How Can You Be Dead with a Strong Pulse? – The Belief that Cash is Dead

When the RBA took the official cash rate below the psychological 1% barrier, vested interests were quick to voice an opinion.

Record low deposit rates are spurring renewed interest in listed investments and adding to Ord Minnett CEO Tim Gunning’s optimism about the sharemarket.

And (emphasis is mine)

Even the best financial advisers will no longer recommend holding cash as an investment. With official cash rates now below 1 per cent, “cash in the bank” as an investment choice is dead.

There’s a BIG surprise coming for the AUD in 2020. Click here to find out what it is.

As I wrote in this week’s The Gowdie Letter

The comments made me smile.

If cash could talk, it could respond with Mark Twain’s witty retort…

The reports of my death are greatly exaggerated.’

The death notice of on an asset class reminded me of the Business Week cover on 13 August 1979…

Business Week Magazine - 11-10-19

Source: Business Week

[Click to open in a new window]

Ironically, it was high interest rates (the opposite of today) that was killing the share market.

After a decade of rising rates, the experts had declared it was time to summon the grave diggers.

In August 1979, the Dow Jones index was 887 points…today its 26,500 points.

Interest rates were in the mid-teens and now there at zero.

The diametrically opposed positions between then and now, is an indication of how long it takes for the social mood pendulum to swing.

Belief systems are formed after decades of conditioning.

And just when there’s (almost) universal acceptance of the belief, the pendulum begins its journey back the other way.

Prior to the US property bubble bursting in 2008/09, the generally held view, which was so eloquently expressed by none other than Ben Bernanke, was…

We’ve never had a decline in house prices on a nationwide basis. So what I think is more likely is that house prices will slow, maybe stabilize…

Ben fell for the old ‘what has been, will continue to be so’ trick.

The extrapolation of a trend is the reason why investors continue to make grave (pun intended) errors of judgement…at precisely the wrong time.

Yes interest rates are low and most probably going lower.

But why is that?

Is it because things are good?

No.

It’s because of warnings like this…

The new managing director of the International Monetary Fund Kristalina Georgieva warned Tuesday [8 October 2019] of an economic slowdown in 2019 in 90% of the world during her first speech at the helm of the multilateral organization.

In 2019, we expect slower growth in nearly 90 percent of the world. The global economy is now in a synchronized slowdown,” Georgieva said at the IMF headquarters in Washington.’

Business Insider

If you truly believe that the knee bone IS NOT connected to the thigh bone, then you can blissfully invest in higher yielding, higher risk investments without a care in the world.

Take your money out of the low yielding, dead as a door nail bank account (the one paying next to nothing because things are tough in the economy) and invest in assets (that the vested interest want you to believe) are somehow not connected to what’s happening in the broader economy.

In the 1970s interest rates were dialled up to combat the inflationary forces in the economy. Higher rates adversely affected share markets. When inflation was contained in the early 1980s, rates started to fall and so began the greatest bull market in history.

Actions have reactions.

Focusing solely on the symptom (low rates) and not on the cause, is simply illogical.

When you set foot outside the confines of a bank account or bank term deposit, you are accepting (whether you realise it or not) a risk to the value of your capital.

That risk might be well rewarded with the twin effects of a higher yield and capital gain.

Obviously, that’s the outcome we all strive for.

However, there are times in the investment cycle when the odds of achieving those twin benefits are better than others.

Currently, in my opinion, those odds are stacked against the average and not-so-average investor.

Unlike the situation in the late 70s/early 80s, share markets are not trading at deeply discounted levels.

In 2019, share markets are priced for perfection and beyond. There is far more downside than upside embedded in current markets.

Property markets are the most expensive they’ve ever been and this asset class is being propped up by highly indebted households.

Economic conditions — after US$13 trillion of global stimulus and the lowest rates in recorded history — are far from being strong. The global economy is teetering on the edge of negative growth.

