05/09/11 Beijing, China – What a wild week it was! Last week, the US bumped off Osama bin Laden. Silver collapsed. Unemployment looked terrible on Thursday…and better on Friday.
Stocks looked like they were in trouble…but then seemed to stabilize by week’s end.
And President Obama suddenly became The Decider.
What do you make of it? Or, a more practical question, if you’ve got money to invest, what do you do with it?
On Friday, gold closed at $1,491 – about 5% below its all-time high. Buy it now? Or commodities, when they too seem to be coming off record highs? Oil was down 10% last week. Buy stocks – when all the evidence shows that they are vulnerable to a big downswing…and will probably produce sub-par returns for many years?
What’s the alternative? Hold cash!
But wait. Who wants to hold dollars (or other paper currencies, for that matter) when inflation rates are rising…and the dollar is currently losing ground at the rate of more than 7% a year (according to MIT’s Billion Prices Project)?
A tough situation for investors. Damned if you do. Damned if you don’t.
Here’s our old friend Merryn Somerset-Webb, editor of MoneyWeek, on the subject:
Why you should hold cash
A long-term property bear told me this week that he was going to buy a flat. Why? He can’t bring himself to keep his money in cash when savings rates are 3%, inflation is 5% and income tax is 40%. But he can’t bring himself to buy much else either: most equities look overvalued; commodities could easily be on the edge of another cyclical peak; and there is only so much gold a man can hold. But his money “has to go somewhere”. And at least property offers some kind of yield.
I can see his points – holding cash in an era of negative real interest rates can feel painful. But what if it’s the least bad option? Dylan Grice of Société Générale points out that while it’s true cash “generally has a zero expected real return”, there is at least a “near-certainty around that expected return”. Mostly if you hold cash you know you won’t make money, but you won’t lose much either.
That’s not usually good enough. Most of the time, risk assets return more than 0%. So it makes sense to be biased towards equities, bonds, commodities, houses and wine instead of cash. But there are also occasions when risk assets are unlikely to return more than zero – times when the risk of losing money in non-cash assets is so high that it makes more sense to aim for a zero return than a real return. Now, says Grice, “might just be one of those times”.
Merryn is probably right. At least, that’s what we concluded at the Family Office too. The Bonner family holds an uncomfortably large amount of its portfolio in cash.
It is uncomfortable because we believe cash will soon be the very worst place to keep your money.
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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I don’t understand, why do you say that cash will soon be the very worst way to keep money?
Ganesh,
Because of the anticipation of high inflation.
Ganesh:
D-E-V-A-L-U-A-T-I-O-N
Mr. Bonner, I think you should read the Mogambo Guru to see if he could suggest an alternative to cash. Something that would hold value, be highly liquid, and even likely to appreciate against fiat currency. I personally don’t have a clue what that could be…LOL
Come on, Bill, spell out your reasons why cash will be the worst investment.
Never mind why cash will be the worst investment. You are usually such a strong advocate for gold, why the restraint now? Why have 40% of your portfolio in cash not gold?
I think what he means is that holding cash makes sense now, as there may well be across-the-board selling in the anticipation of QE2. But then there’s a good chance that QE3 will come along, making cash the worst possible place to be.
I am 100% on board with this freaking article by Bill. My sentiments exactly! And the guy who wrote to him? Totally feel the same way. Nothing I wanna buy right now.
Here is my latest take on the whole cash thing, using PIMCO’s bump to 37% cash AUM as an example.
http://coveringdelta.wordpress.com/2011/05/10/pimco-adds-to-its-cash-position-again-what-is-the-outlook-for-inflation/
D & D
Where is the Mongambo anyway? Haven’t seen any posts since the 18th.
Wife and kids lock him in his Bunker? Back on his meds? Out of beer?
Wheeeeeeeee!!!!
Value is the operable word here. What ever you are holding needs to be a value to someone else. This is where manipulation and fear come into play to get you to believe. It just depends on what sheep corral you want to be in. Bhaaaaa.
Cash yes, but in which currency… The USD has some good days but looks fundamentaly as sick as the EURO and Renminbi you can only buy on the black market in Hanoi…
Even if we get QE3, what investment can we be sure will be better than cash?