the dominance of the private sector.

Likewise, prior to 1915, tax rates were lower at this time than any other point in the twentieth century, with a top marginal tax rate of 7 percent for those with incomes in excess of $500,000. The exception, of course, was during World War I, when taxes were raised to more than 70 percent.

But things were not perfect.

Workers enjoyed very few protections or entitlements, and in especially competitive labor markets, people were often abused or exploited. There were few regulatory bodies monitoring or ensuring the safety of manufactured goods, financial products, or loan activity. By the booming 1920s, this generation was hitting its peak on the heels of a massive real estate and infrastructure explosion that helped bring about the indebtedness pivotal to the Great Depression. Nonetheless, this is the generation where real wealth was made.

THE SECOND GENERATION: 1920s -1970s—KILLING THE GOLDEN GOOSE

Thanks to the prosperity created by the first generation, the second generation spent years living comfortably or, at the very least, watched their neighbors do so. And then, much like now, they counter-intuitively demanded a government that could help them protect and preserve that comfort level, even when faced with common economic cycles and disruptions. They became so accustomed to the trappings of the American dream that, to them, the dream was almost meaningless without them.

In short, they had it good—and they had the clout to demand even better, even if it was unsustainable.

Out of Crisis: A New Breed of Leader

It was around this same time that, in a number of ways, the job of the American politician changed significantly.

The role of a politician became remarkably similar to any other top executive of the twentieth century. The executive risked losing his job if he didn’t keep the shareholders happy, and the politicians had to please voters or risk losing them. They both faced extreme pressure to generate a constant stream of consistent short-term results. And the stiffer the competition, the more outstanding and effective those results had to be.

Thus, as Americans faced catastrophe, they continuously urged the government to step in and make life a little easier for themselves and their fellow man. During the hard times, citizens insisted on increased government spending to stimulate the economy—an idea ushered onto the political stage by John Maynard Keynes, and one that would have a lasting impact on the way politicians deal with the economy even today.

Consequentially, some of America’s most successful executives and politicians make similar kinds of decisions. In general, they tended to favor fast results at the expense of unknown implications—a kind of “buy now, pay later” mentality. To show you what we mean, let’s start with one of the first examples of this new kind of political mentality: the New Deal.

Short-Term Solutions that Never Went Away

We are not going...