Michael Dallas Wealth Management

The Ready for Retirement Experience®

2012-01-26T10:33:00.000-06:00

Our company's logo is based on the strategic game of chess for good reason. A chess player moves many pieces in concert to achieve a single goal - to win. Like chess, the Ready for Retirement Experience® is our customized method of coordinating the pieces of our clients' financial resources in a comprehensive strategy for achieving life goals (i.e. to win).

Like a game of chess, a client's financial picture has many pieces. For example, a client's resources could include investments, a home, Social Security Benefits, pension benefits, medical benefits such as Medicare, etc. Other pieces of a client's financial picture include insurance, mortgages, taxes, and living expense needs. Unlike "investment firms" which only focus on one "piece" (i.e. investments) Michael Dallas Wealth Management helps clients coordinate all of their financial pieces to increase their overall security.

The first step in Ready for Retirement Experience® is the Illumination Meeting®. This private 90-minute meeting precedes our comprehensive financial planning and illuminates the client’s current concerns, financial position, and aspirations for the future. In later meetings, we will provide a detailed strategy as well as assistance in the implementation. (Important pre-existing relationships such as CPAs, attorneys, etc. will be included in the process.)

The Ready for Retirement Experience® addresses a variety of areas including Risk Management, Investment Management, Estate Planning, Tax Minimization, and Education Planning. However, the Ready for Retirement Experience® is not limited to these areas. We can address any other important issues and tailor the strategy accordingly. The Ready for Retirement Experience® provides clients with “financial peace of mind” allowing them to enjoy the important things in life.

S&P Downgrade of U.S. Debt and Market Panic of 2011

2011-08-10T14:22:00.005-05:00

If you can't see the video above, just copy and paste the following link into your browser: http://www.youtube.com/watch?v=JVC1GELzEdE&feature=player_embedded#

Summary:

Author and financial expert, Michael Dallas, explains the causes of current downgrade of the U.S. debt and market panic and how those changes will affect our financial futures.

Video Transcript:

Given the latest string of events, I wanted to publish a detailed commentary. This video includes details on the current downturn as well as an explanation and predictions to how the Standard & Poor’s downgrade of the United States debt will affect your future.

As you know, over the past few weeks, the market has declined significantly with the Dow Jones Industrial Average losing about 1700 points. Last Thursday, August 4, 2011, the market dropped over 500 points and yesterday, Monday, August 8th, the market declined over 600 points. Moreover, the rating agency, Standard & Poor’s, reduced the United States credit rating from AAA to AA+ with a negative outlook.

The two questions I’m being asked are, “should I be worried?” and, “is this a repeat of the 2000-2002 and the 2008 bear markets?” My answer is a resounding, “No.” I don’t believe that there is anything going on that resembles the magnitude of either of those periods.

Remember that both of those down periods were the result of enormous events. The 2000-2002 downturn was largely due to the 9/11 terrorists attacks on New York city. Similarly, the 2008 downturn was the result of the worst banking crisis since the 1920’s. In my opinion, neither the rating downgrade of the U.S. debt nor the European debt crisis rise to these levels.

What I mostly see happening is that Americans are becoming weary and pessimistic. Citizens are worn out from the relatively slow jobs recovery as well as the budget drama in Washington. Against this backdrop, the ongoing European debt crisis and European stock market sell off has rippled panic around the world.

So let’s turn off the cable news channels for a second and look at what is really going on. We need to remember that the economy and the financial system suffered an enormous trauma in 2008. And just like a severely broken ankle, it’s going to take time for the system to heal. The process cannot be rushed.

Let’s look at it another way. In the decade leading up to the 2008 crisis, banks were pouring cash into the housing market. The problem is that an enormous amount of housing was being developed without any real demand for it. Industry, businesses, and jobs were being created around an artificial boom. When the bubble finally burst, the businesses failed and people lost their jobs.

The American system of free enterprise and capitalism is designed to allow failure. We don’t guarantee jobs and we don’t protect businesses. As a culture, we believe that when businesses and industries fail, it is an indicator that capital and jobs need to be reallocated from unproductive activities to productive ones. Many people have called this process the “creative destruction” of American capitalism. Over the long term, it has created the world’s most enviable standard of living. In the short term, it can be a messy and painful process. In the case of the housing collapse, it resulted in millions people suddenly becoming unemployed.

The current high unemployment rate is temporary. With some time, the American economy will recover. Industries will flourish and productive jobs will be created. No matter what you hear on the radio or see on television, the American system of capitalism is robust and will continue to provide a rich environment in which America and Americans can prosper. The fact is that the economy and the number of jobs continue to grow. It’s just not happening as fast as some people would like.

Now, let’s turn our attention to the big news of the day - the Standard & Poor’s downgrade of the U.S.’s credit worthiness. Everyone has an opinion on the problem. Most of these opinions don’t reflect the facts. Over the next few minutes, I am going to leave politics and emotions on the sidelines and explain the issues from a factual point of view.

Before I start, I am going to address the enormous amount of pessimism people feel toward our government right now. Let’s take a step back and look at the situation from a higher plane. We have all heard that the strength of our American democracy is that it is “of the people, by the people, and for the people.” This is absolutely true and it is a beautiful thing. But if we take a closer look, the founding fathers had a very practical purpose in mind for democracy. They wanted a government that could change peacefully.

You see, before democracy, governments frequently changed by violence and force. We’ve all heard the saying, “long live the king.” The people had very good reason for wanting the king to live a long time. At the death of a king, social unrest and civil wars frequently followed. Different factions would try to seize control of the government and in the ensuing struggles, the entire country could be destroyed.

If we look at the war of words going on in Washington in this context, we can see that our system of government is working quite well. No one has pulled out any guns. People are not murdering each other to seize control. The battles, no matter how ugly and fierce, are being fought only with words - not bloodshed and not violence. For this reason, I believe that the messiness of American democracy is not its weakness but its strength.

Now, the path I’m about to take makes me feel like a country preacher I once heard about. You see, the preacher saw that the spouses in his congregation were not getting along. So the next Sunday, the preacher decided to speak about how wives should behave. He preached about how wives should treat their husbands, their children, and their community.

