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The Real Value Of Cash
Submitted by Lance Roberts via STA Wealth Management,
With the "inmates running the asylum" during a holiday-shortened trading week, the upward bias to the market is set to continue. However, as I addressed last week:
"As we progress through the last two months of the year, historical tendencies suggest a bias to the upside. This is particularly the case given the weakness this past summer which has left many mutual and hedge funds trailing their benchmarks. The need to play 'catch-up' will likely create a push into larger capitalization stocks as portfolios are 'window dressed' for year end reporting.
This traditional 'Santa Claus' rally, however, does not guarantee the resumption of the ongoing 'bull market' into 2016. The chart below lays out my expectation for the market through the end of the year."
"With the markets currently oversold on a very short-term basis, the current probability is a rally into the 'Thanksgiving' holiday next week and potentially into the first week of December. As opposed to my rudimentary projections, the push higher will likely be a 'choppy' advance rather than a straight line."
So far, the analysis over the last several weeks has continued to play out as expected. However, and this is crucially important, a near-term expectation of a bullish advance due to the recent correction and seasonal tendencies is not the same as long-term bullish outlook.
As stated above, while seasonality likely holds the cards through the end of this year, projecting much beyond that window is foolishness.
The Real Value Of Cash
This brings to mind a call I had on the radio show recently discussing his advisor's reluctance to hold cash.
The argument against holding cash goes this way:
"If you hold cash you lose value over time to inflation."
This is a true statement if you hold cash for an EXTREMELY long period. However, holding cash as a "hedge" against market volatility during periods of elevated uncertainty is a different matter entirely.
"I have written previously that historically it is relatively unimportant the markets are making new highs. The reality is that new highs represent about 5% of the markets action while the other 95% of the advance was making up previous losses. 'Getting back to even' is not a long-term investing strategy."
In a market environment that is extremely overvalued, the projection of long-term forward returns is exceedingly low. This, of course, does not mean that markets just trade sideways, but in rather large swings between exhilarating rises and spirit-crushing declines. This is an extremely important concept in understanding the "real value of cash."
The chart below shows the inflation-adjusted return of $100 invested in the S&P 500 (using data provided by Dr. Robert Shiller). The chart also shows Dr. Shiller's CAPE ratio. However, I have capped the CAPE ratio at 23x earnings which has historically been the peak of secular bull markets in the past. Lastly, I calculated a simple cash/stock switching model which buys stocks at a CAPE ratio of 6x or less and moves back to cash at a ratio of 23x.
I have adjusted the value of holding cash for the annual inflation rate which is why during the sharp rise in inflation in the 1970's there is a downward slope in the value of cash. However, while the value of cash is adjusted for purchasing power in terms of acquiring goods or services in the future, the impact of inflation on cash as an asset with respect to reinvestment may be different since asset prices are negatively impacted by spiking inflation. In such an event, cash gains purchasing power parity in the future if assets prices fall more than inflation rises.
While no individual could effectively manage money this way, the importance of "cash" as an asset class is revealed. While cash did lose relative purchasing power, due to inflation, the benefits of having capital to invest at lower valuations produced substantial outperformance over waiting for previously destroyed investment capital to recover.
While we can debate over methodologies, allocations, etc., the point here is that "time frames" are crucial in the discussion of cash as an asset class. If an individual is "literally" burying cash in their backyard, then the discussion of the loss of purchasing power is appropriate.
However, if cash is a "tactical" holding to avoid short-term destruction of capital, then the protection afforded outweighs the loss of purchasing power in the distant future.
Much of the mainstream media will quickly disagree with the concept of holding cash and tout long-term returns as the reason to just remain invested in both good times and bad. The problem is that it is YOUR money at risk. Furthermore, most individuals lack the "time" necessary to truly capture 30 to 60-year return averages.
For individuals, trying to save for their retirement, there are several important considerations with respect to cash as an asset class:
- Cash is an effective hedge against market loss.
- Cash provides an opportunity to take advantage of market declines.
- Cash provides stability during times of uncertainty (reduces emotional mistakes)
Importantly, I am not talking about being 100% in cash. I am suggesting that holding higher levels of cash during periods of uncertainty provides both stability and opportunity.
With the fundamental and economic backdrop becoming much more hostile toward investors in the intermediate term, understanding the value of cash as a "hedge" against loss becomes much more important.
As John Hussman recently noted:
"The overall economic and financial landscape, then, is one where obscene valuations imply zero or negative S&P 500 total returns for more than a decade — an outcome that is largely baked-in-the-cake regardless of shorter term economic or speculative factors. Presently, market internals remain unfavorable as well. Coming off of recent overvalued, overbought, overbullish extremes, this has historically opened a clear vulnerability of the market to air-pockets, free-falls and crashes."
As stated above, near zero returns do not imply that each year will have a zero rate of return. However, as a quick review of the past 15 years shows, markets can trade in very wide ranges leaving those who "rode it out" little to show for their emotional wear.
Given the length of the current market advance, deteriorating internals, high valuations and weak economic backdrop; reviewing cash as an asset class in your allocation may make some sense. Chasing yield at any cost has typically not ended well for most.
