If you are like me and get nervous at the thought that interest rates are at the lowest point we have ever witnessed, your concern is valid. Well, unfortunately this will continue for the foreseeable future. This is the way the federal government props up the economy. Typically when interest rates are artificially low, stocks go up, debt is easier to service, and people get lost in a true haze of fiscal sanity. It’s a smoke screen, but it works, it deceives people into thinking that we are on the right track. The Fed keeps printing money, which keeps stock prices stable or rising, and as a result, the public feels as if their personal wealth is increasing. Never mind that the main-stream media fails to report on the potential pitfalls of low interest rates, like we do here at criticalfinancial, see here.
My intent in this post is not to bash the Federal Government for their lack of ethics and morality, but to prepare you for what I believe will be the case in the next 2-3 years. Inflation! It has to happen, when the money supply is dramatically expanded in an economy with little or no growth (like in the US) then the value of the dollar will eventually decline. The Fed can add or subtract to the money supply any time it pleases, they have that power. Also, the Federal Reserve is an unregulated entity, they are not a accountable to the general population. You probably have already noticed the prices of daily staples, such as bread, milk and gasoline, going up. When inflation rises then asset values; such as stocks, bonds, home prices, dollars, all go down. So, after this longwinded warning, here is one investment method you can use to prepare yourself for this coming scenario:
LEAPS! Long-term Equity AnticiPation Securities. These Leap investments are stock options which allow an investor to short the market or specific stocks (at least those which are optionable) for a given period of time. Leaps are bought the same way you would buy options, although most options are for a much shorter period of time. Since Leaps are a long term strategy, this generally means that the short term volatility is minimized. Timing is extremely important with Leap investments, as with most stocks. Because of this, you wouldn’t want to take a Leap position for a one or two year period if you don’t feel the economy could be significantly different in that time period. So, if you were interested in taking a long term put option (short) on some Dow stocks, because you believe that the Dow will be significantly lower in 2 years time, then Leaps may be a good hedge strategy. However, if you are not comfortable with options at all, then Leaps are certainly not for you. Leap investments are a great way to leverage your money and turn a good investment into a fabulous investment!
Disclaimer…..I am not an investor in Leaps, have never bought options. I am simply exploring different investment ideas, because I do feel that this country is in for inflation problems in the near future. I will provide more ideas in future posts. Please consult a professional before making any investment decisions.
SO because of this, do you think then that there will be a double dip in the housing prices as some forecasters have predicted? Do you think that home prices will go down again since recently they have started rebounding.
Well, I think the housing market will do fine as long as money is cheap. With interest rates in the 2.5-3% range it is certainly affordable, if you have the down payment, to buy a house. This helps demand, and therefore helps the housing market. As far as a double dip, I think if interest rates go up, and they will at some point, then yes the housing market will get smacked. The loan payment on a $200,000 house, depending on how much rates had to increase, could possibly double. If that happened that shrinks the market of potential buyers who can afford to make a payment of $1000 month, but not $2000. With high unemployment, like we have, this too shrinks the market. We are currently being set up for the same problem we had pre-2008. People “feel” wealthy because the market is doing well, money is cheap, they can buy on credit and afford the monthly payments, so people feel like that can buy more house. The main difference now is the lack of speculators, those who buy a house for returns rather than to live in
it. Hope this helps, sorry for the rant.
I’ve meddled with options in the past and never developed a good (profitable) strategy that worked for me. I always looked at the long term options wistfully as they seemed to be the right way to get into them. The only thing that has kept me out of long term options was the “premium” involved. The longer into the future the option lasts, the greater the premium. So to make those work from a trading perspective there would have to be a pretty large swing in the stock price.
If I strongly felt that the market was going down, I would probably sell covered call LEAPs.
I wouldn’t sell puts, since that is basically a bet that the market will rise.