At the end of the service, one of the parishioners came up to the preacher. He said, “you know preacher, I believe that was the finest sermon I’ve ever heard. I’m going to make sure that I’m here next week to hear more of that.”

So the next week, the preacher gave a similar sermon but this time for the husbands. He talked about how husbands should treat their wives, their children, and their community. At the end of this service, the same parishioner came up to the preacher and said, “You know preacher, last week you did some mighty fine preaching. But this week, you done left preaching and gone to meddling.”

In this video, I am going to talk about the two political parties. I am going to stick to the facts and let the cards fall where they may. Please understand that I am not making a political statement nor am I favoring one party over the other. I will let you know up front that I believe that both parties have plenty of culpability in bringing us to where we are today. If at some point, you think I’m picking on one party more than the other, just wait a little bit. I have plenty to say about both organizations.

So, what’s really going on? In two words - entitlement reform. Or to be more accurate, the lack of entitlement reform. For over thirty years, our elected leaders have known with absolute certainty that, without change, our current system of entitlements would bankrupt the country. The reason our leaders have never acted to fix the problem was two-fold. First, it would have meant that a large swath of the voting public would get less in government benefits. Reducing these benefits would have meant the politicians could not get reelected. Second, the day of reckoning over unsustainable entitlements seemed far away and in the future. Political necessity dictated that each new generation of politicians kick the “can” of entitlement reform into the future. Well, the future is now.

Last Friday, a credit rating agency known as Standard & Poor’s downgraded the rating on the United States debt from AAA to AA+. The downgrade was an explicit statement that the new federal budget agreement is not enough to keep entitlements from burying the country under unsustainable debt.

Let’s take a look at what the downgrade means. People have been asking me if the downgrade is “The End of the World as We Know It?” Absolutely not. The 9/11 terrorist attacks in 2001 and the near collapse of the banking system in 2008 dwarf the current downgrade issue. However, there will be some very real and broad consequences.

The most obvious consequence of the downgrade is the effect that it will have on U.S. budget expenditures. An interest rate rise of even .5% (one-half of one percent) would mean an extra $700 billion in additional expenditures over the next decade. This extra spending will just get piled onto the debt making the problem worse.

Less obvious and more important consequences will occur all across the country. A downgrade means that a large raft of other debt based on U.S. creditworthiness will get downgraded as well. Just yesterday, the government backed mortgage debt of Freddie Mac and Fannie Mae were downgraded. What you might find surprising is that over 7000 municipal governments could see their ratings drop as well.

Here’s why. Frequently, municipalities will borrow money at a low rate and then lend it to the U.S. government at a higher rate. The way that the municipality makes money is in the difference in the interest rates. For example, suppose that the city of Hooterville issued $10 million in Hooterville bonds at 2%. (Bonds are simply loans.) Hooterville will then take the $10 million in cash that it gets from the loan and invest it in U.S. Government bonds at 3%. By doing this, Hooterville earns the difference between the rates at which it borrowed and the rate at which it lent. In this case, it is 1% per year on $10 million.

Since Hooterville uses the government bonds as its collateral for its own loan, Hooterville enjoyed the same AAA rating as the U.S. Government. Now that the government debt has been downgraded, the debt of Hooterville will follow suit. In other words, since the federal government’s rating is downgraded, Hooterville’s credit rating could be downgraded as well. Again, it is estimated that 7000 municipalities could see their ratings drop. Obviously, the resulting rise in borrowing costs could weigh on already strapped municipal budgets.

The other effect could come from institutional investors. Many investors such as pensions and foundations are required to hold AAA rated debt. With the downgrade, many of these organizations may need to reorganized their portfolios. Since this has never happened before, it’s not yet clear how these institutional investors will react.

Now let’s talk about the debt itself and examine the problem in more detail. When we talk about trillions of dollars, the number is so large that it really doesn’t mean much to us. So let’s look at the debt in terms of how much federal debt each of us owes. Currently, the debt is $14.5 trillion dollars. If we divide that by the number of Americans, 311,800,000, we find that each baby born in America today owes $46,504 when taking his or her first breath.

So, where does this debt come from? I think we all know. Just like you or me, if we spend more than we take in, we have to borrow the difference to pay our bills. Here’s chart of the federal receipts and outlays. This “gap” is what we call the “deficit.” The deficit is paid for with borrowed money. This borrowed money is our “ national debt.” Just like people who live on their credit cards. The ongoing borrowing and accruing interest makes the debt grow larger and larger.

Now let’s put the debt in perspective. When you and I borrow money at the bank, one of the first questions the bank asks us is how much income have. The bank understands that we need to keep our debts in balance with our ability to pay them back.

As a country, our “income” is known as the “Gross Domestic Product” or “GDP.” It is the sum of all of the earnings in the United States. Just like at the bank, we need to put the size of the national debt in perspective. We need to measure the size of the debt against the size of our income or GDP. This chart show graphs that ratio since the 1950’s. Currently, the national debt represents about 30 some odd percent of GDP. You can see that the ratio has been higher and lower in the past. In general, our current debt load is not excessive. In other words, the amount of our current debt is not the issue.

Here’s the problem. If we don’t change our entitlement programs, the federal debt will begin spiraling out of control in 15 years. The reason Standard & Poor’s downgraded the debt was not that the current debt was too large right now, but that that the recent budget agreement does little to resolve the ballooning debt in the future.

So why is getting the budget under control so hard? Well here’s a quick drawing of how the federal budget is spent - Social Security, Defense, Medicare, Medicaid, etc. Here’s a quick drawing about how the average American views federal spending. Here’s “the stuff that benefits me personally” and here is the “waste.” A lot of people are getting a lot of benefits. To get the budget under control will require a lot of weeping and gnashing of teeth from a lot of voters. Up to now, politicians have not had the stomach to “just say no.”

