Investment Because You Have To? Sell Stocks, Bonds, & Cash, Buy Gold

| About: SPDR S&P (SPY)


We've been surprised to hear many strange investment philosophies of late.

TINA is one.

Goldman Sachs recently had a recommendation: the "least bad" investment.

Am I the only crazy one.


We were surprised when we heard the term TINA (There Is No Alternative so invest in 1% 50 year Deutsche Bank bonds. Throw risk measures OUT the window.). We were surprised to recently read that Goldman Sachs rated something "least bad." (That's Goldman Sachs!).

We were relieved however to see recent and massive fund outflows. Consumers are smart and they aren't buying the TINA concept as much as pros.

Investing is not to make money at any cost. Risk should continue to play into the equation. We worry it is not. Investors who go to the sidelines may have to watch a period of underperformance as brokers recommend "least bad." In the end, we believe, avoiding such calls will be more than profitable.

First Let's Look Up The Meaning Of The Word "Greed"

Definition: intense and selfish desire for something, especially wealth, power, or food.

Elazar Definition: the race for the last nickel or basis point at all costs overlooking all risks or risk/reward scenarios.

Brokers and managers are paid to perform. They get paid monthly, quarterly and annually. The money they manage is wealth created that needs proper care. 1% and huge risk, we feel is not proper care when understanding the massive risks in such investments.

Here's some quick signs of complacency we'll review in more detail


-Investors swap 1 year of risk for 1% return to buy 10 years of risk for the same 1%.

-Goldman Sachs' "Least Bad" Rating


Recommendations are chanting "there's is nothing better." There is, it's called cash. And our TINA rating is gold (NYSEARCA:GLD).

TINA- As global yields race for zero investors are chasing them.

Click to enlarge

The above chart deserves the Elazar "Prehistoric Rating" For never having been here.

1% each year for 10 years. You want the risk associated with that reward?

What's wrong with cash? We'll tell you in a little bit. We will say cash sounds better than principal risk versus 1% reward. (Risk/Reward)

Here's the yield curve. Investors are rushing to buy 10 years at 1% faster than they are buying 1 year at 1%. They want more risk for longer at the same price, next-to-nothing. We see inflation already here making this even more problematic (as we will explain).

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The global search for yield means to have money parked somewhere for a long time period because there is no better option. We are sorry, that simply doesn't make sense.

We can understand if the yield curve is flat or down with the 10 year at 5%, 4% or even 3%. You may need the visibility to lock in cash flows for that time frame. That makes sense.

Rates can do anything in the next few months. We think they will led by inflation. So 10 years of risk for 1% does not make sense to us.

We'd rather be on the sidelines in cash or in gold.

"Least Bad" That get's our "Uy" rating

We respect Goldman Sachs. We were surprised to read a rating of "least bad." Value-walk reported that on July 7th Goldman Sachs had a report saying, "Ultra-low rates make credit the least-bad option."

Investors are buying that least bad option. That seems beyond rational to us.

Side-note Thinking: Let's think normal life scenario for a second (as opposed to markets (NYSEARCA:SPY)). Imagine you take your kids into the store to buy them something. You ask the salesperson, "Can you show me your best selling toys." The salesperson brings you two choices.

1) This toy is very popular with great safety features.

2) This toy is great for your kids but "least bad safety standards."

Do you:

A) Choose toy 1

B) Choose toy 2 and pray

C) Get the heck out of that store.

We choose "C." We don't like that option for our kids but investors are flocking!

That's the environment you choose to invest in if you choose to buy. Buying means choosing from a myriad of investment funds, dividend payers, "high"-yielding 3-4% 20 year C rated bonds (NYSEARCA:BND) (NYSEARCA:TLT) (NYSEARCA:LQD), and more.

You have another choice, not like Goldman advises clients. You can say, "NO" and wait.

You can (new novel Elazar investment philosophy) wait for better prices and values that make rational real world sense to you AND your kids. You don't have to invest because you "have to." You can choose, "no thanks."

Broker Disclosure: Brokers are paid by buying and selling (and buying again and selling again) products to their clients. To be fair it is not in their interest to say hey, let's go to cash and pay us nothing. That business model doesn't make sense to them. We went to school, we respect that. There is no incentive to make the, "don't pay us anything" call. That's why "least bad" ratings and "long term buy -3 5 j" makes sense to us.

But really, to us, a rating of "least bad" means get to cash.

ATH Strategy's Psychological Weakness

We respect the ATH (All Time High) strategy. We really do. Markets breaking out makes sense to us. Price drives price and it feeds on itself. We know, understand and thoroughly respect the concept.

We are here to say that ATH alone is not a sound strategy. We know we take big risk by saying so because we love break-outs. The market could be classified as breaking out right now. We might be about to miss a major move. We respect that.

There is one problem with this strategy which is one of psychology.

We believe as more and more investors get sold on the ATH strategy they lock themselves into a bullish mindset. As Fed Funds Reserves (which have been driving the market as we will show) come down, ATHers could lock themselves into a mindset and "average down" as it goes down. This is a losing strategy especially if it then continues down.

ATH Disclosure: If you decide you want to be an ATHer choose a stop loss with a friend and stick to it or invest much less than you need. That's our take.

We think there are multiple factors nearer term that force us to stay on the sidelines or short.

Federal Funds Reserves

The Fed has talked about lowering their Fed reserve balances since 2014. They have not yet done so. Since they stopped raising their reserves markets stopped going up (respectfully until yesterday).

Here's the Fed Reserves versus the market.

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Although investors chase ATH we think the market is capped. Based on updated Fed commentary after Friday's jobs we think that Fed balances may start to work their way lower.

