How the Rotation from Risk On to Risk Off is…Creating Risk

The Oxford University Press tells us that the principal meaning of being “flush with cash” is having a lot of money, usually for a short period of time. The last part of the definition is interesting considering investors’ newfound interest in holding abundant piles of cash. A recent article headlined with Retail money market funds inflows are the highest in 30 years as investors seek safety.”

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What a difference a year makes. In September and November of ‘21 we highlighted the two charts below. The first chart showed that investors believed markets would return over 16% a year. The second chart showed these same investors backed that belief up with over $1 trillion of inflows to stocks.

Investors and advisors investment return expectations are growing further apart and record annualized inflow to global stocks in 2021

If there is anything KCR hopes our readers have learned over the last 12 years, it is this: where there are crowds there are not sustainable returns. Today, 4% yields on cash are the new sexy thing.

Here are some thoughts on owning cash today:

  1. If you own cash because you want to time the stock market or are afraid of market neutral, managed futures, and other alternatives that offer non-correlated absolute returns….good on you
  2. If you are piling into cash for the ~4% yield, you are either
    a. willfully opting to lose ~4% of your purchasing power[1] based on recent CPI readings for “safety”
    b. or believe the Fed will get inflation to or below 4% making cash a breakeven proposition
  3. If you believe the Fed is going to get inflation under control, why wouldn’t you own long-duration bonds which offer similar yields but also the prospect of significant capital gains if inflation goes below 4%?

If you are comfortably sitting in cash and find this note irritating, we apologize. But we must remind you that we are not here to try and make you comfortable. We are here to bring the empirical evidence to bear that can help you make money by asking your financial advisor or money manager better questions.


Flushed With Cash: The Recent Post GFC Experience

The chart below shows the following:

[1] Annualized

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.


The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.

November 11, 2022 |

Categories: Quick Takes

November 11, 2022

Categories: Quick Takes

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