Let’s look at some myths about the problem The first myth is that welfare is the problem. The fact is that relatively few people get welfare. You can see here that the reforms of the 1990’s to “end welfare as we know it” were successful. In the early 1990’s about 5.5% of the population received welfare. Today, that number has dropped to just over 1%. Likewise, the percentage of the overall budget devoted to welfare programs is relatively small. The fact is that if we completely eliminated the programs we refer to as “welfare” it would have only a marginal effect on the problem.

Let’s look at another myth. For this myth, let me ask you a question. Which administrations added more to the overall debt load - the Republicans or the Democrats? Here’s another chart that shows the federal debt relative to GDP over time. The administrations have been added below. The red swathes are Republican administrations and the blue are Democratic ones.

What we see is that, with the exception of President Obama, every Democratic president since Roosevelt has lowered our relative debt load - Truman, Kennedy, Johnson, Carter, and Clinton all reduced the ratio of debt to GDP.

On the other hand, every Republican administration since Nixon has increased our relative debt load. Ford, Regan, Bush I, and Bush II all increase the amount of debt relative to our GDP. In fact, the vast majority of our debt today can be traced directly to the Regan and two Bush administrations.

How did this happen? If we characterize the Democrats as the “tax and spend” party, then we have to characterize the Republicans as the “borrow and spend” party. The fact is that both parties have been more than happy to spend a lot of money. Republicans have just been more willing charge the spending to the the national credit card.

Now let’s take a look at the federal receipts and expenditures. On the receipt side, you will notice that Social Security taxes and income taxes each represent about 40%% of the federal receipts. Corporate taxes represent 9% of receipts and other miscellaneous taxes represent about 9%. In other words, Social Security taxes and income taxes represent the vast majority of receipts at about 80%.

On the spending side, each category represents about 1/5 of the budget. Medicare represents roughly 20%, Social Security about 20%, defense about 20%, and everything else about 20%. But the future spending of each entitlement varies significantly.

Here is the future budget spending. The green and blue bars are the three entitlement programs - Social Security, Medicare, and Medicaid. The red bar is the interest on the debt. And the white bar is everything else - defense, road building, federal justice system, etc. You will also notice this dotted line. This line represents the amount of tax revenue collected relative to today’s standards. It’s about 20% of GDP. If we trace this line, you can see that by 2030, almost all federal tax receipts will go to Social Security, Medicare, Medicaid, and the interest on the debt.

Let’s look at each of these programs separately. Surprisingly, Social Security is in relatively good shape compared to the others. If we lay a ruler down here, we can see that we will only have to cut future Social Security benefits by roughly 30% to keep spending similar to today’s levels. Likewise, the dark blue bar of Medicaid will need to be trimmed but not too drastically.

What is painfully obvious is the light blue bar. This is Medicare. If we look back to 1970, it was a tiny slice of the overall budget. Today, its about 20%. By 2020 and 2030, the program will consume the lion’s portion of the budget. Few experts serious believe that Medicare as we know it is sustainable.

The next thing we notice is the red bar. This is the interest on the debt. People say that Einstein called compound interest one of the most powerful forces in the universe. Whether he actually said that or not, we may never know. We do know that as interest accrues it begins to snowball. Given enough time, an unpaid debt and its compounding interest becomes enormous. If we don’t come up with a plan to balance the budget soon, the interest expense on the national debt will eventually consume the entire annual tax receipts of United States’ many times over.

So who’s responsible for the entitlements as we know it. The fact is that Democratic administrations presided when Social Security and Medicare were created. And a Republican administration, Bush II, presided when Medicare Part D was created.

Now let’s pause and look at tax rates for just a moment. There is an idea in economics that governments can only extract a maximum amount of money from an economy. To show you why, let me ask you a question. If the government had a zero percent tax rate, what would the government’s revenues be? Zero, of course. Now, as you increase the tax rate from zero to one percent to two percent, etc., government’s revenues would rise.

Now let me ask you another question. If the government had a 100% tax rate, what would the revenues be? Obviously, the revenue would be zero as well. No one would go to work if they couldn’t keep any of their paycheck. This implies that the tax rate can rise to a certain “maximum tax rate.” After that, overall revenues will continue to fall. This idea is known as the “Laffer Curve.”

As a practical matter, when tax rates are high, people begin making decisions to not be productive. A good example would be the Social Security earnings limit. According to the limit, when a Social Security recipient between the ages of 62 and full retirement age works, he or she can earn a certain amount with no reduction in Social Security retirement benefits. Any earnings over that limit reduces the Social Security benefit by $1 for every $2 in earnings. Because this Social Security reduction acts like a 50% tax, most beneficiaries quit working when they reach the earnings limit. For most people, a 50% “tax” is just too much.

Now the optimum point on the Laffer Curve is subject to a great deal of debate by very smart people. So, instead let’s compare the overall tax rates in the United States with the European countries. This is a chart of the rates over time. You can see that the United States historically taxes between 25% to 30% of GDP. The European countries, on the other hand, typically have higher tax rates of 30% to 40% of GDP. Whether taxes could or should be raised will certainly be the subject of vigorous debate in the future.

Now we have reached the part of the program where we ask the Magic Eight-Ball to make some predictions. Understand that the predictions and opinions expressed are solely that of the Magic Eight Ball.

First question. Will this downturn in the stock market be as severe as 2008 and will it last a long time? Answer, “Highly unlikely.” The current market downturn will be temporary. There are no significant structural problems in the economy or financial system. The banks are healthy. The economy is growing. Jobs are being created.

Second question. Will the Social Security program change in the future? Answer, “Yes. For some more than others.” For people who are receiving Social Security now, the biggest change might be in the way Cost of Living Adjustments or COLA’s are calculated. For those born after 1960, their benefits will be about thirty percent less than today’s retirees receive.

Third question. Will Medicare change in the future? Answer, “Yes. A lot.” In its current form, Medicare cannot survive. Medicare probably will not remain a “blank check” “fee for service” benefit. Many ideas are floating about how to reign in the costs of Medicare - block grants, subsidized private insurance, etc. Time will tell what Medicare ultimately will become. But it will change.

