Cash is trash

“Cash is trash” – You Shouldn’t Own Cash For Long

At the recent World Economic Forum in Davos, Ray Dalio, manager at the largest hedge fund in the world, Bridgewater said it. He said:

“CASH IS TRASH”

Many might not understand what he means as most of us, especially those a little bit older, were taught to save our money as cash is something valuable. That isn’t the case anymore and hasn’t ever been the case. Therefore, Ray Dalio didn’t suddenly invent hot water, he is just telling a historical truth.

Those that prefer watching can enjoy the video here, article continues below:

Let’s put things into perspective by:

  • Defining cash as an asset class
  • Explaining why cash is definitely trash over the long-term
  • Explaining how one can benefit from cash
  • What should you do scenarios – cash or expensive stocks or???
  • Discussing the skin in the game part – my cash

What is cash?

The definition of cash depends on whether you look at it from an economic or financial perspective. In economics, cash is the money you have in your pocket while in finance cash is current assets comprising currency or currency equivalents that can be accessed immediately or near-immediately. Thus, cash is something short term and usually liquid.

Also, cash is usually connected to a currency and a currency is something that offers store of wealth and is a medium of exchange. It offers that at least in the short term where the length of the safety period depends on inflation. Due to inflation, it is inevitable that cash loses its value over time and therefore the saying ‘cash is trash’.

Cash is trash

The ‘cash is trash’ saying is exceptionally meaningful today in a world of loose monetary policies and extreme government and corporate debt. Monetary policy and debt are the two reasons why Ray Dalio states that one should avoid having cash and should be globally diversified (more about that in a moment).

Why is cash trash?

To explain why cash is trash we can simply take a long-term historical perspective. If we go back to 1802 and look at the chart from Jeremy Siegel in Stocks for the Long Run showing returns on asset classes over two centuries, it quickly rests the case and confirms the fact that cash is trash.

cash is trash
Cash is trash – always has been

One dollar held from 1801 till today would be worth just 6 cents from a purchasing power perspective while the same dollar invested in stocks would be wort about $1.5 million. The chart shows $755k but it was made in 2006 and stocks more than doubled since. Gold, T-bills and bonds do a little bit better than cash, but not that much better and can be considered equal to cash from an investing perspective.

There are another two things to note form the above chart. The first is that stocks are much more volatile than any other class – just something to keep in mind when investing.

The second thing is that cash actually started rapidly losing its real value only after the 1930s and definitely since the 1971 Nixon shock.

The ‘Nixon shock’ was a series of economic measures undertaken by United States President Richard Nixon in 1971, in response to increasing inflation, the most significant of which were wage and price freezes, surcharges on imports, and the unilateral cancellation of the direct international convertibility of the United States dollar to gold.

The United States dollar was exchangeable for gold where one ounce of gold was worth $35. The same ounce of gold now is worth $1,556. Gold is gold, so nothing changed there, while what changed is the real value of the dollar.

Gold price in cash USD
Gold price in cash USD – Source: FRED Gold Price

As from 1971 the dollar wasn’t backed by gold anymore, it became a FIAT currency. A FIAT currency is a currency that is just backed by the government and the governments are usually very flexible when it comes to backing it.

Temporary perspective on cash is trash

Apart from the historical perspective on cash is trash, the current flexibility governments across the world exercise when it comes to their currencies is the main risk for cash and the reason why Ray Dalio is suggesting cash is trash.

The US economy is doing fine, has been doing fine for the last 10 years as it is enjoying the longest economic expansion in history. At the same time, unemployment is at historical lows.

cash and loose monetary policy
US annual change in GDP and the unemployment rate – Source: FRED

With such economic numbers, you might think that the FED and the government would have tight monetary and economic policies in order to save some dry powder for when an inevitable recession arrives.

However, reality is the total opposite of what one should expect. The FED tried to increase interest rates and slowly decrease its balance sheet but steered away from that fairly quickly. As soon as there was a liquidity issue in the REPO market, the FED stepped in and quickly reversed its balance sheet contraction policy and added half a trillion into the system.

cash and debt
FED balance sheet (blue – left) – FED interest rate (red – right) -Source : FRED

Similarly, the US government is spending like there is no tomorrow, or like all the future debt will simply be erased through inflation and money printing.

cash and deficit
Federal deficit – Source: FRED

As the situation is similar in the most important economic hubs across the world like Europe and China, it is clear that cash will continue to be sacrificed to help service the staggering amount of debt governments and corporations have been piling.

Debt levels significantly increased over the past 50 years and exploded over the last 10 years thanks to the free money coming from the money printing through asset purchases and zero real interest rates.

What do you think is going to happen next?

When the next recession or slowdown comes – politicians will do the same thing they have been doing – they will print more money. This will lead to some kind of inflation depending on the policy applied, but one thing is pretty certain:

Given the staggering amount of debt, the best way for the governments to solve that issue is through money printing and the loss of value for the currency.

