Cash Is King, Yet Everyone Hates It - And It's Driving Every Asset Class Too High

Includes: CEW, DBV, UDN, UUP
by: The Capitalist Manifesto

I have recently been moving a lot of my investments to cash. Not bonds. Not stocks. Not real estate. Cash. I have refinanced some real estate and I have sold stocks and bonds, and the comment I get from a lot of people is, "Well then, what are you investing in?" And my response is "Since when is cash a bad thing?" Everyone always uses the mantra of "Cash is King." And this is very true. When it comes to buying large assets, the more cash you have to assure a transaction, the better off you will be. Plus, cash is the ultimate in liquidity, obviously, so if times are tough, and you have cash, you can weather those times.

So if Cash is King, why is everyone so against it? Well, it's obvious. Yield! What are you getting on your cash sitting in a bank account? Diddly squat! And that stinks. Does it though? Yes, making practically nothing is not fun, but the alternatives are: 1.) A bubble in the bond market. 2.) A super hot stock market that is starting to have valuations that are making a few noses bleed. 3.) Real estate: Don't get me started on real estate values. It's crazy to think that we haven't forgotten 2006 and 2007. We are going back there. Mortgage rates are so low that people are buying homes like crazy (inventory is down from 4.5MM homes 3 years ago to 1.7MM homes now). And commercial real estate is starting to get bid up into ridiculous prices because of the cost of funds these days.

Anyway, the point I am trying to make here is that in this low interest environment of bonds and sideways stock market (potentially lower stock market), it's sometimes OK to just have cash sitting on the sideline. I have personally started selling my bonds and stocks together and I have large amounts of cash right now because of this.

I just saw an article on Yahoo Finance today (Buffett on Stocks) where they are saying that Warren Buffett is buying stocks and the actual quote is this: "if you're asking me if stocks are cheaper than other forms of investment, in my view the answer is yes."

Now, he may be right considering that bond yields are at all-time historical lows and real estate is getting pretty pricey again because of those yields, but does that make it a good time to buy stocks in general? In my opinion, it is not. In fact, Buffett even says that he is buying good companies where the "price is the main consideration because it 'takes care of the future.'

The Heinz deal he entered into was a deal that he even admits, in the same article above, that he "barely liked the price" but he went into it because of the partners. This is an odd statement considering what he has said above about price taking care of everything else in the future.

The bottom line is that even though Buffett is looking at stocks and buying stocks, it is NOT an obvious time for him to be buying. He is still searching and, by his own admission, the best time to buy stocks is when the total stock market market capitalization is between 70% and 80% of GDP and right now, we are at around 134%. So we still have a ways to go before we get to very attractive levels of the stock market.

In the meantime, I don't have the ability to get deals that Buffett gets, so I am sticking my money in cash. One of these days, whether it's next week or next year or 4 years from now, I will feel comfortable investing in stocks when valuations are better. Bonds have a lot of risk right now due to interest rate fluctuation possibilities even though the Fed has said they plan on keeping rates low for a few more years.

One concern amongst investors in cash would be the problem with the potential loss of the currency you are holding your cash in. Fair point. I am not a currency expert, but if that is a main concern, in order to diversify and hedge your bet, you may want to consider buying positions in several strong foreign currencies of strong nations in order to make sure that the purchasing power of your cash is not lost. With how much money the U.S. is printing on a daily basis, it is something to consider for the long-term holding of cash.

Cash is king and cash is okay. If the price of your favorite shirt sky-rocketed, and you have 5 shirts in your closet, would you go out and buy more just to buy more? Of course not. You should only buy more than you need if the price is so desirable that you would be crazy not to buy. The same should be said about stocks and investing. I have the ability and patience to wait for the right buying opportunity and that's precisely what I will do. If you are a true investor and are waiting for the right opportunities to buy, don't worry about making no yield on your cash. I have slept very well the past few months even though I have missed out on a lot of gains in the stock market and real estate market. That's life. It sure beats losing sleep when the markets eventually come back to normal levels... and they will.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.