A couple months ago Financology summed up its broad market call in It’s A Bear Market, concluding that

“In general, I still like cash, gold, cash, copper, cash, industrial commodities, cash, energy … did we mention cash …”.

The context was our sense that the “Everything Bubble” was in the early stages of collapse.  This term was hardly invented here … it’s been fodder for many a financial analyst.  But how can everything be in a bubble?

A Financology stock in trade when it comes to the purported value of anything is to ask “In terms of what?”  Usually it’s dollars, but to just tacitly equate dollar price with value without further examination is the most popular error in finance.  I hold that whenever you see across the board price changes anywhere, check your unit.  If “everything” appears to be in a “bubble”, Occam’s Razor dictates that it’s because your unit is in an antibubble.

Just as “in a bubble” refers to something apt to decline, “in an antibubble” means something apt to go up.  That led to the conclusion that cash was going to be an important asset to own.  Fundamentals also underscore this, as interest rates have been too low for years and are now begging to make up for lost time … rising rates make shorting dollars more expensive and therefore support their value.  Also being a subscriber to the principal of diversification, I sprinkled in a few other assets I believed would have the wind at their backs, each with their own story.

So far we’ve seen nothing to change our mind.



19 thoughts on “Cash

  1. cb says:

    This may one of your most important posts. You are discussing something that should be as obvious as the sun at mid-day in the desert sky, but very few people, even among financial types, acknowledge it.
    It’s as if no one wants to point out that the King has no clothes.
    We have suffered from continuous dollar inflation and debasement for decades, by a larcenous FED and Government. Sorry to hurt some feelings here, but both sides of the aisle have had their hand in it. And Reagan was no exception, neither Trump.

    1. Bill Terrell says:

      I agree that it’s been a thoroughly bipartisan issue. But it’s much more about the deep state (the military-industrial-financial complex) including the Fed – and Congress – than it is about who happens to be the occupant of the Oval Office.

      Carter is widely blamed for the economic misery and inflation of the late 1970s, but he didn’t cause it. At worst, he didn’t deal with it effectively. That inflation can be traced to the “guns ‘n butter” Johnson years, where federal spending soared on both the Vietnam war and the “Great Society” social spending. Johnson himself infamously physically threatened Fed Chairman William McChesney Martin into underwriting it with easy money policy.

      Biden has been an obvious disaster. Trump should have known better … he arguably did. In fact during a debate with Clinton candidate Trump lambasted the Fed for holding rates too low and blowing a “big fat ugly bubble”. Yet when Powell tried to normalize rates in late 2018 President Trump hectored him ruthlessly about it. So yes, Trump doesn’t get good marks either.

      I have to make an exception for Reagan. Carter had appointed Paul Volcker Fed chairman, but pressured him to hold the line on raising rates. That changed when Reagan came into office. Reagan gave Volcker the political cover to take the tough action needed to break the inflationary cycle. Both men took the unusual path of sacrificing their own short term popularity and allowing the economy to sink into a deep recession for the longer term good … indeed they laid the foundation for two decades of prosperity. Party? Volcker was a Democrat and Reagan was a Republican.

  2. sunpearl71 says:

    “A Financology stock in trade when it comes to the purported value of anything is to ask “In terms of what?” Usually it’s dollars, but to just tacitly equate dollar price with value without further examination is the most popular error in finance. I hold that whenever you see across the board price changes anywhere, check your unit.”

    After reading your previous article and the comments section (2-3 times!), this makes perfect sense now.

    Could the “most popular error in finance” you refer to above be caused by lingering confusion about currencies historically being supported/guaranteed through gold reserves whereas currencies today are primarily a claim on future income/productivity?

    1. Bill Terrell says:

      Thanks for calling attention to this, Sunpearl. I think it’s mostly a function of convention and habit.

      Every kind of measurement we make uses some kind of unit. In the physical world, we’re accustomed to unchanging units. The length of a foot or meter doesn’t change. A pound or kilogram is always the same. But in finance, we don’t have anything like that. We measure value with currencies, but currencies themselves are constantly changing in value.

      Imagine what it would be like if the physical world worked that way. If the length of, say, a foot shrank. Today you live in a 2200 square foot house. Six months later it’s a 2600 square foot house. The drive to a nearby town might increase from five miles to seven. If physical science were as sloppy as economics, it would invent concepts like “house inflation” and “distance inflation” to describe these phenomena. The implication being that somehow the size of the house increased or the nearby town moved away.

      Or if the weight of an ounce deceased. Today a loaf of bread is sixteen ounces, a few months later the same loaf weighs twenty ounces. Presto, “bread inflation”.

      Sounds crazy, but it’s routine in economics. Rent is “going up”. Gas is “going up”. Stocks are “going up”. At Financology, we call bullshit. It’s the dollars that are going down.

      It’s not hard to sympathize; after all we just don’t have solid units of value in finance. But to pretend the flimsy and volatile ones we do have are solid is inexcusable.

      The matter is further complicated by the fact that when the unit of value changes, all prices don’t move in sync. Stock prices for example can rise for years before the effects of a shrinking dollar show up in consumer prices. This is a particularly timely example because it applies to what’s going on right now.

