CASH: The Most Hated Asset Class On The Planet

01-Nov-2016

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An eternal optimist, Liu-Yue built two social enterprises to help make the world a better place. Liu-Yue co-founded Oxstones Investment Club a searchable content platform and business tools for knowledge sharing and financial education. Oxstones.com also provides investors with direct access to U.S. commercial real estate opportunities and other alternative investments. In addition, Liu-Yue also co-founded Cute Brands a cause-oriented character brand management and brand licensing company that creates social awareness on global issues and societal challenges through character creations. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising UHNWIs and family offices on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in Latin American equities and bonds investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.







By Jesse Felder,

I regularly like to ask myself, “what the most hated asset class on the planet?” simply because what is most hated usually presents the greatest opportunity. For example, this time last year I answered this question by writing It’s time to get greedy in the gold market. This year gold, and more specifically the gold mining shares, have been one of the best performing asset classes on the planet.

I still like gold but it can’t be said that it’s the most hated asset class anymore. Sentiment has followed prices higher as it always does.

Today, cash has now become the most hated asset class on the planet. What makes me say this? Well, investors are willing to accept negative returns on many asset classes right now rather than hold cash. This is totally irrational.

The most obvious example of this is negative interest rates on many bonds around the world. Last I read the nominal value of these has reached $16 trillion. And now even corporations are selling short-term debt at negative yields.

 

It’s not just overseas. Investors here at home are willing to buy long-term bonds at negative real yields for the first time in a very long time.

 

In corporate bonds the math is even worse. Junk bond ETFs now yield about 5.5% while default rates are climbing and expected to hit that mark very soon. At the same time recovery rates are already hitting record lows. Now take that adjusted return and compare it to core inflation. Good luck to buyers there.

 

Finally, because bond yields in both treasury and corporate securities have become so unattractive investors have fled into what they believe to be “bond alternatives.” No matter how much they hope to attain bond-like returns here, these stocks are not bonds. This epic “reach for yield” will end no differently than any other episode we have seen throughout history.

 

Just how much are investors overpaying for “stable income” in the stocks? More than ever before. And if “the price you pay determines your rate of return,” then investors here are essentially locking in the worst returns ever recorded for the sector.

 

All of this is indicative of just how desperate investors have become to abandon cash for anything with any sort of perceived yield. But the hate for cash goes beyond investors. Influential economists are now starting to bash cash like never before.

 

In stark contrast to both economists and investors, it certainly seems the greatest investor of all time sees plenty of value in ‘greedily’ accumulating cash as others become so ‘fearful’ of it.

 

The popular aversion to cash disregards exactly what makes it so valuable today: it’s optionality. As Buffett’s biographer, Alice Schroeder, revealed a few years ago,

“He thinks of cash differently than conventional investors,” Ms. Schroeder says. “This is one of the most important things I learned from him: the optionality of cash. He thinks of cash as a call option with no expiration date, an option on every asset class, with no strike price.” It is a pretty fundamental insight. Because once an investor looks at cash as an option – in essence, the price of being able to scoop up a bargain when it becomes available – it is less tempting to be bothered by the fact that in the short term, it earns almost nothing.

I imagine Jim Rogers must have been considering all of this when he recently spoke with RealVision.

The bottom line is this: once everyone believes “cash is trash” we are likely already moving toward the time when cash will once again “king.”

CASH: The Most Hated Asset Class On The Planet

 


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