Economic Update 2009
November 5, 2008--San Diego--Given the current economic conditions, we have received numerous emails, phone calls, and in-person visits from many of you asking 'what should we do now' and 'how bad is this situation'. The purpose of this communication is to offer our humble opinion of how to best handle your finances moving forward.
These next 10 years will go down as the single greatest transfer of wealth in the history of mankind. This is the greatest time to be alive and seize the opportunities that are in front of us. Franklin D. Roosevelt's quote that "There is nothing to fear but fear itself" is a wonderful way of approaching this situation. Those people who choose to focus on who is to blame for the collapse and/or be scared of the unknown will be kicking themselves later for missing the opportunities. The thing to do is to ask yourself how is this situation playing into you hands, and what is the next great opportunity? When the answers present themselves, you simply have to trust your gut and go for it.
We, as a country, have experienced a few $ Trillion in stock market losses and real estate losses, and there will probably be more downside before we turn this around. That is the bad news. The great news is that this enables the FED and the US Treasury to pump a few $ Trillion back into the system without creating inflation. We simply need to position ourselves to capture some of this money, if our goal is to accumulate financial wealth.
One of the lessons here is that equity in publicly traded companies is not a safe investment, for those of us who did not learn this lesson in 2000-2002. The stock market can and does lose up to 50% of its value, and even some of the nations "strongest" companies can lose 95% of their value (Lehman Brothers and Bear Sterns comes to mind). This is because their value is based on nothing concrete, just future hypothetical projections. Most traditional advisors simply like to paint this picture with a different stroke of the brush. There is no collateral when you invest in a publicly traded company, and that is why the vast majority of truly sophisticated investors simply do not invest in mutual funds or stocks as a long term strategy. It is really just the middle class that subscribes to this investment strategy, because they are convinced by sales people that this is a wise decision.
{C3} clients are advised to think and invest like the top 1%. They are encouraged to only invest in something that offers guarantees or highly rated collateral. {C3} clients invest in the stock market using maximum funded equity indexed life insurance contracts, so they can earn an after tax ROI average of 8.5%. 95% of the funds are invested in AA or better rated fixed income bonds or notes and the other 5% is invested in call options on the stock market. When the market is up, our clients will earn up to 17% on their investment. When the market is down, like it is this year, the options may go worthless, but the bonds will provide enough income for the portfolio to earn 1%. A positive 1% is a lot better than a negative 40%, unless we are missing something.
The top 1% of hedge fund managers have been employing this asset allocation structure for many years. They may place 80% of their assets into fixed income, highly rated securities, and then leverage the other 20% of their assets to swing for the fences. If they are wrong, then they cut their losses short, and let the fixed income return on the safe 80% give them a small return for the year. When they are right on with their leveraged bets, the portfolio has a fantastic overall return. By not placing all of their eggs into the risky basket, they do not ride the rollercoaster like the average investor or like the average fund manager (the other 99%).
Another lesson is that keeping money inside of your real estate is not a wise idea. Real estate equity is not liquid, not safe from loss, and offers ZERO rate of return. We had advised our clients to leverage their homes to the max, pull out their valuable equity, and stuff that equity into maximum funded life insurance policies with strong insurance carriers. Maximum funding is when you invest maximum premiums by IRS guidelines, and purchase the smallest death benefit possible to reduce the cost of insurance. In this way, the over-funded cash value grows tax free, and the cost of insurance is equal to roughly 1/3 of what you would pay in taxes on a similar investment over a 20 year period. Our clients wrote off the interest on the mortgages against their income, and stopped funding their IRAs/401ks beyond their employer's match. Their monthly costs stayed the same and they received the same tax deduction, but they accomplished something far more important. This sophisticated maneuver enabled our fortunate clients to keep the hard earned wealth they had built up by buying real estate properly. When the real estate market tumbled, our clients did not lose their money, since it was now safely placed into life insurance policies. If the economy hurts them and they lose their jobs and income, they can simply sell their home (even short sell their home) and rent for a while. Additionally, their money is liquid, safe and secure inside their life policies. If a creditor or litigator comes after our clients' assets for any reason, they can switch the ownership of the policies to a Trust, and then change it back after the issue is solved.
Today, most of the loans our clients were able to get into with little money down are no longer available, and those clients who decided to leave their wealth inside their properties simply do not have that money any more. It is gone. If they still have equity in their properties, they may not be able to access it, since the current lending environment has temporarily collapsed.
We have always advised our real estate investor clients to purchase their real estate with as little money down as possible, and to separate each investment inside of a separate LLC. This has also proven to be a wise method in both good and poorly performing markets. The less money down, the more assets our clients control for the same dollar invested. The less money was invested, the less risk to our clients if the investment does not work out. We have always advised our clients to place their serious funds inside of principal protected investments, and to take risks with a very small portion of their portfolio.
When the economy heats up, the leveraged real estate and the equity indexed structure creates an outstanding and balanced return. When the economy is slowing, like it is now, the principal protected portion of the portfolio will create the necessary liquidity to take advantage of unique opportunities, and only a very small portion of the portfolio is at risk. With this type of philosophy, our clients' portfolios are impervious to bad economic conditions and perfectly positioned for good economic times.
{C3} NEWS
We have been blessed to attract many incredible clients and partners from around the globe, and we are set for another record breaking year. It humbles us to report that we now have over 25 new ultra high net worth clients, each of whom have a net worth of well over $1 Billion, and we have been featured as wealth experts, answering financial questions in the recent Nov '08 issue of SUCCESS MAGAZINE. We have also recently opened up an office in Dubai and added a full time partner, who resides there, to assist with our international relationships and growth opportunities.
