Cash Is King: Everything Else Has Too Many Problems

by: DoctoRx
- Cash has begun to look better and better to me as an asset class.

- A bond bull for years, I've been taking profits there for reasons discussed below.

- Precious metals and stocks have their negatives, which I discuss as well.

- Thus I think that for US-based investors, the "cash is trash" theme maybe should be re-examined in favor of keeping powder dry for better buying opportunities.

- Which asset class(es) will provide that opportunity will simply have to be sorted out as fundamentals and technicals guide us.
 
Introduction - why cash may be King
 
This article's thesis is that the three major asset classes I've been following, owning, trading and writing about since I began a blog in 2008 are all difficult buys for new money and that cash is now attractive as the least dirty shirt. As the old Street saying goes, there's always a bull market somewhere; but if you lose money now, with interest rates so low, you may never get back to even.
 
Ever since I began writing for public consumption in late 2008, I've almost always been positive on something - i.e. either gold and silver, and other inflation/weak dollar plays; Treasuries or at times muni bonds; domestic shale oil driller or related stocks; or, biotechs. I'll have a few words on most of those asset classes next, but first, it's time to make the case for cash.
 
To repeat, this article is a change for me, in that except for early 2009, not finding any asset class attractive is a first for me in this entire tricky investment scene.
 
Important: this is written from a US perspective, i.e. that of a US citizen living and writing in the US. My views might be very different if I lived in the eurozone, Japan or elsewhere, where interest rates and stock valuations are quite different from here.
 
Also, there are timing aspects to this article that are difficult to define. If you are a (say) 30-year old professional or successful businessperson, and are in a saving mode, and have (say) a 50-year time frame on your investments, you may have no special interest in ever owning cash.
 
You may just want to average down if your favored asset class drops in price against cash. On the other extreme, if you're of a certain age, you may just want secure income greater than cash can provide.
This article is therefore mostly intended to discuss a multi-month to multi-year time frame for individual investors or asset managers who can think and act strategically to achieve alpha over time with acceptable risk. Here the risk is of being out of overvalued markets. Thus:
 
A brief case to overweight cash
 
There are theoretical and practical points to mention here.
 
Beginning with the practical point, pretty much all asset classes in the US key off of the shorter-term Treasury market. As I write this, a 2-year T-note yields about 0.70% per year. Buying that bond means that aside from taxes and any brokerage fees, $100 will turn into $101.40 in two years. T-bills are liquid; going into an illiquid 2-year bank CD can yield as much as 1.5%, which is less unattractive and could keep up with inflation, but which offers less opportunity to liquidate it penalty-free to jump into an asset which looks good.
 
As far as truly liquid cash goes, for several years, the online "high yield" savings account from American Express (NYSE:AXP) has yielded a steady 0.9% for several years. That's from an AmEx-owned bank with a AAA-rating last I looked, FDIC insurance, and almost unrestricted withdrawal privileges (6 per month). This of course can float down, but it's been there or near there for quite some time, and if the rate declines a lot, maybe stocks will be cheaper than now so cash will be a good thing. Other online banks have similar yields, though they may not have the history of high yields that the Amex bank has (I'm a depositor with the AmEx bank, but have no relationship with it beyond that).
 
I find this yield with full access to the money reasonably attractive given rates on Treasury bills, notes and money market funds.
 
Now, the theoretical underpinning of this pro-cash thesis:
 
That many years of "QE" - a highfalutin term for "excessive money printing" have pushed all tradable asset prices to extreme levels. That's except for the commodities prices that have fallen in line with the collapse of the China growth story. Driving all these rolling bull markets has been the underlying theme of all the speculation has been that cash is trash, therefore money needed to rotate into something.
But now I think that it's all pretty much played out on an intermediate-term time frame. Even at somewhat higher interest rates, I recently had positive things to say about Treasuries, but with the panic drop in rates this week (and the turnaround Thursday), this move may also be played out.
 