Those who say cash, as an investment choice, is dead, have ignored or forgotten the golden rule…‘it is the return OF Capital, not the return ON capital that’s most important’.

And as we edge closer to a significant market correction, that rule has never been more relevant.

In The Gowdie Letter we’ve recently been reporting on a number of large investment failures in the US and UK.

Those who have lost some or all of their capital in funds that promised to deliver the twin benefits of growth and income, would dearly welcome having their investment dollar made whole again. Forget the interest, just give me my capital.

It’s a common lament of those lured into higher yielding alternatives.

The recent collapse of property developer Ralan Group has seen the familiar airing of grievances by those who went chasing higher returns.

As reported by Nine News on 3 October 2019 (emphasis is mine):

Ralan has debts of around $500 million. Of that, $292 million is to unsecured creditors like Wong and Zhao.

Jenette Zhao spent close to $200,000 on two apartments that may never be built.

The two deposits were for apartments in Ruby 2 and Ruby 3 — part of the $1.4 billion Ruby Collection by developer Ralan Group — built on the former Paradise Resort site on Queensland’s Gold Coast.

After the purchase the developer asked her to sign over her deposit for a 15 per cent return on interest. She felt the offer was too good to refuse.

However Ralan Group is now in receivership, with unsecured creditors like Zhao unlikely to get their money back.

Yan Wong and his family invested all of their superannuation, as well as refinancing their Sydney home, in order to invest in Ralan Group’s Sapphire Project in Surfer’s Paradise.

Wong says he agreed to hand over $461,000 after a Ralan salesman offered his family 15 per cent interest as well as an eight-year rental return guarantee.

“All of the money is gone and we don’t know why,” he said.

“We didn’t realise because they have been doing the same thing for 15 years,” Zhao told A Current Affair.

“This is our lifetime savings. We are not going to give up and just let it go. We going to chase it down to the bottom no matter how long it takes,” he said.’

Here’s a summary of the highlighted sections.

  • 15% return.
  • Too good to refuse.
  • Unlikely to get their money back.
  • Money is gone.
  • Doing the same thing for 15 years.
  • Lifetime savings.
  • Chase it down…no matter how long it takes.

These tick all the boxes of the BEFORE and AFTER symptoms of an investment gone bad.

The ‘befores’ are high returns. Established track record. Too tempting to ignore.

The ‘afters’ are…life savings lost. A determination to pursue justice.

The plot is always the same, the actors are different.

I can tell you how it ends. The investors have done their dough. Not that they’ll accept this straight away.

In the beginning they’ll fight hard for justice. But, over time, the legal system grinds them down. Receivers. Lawyers. Court hearings. This very expensive machinery turns very slowly.

In the end, the fight gives way to resignation.

Far better to avoid placing yourself in this situation in the first place.

Those who accept on face value that cash is dead and go seeking higher yielding alternatives to breathe life into their money, may well find their actions unwittingly sign the death warrant on their capital.

Higher yielding alternatives are dependent upon the issuer being able to generate sufficient profit to meet their obligations.

When, not if, the global economy experiences its next recession, which companies and investment funds are going to be impaired by the interconnectivity that exists between the economy and markets?

My guess is it’ll be more than people expect.

With money in the bank, the nasty surprise is a known known…you’ll get bugger all return on your hard earned money.

However, you will get the return OF your money.

Whereas those who fell for the industry spin of ‘having your cake and eating it too’, have no way of quantifying how nasty their surprise is likely to be.

For many, like those investors in the Ralan Group, it’s an unknown unknown that’ll leave them in utter disbelief.

To say that cash is dead when it has the strong pulse of capital return coursing through its veins, is a case of serious misdiagnosis.

Regards

Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

PS: Is the Australian economy in danger of a Japanese-like economic winter? Download your free report now. 


Vern has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia. In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback. In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry. In 2013, he joined Port Phillip Publishing as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter. Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors. His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.


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