I have a short story about cash being king. In November last year, I was in line at a bank to cash out matured savings bonds. The ticker prices were scrolling across the LED board. Citigroup had corrected to $14 (from $20) the last few weeks. In that month, the markets had only anticipated losses in the subprime arena. Business Week already speculated greater losses in other areas of lending, but that was not yet revealed. A thought had come to mind for me to use the cash proceeds to buy Citigroup.
Any experienced investor will know that cash is perceived as boring and unproductive in a portfolio. From an emotion standpoint, it is difficult to do nothing, to sit on cash, and to not invest in something in hopes of producing a higher return.
We all know the story now about Citi. Losses continued to mount, and housing prices continued to fall throughout 2008.
A year has passed since I passed this trade. The economic fundamentals are still terrible, and momentum is still building even faster now in what appears to be the worst economic storm for all eternity (well, at least as long as capitalism existed)! Does this mean that investors should be holding all cash? With the U.S. now at 0% interest rates, there is no more room for the government to lower the cost of borrowing. Its only option now is to buy up distressed debt and to spend a substantial amount next year.
Investors need to foresee the consequences of all of this:
- Tax rates must rise (the city of New York is already seeing this happen)
- The US dollar must collapse (it is already correcting) - see chart
- Gold will rise speculatively - a new bubble might form here...why? Because the only thing more attractive than the US dollar is gold (and no other currency)
- Various industries still need to fall, unfortunately (auto, housing, banking)
- Cash is more than king, especially when we are in a deflationary environment
- Gold will still rally (but in a deflationary environment, money will eventually need to find a better place to be than this commodity)
- At some small, almost random point in time, something new will emerge. Identify it, and invest in it.