In other words, it was revealed in 2011 and 2012 that the entire commodities boom was built on the sand of a floundering EU economy, more weakness in the US than expected, and as the next years went by, by what amounts to recession in China. That led to QE 3 and the final advance in biotech and most bubble-type information technology stocks. Then when the US economy decelerated, money bid up the remaining reasonably-valued assets, namely Treasuries and bond substitutes such as consumer staples and utilities.
 
With that, and with extremely low cap rates on commercial real estate, it's either move on to foreign markets, which I'm not addressing in this article, or take the best market rate available on cash or near-cash.
 
Next, the reasons I'm finally turning negative on Treasuries from a trading standpoint.
 
The case against bonds gets better, at least on a trading basis
 
I've been saying for five years that bonds were in a structural bull market that (five years ago) had real value and that, importantly, was hated and/or ignored by the entire financial media.
 
This hatred, disdain and obscure nature made it attractive to me on several fronts.
 
Thus, when I got the right fundamental signals, five years ago, as documented in several blog posts, I made a 180 degree turn from pro-inflation hedges to pro-disinflation hedges.
 
On a 5-year basis, the longer-duration zero coupon Treasury bond fund run by PIMCO (NYSEARCA:ZROZ) has outperformed the stock market (NYSEARCA:SPY) in price by over 2 points per year while probably yielding an additional 2 points per year in payouts. ZROZ has also beaten SPY on a 1 and 2 year basis. Now this outperformance may have peaked.
 
Note how different the media reporting of bonds is now, from the way I described matters just 2+ years ago on Seeking Alpha:
On March 17, 2014, with the stock market red-hot and the unconventional oil boom in full swing, I trusted that the Fed would finally follow through on tapering QE 3, and, expecting that the economy would promptly decelerate, I wrote an article titled Turning Bullish On Bonds.
 
The two most important bullet points from that article were:
  • Historic bond bull market lives, with important implications for all investors; and
  • Implications for stocks are short-term neutral, intermediate-term negative.
My conclusion was:
Conclusion: Both as a portfolio diversifier and as an aggressive long strategy, investors and speculators may wish to consider the possibility that the amazing bull market in bonds may have a good deal more life left and thus may merit either a trading position (not necessarily after the recent run-up) or a core position for long-term investment.
I also clarified my views in a response to a reader's comment:
I did not call for deflation per se. IMO, the US interest rate structure can continue structurally to trend downwards w/o price deflation.
Let's see how that call held up.
 
On March 17, 2014, SPY opened at $184. It closed on Thursday, June 16, 2016 at $208 (rounding). That's a 13% price increase in a little over 2 years. With estimated dividends, that comes to about an 8% per year total return. Not bad; basically historically average. But it's only that good because interest rates have completely collapsed in the US and globally:
ZROZ has clobbered the SPY. ZROZ has gone from $92 to $132. That's a 43% price increase.
 
Counting about 4% payouts on ZROZ, that comes to about a 23% CAGR. For a mere T-bond fund for a period greater than 2 years, that's quite amazing - and distressing, given that the starting yield (on March 17) was already notably under 4%.
 
The lower duration T-bond fund that is far more popular than ZROZ (NYSEARCA:TLT), has risen from $108 to $136 in that time frame, a 26% increase. This doubles the percentage rise of SPY with about double the percent payout as well.
None of that bond outperformance was expected to happen given that there were several months and several hundred billions of dollars of QE 3 money still to be printed. All this money was intended to create a wealth effect and in other ways stimulate the economy and thus the stock market.
 
Since almost all the Fed has done for the nearly two years that QE 3 has ended or effectively ended is dither and find excuses not to normalize policy, this should be a risk on environment.
 
A tenet of risk on investing is that the longer duration assets outperform shorter duration ones, all else equal. And a Treasury bond fund yielding, on average, roughly 3% should not, not, not outperform a much longer-duration growth asset such as the SPY if any QE principles were valid.
 