Fourth question. Will the budget come into balance. Answer, “Yes. Definitely.” Winston Churchill said, “The American people always do the right thing, but only after exhausting every other alternative.” There is no viable alternative to balancing the budget.

Fifth question. Will a balanced budget amendment be added to the United States Constitution? Answer, “Yes. Definitely.” In 1980, the state legislatures came within two votes of calling a Constitutional Convention to add a Balanced Budget Amendments. In 1995, the House of Representatives passed legislation for a Balanced Budget Amendment. When the measure went to the Senate, it failed to pass by a single vote. The Magic Eight Ball predicts the passage of a Balanced Budget Amendment in the not to distant future.

Sixth question. Will there be political fallout from the downgrade in the upcoming elections. Answer, “Yes. Definitely.” Americans are very proud of baseball, hot dogs, apple pie, and a AAA credit rating. Having that rating lowered has defiled sacred ground. The Magic Eight Ball thinks that American’s outrage will grow over the next two years. Politicians who have been in office for a long time will become the object of that anger.

So, what do we do? Be patient. Stay optimistic. The sky is not falling. In the near future, the stock markets may go up or may go down. We just don’t know day to day what’s going to happen. For those of you who are my clients, you need to remember that we have worked together to put a customized LifeCentric(TM) Wealth Management plan in place. When we do create this plan, we do it knowing that there will be days like these. A down market doesn’t change anything. Pessimism and panic in the markets are going to happen. It’s inevitable. That’s why we prepare for it.

Over the next thirty six months, we will see enormous change in the way our government does business. There will be enormous political change. And, there will be screaming and howling like you’ve never heard before. But that’s okay. It just means the system is working.

I firmly believe that America’s best days are still ahead. And I believe that today is the best time in history to be alive. The way forward for you and me is to remain optimistic and keep everything in perspective.

If you have any questions or if you need anything, call me. I’m here to help.

We’re in this together. I’m Michael Dallas

Facebook Pokes The Islamic World: How The New Middle East Revolution Will Change Our Future (6/8/2011)

2011-06-08T18:49:00.007-05:00

If you can't see the video above, just copy and paste the following link into your browser: http://www.youtube.com/watch?v=U1GMkBTG1ms&feature=player_embedded#

Video Transcript:

Welcome to “Facebook Pokes the Islamic World: How the New Middle East Revolution Will Change Our Future.” I’m Michael Dallas.

There is no question that we live in an increasingly globalized world. Instead of just investing blindly, we need to be smart investors and make our decisions in the context of world events. We need to know what is going on.

In this short video, I am going to take you behind the headlines and explain in a simple and easy to follow way, the remarkable events currently occurring in the Islamic World. I am going to provide you with the context of what is happening, why it’s happening, and what this means to you and me. Toward the end, we will ask the Magic Eight Ball how the future will be changed by these events.

The questions we will ask the Magic Eight Ball are:

Freedom - will the Islamic World become democratic or a new Byzantine Empire?
Radicalism - will radicalism increase or decrease in the future.
Mid East Peace - will that region of the world become more or less peaceful?
Oil - Will there be more or less oil produced in that part of the world?

While this video, obviously, will contain some of my opinions, it primarily is based on the work of preeminent Mid East experts and think tank institutions.

So the first question is, where is the Islamic World? Here’s quick glace at the region. It includes primarily the Mid East and North Africa.

The second question is, Why do we “care” about the Middle East and the Islamic World? There are three reasons. The first is population. By some estimates, there are 1.6 billion Muslims in the world today. This represents 22% of the global population and is only ranked second to Christianity in terms of religious followers.

The second reason is terrorism. It is no secret that most of the international terrorism is generated from that region by Islamic groups. If we are going to “fight terror,” then we need to understanding why some people are motivated to join these groups and what might be done to cultivate peace.

We all know the third reason - Oil. I think we all understand why oil is highly prized and sought after. Currently, oil provides 40% of world’s energy. It is particularly important to transportation providing 96% of the energy for planes, trains, and automobiles. In today’s world, without oil, our economy would stop and our military would cease to function.

The problems are that currently, 75% of the United State’s oil consumption is imported and 70% of the world’s oil reserves are in the Muslim World.. In the next ten years, that fraction will grow to 81%.

Let’s talk about or perceptions. When the media shows us pictures and videos of the Islamic World, they usually start with oppressed looking women, graduate to flag burning, and finish with blown up planes, destroyed buildings, and dead families. For most people, this is our impression of Arabs, Muslims, and the Islamic World. In fact, in my first public workshop, I asked people to give me words that described their perceptions. Here is the list:

Strange clothes
Censorship
Oppression of women
Lack of education
Radical ideology and religion
Fear
Government dominance

You can see that these words are negative and paint a pretty bleak picture. And while there are elements of truth in these perceptions, they don’t really reflect who these people are, what they want, and what they are trying to do. We will come back to this.

So what do these people think about you and me? I found a very remarkable question in a recent Brookings Institute survey. The question asked people throughout the Islamic World what was the thing that they liked about the West? The number one answer was “technology.” The number two answer will shock most people. They said, “democratic values.” What you may not realize is that the people in the Islamic World value freedom and democracy, and they desperately want to be free.

So if they value freedom, and the United States stands for freedom, then why do we see so many pictures of Arabs burning flags? It’s simple. These people do not think that our actions in the region reflect our democratic values. Here are the four top “beefs” that the Arab world has with America, in order of important. This is not my opinion. This list comes from high-quality research in the region.

The number 1 beef is the Iraq War. There is almost a consensus in the region that America should not have attacked or occupied Iraq. The hostility over this is very deep and its widespread.

The number 2 beef is the standing forces in region. How would you feel if you looked down your street and saw Chinese soldiers standing guard? Or if you looked up and saw Chinese airplanes flying overhead? You would not feel like you had control over your home. And that’s exactly how they feel about our military being there..

The number 3 beef is our support Israel. I won’t go into detail. But everyone realizes that there is widespread dissatisfaction with America’s support of Israel in the region.

(break)

The number 4 beef is our “Deals with the devils.” Over the last few decades, the United States has made deals and provided support to a wide variety of dictators who promise to keep the oil flowing. How these dictators behaved or treated their peoples was much less important to us than whether they maintaineda stable flow of oil.