The reason for our success is that we relentlessly pursue unique opportunities and offer tremendous service to our clients. Here are our latest ideas that our clients absolutely love:
IDEA #1 - 9.25% Fixed, Guaranteed Return on Liquid Assets
Through our close relationship with 15 of the strongest banks in the world, we now offer our clients a guaranteed return of 9.25% on a minimum investment of $500,000. The funds never leave our clients' accounts, and the funds are fully liquid. The revenues from the program are guaranteed and insured. If you want to lock in this rate for some of your serious funds, let us know and we will get you into this program. This is a 12 month program, but can be extended to 24 months.
IDEA #2 - 9.25% Fixed, Guaranteed Return on Illiquid Assets
If you like IDEA #1, and would like to use a different asset instead of cash, like a CD, precious artwork, precious emeralds, real estate, yachts, or any other bankable asset, we can help. {C3} can assist in monetizing your bankable assets, as long as they have a minimum value of at least $1M (the minimum will increase to $2M on Jan 1, 2009). For instance if you have a $5M CD earning 6% at your bank, you can leave the CD at your bank and we can help you earn an EXTRA 9.25% per year on top of the 6%. There will be no fees, points, costs, or risks in the process.
Some of our clients are simply depositing assets at their bank and getting a line of credit against them (which will never be drawn upon). Most are simply asking for maximum lines of credit against real estate holdings. The bank simply blocks the line of credit for 15 months, and the client earns 9.25% per year on a line of credit that costs the client nothing.
Whether the client pledges cash or other assets into this program, their assets are fully protected with multiple safeguards specifically designed into the structure. The standard 12 month program is initiated when the client's assets are blocked with a 15 month Stand By Letter of Credit (SBLC) and sent bank-to-bank via SWIFT to Hong Kong Shanghai Bank (HSBC). The client receives 9.25% yearly return (paid monthly) which is fully insured by a performance bond. Since the SBLC is written so that it cannot be touched until maturity (15 months from inception) and the program pays out the guaranteed profits and principal over the first 12 months, the client enjoys a hassle-free, risk-free transaction.
IDEA #3 - Acquire AA Rated Asset(s) with ZERO Out of Pocket Expense or Investment
For those of you who have a net worth of $10M or more, we have a program that has revolutionized retirement planning, estate planning, and wealth buildingÉall in one. You may have already heard about financing life insurance premiums for people in good health over the age of 70. In this program, seniors can have life insurance policies purchased for them, which they own, but are financed by investment firms. The death benefits serve as the primary form of collateral for the loan.
Over the last decade or so, financial firms have quickly realized that financing highly rated life insurance policies is a much more profitable and safer bet than financing real estate. This discovery has never been more apparent than in today's economy (2008).
With so much progress in the premium finance industry over the last decade and specifically, the international investment banking community treating life insurance policies like bonds or notes, anyone who is healthy and wealthy can own both assets contained in a life insurance policy (cash value plus death benefit) and not have to pay the premiums.
Our international banking partners will finance a AA or better rated life insurance policy on you and/or your spouse, and pay all of your premiums, if you qualify with health and net worth. They will use their currency trading platform to borrow funds at 2.25% in Japanese Yen (all in cost, including fees) and maximum fund the policy, investing the funds in either fixed income notes (6% return) or equity indexed policy with a 9.5% or better average rate of return.
For example: The Client receives a $10M policy, and he/she never has to pay the premiums. The cash value of the policy and the death benefit (two separate assets) will serve as the primary forms of collateral for this loan. This loan will be paid off by either the death benefit, the rising cash value, or by selling the policy in the life settlements marketplace (projected to grow into a $160+B industry over the next 5 years).
The client can receive $4.5M of cash inside the policy, and watch it grow at an average rate of 6% to 8% (9.5% - 2.25%). This structure is designed to eliminate risks like interest rate movement, since both the crediting of the account and the cost of the funds move up and down with interest rates, leaving the arbitrage spread stable over time. The investment bank will mitigate currency risk, because they already have positions in all G7 currencies, and they will use their currency platform to manage this for the client. The investment bank simply wants a relationship with the client, which means they want to manage some of your money. If they are funding a $10M policy with say $4.5M of cash, they may want you to give them a $600k brokerage account for them to manage. This brokerage account will serve as a secondary form of collateral, which will be released approximately 8 years into the program. If the client wants to maintain their brokerage account with their current broker, that is not an issue within our flexible structure. The clients' broker can simply move the custodianship to our banking partner, and create the win-win-win.
The most important aspect of this structure is to understand that the investment bank is putting up the money to pay the premiums, and our clients have ZERO expenses, and their collateral is less than 15% of the total value of the loan, or approximately equal to one year of premiums.
Our client receives a massive death benefit, which they never have to pay for, a rising cash value that will be used as additional retirement income, and we can even roll in up to $50k of estate planning fees into this structure. There is one word to describe how our clients feel about this idea: COMPELLING.
MOVING FORWARD
While what is going on in our economy is unprecedented, Henry Paulson and Ben Bernanke have the tools and the expertise to get our economy on track. This country will come out of this slowdown stronger than ever before. The only question is whether we as investors can take advantage of this situation. Our job here at {C3}, is to ensure that you do. Feel free to contact us with any questions or clarifications.
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11/5/08 - Economic Update
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