This merely continues the outperformance of bonds on a multi-year basis over stocks on most time points since 1981.
 
But now the bond bull smells fishy (to mix metaphorical species).
 
The traders are finally wise to this game. Much of the developed world's corporate bonds are yielding little or nothing. This is beyond bizarre; it's inappropriate monetary policy; the investing and general public has begun to rebel.
 
Another danger signal for bonds is that for some months now I have seen Yahoo! Finance (NASDAQ:YHOO) and other sites report that a commentator or hedge fund is recommending long term Treasuries as a momentum play. The message is, buy now, because rates are going even lower.
 
I actually think this may very well happen in the US at some point.
 
This looks like the end or perhaps near the end of a frantic move. The RSI on the 10 and 30 year T-bonds dropped to around 25 today (daily chart; mid-30's on the weekly chart). This is a classic trading sell point.
 
There is now a significant speculative element to the yield curve, focused on the long end, so I've been lightening up significantly on long bonds. After all, even in Japan, nominal GDP was running at zero for a goodly number of years before the 30-year bond got sustainably below 2%. The US GDP, sluggish though it is, does not merit a 1.5% 10-year T-bond - at least, not yet.
The possibility of a global bond bear market, or bear move, is high now.
 
So for new money, I would like cash over longer-term bonds here.
 
Then there are gold and silver, which have been rising along with bond prices as weak dollar plays.
 
Gold and silver - moving in panic with interest rates but out of sync with other commodities
 
As I said above, my thesis is that investors have been trying desperately to find something that works, given the Prime Directive from the Fed that cash is trash. So with declining interest rates, people have glommed onto gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV). My take is that this is typical late-cycle stagflationary action which tends to peter out in recession or near-recession.
 
With the Fed sidelined for now, it's difficult for me to think of a strong up-cycle in inflation, at least now. I think it's not unreasonable to think of the global economy as just too weak right now to generate enough inflation to really push gold up beyond $1300.
 
This is very different from the primary metals bull market that began in 2001 and began to manic right after I wrote the following as a blogger in a post from October 2010:
Right now, the premia over NAV for GTU and PHYS [bullion gold funds] are at historically low levels. This along with the slow ramp-up in assets in the Rydex SGI Precious Metals mutual fund and the utter lack of speculative froth in Newmont [NEM], Goldcorp [GG] and Barrick [ABX] suggest to me that the strong bull market in gold is the most apathetic one from the public's standpoint I have ever seen in any major asset class.
However, that changed dramatically by spring 2011 (summer for gold and platinum). The public went all in, and then some, and now speculative positioning in gold and silver (and oil) is very bullish - to me, a potential warning sign.
 
I'm cautious in good part because of the horrendous bear markets in crude oil, copper and even lumber. In 2010, if I remember correctly, the average exchange-traded commodity was up 29%, and gold was up... 29%. That's the way it should be. Gold should be a marker for general inflation, but where's the inflation from these key commodities shown below? First, oil.
Here is oil from FINVIZ, which ever since gold traded freely in the 1970s has tracked gold:
 
Where's the inflation?
 
 
Where's the inflation here?
 
Of course, any asset can go anywhere at any time.
 
That said, this move in gold and silver, mostly in isolation except for the crazy global bond bull market (and some move in the ags), reminds me of the periodic flares in gold in the 1980s and '90s. Finally, fully washed out, gold began soaring as the Bush administrated emulated LBJ and did a 'guns and butter' policy after the 9/11 attacks 15 years ago, "paid for" by the Fed. That was a clear inflationary policy signal. Here, the Federal deficit is "normal" as a percent of GDP and the Fed is neutral. That's very different from the typical bull market pattern for the metals.
 
Finally, I do not want to jump into the gold-silver complex when silver keeps making bearish wicks on the intra-day chart; also from FINVIZ:
 
 
All this effort just to stay in the structural downtrend and barely break through the mild, unimpressive rebound high of May 2015, with many wicks pointing the wrong way in this rally? I'd rather stand aside and let the rally prove itself. And while gold looks better than silver, gold can't do it alone.
If I had gotten into silver at $15 or below in a big way, or gold, I'd be taking some profits and sitting in cash with those profits.
 