Case in point is Sadaam Hussein. Three decades again, he was a “devil” that we made a deal with. We provided money, arms, intelligence and a whole range of support. In fact, we were more than happy to see him go to war with our so-called “enemy” at the time, Iran. In that war, millions of young Iraqi and Iranian soldiers were killed. We even looked the other way when Iraq used poison gas on the battlefield. It was only after he attacked Kuwait in an attempt to control the world’s oil reserves that Sadaam Hussein became our enemy. And he’s just one example. There are many others.

So let’s look at the governments in the Islamic World. Here is a map which shows the level of freedom for each country around the world. The map goes from freest countries - dark green - to the least free countries - deep maroon. You will notice the Islamic World represents the least free region of globe. In fact, virtually all Islamic countries, except Turkey, are dictatorships. And even though it’s not a perfect match, you can generally see that the countries that have the most oil production are the least free of all.

So how do these dictators keep control of these countries? Well, we usually imagine dictatorship countries as being under marshal law with heavy handed troops patrolling the streets and beating the citizens. While there may an element of this, this is not really the way these dictatorships work. Instead, most of these dictators have “social contract” with the population, which is commonly referred to as “The Bargain.”

“The Bargain” is really quite easy to understand. The dictator promises to provide the population with a wide array of benefits including good jobs, free education, subsidized food, affordable housing, free health care, and other entitlements. In exchange, the population agrees to give up its right to participate in the political life of the country.

The Bargain worked for a long time. But over the last twenty years, two shocks destroyed The Bargain in many countries. The first shock was the plunging oil prices in the late 1980’s early 1990’s. Revenues in the region collapsed. If this were the only shock, things would eventually return to normal as prices returned.

However, the second shock is far more difficult to deal with. Over the last ten years, the Islamic World has experience a huge demographic shift. There has been a massive number of youths entering workforce. If you don’t remember anything else in this video, you need to remember this one thing. The Islamic World is primarily a bunch of hungry kids.

There is a phenomenon that has occurred in almost every region around the world. It happened in the Americas, it happened in Europe and it happened in Asia. It’s easier to understand the phenomenon if we use and example. Let’s go back in time to 1800 in the United States. During that time, the child mortality rate - the rate at which children died before five years old - was about 40%. In other words, the chances that a child died before turning five years old was slightly better than the flip of a coin. To compensate for this high mortality, women would have a lot of children in the hopes that some of them would survive to child bearing age. It was not uncommon for women to have five or six children and to lose three or four.

If you want to see evidence of this mortality rate for yourself, go to an old grave yard and look at the headstones. You will find a lot of headstones for children. Many of them unnamed and just say “Baby” with a date.

But, over time, something very interesting happened. The mortality rate of children dropped significantly. We had better nutrition, vaccines, and better prenatal care. Instead of half of the children dying, virtually all of them survived. However, even though the child mortality rate dropped, the fertility rate remained high - for a while. It’s during this time that you see extremely large families and a huge boom in the population. In every culture that has experienced this, the fertility rate begins to drop until you see smaller families and a leveling off of the population.

Right now, the Islamic World is in a phase where the child mortality rate is low, but the fertility rate is sky high. As a result, the population is booming.

Let me show you the data. Let’s look at type of chart called a “population pyramid.” A population pyramid shows the population of a particular region at a particular time. For example, here is a population pyramid of the United States. It has two sides. On this side is males. On this side is females. The pyramid is organized into age bands starting with the youngest and going to the oldest. For example, this first bar on the bottom left shows the number of girls ages 0-5. The next bar up is 6-10. The next is 11-15 and so on. You will notice that there is a bulge in the pyramid in the 50 to 65 range. These are the “baby boomers.” Also notice that the pyramid is rather straight toward the bottom. This means that the population is growing at a slow rate.

Now let’s look at the population pyramids of five Arab countries - Yemen, Saudi Arabia, Samolia, Iraq, and Pakistan. The pyramids show three different time periods - the years 2000, 2025, and 2050.

Notice that the pyramids have steeply sloping sides. This means that an increasing number of babies are being born each year. If we look at the pyramids over these three time periods, we can see that the population is swelling. Notice how much bigger the pyramids get over time. I also want you to see something very important. Notice how many people there are under 25 years old. If you cover up the ages over 25, you can see the majority of the population is kids. These numbers have some very serious real world implications.

The biggest implication to these numbers is “who” we are dealing with. When we deal with the Arab world, we are not dealing with a bunch of rich, old, bearded guys. We are dealing with a bunch of hungry kids. Here are the statistics:

60% of the workforce under 25 years
A huge fraction of these kids are unemployed - 25% to 30%.
Educational opportunities are extremely limited. Schools and universities are stressed to their limits.
Even for those who are working are not paying the bills. Most youths live on less than $2 per day.
In other words, for a large part of the population, The Bargain is Dead.

The next thing we need to understand is that there are two kinds of countries in the Islamic World - Oil exporting and Non-oil exporting. Here is a list of the exporting countries. And here is list of the non-exporting countries. Now, on the Oil Exporting list, I included all countries that export oil. In reality, most of the countries on this list produce so little oil, that you could move them to the Non-Oil Exporting list. In fact, the top five Oil Exporting Countries sell more oil than all the other countries combined.

So what are some of the important differences between Oil Exporting and Non-Oil Exporting countries?
First, Oil Exporting countries are “eating at the table.” They are the primary beneficiaries of the revenue coming out of the ground. Non-oil Exporting countries are “eating the crumbs.” They benefit from the oil in a secondary fashion. The provide goods and services to the exporting countries but their benefit is only secondary.

Second, the governments of Oil Exporting countries are funded by oil revenues while non-exporting countries fund their governments through taxes. As we know, governments who rely on taxes for their funding tend to be more responsive to the tax paying public.

Third, Oil Exporting countries have far more ability to keep The Bargain than non exporting countries.

Fourth, Oil Exporting countries have more ability to keep the loyalty of the population, the military, their allies, their “friends” such as their oil customers.

