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.
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:
- 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
- If you are piling into cash for the ~4% yield, you are either
a. willfully opting to lose ~4% of your purchasing power based on recent CPI readings for “safety”
b. or believe the Fed will get inflation to or below 4% making cash a breakeven proposition
- 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:
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November 11, 2022 |
| Authors: Matthew Malgari, Nathan Przybylo, Dr. Sanjeev Bhojraj and John Durkin
November 11, 2022
Authors: Matthew Malgari, Nathan Przybylo, Dr. Sanjeev Bhojraj and John Durkin