For a longer term perspective you can see (below) how the Fed reserves jumped since 2008.

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We are nervous about that yellow line coming down.

Since Friday's jobs report, Fed officials have hinted to a hike being on the table before the elections.

Don't glaze over, this is important: We've shown that the Fed plans to drop these reserves BEFORE they raise rates which is an even more imminent proposition after Friday's jobs report.

Fed May Not Raise Rates But They Will Likely Cut Reserves.

For those that don't think there will be a rate hike, there may be a drop in Fed reserves in any event. Why? Because fewer people are focused on reserves they can "get away with it."

We think, however reserves may have a bigger effect than rates because they directly suck money from the economy.


CPI reports on Friday which is Elazar critical. Both PCE and CPI have jumped of late.

Here's CPI.

Nov Dec Jan Feb Mar Apr May 2 mo avg Annualized
Topline 0.1 -0.1 0 -0.2 0.1 0.4 0.2 0.3 3.6
Core 0.2 0.2 0.3 0.3 0.1 0.2 0.2 0.2 2.4
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Click to enlarge

CPI has picked up. Core is at the Fed inflation mandate and Topline (with food and energy) is now tracking above their Fed mandate.

PCE has already jumped.

PCE Dec Jan Feb Mar Apr May 2 Mo Avg 2 Mo Annualized
Current Dollars 0.1 0.1 0.2 0.0 1.0 0.4 0.7 8.4
Chained Dollars 0.2 0.0 0.3 -0.1 0.6 0.3 0.5 5.4
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Click to enlarge

PCE is tracking well above their mandate yet nobody is even admitting to inflation. We think that's another sign of complacency.

We've recently shown that inflation is rising around the world.

Inflation is the bubble popper because it reduces the value of future cash flows to us today. If everything costs more now, future cash flows help us less. Therefore principal amounts need to correct lower to adjust for inflation's effects on future cash flows. That principal correction is called a market correction. That's the process.

Here's a chart showing market returns versus inflation.

Click to enlargeWhen inflation is up markets are down.

Cash Is King...

Cash is also an investment decision. You may miss out on 1% each year but at least your principal is safe. You may miss the next news report of All-Time Highs. It may hurt the ego but we think it wins out in the medium term.

...But Gold Is Queen

That said we do think the dollar value is going down over time. We think other currencies will also go down as the printing presses lead to an unused high supply of money.

What does a large amount of unused currency supply tell you about prices to come (Put your Econ 101 hat on)? What does high supply in the face of low GDP demand mean? Prices of currencies are going down.

But Elazar, all currencies trade against each other, how can they all go down? That's an easy one, inflation. Currencies that are worth less can buy less -or- said another way the things they buy cost more. That's inflation.

Econ 101 Review:

Lesson 1: Lots of currency supply, lots of dollar supply

Lesson 2: No currency demand because of low GDP

Lesson 3: What does high supply and low demand mean to prices? Down, excellent job.

Lesson 4: But all currencies trade against each other? So they all go down. Each currency can buy less. Where does that show up? The ability to buy less shows up in higher prices. Excellent job again.

Lesson 5: What do we call higher prices??? Anybody? Inflation! You all get an A. Econ 101. (If you answered them all correctly and let us know you are in the running for a coveted Elazar Like 1.)

We call it the Inflation Formula. An ex-Fed chair recently mentioned this same formula as well.

So all currencies CAN go down together? That's called inflation? So what can I buy if cash is no longer king?

We're in an election year: Gold running for the new king.

That's one key reasons why we like gold. Gold is the grandparent store of value. It's been around forever, much longer than any of these famous currencies we read about each day. It's proven to be valuable for at least several thousand years. I like that.

When currencies compete to devalue themselves we see gold rising as the king over cash.

Fund Flows Of Late: We like what we see.

We don't see everybody buying into TINA and Goldman's call.

This is from Lipper fund flows.

Lipper Equity Bond ETF Tax-Free
07/06/16 -1.4 4.1 -6.1 -1.0
06/29/16 -6.8 -2.6 -2.8 -4.1
06/22/16 -6.1 2.5 -1.8 1.7
06/15/16 -3.4 -3.1 -4.4 -1.8
06/08/16 -0.9 1.9 -4.0 0.4
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Money is coming out of Equity funds, ETFs and some tax-frees.

Consumers are smart. Managers piling on top of each other for 1% 50 year yields isn't getting the consumer nod.


Goldman language: (Sorry Goldman), we "don't love" "least bad." We hate it. We don't love TINA unless its Tina Turner.

Click to enlarge

We think there IS an alternative. Cash is one. But we think gold is the new cash-is-king, king. We think other factors besides ATH and the "have to be invested" strategies will win out. As inflation continues higher and Fed balances START to go lower, the ATHers better have discipline to exit. We don't want to play that game.

Please stay safe.

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See more from Elazar Advisors, LLC on SA

Weekly Rating: Downside, Weekly Aggressive Rating: Downside

(Aggressive Ignores our Medium Term Fundamental Call and just focuses on the week)

Medium Term Rating: Downside, Longer Term Rating: Downside

Disclaimer: All investments have many risks and can lose principal in the short and long term. This article is for information purposes only. By reading this you agree, understand and accept that you take upon yourself all responsibility for all of your investment decisions and to do your own work and hold Chaim Siegel, Elazar Advisors, LLC, bestideas, their related parties, and its authors harmless. #in, $spy, $qqq, $iwm, $vxx, $ycs, $fxe, $EUO, $YCS, $uup, #elazaradvisorsllc, ^GSPC.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in SPY FUTURES OR OPTIONS over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.