This means that the rulers of Oil Exporting countries are more likely to “fight back” against any movements to change the government. Together, these mean that the population is far less likely to topple a dictator in an Oil Exporting country than a Non-Oil Exporting country.

Let’s compare two recent examples - Egypt and Libya. Egypt experienced a relatively peaceful change of government. On the other hand, Libya’s experience has been a violent one. At the time of this video, the conflict is still raging. While there are many factors that cause this difference. Let’s look at the economics. An important issue is the amount of oil exports in relation to the size of the population.

Egypt produces 3.7 mbd. It has a population of 79 million people, which, when divided out equates to a production of about ½ of a barrel of oil per person per day. If we assume that oil is $100 a barrel, that works out to a little less than $50 per person per day.

On the other hand, Libya produces 79 mbd - almost 20 fold more, but has a population of 6.5 million - less than one tenth as many people. If we do the division, we find that Libya produces 12 barrels per person per day. At $100 per barrel, Libya brings in $1200 per per per day.

If we understand these numbers, we might not be as surprised to find that Mubarak left in relative peace while Kadaffi is putting up a vicious fight.

There was a time, not so long ago, that America experience a surge in the twenty-something year old population of young, hungry, and angry people. Do you remember it? We call them “the baby boomers.” Their youthful activism gave us enormous social, political, and cultural changes. It is not unreasonable to think that the youth culture of the Islamic World will do the same for that part of the world. The Beatles sang about Revolution so let’s look at this one.

It’s been said that Revolution = anger + organization + inspiration. We’ve established the anger. However, modern technology has completely changed the opportunities for organization. Historically, social organization in the Islamic World was through religious organizations. Generally, political opposition organizations were not allowed. Imagine what would happened if you tried to start an organization with the purpose of throwing out the local dictator. After a few days, someone would come get you. After you came back beaten or didn’t come back at all, everyone else would learn that political organizations and political discourse were not good for your health.

In that part of the world, gathering at the mosque is a part of daily life. This monopoly on the ability to gather made the religious centers the de facto locations for political discourse. I believe this is why most of the opposition and terrorist groups tend to have a heavy religious overtone.

However, over the last few years, the Internet and social media have completely changed in the model. For example, in Egypt in 2004, there was virtually no Internet use. By 2009, over 25% of the population used the Internet on a daily basis. Sites like Facebook and Twitter allowed many people, for the first time, to freely talk about politics and organize without the threat of violence. While Facebook and Twitter did not cause the revolution, it certainly gave people a way to organize like never before.

The last piece needed for a revolution - inspiration - came from Tunesia on December 17, 2010. A 26 year old college graduate named Mohammed Al Bouazizi set himself on fire in front of a government building. Al Bouazizi set himself on fire in utter desperation after govenment officials continually thwarted his efforts to support his family by selling fruit. The story of his desperation resonated so strongly with the Tunesian people’s frustration, that rioting broke out across the country. A few weeks later, the 24 year regime of President Al Abidine Ben Ali was gone. Here, the president visits the young man in a desperate bid to calm the Tunesian people. The collapse of the Tunesian dictatorship provided additional inspiration and lit the spark for the other protests across the Islamic World.

The next question is, “Is US ready to embrace democracy in the Islamic World?” Well, let’s look at what’s going on. After 9-11, the administration began making a push to democratize the Mid East. One of the results of this effort was the Palestinian elections of 2006. To the chagrin of the United States, a terrorist organization, Hammas, was elected into power. As a result, the world began to believe that democratic rule in the Mid East was not possible. The fear that radical groups would take the election and then never release power. The saying was, “one man, one vote, one time.” However, these fears may not be justified. Recent surveys and public opinion poles in the Middle East show that when religious and radical groups participate in an open political process, they lose their support. In essence, when the politics becomes open, radical groups become obsolete.

As a matter of fact, do yo know why Al Queda was formed in the first place? It was not to attack America. It was to remove Mabarak from power in Egypt. And what Al Queda could not do in twenty years through violence, a peaceful political movement accomplished in a matter of weeks. The fact is that the current revolution in the Mid East is Al Queda’s worst nightmare. The movement highlights the fact that terrorism doesn’t work and the organization is obsolete.

Okay. So back to the question, “Is the U.S. ready to embrace a democratic Islamic World?” Well, in its day-to-day operation, our elected officials have to meet with all kinds of people asking them for favors. Let’s look at who is “talking to the White House.”

The first set of people we see are “kings and princes.” kings and prices of Arabia, kings and princes of Jordan, kings and prices from all over the region. Do you think that any of these people are interested in having elections? Of course not. They have money and power and they are in control.

Who else visits the White House. Well we have the CIA, the military, big oil companies, and big auto companies to name a few. All of these people have an interest in the Middle East. Now do you think the CIA has an interest in elections in the Arab world? Of course not. They have spent decades putting what they call “assets” - or what you and I would call contacts and spies -in place. Having the governments change every few years would make their job a lot harder.

Do you think that the military wants democracy in the Mid East. I would say, “probably not.” The military has positioned ships, planes, equipment, and troops all over the chess board. It is highly likely that if the top leaders of the Mid East were elected by the population, they probably would ask the U.S. to remove its bases, equipment, and troops.

Let’s look at big oil. What does it want? Open oil routes. It’s not interested in dealing with the dynamic change and uncertainty that democracy brings.

The American public? What do they want? They want cheap gasoline. Keep the cheap oil flowing.

All of these people visit the White House on a regular basis.

Now. Who does not visit the White House? This lady doesn’t. This guy doesn’t. In other words, the average citizen living in the Islamic World does not visit the White House. They have little power or few groups representing their interests. Powerful interests put enormous pressure on the United States government is to keep the “status quo” and resist change.

What outcomes are possible or likely? Let’s ask the “Magic Eight Ball.”

Okay. The first question is about Freedom. If you listen to the media, you hear all kinds of predictions. Some people say that the Middle East will quickly democratize. Other people say that the region will reemerge into a new Byzantine Empire.