      I call this “convention and habit” because there’s no fundamental obstacle preventing us from using any commodity or security as a unit of value. We could use shares of General Motors stock. Then economists would declare we had “inflation” whenever GM was doing poorly. Or it it were firing on all cylinders, they would be in a panic over “deflation”.

      I devoted an article to this a few years ago: Inflation is Not an Economic Condition. One of the great fallacies of economics is to speak of inflation as if it were an economic phenomenon … there I explain why it is not.

  3. cb says:

    Okay, Reagan can have credit for standing with Volker. Unfortunately, his deficit spending made him a contributor to the inflation problem, delayed but a root cause.

    1. Bill Terrell says:

      Ahhh … the monarch fallacy. Reagan was not dictator … while we easily associate his name with the 1980s, names like Tip O’Neill and Dan Rostenkowski seem to slip from memory.

  4. cb says:

    Reagan was not dictator, nor monarch. He was President, and had his hand in inflation. He also had his had in our immigration situation. His amnesty didn’t work out as presented. He was a good actor though.

    1. Bill Terrell says:

      Oh we’ve already established that Reagan had a hand in crushing inflation. As far as deficits and other policies go, however, are you sure people like Tip O’Neill and Dan Rostenkowski had nothing to do with them? You are aware that the House of Representatives has the power of the purse, right? And that their party had a majority for most of the Reagan administration? Reagan far from got his way on everything, having to compromise and horse trade with this powerful opposition. As a reminder, O’Neill was Speaker of the House and Rostenkowski Chairman of the powerful House Ways and Means Committee.

      Tsk tsk … popular as it may be in the mainstream media, selective recollection of history doesn’t get very far at Financology!

      1. cb says:

        No cheap debate tricks Bill. Stop with the “Hey, look over there.” Just because other losers had a hand in deficits does not negate those of your Supreme Commander Reagan (sorry, couldn’t resist a cheap debate tactic myself – see, it’s contagious).
        As for a hand in defeating inflation? Yes, at that time. Unfortunately, running deficits are a contributor to inflation, delayed.

        And by all means, do work on your selective recollection.

        1. Bill Terrell says:

          It’s not that complicated cb.

          Two monkeys walk into a bar. An hour later they leave. Then you and I go into the bar.

          “Look!”, you say, “Your monkey left banana peels all over the floor.”.

          I reply, “But you don’t know that. Your monkey was in there too.”

          Was there a debate?

  5. cb says:

    Sunpearl 71 said: “whereas currencies today are primarily a claim on future income/productivity?

    That is what savers would hope, The unfortunate actions of Fed monetary debasement make that not the case.

  6. Peter Fife says:

    Latest tweet from @ejanszen:

    “Everyone recall why the stock market kept going up for 10 years while rates were near zero? No yield bond market kept drawing capital away from overpriced bonds into relatively less albeit still grossly overpriced equities. Process running quickly in reverse.”

    1. Bill Terrell says:

      Thanks Peter. It’s a little cryptic … the “no yield” bond market wasn’t “drawing” capital … it was repelling it. But I think I know what he meant.

      Looked at another way, the bond market has already crashed. The stock market is next in line. Now that bonds are no longer “no yield”, they are drawing capital away from stocks.

      That effect has been muted so long as bonds have been in free fall, leaving investors reluctant to catch the proverbial falling knife. But once the bond market stops falling …

  7. Bill Terrell says:

    I should add that the bond market (UST) is beginning to look attractive. No … better to say no longer looking repulsive. I went deeply underweight bonds at the beginning of the year and have brought that back up to neutral.

    Physical commodities are looking a little shaky, likely because the bulk of the pandemic impact may just now be hitting China. While its zero Covid policy allowed it to sidestep much of the disease early on, it didn’t eliminate it … it just delayed it. Along with a tough talking Fed and a bond market that has already tightened policy, it’s just not clear where we go from here. I’m still overweight industrial commodities and real asset stocks, but the overweight was modest to begin with.

    I still like cash…

      1. Bill Terrell says:

        In the Financology lexicon “crash” refers to a market that has declined by a large amount in a short amount of time. In other words, the level at the end of that period is much lower than that at the beginning of the period. Where it is relative to the rest of history doesn’t enter into it.

  8. Peter Fife says:

    Just a clarification, when you state “I like cash”, does it matter which currency? In your case cash is USD, in my case cash is AUD. Recently, AUD has been falling relative to USD, hence my question.

    1. Bill Terrell says:

      Mea culpa, Peter. Actually it’s a little of both. I had USD specifically in mind, but currencies as a class do have a tendency to stick together, much like stocks or bonds or commodities. Their issuers, central banks, practice herding behavior.

      Sharp readers like yourself of course are aware of the differences between individual currencies. I claim no expertise in Australian monetary policy and you should assume you know more about it than I do. On the other hand, it’s not hard to think of exceptions. Any readers in Japan for instance should not take my careless use of the word “cash” to apply to yen and are asked to please accept my condolences.