A Look At The Numbers

But all was not bright on that beautiful sunny day.   

The Fed can't save us now. In fact there are only so many options left, and all of them look darn right dreary. With Yellen leaving interest rates unchanged at yesterday's FOMC meeting, it was made clear that we are in a much slower rate hiking cycle than previously expected. Sure, the Fed's low interest rate policy helped us get out of the Great Recession, but then again, it could be argued that they got us into it in the first place with low interest rates in '02 and '03. Low interest rates almost by definition create bubbles - and since 2008, every time the market took a dip the Fed came to the rescue.

But what happens if the economy is deemed healthy enough to merit a rate hike or two? Well, in that case expect nothing other than selloff after selloff. Just look at January and February after the Fed's liftoff from zero (the first week of January was the worst opening week in the stock market's history - preceding just the Great Recession followed by the Great Depression).

First and foremost, China's second largest economy has been contracting for the past several years; this year marking the fastest decline in nearly a quarter century. Systemic risk in China is at an all time high and potential for a spillover into the rest of the global economy is not a possibility but rather a probability.

Earnings in the United States are also highly suspect. Low interest rates have enabled companies to borrow mass amounts of capital over the past several years, but rather than reinvest that capital into businesses, companies have simply been buying up other companies in order to boost their balance sheets. As Carl Icahn puts it: it's financial engineering at its best. Overvaluation in the market is predominant in all sectors. 

Thirdly, housing prices and median income have begun diverging again, as the graph below indicates: 

Furthermore, credit-card debt is nearing $1 Trillion: its highest level since July 2008. Even highly reputable credit-card issuers such as American Express are lowering their standards for card holders as banks are pushing plastic like there's no tomorrow.

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The list goes on and on:

The UK will vote on whether or not Great Britain will leave the European Union on June 23rd. If they do, this will cause a huge spike in the dollar, and paired with negative bond yields across the globe, deflation becomes a real possibility for the US economy. So, that leaves us with one question:

Where do I put my goddamn money?! 

Well, simply put (pun intended), one could do one of two things in order to hedge their portfolio:

1) Put options (A more aggressive strategy would include targeting banks as they get hit hardest when the market turns south - or one could simply buy put options on the SPY or another index-correlated ETF.)

2) Buy Gold.

• I think it's important to note that buying gold at a time like this is a lifetime opportunity. Here's why:

People buy gold for a multitude of reasons, but mainly: it acts as a hedge for inflation and retains value in times of uncertainty as investors flee riskier assets. In the event the Fed keeps rates low for longer than expected (as they have suggested), gold will outperform the market substantially. Likewise, if the Fed raises rates, gold will still outperform as investors use it as a safe haven, despite a stronger dollar. Most importantly however:

Gold has been declining for the past three years due to unwarranted confidence in a staggering economy. This has created an opportunity for the investment of a lifetime.

George Soros, a notoriously bearish investor has recently taken a 19 million share stake in the largest gold producer Barrick Gold Corp (ABX), as well as having bought put options on the major indices. He believes China is a huge threat to the global economy.

Not knowing what to do in times like these may be nerve racking, but having a valid hedge to guard your assets can be substantially beneficial for your sleep cycle. 

Don't be stupid! Buy the dips and protect your capital!

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Ben Koeppel is a MSc Management Science candidate at the London School of Economics and Political Science. He attained his BA in Economics at the University of Miami (FL). Ben can be reached at (504) 430-6450 or email: [email protected].