Is cash trash?

Good afternoon,

Ray Dalio from Bridgewater described cash as trash. Some may disagree it is trash, but at a zero bound rate setting you really wouldn’t want to hold it for too long, the returns really can stink over the long term. The banking system is flooded with cash and the outcome is that it leaks everywhere, this may have been the central banks’ grand plan but that seems unlikely. The central bank liquidity strategy was based around twin tenets; banks cannot fail and by lowering the rate enough corporates would borrow to stimulate their businesses. Banks haven’t failed but corporates have become financial sponges. It is hard to see the acceleration of the funding transfer within the business community. Recent stories of the JobKeeper subsidies becoming profit centres for business is an example of the lack of acceleration in the government mandated spending. As the world stumbles through a pandemic it’s not surprising that businesses retain cash wherever it is supplied.

The Reddit bandits/freedom fighters are also the beneficiaries of the loose monetary policy. In a bygone era brokerage companies charged a lot for execution, in the modern world trading is priceless. There are consequences for inaccurate policy, the central banks didn’t reduce the cost of funds so that the recently unemployed could terrorise the well-connected hedge funds. As unintended as it was, there are enough in the Reddit supporter base to give non-establishment traders hope that there is a new world coming. Hedge funds are like the Brexit debate, after decades of insults by British politicians about Europe’s influence it became impossible to be pro-Europe in the Brexit debate. If you were to google “nice stories about hedge funds” the response time would be quick, the articles would be limited.

The system is looking to reduce the impact of the “free to trade” and the “let’s pick on the vulnerable” hedge funds strategy. The platform providers are reducing trading and organisations such as Wells Fargo are stopping advisors from recommending the popular shorted stocks. The reason is risk mitigation, for the provider. The problem with retail trading is a matter of perception. What the Reddit traders see when they look in the mirror are people taking on Wall Street and winning. What Wells Fargo and the platforms see is litigation and huge losses via regulator fines, under the catch all of “inappropriate advice”. The GFC was a lesson in accountability. Ignorance as a defence may not always win in court but it gets the regulators’ and the legislators’ attention.

This leaves us with too much trash/cash and not enough release valves. Everyone is trying. One of the Australian majors is offering four year home loans at 1.99% as an inducement to get the cash out the door. Dalio and his team made the point that everyone is too America centric and monetary policy is going to impact the US dollar over time. The Bridgewater view is to look at the global growth centres as a destination for cash and research. Asia in its many forms, and Australia as an Asian beneficiary, are worthy of Bridgewater’s time and money.

Like a broken record we think the 2021 story is mandate change, if you have to hold cash make it work harder. Asia is calling. All we need to do is think like Dalio and look at Asia as an opportunity.