For example, if you borrow $10 at a 2% interest rate per year and you have inflation at 5% per year, the real, not nominal, amount you have to pay back is much smaller than what you initially got. You have to pay your yearly interest cost, but after 5 years, the $10 you borrowed have now a real value of $7.73 as inflation chipped 5% of the real purchasing power away every year.

So, one thing is certain:

IF YOU HOLD CASH UNDER YOUR MATRASS, OVER TIME YOU CAN BE CERTAIN YOU WILL LOSE A LOT OF ITS REAL PURCHASING VALUE.

What to do when cash is trash and stocks are expensive?

Answering the what to do question is always the tricky part because nobody knows what will happen, nobody.

We have Dalio saying how cash is trash and on the other hand we have Buffett holding $124 billion in cash as short-term Treasury bills.

cash Berkshire
cash Berkshire

It all boils down to being well diversified while owning hard assets and good businesses. 

When it comes to Buffett, we have to understand that the $122 billion in cash are just 15.7% of Berkshire’s total assets. Therefore, we could say that Buffett is keeping a small safety cushion as he always does, especially when valuations are relatively high.

Cash Berkshire balance sheet
Buffett cash pile in portfolio – Source: Berkshire financial statements

Ray Dalio, who is more of a market player than a value investor like Buffett, prefers to play the market in a different way and just two months ago the story was that Bridgewater is betting big on the stock market crashing.

cash is trash ray dalio
Ray Dalio hedge – Source: WSJ

So, the message is simple – you have to see how a certain investment, asset class, financial burden or whatever fits your financial requirements.

I think that both Buffett and Dalio concur that the average investor should be diversified and be far away from cash for any longer term period. Let’s discuss a bit of scenarios.

Cash vs stocks?

So, we have understood that cash is trash and that loss is unavoidable over time. But then, stocks are also extremely expensive from a historical perspective and those can always crash as we have seen in the chart showing 200 years of asset class returns. Stocks are much more volatile in comparison to other asset classes.

But currently stocks offer an earnings yield of 4%, which is better than what cash or bonds offer and one reason why to own assets in comparison to cash.

Cash and market valuation
S&P 500 PE ratio – Source: Multpl

Further, what could happen in the future is what is already happening in Japan. The Bank of Japan is the largest owner of Japanese stocks. It owns more than 73% of the country’s ETFs.

Cash and bank of japan
Source: Bloomberg

If a similar policy is applied in Europe, the US might follow, and we could see stocks reach new highs thanks to new market interventions by central banks.

Another benefit is that stocks, as those are businesses, offer some protection against inflation. We have seen how one dollar invested in stocks turned into $755,163 real dollars over 200 years and how a dollar not invested turned into 6 cents of real value.

The thing is that businesses can increase prices and that those hold real assets in the form of production facilities, real estate etc.

Thirdly, and this to cater to Dalio’s message that one should be diversified, global valuations are far from equal. I’ve recently been researching the top 25% dividend yielders in Hong Kong and there are companies across the globe that trade at price to book values below 1, thus offer some kind of  real asset protection, have dividend yields above 5% and offer growth over the long-term.

Cash and stocks
Source: Stock Market Research Platform – Sven Carlin

Dalio clearly says he can be wrong, but you have to see how the cash vs. stocks vs. other asset classes fits your investment requirements.

If you need the cash in the next few years, then it is very risky to invest it in something other than short term bonds or just hold it within your savings account because every asset class will crash at some point in time.

The answer is again diversification, and you have to see what best fits your requirements.

Cash and investing – an opportunity but also opportunity cost

Given that thanks to inflation and money printing, cash is certain to lose value, we can say it is trash. However, holding some cash is what enables investors to take advantage of opportunities created by the inherent volatility other assets classes show. .

For example, those that had cash in 2016 could take advantage of Apple’s stock cheapness. Those that didn’t have the cash, probably enjoyed returns elsewhere given the environment over the past years but then again it all boils down to risk versus reward of each potential investment.

Cash
Source: CNN Money Apple stock

The main message is simple, see what is your opportunity cost when owning cash and compare it to other opportunities out there. When you find an investment that will likely lead you towards your investment goals and also offers you the protection you need, then you buy that. It is as simple as that.

Skin in the game – my cash

To be transparent, it is always good to share what I have. My stock market portfolio as of January 2020 is heavily invested with 86.79% in stocks and the rest in cash waiting for opportunities.

Further, I still have a bit of cash that I got in September of 2019 when we sold out house but that is waiting to be deployed as we are looking for a new property to buy.

So, you could say that the cash I will have is very little and therefore my money is where my mouth is.

This article is part of my Free Comprehensive Stock Market Investing Course – under the asset classes tab. Feel free to join and learn more about investing – it is and will always be free.

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