Does the Magic Eight Ball think there democracy or Byzantine Empire?

The Magic Eight Ball says:

No Byzantine Empire
No full blown democratic reform
Some new democracies
Some reformed dictatorships

In all probability, most of the new democracies will be those countries who are not the major oil exporters. The dictators who do retain control will be those who are able to reduce the “anger” in their populations. They probably will work on ways to share power and to sharpen The Bargain.

The next question is about radicalism. Does the Magic Eight Ball think there will be more radicalism or less? The Magic Eight Ball thinks that radicalism will decrease. As venues such as Facebook open up freedom of speech, people with moderate political views can come forward. As this “silent majority” get a voice, extremism will become more and more marginalized. The oppression of speech and free government has been the catalyst of the extremist movement.

The next question is about Mid East Peace. Does the Magic Eight Ball think the Middle East will be more peaceful or less peaceful? The Magic Eight Ball thinks the Middle East will be more peaceful. This is tricky question. Just because the Islamic World is moving toward democratic values and institutions doesn’t automatically mean more peace. Remember, our nation went to civil war because of an election and Adolf Hitler came to power in an election. Nevertheless, there is a tremendous amount to be gained for everyone if peaceful solutions can be found.

The next questions is about oil. Does the Magic Eight Ball think there will be more oil production or less oil production. The Magic Eight Ball thinks there will be more oil production. Whether a country goes democratic or stays a dictatorship, there is pressure on all Mid East countries to provide more benefits to the citizens. This is going to take increased revenues. That means there will be tremendous pressure to open the taps and produce as much oil as possible.

So what are my opinions about America’s role in the Middle East?

First, we should not make the movement toward freedom “from America.” Bush’s push for democracy failed not because they were against democracy, but because they just didn’t want America meddling in their affairs.

Second, we should avoid trying to “engineer the outcome.” We cannot and should not lead or try to nullify election results. Let me ask you a question. Has America ever elected crummy leaders? They most certainly will do the same. We need to let them make their own mistakes.

Third, we should support all peaceful movement toward freedom and democracy.

Fourth, we need to embrace “the new generation.” Remember that 60% of the population is under 30.

So much for the politics, let’s get down to what we need to be doing. How should we invest?

First, we need to expect foreign oil supplies to become more volatile and less reliable. Even if oil supplies are not disrupted outright, the possibility of disruption will continue to increase. In the very short term, oil may be more or less expensive than it is now. However, as these countries democratize and reorganize, our ability to tap these supplies will be much less certain.

Second, we need to realize that there are other energy alternatives to basing our economic growth on imported oil. Taping domestic energy sources will require large capital investment and may be more expensive in the short term. But ultimately, our economy will adjust and continue to grow without relying on imported oil. We need to invest our portfolio so that we maximize our returns during this transition phase.

Third, don’t worry. They sky is not falling. The world is changing but everything will be okay.

We’re in this together. I’m Michael Dallas.

The Great Bond Crash of 2011 (1/26/2011)

2011-01-26T16:29:00.006-06:00

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The Great Bond Crash of 2011

Remember the tech bubble of the late 1990’s and how that bubble burst in 2000? I believe that the bond market is currently in a bubble. I also believe that the bubble could burst in 2011 in one of the worst bond market crashes in memory.

But before I get to that, I am going to answer your burning questions first, which are: Would a bond crash mean the The End Of The World As We Know It? Would it mean the fall and destruction of the United States? Would humanity melting down into a Mel Gibson Road Warrior existence?

If you watch other videos on the subject, you would think western civilization is on the edge of destruction. But the situation is not quite that dire. The worst case scenarios are probably that:
1) Bond investors could experience significant losses of value on their bond holdings.
2) Prepared investors could protect principal and get higher interest rates on their investments.

So let’s look at what a “bond crash” means, how that would affect you, and what you should be doing to protect yourself.

To understand the bond bubble, we must first understand what bonds are and how they work. So what is a bond? A bond is simply an IOU. It’s a loan. The loan can be to a government such as the federal government. These bonds are called Treasury bonds. If the loans are to a local governmental entity such as as your state, city, or local school district, they are called municipal bonds. If the loan is to a business, they are called corporate bonds.

When you buy a bond, you earn a specific interest rate for a specific period of time. For example, if you bought a 4%, 30 year treasury bond for $100,000, you would receive $4,000 per year for thirty years. At the end of that time, the bond would mature, and you would get the principal value of $100,000. It’s really that simple.

The part that confuses most people is the “market value” of bonds. Like stocks, bonds are traded in a market. Not surprisingly, we generally call this the “bond market.” Hundreds of billions of dollars of bonds are traded every day in the bond market.

So, if you’re going to understand what “bond crash” is, you have to look at the relationship between the market price of bonds and interest rates in the market. The best way to see this is with a quick example. Let’s go back to the example we had before. Suppose you own a 30 year Treasury bond with a 4% interest rate. You decide that you need to sell the bond. However, interest rates in the market are no longer 4% but 6%. Do you think an investor would pay you $100,000 for your 4% bond when he can get buy a brand new Treasury bond at 6%. Of course not. Is you bond worthless? No. Your bond is worth something though, just not $100,000.

If we do some math, we can figure out what an investor could pay for your bond and still get a 6% return. In this case, an investor could pay you $72,470 for your bond and get a 6% yield to maturity. If we say it another way, the market value of your bond is only $72,470. When interest rates rose 2 percentage points, the value of your bond declined over 27%. Notice that the only thing about your bond that changed was the market price. You are still going to get your $4000 per year interest payments and at the end, you will get $100,000.

If you kept this bond in your sock drawer, you probably would not know that your bond lost over one-fourth of its value. But what if you keep your bond in an investment account? When you received your statement, you would see that your account went down in value. You would then call your financial professional who would explain that the value went down but you would still be getting your interest and you would still get the principal value when it matures.

I find that the unhappiest people in a bond crash are those that own bond mutual funds. When interest rates in the market rise sharply, people who own bond mutual funds can experience huge losses. When you consider that people usually buy bond funds for good dividends and relative stability of principal, big losses in a bond fund can be extremely disconcerting.

