This is entirely the wrong context. If you knew that stocks would double over the next year then a moneymarket yield of zero is bad. If you knew that stocks would cut in half over the next year then a moneymarket yield of zero is fantastic.
Obviously no one knows whether stocks will go up 100% (unlikely) down 50% (unlikely) or something in between (likely). People who actively manage portfolios (for themselves or others) probably have an opinion about direction and tilt to that opinion in some magnitude. In this context cash becomes a tactical tool regardless of the yield. As a tool it is used in correct proportion for a given period or it isn't but the idea of too much cash does is not complete without context.
During the worst of the recent (current?) bear market I met with my firm's primary point of contact at Schwab and he mentioned something about our cash level being high, this as the market was puking down. To put it in Hussmanesque terms if risks favor the downside then having cash regardless of the yield becomes the correct tactical decision.
Unfortunately much of what we see in the media asks the wrong questions or more correctly frames the context incorrectly. "I see you don't like financials" as one example. Actively (so not passive) navigating market cycles can be made much easier (not easy, easier) by weighing risks and rewards of various things you invest in either broad asset classes, investing at the sector level, country level or however narrow you go.In too many interviews in the media, maybe as a function of time, the questions asked do not necessarily seek the correct context and the person being interviewed may or may not realize this and add in that context. Anytime you read or hear anyone speak it is important to realize there could be more context as not every one tells you everything he is thinking like Jimmy Rogers.
Fred Cusick long time announcer for the Boston Bruins died yesterday at age 90. I mentioned him in a blog post recently for still doing some announcing work into his late 80s. The picture is of him calling games in the Cape Cod Baseball League from a couple of years ago.
12 comments:
Excess cash in a bear market makes sense, but we are now in a bull market so excess cash is a mistake.
We can discuss cyclical versus secular bull markets after it is over, but for now the trend is obviously bullish
the post is not a discussion about the current animal descriptive of the market.
Excess cash in a bear market makes sense, but we are now in a bull market so excess cash is a mistake.
Technical trend is up, but there are reasons to be cognizant of the risk here after a 50%+ run.
http://money.cnn.com/2009/09/10/news/economy/insider.sales/index.htm?postversion=2009091107
"The stock market has mounted an historic rally since it hit a low in March. The S&P 500 is up 55%, as U.S. job losses have slowed and credit markets have stabilized.
But against that improving backdrop, one indicator has turned distinctly bearish: Corporate officers and directors have been selling shares at a pace last seen just before the onset of the subprime malaise two years ago.
As far as I can tell, all you've really got here positive is the technical trend. Valuations are no longer attractive (see Hussman), on the economic front we have "less bad" based on government life support (cash for clunkers, 8K housing credit), and corporate insiders selling like rats leaving a sinking ship.
That leads to 100% equities/0% cash? Not in my book.
I'm personally (along with client accounts) at 40% cash after having bought during the Oct 08 crash and the Nov low and recently trimming about 10% equities. Is that "excess" cash? I just can't see how the current risk/reward would merit an "all in" posture unless one doesn't worry about downside risk, or has stop losses in place, and that won't protect against a sudden rapid drop.
Mike C
You make valid points. These same valid points could have been made most years since 1995. Many of those years the market was over valued and everyone argued it was reasonable.
One thing I have learned is if the Fed wants loose money policy damn the asset price increases then they can make that happen. Todays risk is no different than the last couple of bubbles from the fed (tech and housing).
I do not see this ending tomorrow, but as always it will end eventually.
Roger, this is OT, but I'd be interested to hear your thoughts on it since you've written on shipping stocks in the past.
It's from the British Daily Mail, "Revealed: The ghost fleet of the recession anchored just east of Singapore." Long story short, about 12% of the world's cargo fleet is idle, and that could double in the next two years. Seemed pretty disturbing as far as an indicator of world economy.
Ghost Fleet of the Recession
I have seen that picture somewhere before. There is some context missing here. 12% of ships are doing nothing? What is the growth of existing ships available in that time. What is normal for the number if idle ships? What if 8% is normal and the supply has increased by 4%?
The decline in shipping rates would seem to be a good indicator for what is going on but without more info the idle ships count may not be a good indicator.
Keeping cash in a money market fund is just fine. That is the wealth holder's choice. It's not my choice but maybe I'm the dumb one.
I recall money markets paying higher double digit rates of return during the Carter Presidency. It was not a bad place to park money (long cd's would have been better at the time, but I digress).
Likely, more people have gone belly-up trying to game the market than those living within their income(s) shifting earned wealth into money market funds. They won't be a Rockefeller, but they will still have their home.
T
T
I think choosing a word like gaming the market as a derogatory context to what I view as a valid approach. After the huge decline we had, buying low with the fed easing monetary policy is a very valid approach. The fact that I acknowledge that this will come to an end eventually is just realization of a fed that likes blowing bubbles. I don't like fed policy, you probably do not like fed policy either but we can not change it.
BTW, IMO to use your choice of words all active management approaches are an attempt to game your investments. Otherwise you should simply index and rebalance if you are not trying to beat the market. I am trying to beat the market and I do not think heavily after a big decline is as risky as many others.
otherwise you might be surprised we agree on several things. While I do not keep hoards of money in cash there is well over a year of expenses in cash. I also made sure all debts including my home are paid for. Additionally I live well within my means, having always bought houses based on one income not both incomes when we did need mortgages. So, I am guessing we likely agree on many issues, but maybe not this one
The idle ships story has been in the news for months. Nothing new. There are similar pics of China and China docks, with bunches of empty ships hanging around.
My answer to "cash earning zero" is turning into a Larry Swedroe-type answer. Pile up the cash for a while, then use a bunch of short term Treasuries and a bit of something risky like domestic/int'l small caps or emerging markets. I feel relatively safe, yet a little better because I have a chance at decent gains.
come on people. the us markets has gone nowhere since 1999. in fact, purchasing power of the dollar has dropped dramatically. S&P 2500 would still not get most long term investors back in the black this decade. stop whining about a 55% increase when foreign markets are up double that.
Anon 2:01,
If you have missed what is going on, Roger since 2007 called a bear market and in march 2009 he picked up on the rally. He did not know if it was a suckers or a real rally. As it turned out it is a bull. Roger had articles in june-july about the 200 day moving average as a real bull market signal and the 50 day cross signal. As of today we are rideing this move each one of us in a different individual way. So please tune in.
Jeff from Milan Italy
Roger - you mentioned awhile back that you expect to see a "scare the heck out of investors" downside move (a believe you said a potential retest at the time). What are you thoughts on this now? Do you still see a sudden down move in the cards or believe we'll keep drifting upwards?
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