It’s Not Possible for Everyone to Get Out of Cash

Dear Reader,

Wall Street crashing 80%? You must be certifiably crazy!!!

And that was one of the more polite emails I received last week.

As to whether my publicly airing of this potential outcome is bat sh*t crazy or extremely bold or prophetic, depends on your perspective.

In last Thursday’s (30 January 2020) issue of The Rum Rebellion, I went out on a limb to point out an error made by one of the world’s most successful investors.

Here’s a quick reminder…

‘“Cash is trash,” Dalio said. “Get out of cash. There’s still a lot of money in cash”.’

CNBC 21 January 2020

For those who are not familiar with Ray Dalio, he’s the founder of the world’s largest hedge fund firm, Bridgewater Associates.

Forbes puts Dalio’s net worth at US$19 billion.

He’s seriously wealthy and seriously smart.

‘‘‘Everybody is missing out, so everybody wants to get in,” Dalio said on CNBC’s ’Squawk Box’ at the World Economic Forum in Davos, Switzerland.’

What does Dalio think everyone whose missing out should do (emphasis added)?

‘…he [Dalio] thinks investors shouldn’t miss out on the strength of the current market and that they should dump cash for a diversified portfolio.

‘Dalio advised having a global and well-diversified portfolio in this market and said the thing people can’t ‘jump into’ is cash.’

His advice could not be more emphatic…get out of cash and into a well-diversified portfolio.

For every buyer there has to be a seller

Well, it’s simply not possible for everyone to get out of cash…even if they wanted to.

Why?

Because for every buyer there has to be a seller.

In simple terms this is how it works…


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The $100k leaves one bank account and ends up in another.

For everyone who wants to jump out of cash, another has to jump in.

Simple logic.

And for those who think it’s certifiably crazy to even suggest an 80% fall on Wall Street, they show their ignorance of history.

From peak to trough, here are three market collapses that have exceeded 80%…


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There is precedent…admittedly it’s rare…but it has happened.

And when do these truly exceptional market sightings appear?

Free report: Aussie dollar crunch coming (find out why).

After an extended period of speculative excess.

This is a time when reality is suspended and the investing public embrace a belief in a new paradigm or that debt funded growth can continue unchecked or as Edward Chancellor noted in his book (published in 1999) Devil Take the Hindmost…

The most striking similarity between the 1920’s and 1990’s bull markets is the notion that traditional measures of stock valuation had become obsolete.’

Who wants to be bothered with those old fuddy-duddy measures — the ones that determine whether the price being paid for future earnings is fair value or not — when the market is on the up and up?

The prevailing thinking (or, not thinking) is…you’re bat sh*t crazy if you don’t recognise that these ‘traditional measures of stock valuation had become obsolete.

Apparently this new era of low rates and central bank intervention has changed the game.

People seriously believe this rubbish being peddled by those with obvious vested interests.

You have to ask who really is the certifiably crazy person?

The long and storied history of markets

For a little historical perspective, let’s look at the period leading up to the great crash in 1929.

‘During the 1920s, America was experiencing a growing economy…The vast majority of the growth was experienced by the wealthiest tenth of America. People who had wealth acquired much more wealth in the 1920s. Most Americans did not get richer during the 1920s. What they did get was access to cheap credit. People bought cars, radios, and many other new technologies and consumables.’

Devil Take the Hindmost

The wealthy getting wealthier. Cheap credit to finance consumption. Ringing any bells?

How about this (emphasis added)?

The first premise of the ‘new economics,’ as [the new era] was otherwise called, was that the business cycle…had been effectively abolished by the establishment of the Federal Reserve System in 1913. …The Federal Reserve, with its ability to control interest rates and conduct ‘open market operations’ …was hailed in the 1920s as ‘the remedy to the whole problem of booms, slumps, and panics.’ …’

International Monetary Fund publication ‘Current
Developments in Monetary and Financial Law’

And in the wake of the market collapse, there was the obligatory Senate hearing into what happened…

‘Representative Hamilton Fish [during the 1931 Senate hearing] agreed that large banks and their securities affiliates were primarily responsible for the speculative ‘inflation’ that led to the Crash of 1929 and the Great Depression:

‘[T]hese bank presidents…got us into this [asset price] inflation largely through these securities affiliates connected with the big banks.