Of course, since Wall Street does not make fees on investors holding cash, maybe there is another reason they are so adamant that you remain invested all the time.
Just something to think about.
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Well...that silver rally of 1 cent today had me on edge....pure awesome.
Sell the rally bro
Cash is a relative term - once, all cash had to be backed by something of value - gold and silver, legal tender, real money as in real cash.
Problems with gold versus silver start with the unit cost ratio versus silver.
Almost all gold mined is still in existence.
Paper gold has not been as mercilessly manipulated as silver paper because of the influence of institutional and governmental gold asset holders.
Silver mining has dwindled to incidental recovery as a by product of copper, nickel, and lead mining - pure silver mines were played out for the most part over one hundred plus years ago.
Down turn of economy will not deter the most significant modern day usage of consumer electronics - the smart phone. Silver is the most efficient conductor of electricity on a unit cost basis.
Economic recovery of silver in consumer electronics is not feasible, even in China. Economic recovery of silver used in most other modern day applications of silver is not feasible either.
The ten percenters will never stop wanting new consumer electronics, and they survive down turns to the economy just fine it seems.
Add in the newer industrial uses of silver that also shrug off economic issues out of necessity - medical wound dressings, water purification filters, etc., and you have a continuing demand for a metal whose annual production has been falling for decades.
So, you have an indispensable metal being consumed by industrial use constantly, declining in mining production, and under supply pressure to serve both the industrial and monetary silver markets.
Take away the paper manipulation of 2 - 300 times the available physical silver available in the market, and there's a problem with price discovery for the real deal versus fantasy paper silver that never existed.
Lastly, the uncertainty of a major world or economic event always moves people to seek out safe haven for their hard earned money. Fiat currency has a history of failure for thousands of years, a near perfect track record of failure.
Silver and gold have a five thousand year history of recognized value in times of uncertainty, more so than any other commodity you can name that is portable, incorruptible, stable, and internationally recognized.
To summarize, with silver spot trading for substantially less than the cost of production, I see no down side to investing in it as a safe haven.
If the whole world burns, silver will be a recognized form of currency far easier to trade with than anything else short of 22 LR ammo.
I would rather dance with the silver devil than take on Wall Street, Goldman Sacks Biters, JP Morgan Chase, banks, politicians, the Fed, the CIA, NSA, DHS, IRS, and all of the other thieves on the loose out there.
Silver is cash with an upside.
PhVk your cash, it's trash! Buh Bitcoin!
you've sucked too much Bonestar!
Long post. I scrolled to the last line and appreciated it.
Better a Silverfish than a Stockroach
President Obama:
Thwart terrorists!
End this deception by omission NOW!
http://showrealhist.com/begun.gif
http://showrealhist.com
Fuck cash - hold Gold
"The idea that the paper price of gold and silver will head toward zero as monetary printing and debt skyrocket towards the heavens… just goes to show how serious the BRAIN DAMAGE has become in a good percentage of Americans." ~SRSrocco Report
Silver Doctors website blows.
Yes I do hold PM's :)
So you are saying IF/WHEN COMEX defaults, they'd rather settle up in cash at $1100 an ounce rather than at $35 an ounce?
Sure paper gold and silver will go to zero.
Thank you but I will stick with ammo, booze, and 100-can cases of sardines.
... and if you have the space, TP.
Definitely!
I don't want to end up like Venezuela or depends on leaves or old newspaper.
the S&P is up 0.8% ytd (plus divi of course) yet all the equity holders mock bond holders who "lost" (-0.6%) on the price but made 2.25% on the coupon. whatever bitchez. the stock market wasn't "all that" in 2015.
Shine, Shine, you swim so fine, but miss one stroke and your ass is mine. [/Shark]
Hey, how'd you make out today? [/Billy Ray Valentine]
https://thinkpatriot.wordpress.com/2015/11/14/in-reality-everything-is-c...
It is guaranteed that new connections for contagion will be found in this new, more complex system of the world.
https://thinkpatriot.wordpress.com/2015/11/11/dynamics-of-national-colla...
https://thinkpatriot.wordpress.com/2015/11/10/a-measure-of-propagandas-p...
https://thinkpatriot.wordpress.com/2015/11/10/were-still-going-to-be-here/
https://thinkpatriot.wordpress.com/2015/11/09/oil-is-the-excuse/
https://thinkpatriot.wordpress.com/2015/10/27/ignoring-the-absolutely-in...
Nobody in their right mind would have a cent in any paper 'asset' at this time in history. This is a time in history when people lose their $B fortunes. 1929 ** Dunning-Kruger morons on steroids and coke.
Turkey's is a 3rd world military screwing around with 1st world weapons and annoying a major neighbor. In a world of electronics and software.
https://thinkpatriot.wordpress.com/2015/11/22/if-windows-crashes-wwiii/
I'm sure the graphic was intended to be a play on "king dollar", but for the younger members here, I'd like to point out that one of the reasons Washington is my favorite president and among my heros is that, when offered to him, he refused to be king of the USA and found the idea abhorent to his values. The image is offensive to his memory.
nice
Just BTFD.