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.