Don't Fight The Fed

Alicia Badilla By Alicia Badilla, 1st Sep 2011 | Follow this author | RSS Feed
Posted in Wikinut>Business>Investment

How to approach investment in the US Market when there is a real and present expectation of continued low rates. Three simple keys to invest in this market without fighting the Fed.

What do Investing, Dos Equis and Jack Sparrow have in Common? Nothing, only this article.

"Don't Fight The Fed" Old School words from a New School gal. I used to hear that phrase from the 20 year veterans of finance in my previous employment. If there is one mortal certainty to investing as of late, it's that the market will continue to write and re-write the rules on investors. It reminds me of someone mumbling while fumbling for the right key to open their door after a night of several dozen Dos Equis...picture Jack Sparrow with a unlit smoke in his mouth..."Oh yes, there it is, I think I've found it, wait nope that's not it is"... and right when we investors think we've got it... We finally find the right key... then suddenly the lock changes. Big frown.

The Old School thought on the above Old School thought, is to Avoid Long-Term CDs and Long Term Bonds.

If we decide to take a "Macro-Economicish" point of view, we may want to allow percolation of thought, on marginal efficiency. Or MEC as we sexy nerds like to put it. MEC is defined as the interest rate at which a proposed investment becomes viable. Fear not, I won't bore you. We will get back to talking about Jack Sparrow or drinking Dos Equis in a moment. Follow me carefully:

Lower rates=more viable projects for companies.
More viable projects to be invested in should=higher investment demand.

It is the same pseudo-capitalistic concept your local pub employs on you while your there drinking your Dos Equis. According to the experts:

Increased number of choices on the menu should=an increase in orders received

As a new school gal, I say rubbish. I don't like to eat at restaurants that have a huge menu because what usually happens is that instead of doing a few things well they do a lot of mediocre forward slash horrible things. Some of my favorite restaurants have only a couple of choices on the menu. Jungle Surf Cafe in Central America for example: it's either Mahi Mahi or Tuna. Will you have the Jalapeño sauce with that or the Jungle Wasabi? And damn it's good.

At best the link between changes in interest rates and an increase in planned investment capital by companies is weak. Show me the data. Most of the big boys out there prefer to use the capital market through the issuance of shares and bonds to obtain funds for investment over bank loans. If I am forced to agree with The Keynesian Macro here I will say: interest rates influence capital investment decisions in terms of business confidence with expectations of demand variables and it's link to exchange rates. Ergo:

Low rates=an expectation of rising consumer demand and a lower exchange rate.
Low exchange rates=increased export demand.

Or in other words if your stuff is cheaper than it was previously than more people will want to buy it. As the foreign currency becomes worth more and more, foreigners obviously are paying in their own currency are getting more and more of your stuff for the same price.

Finally, what should we as investors do while this cheap borrowing is available? Here are my three keys:

1. Eliminate Macro Risks: Eliminate as many macro risks as possible as if you had rocket boots attached to your sneakers. Examples of Macro risks are things like your job security and having your insurance paid up. If you loose your job then who cares what the market is doing. If you get sick and spend all your money on a Doctor then your f... you get the idea. Think of all of them. Write them down... and then eliminate them. One by one. And I prefer that you do it with a determined look on your face.

2. Uncertainty = Volatility: If you are uncertain then maybe everyone else is too. When dealing with a volatile market, try and use 10% of your money to make 100% returns rather than taking 100% of your money to try and make a possible 10% return... (or loose 10% or more). Take a little risk! I say hire an Full Service Options Trader to trade something like Gold Options. Gold has been making history during this time of uncertainty. Hiring a full service trader won't be cheap but it will be worth it. Options are extremely complicated and the last thing you want to do is loose money because you pressed the wrong button...ooops. American Options have a finite amount of risk because there is predetermined premium paid with no such thing as a margin call like in futures. Just remember, if you have a dollar in your pocket and you loose 10 pennies, then your not stepping off a cliff if you still have ten dimes to spend. Maybe it's a step back but it's not a jump off a cliff. To put 10 percent of your money in something that thrives on volatility (like American Options) is definitely the way to go in this market.

3. Be Bold-No Fear: Start a small business. It's not rocket science. You like animals? Start a dog-sitting company or a local pet saloon. You like fruit? Lemonade stand, anything. Open up shop right next to the big guy who was already there and undercut his prices. Be bold! It's the time for "lettin loose" when loans are cheap with all sorts of government programs trying to get you off the couch to borrow money to do just this. Small business. If it will work in this economy your real payoff will be when things pick up again. Treat a small business venture as an investment. High risk. If your using only 10% of your money to implement a well thought out plan...just think about it: no boss, your in control, you can do anything. Even in the worst case scenario it's like I said, if you end up loosing 10%, it's a small step back: NOT FINANCIAL SUICIDE

Links To Related Articles On Wikinut:
Click Here to Read More Of Alicia Badillas Wiki Pages:
Breaking News! Gaddafi Shot In The Head:The Dictator Odyssey
6 Reasons Why Smart Investors Choose Options Trading Over CFD Trading

Outside Links: About CME Group


Gold, Gold Investing Tips, Investing, Jack Sparrow, The Price Of Gold

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author avatar Alicia Badilla
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I'm a Traveler/Writer/Investor At times I interview interesting professionals. Thank you for reading.

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