That leaves equities. 
 
US stocks more toppy than not
 
My views on this asset class from a macro standpoint are well known. At this point, the only good case for US stocks is the one that they are the least bad asset class, or that a patient investor willing to perhaps wait decades comes out best with stocks than anything else.
 
No matter that stocks have not beaten bonds for the past 50 years. They had their matching bear markets from 1966-81/2 and then their matching bull markets.
 
On a shorter-term basis, I don't like the prospects for corporate profits.
 
On the one hand, the low nominal GDP growth to which bonds are responding bullishly is bad for stocks. On the other hand, the inflationary issues to which gold and silver are responding are also bad for stocks, by shrinking profit margins. We see this sort of margin pressure in almost every regional Fed purchasing survey - input costs rising but much less ability to raise selling prices. This is doubleplus not good for stocks. It never has been and I don't expect that now. Conditions can of course change, but on a macro basis, I would underweight the US stock market if I were constructing a portfolio de novo.
 
Personally, since I've been so very underweighted in equities for so long, I've observed that 20X P/E's are somewhat like the new 10X - if the Street likes a company. Thus I have begun trading in and out of such income vehicles with staying power such as Boeing (NYSE:BA) and a trading favorite Amgen (NASDAQ:AMGN), each with decent yields and TTM GAAP P/E's well below 20X. Plus I like and own all my usual biotech/pharma names on a more or less permanent basis.
 
That stuff aside, and focusing on the big picture for the SPY, this looks like a classic late-cycle stagflationary situation for stocks, with margin compression. 24X EPS for this? With even higher P/E's for even worse merchandise in the smaller stocks below the many dominant companies in the '500?'
If almost 4 uninterrupted months of "greed" or "extreme greed" per the CNN Money Fear & Greed oscillator couldn't push the SPY to a new high, then I really don't love the technicals on this market - matching not loving the fundamentals.
 
So I think the case to underweight equities joins the case to be cautious about the precious metals and the case to either lighten up on bonds or not jump into them now if out of them.
 
Where does all that leave investors?
 
Basically it leaves us in a sort of suspended animation. To summarize, it's very late in the bond game, and even later in the stock game. If gold and silver are signaling a significant rise of inflation, then it's early in the commodities cycle, with lots of upside in oil, copper, silver, etc. likely. If so, what's the rush to get in there? Maybe silver will finally go to $100, or even the $200 that the silver bulls were looking for in 2011. There's time for the charts and fundamentals to show the real power of this move.
 
With cash in a high-yield demand deposit savings account, or near-cash in some short-term bond fund or insured bank CD, the investor has limited give-up (or, opportunity) cost relative to other safe investments.
 
A big-picture comment to close the article:
 
We have never, ever come close to being "here" before, where the Fed has created more excess monetary units than are being used in the actual economy. This is what QE 2 wrought, with QE 3 an over-the-top, jumping-the-shark gigantic policy error. And, it was made even worse when then-Fed chairman Bernanke backed away from tapering QE 3 in the spring of 2013 due to the "taper tantrum."
 
Also, at every FOMC meeting, the Fed announces that it will continue to "print" new money to "reinvest" the proceeds from maturing bonds. This too is a virulent, large and continuing form of QE and continues to pump up asset prices. But we're inured to it by now, and that argues against pushing the asset inflation theme at this late stage of the financial and economic cycle.
With valuations of US stocks at 1998 (bubble or near-bubble) levels, weak sales growth and margin pressures; with the entire interest rate curve looking unattractive; and with gold difficult to put a valuation on, cash yielding something looks to me like the least unattractive of these assets to overweight based on an intermediate-term time frame.

0 comentarios:

Publicar un comentario en la entrada