Now, another thing that can affect bond prices is credit quality. Credit quality is simply the ability of borrowers to repay their debts. If investors think that there is an increased risk of not getting paid, the bond value will decrease.

I want you to think back for just a second. Do you remember 1994? Let me give you hint. Now do you remember 1994? Remember the famous low-speed chase between OJ Simpson and the Los Angeles police? That event took place on June 17, 1994.

Later that year, while the OJ media frenzy was in full swing, another significant event occurred in the same location. On December 6th, 1994, Orange County declared bankruptcy. You probably don’t remember it, but bond values across the country dropped like a rock.

To make matter worse, this shock occurred at the same time that the Federal Reserve was raising interest rates. This one-two punch created the worst bond crash since 1926. Many bond investors had losses in their bond portfolios of 20% or more.

So why don’t people remember the bond crash of 1994? Well, by the time the OJ Simpson trial wrapped up in the fall of 1995, the bond market had fully recovered. The Federal Reserve lowered interest rates and Orange County was emerging from bankruptcy. People who owned bond funds had recovered most if not all of their losses.

So how is 2011 similar to and different than 1994?

First, just like in 1994, there is a high probability that the Federal Reserve will raise interest rates. Over the last thirty years, interest rates have been on a long down trend until they now hover just above zero. The fact is that rates cannot go below zero. With rates so low, the odds are that interest rates will be higher in the future, not lower.

The difference is that in 1994, rates were at much higher levels. After the crash, rates fell again and losses were recovered. If rates rise in 2011, there is the possibility that interest rates may never return to these historically low levels. In other words, we may not see a bond market recovery as occurred in 1995.

Another factor is that municipalities all across the country are in dire financial condition. That means that the odds of an “Orange County” type municipal bankruptcy are better than average. For example, here is a map showing the Forbes credit quality of each state. The darker the state, the worse the debt quality. While the problems in California and Illinois are well publicized, you can see that debt problems affect a wide swath of the states. Does this mean that there will be a spectacular bankruptcy? No. I’m just saying that the possibility of one is higher than in the past.

These problems are not going unnoticed in the bond markets. Remember, when bond prices go down, interest rates go up. Here is an article from last week’s Wall Street Journal. As you can see, rates on 30 years Triple-A municipal bonds have shot up over the last three months. This indicates that investors are beginning to move away from municipal bonds.

In fact, over the last couple of months, all interest rates have been going up quite rapidly. Here is a graph showing the interest rate level during 2010 on 10 year Treasury bonds. As you can see, interest rates have risen three-quarters of a percentage point over the last three months. It may not sound like much, but in the bond world, this is huge. And remember, this rise in interest rates directly corresponds to a decline in bond prices.

So, what should you do?

First, I would suggest that you avoid bond funds that can lose a lot of value if interest rates rise. You can do this by looking at a fund’s “duration.” You can get the duration on your bond fund by calling your bond fund company or going on the Internet. Duration is quoted in “years.” I won’t go into why its quoted as “years,” but forget the years part. The duration will tell you how much your principal value will decline for every percentage point interest rates rise in the market. For example, if the duration on your bond fund is 7, and interest rates in the market rise by 2 percentage points, then the value of your bond fund will fall by 14%. If rates in the market rise by 3 percentage points, then the value of your bond fund will fall by 21%. Use duration to choose funds that will lose less if interest rates rise.

Another strategy is to avoid using bond funds altogether. Instead, you may want to use investments that have a maturity date. These include CD’s, savings accounts, fixed interest annuities, etc. While these types of investments don’t pay much interest right now, they do protect your principal.

Another thing I would recommend is to avoid investing in investments that act like bonds and are sensitive to interest rate changes. These include preferred stocks and some utility stocks.

Finally, I suggest that you avoid what I call “something for nothing” bond funds. These funds use option strategies to increase yields. The funds frequently blow up in markets where rates rise or fall quickly. The names on the funds frequently hint at the strategies. Names you might see might be “Yield Plus” or “Option Income.” The funds promise higher returns with less risk. Remember, in the financial world, there is no “free lunch.” If you want higher potential returns, you have to take on more risk or pay higher costs.

While a bond crash in the near future would not mean the end of the world as we know it, unwary investors could suffer unexpected losses. By keeping our eyes open and staying alert of the situation, we can take steps to protect ourselves in these times of change.

I’m Michael Dallas

Jeanette Alexander - Beats Cancer & Survives Hospice

2010-09-27T15:23:00.003-05:00

The Hedge Fund Collapse is Concluding (4/28/2009)

2009-04-28T14:30:00.001-05:00

Financial Crisis - Part 6 "Hedge Funds Collapse" (1/2/2009)

2009-01-02T12:58:00.000-06:00

Financial Crisis - Part 5 "Wacky Stock Market Clues" (11/14/2008)

2008-11-14T17:27:00.000-06:00

Financial Crisis - Part 4 "Wacky Stock Market" (11/13/2008)

2008-11-13T16:02:00.000-06:00

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2008-11-10T15:48:00.000-06:00

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2008-11-09T10:22:00.000-06:00

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The Courage To Retire: The Must-Have Money Book for People Over 55

By Michael Dallas, CFP

America's retirement expert, Michael Dallas, CFP™, helps retirees and soon-to-be retirees learn how to make the best decisions regarding their entire financial picture. He reveals critical details about investment strategies, Social Security retirement benefits, Medicare benefits and Medicare supplements, long-term care, pensions, rollovers, required minimum distributions (at age 70 1/2), and final arrangements. Mr. Dallas also discusses important strategies for safely generating more retirement income.

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Stock Market Will Recover (11/7/2008)

2008-11-07T12:27:00.001-06:00

Financial Crisis - Part 2 "The Recession" (10/29/2008)

2008-10-29T18:34:00.001-05:00

Financial Crisis - Part 1 "The Banking Crisis" (10/28/2008)

2008-10-28T12:28:00.000-05:00

Birthday 2012 - "Compound Interest"

2008-01-01T12:27:00.000-06:00

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