CASH IS TRASH?
Cash has quickly become the biggest loser in recent years as euphoria moved to panic and panic moved to euphoria. Many investors have noted this search for yield as investors are forced out of cash and into higher yielding assets. This is exactly what the Fed has been hoping for of course. It is, in my opinion, only one more contributing factor to the flawed theory that nominal wealth effects result in sustained wealth. But cash is not always trash. In his weekly letter Jeff Saut discusses the idea that cash is not trash and can actually be utilized quite strategically in a portfolio:
To be sure, unlike many investors, I consider cash to actually be an asset class. To put this loathsome asset, i.e., cash, into perspective, Seth Klarman, an outstanding value investor, dissected the faulty rationale that “cash is trash” during an interview in Grant’s Interest Rate Observer. To wit:
“They compare the current yield on cash (lousy) to the current yield on longer-term bonds or (the) dividend yield from a stock. Cash nearly always loses in this comparison, and investors feel quantitatively justified in doing what career and client pressures cause them to do anyway. It makes no difference how overvalued these alternatives may be in an absolute sense.”
Further, I would note Seth’s point that investments be made “not because cash is bad, but because the investment is good.” I think some people lose sight of this fact.
Now, coming up to Seth’s key point, which is ignored by nearly everyone:
“One of the biggest challenges in investing is that the opportunity set available today is not the complete opportunity set that should be considered. Indeed, for almost any time horizon, the opportunity set of tomorrow, which could be greater, narrower, or similar in scope but different in specifics from today’s, is a legitimate competitor for today’s investment dollars. It’s hard, perhaps almost impossible, to accurately predict the volume and attractiveness of the future opportunities; but it would be foolish to ignore them as if they will not exist.”
These are great thoughts. Yield doesn’t equal value. Reaching for yield just because cash appears to be trash is beyond foolish. Of course, this is what the Fed wants you to do. They want us to be reckless and speculative. They want us to reach out on the risk curve and bid up any assets that aren’t cash or cash equivalents. It’s difficult when one is not fully invested during a raging bull market, but this isn’t the first time the Fed has attempted to create a virtuous cycle via a wealth effect. It’s not a sustainable strategy and those who utilize cash strategically will forego a bit of upside while generating superior risk adjusted returns.
Source: Raymond James
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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25 Comments
Or for simpletons like me; by holding cash you’re also holding an option (the ability to use that cash to make an investment at a more opportune time) that people (incorrectly) ascribe no value to.
So true. Optionality always has value.
I don’t really see how rising assets prices would encourage spending though. You can hardly spend a Dollar you put in the market…
Higher asset prices does encourage spending…it just doesn’t support it.
i aqree wholeheartedly
“Of course, this is what the Fed wants you to do.”
It’s the wealth effect you know – NOT!!! After all that “dis-savings” in the ’90′s when the market was burning up; the FED actually believes it exists. Problem is they all just failed their basic accounting courses – it wasn’t a wealth effect.
Promise a high enough current relative return on an asset class and investors will ignore the fundamentals. This is what makes rational investors irrational and in mass creates market tops.
The Fed is luring money into the market believing that this money will lead to investment in productive assets…I don’t believe American business leaders share the same theology.
This bubble doesn’t fuel demand for finished goods or labor to the same degree as the previous two did and I doubt that will change unless there is a major catalyst.
But Greenspan just said things were great because of the stock market rise! He must be right, being the maestro and all.
“Cash is trash” is just more Wall Street nonsense. There are always bells ringing at the casino. Cash was king in 2008-09, and major US corporations are still sitting on a pile of it in 2011 waiting for better values and hedging against uncertainty. If it isn’t on sale at a discount, don’t buy it (unless you’re a trader who knows what he’s doing)and enjoy your optionality and liquidity. It’s easier to make up for lost investment opportunities than it is to make up principal losses (as I know from personal experience).
as the previous poster JWG said, how can cash be trash when corporations are sitting on quite a lot of it, and are wanting more of it.
so how can cash be trash? unless its a depreciating US dollar ?
Cash is not trash. That’s the point of the post. But keep in mind that corporate America is also sitting on record debt….
With the market in freefall, cash is looking pretty good right now.
hyperinflation can make instant trash of cash; real goods, esp. those that can be bartered, would hold value in such a case. So may be best to buy a lot of “stuff” with the cash & hope it gets put to optimal use, rather than doomsday survival
One of the only things I remember from my first Finance class (about 35 years ago) was: Sometimes you are not concerned with return on capital but return of capital. Right now a lot of people should be concerned about the return of capital.
Money should be a store of value. When the price of our credit money shifts around it is stealing from the mouth of labor. The baker and candlestick maker should not have to look up from his labor to examine the nefarious movements of the market makers. In effect, the FED is pushing a wealth effect, with empahasis on the word “effect.” Money is not wealth. Money, especially credit money, stands in for wealth and is a pretender. The credit money pretender can be moved by hedging and manipulation and rapid increases/decreases in supply.
By creating “wealth effects” imaginary wealth appears. But, there is no free lunch, some real wealth must be consumed. If labor is working two jobs under a heavy debt load, then future opportunity is stolen. Also, entrepeneurs cannot price goods and services, or see holes in the market, because his “money” measuring stick is moving around. The market is also signaling incorrect signals to the real economy. This behavior is akin to a virus in the body politic and has consequences that are not “monetized.” That is, the consequences cannot be eaisly seen on a ledger, and the market makers are thus able to get away with it.
Money and the market need to be real, otherwise Capitalism doesn’t signal properly, and the system becomes sick. If it becomes sick, then what do we replace it with?
The nature of money may be the most important question of our time. Cash should never be trash.
Amen to this comment!
Sorry, not very savvy in these things, but thought the problem those who say “cash is trash” were really getting at (besides the relative low yield) was the expectation that cash is going to zero–that is, there’s a strong belief among many who are savvy in these things that the USD is going to inflate to practically worthless, sometime in the next decade. Response?
I think investing is the least of your worries when the USD becomes “practically worthless”. So naturally I wouldn’t worry about that, well knowing that most prohpecies of impending doom are exaggerated and many times motivated by other interests (religous, political or economical).
Exactly.
Just keep your wheelbarrow oiled up and in good repair so it will be available to transport all that cash when you go to the grocery store or the filling station.
We all hedge against perceived major market downturns and there are many ways and vehicles to “short” the market. But a well-proven technique is to simply increase your “cash” position until you feel comfortable increasing being further invested. I always try to remember Buffett’s two prime rules of investing. One: “Don’t lose your money.” Two: “Don’t forget Rule Number One!”
Why not just turn you cash into gold? Gold has not lost its value in relative terms in 6000 years, even though in the short term (20 year cycles) it can lose some value relative to the cash that is circulating. Everyone keeps calling for inflation and I suppose that is true somewhere down the road, but as long as people are scared and keep hoarding cash and not spending money, I would expect deflation. Someone please tell me I am wrong and I have some gold.
Cash is not trash in terms of easy readiness to use it to purchase superior investments. However, the dollar is losing value so rapidly that holding cash should be considered a short-term strategy. If one is trading in currency that is rising, then holding that cash makes more sense. Those are few and far between, however, and better opportunities to invest abound.
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