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
Explaining how one can benefit from cash
What should you do scenarios – cash or expensive
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’.
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
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.
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
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
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.
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.
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.
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.
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
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.
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.
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.
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.
So, the message is simple – you have to see how a certain
investment, asset class, financial burden or whatever fits your financial
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.
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.
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.
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.
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
The answer is again diversification, and you have to see
what best fits your requirements.
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.
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