All the time they were saying to their depositors, “You have got money [cash] in our banks, and you ought to take it out of our banks and invest it.’’

International Monetary Fund publication ‘Current
Developments in Monetary and Financial Law’

Investment banks encouraging depositors to withdraw their cash and invest it.

Where?

Into the institutions higher fee paying products of course.

Wow. What a startling revelation.

Big banks trying to boost profits?

Couldn’t possibly be happening today?

Bloomberg, 17 January 2020:


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Source: Bloomberg

[Click to open in a new window]

But hey this is a new paradigm. These similarities between then and now are meaningless.

That stuff about history repeating (or even, rhyming) is just the mindless muttering of someone who’s certifiably crazy.

But what about recent history, are there any hints of how people might act in boom times?

Glad you asked.

The following chart shows two things.

Firstly, the blue line is the S&P 500 index since late 1999.

Secondly, the orange line is Cash/Debt position over that period.


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Source: CMG Wealth

[Click to open in a new window]

In plain and simple terms, here’s the pattern…


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Again, who would have thought that possible?

People being ALL-IN during the boom phase and ALL-OUT when it busts.­­

Interest rate cuts will trigger the next global financial crisis. Here is what you should do now to protect your wealth.

Surely, investors know buying high and selling low is not the way to create long-term wealth?

Obviously not.

And where are we today after the longest US bull market in history?

Back to the ‘low cash/high debt’ level that preceded one of those rare 80% or more market collapses.

Hmmm.

And if you think it was only those loss-making dotcom start-ups that got spanked in the 2000 to 2002 market collapse, then think again.

The bluest of blue chips were hit also hard.

As reported by Hussman Funds in January 2020:

Blue Chip Performance: 2000–2002
Cisco Systems -89.3%
Microsoft -65.2%
JP Morgan -76.5%
Intel -82.3%
McDonalds -74.4%
EMC -96.2%
Disney -68.4%
Oracle -84.2%
Merck -58.8%
Boeing -58.6%
IBM -58.8%
Amgen -66.9%
Apple -81.1%

When the run is on and people have to cover margin calls or need cash, there’s no market for the penny dreadfuls. Therefore, they unload the stocks which have liquidity.

In March 2000 — just days before the NASDAQ began its 83% descent — John Hussman wrote this in his regular newsletter (emphasis is mine):

Over the past 5 years, the revenues of S&P 500 technology companies have grown at a compound annual rate of 12%, while the corresponding stock prices have soared by 56% annually. Over time, price/revenue ratios come back in line. Currently, that would require an 83% plunge in tech stocks (recall the 1969-70 tech massacre). The plunge may be muted to about 65% given several years of revenue growth. If you understand values and market history, you know we’re not joking.

His call was deadly accurate.

Why?

The answer to that can be found in the last sentence…If you understand values and market history

Eventually, markets are governed by mathematics.

That’s the long and storied history of markets.

And, if you ignore history, then you are doomed to repeat it.

What do the mathematics indicate for the future?

From Hussman’s December 2019 newsletter:

…if market valuations merely touch their long-term historical norms, without breaking to undervalued levels (as they did as recently as 2009), the S&P 500 would lose about two-thirds of its value.

Given that most market cycles end at valuations well below historical norms, a projected 50-65% market loss over the completion of this cycle is actually somewhat optimistic.’

In due course we’ll find out who really was certifiably crazy…me or those who believed every single market precedent no longer applies to this new paradigm.

Regards,


Signature
Vern Gowdie,
Editor, The Rum Rebellion

Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own. Or worse, we only seek out the voices who are confirming our biases and narrowminded views of the truth. Either situation is not ideal. With regards to investing, this makes us follow the masses rather than our own gut instincts. At The Rum Rebellion, fake news and unethical political persuasion are not in the least bit tolerated. It denounces the heavy amount of government influence which the public accommodates. Greg will help The Rum Rebellion readers block out all the nonsense and encourage personal responsibility…both in the financial and political world.


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