Billionaire Ray Dalio now says Cash is NOT Trash in 2022?
Is cash indeed not trash? Is this relevant for your retirement plan? Back in 2021 during the COVID pandemic, billionaire Ray Dalio told the masses that cash is trash. Seemingly a year later he has completely reversed this statement and now states the opposite.
With short-term interest rates now approaching 4.5% on 2-year Treasuries, billionaire hedge fund manager Ray Dalio of Bridgewater Associates has recently declared cash is NOT trash. Mr. Dalio started using the catchy phrase, “Cash is trash,” quite a few years ago. We did a few podcasts in 2021 discussing this.
He became notorious for it when he pronounced “cash is trash” from on high, both literally and figuratively, on January 21st, 2020, amongst the business and political elites in the mountains in Davos, Switzerland, at the World Economic Forum, also known as WEF. And then Covid hit, and the S&P500 dropped over -30% in just four weeks.
Then again, on Xmas day in 2021, Mr. Dalio put out a YouTube video, once again, declaring “Cash is trash,” a mere week before the S&P500 peaked at all-time highs and then fell over 25% in a little over 9 months. Then finally, on October 3rd, about six weeks ago, with the S&P 500 down almost -25% in 9 months and closing at near 2-year lows, but short-term rates approaching 4%, Mr. Dalio came out and declared “cash is NOT trash” anymore.
I am Chris Perras, Chief Investment Officer at Oak Harvest Financial Group, and before I address the notion that “cash is trash or is not trash” for investors other than billionaires or 100-year time horizon endowments and pension funds that Bridgewater markets their funds to, make sure you click on the subscribe button as well as the notification bell, so our team can notify you when we upload new content.
First off, I have never argued with the basic academic premise behind Mr. Dalio’s original proclamation calling “cash trash.” His basic rationale had been that a mushrooming money supply, as well as government money printing caused by our deficits, would eventually bring on inflationary pressures and a weakening of the dollar.
Well, after nearly 30 years of deflationary pressures caused by 1) rapid technology adoption,2) outsourcing of our production and labor to cheaper continents, and 3) morphing and aging demographics here in the USA, a combination of Federal Reserve-based stimulus and money printing, coupled with supply chain disruptions and an acceleration in baby boomer retirements did finally inflect long term inflation rates well above the Feds 2% goal in the last 18 months.
But the question is, should retail investors view or subscribe to the notion that cash is trash or not? That it’s good or not. That cash is black or white. It’s yes or no. That it’s an investment alternative or not, and they should think of the world in terms of “TINA,” there is no alternative.
If you have ever taken an economics class, you know that “inflation” is a tax. It’s a tax on savers. It’s a tax on those holding cash and other longer-term fixed-income investments. It’s a tax on any asset that neither has the pricing power to raise prices and offset inflation, nor maintain its own utility of use, like a basic industrial commodity, maybe.
Inflation is a consumption tax in reverse. How is that? It’s a tax on deferring consumption. If you don’t buy that good or service today, it might cost you 5-10% or more next year. In a hyperinflation world, people see 100-500% inflation moves and crashing currency values.
Venezuela and Turkey are the most recent examples. We aren’t currently talking about that kind of inflation here in the US, but we are now running much higher than the Fed’s 2% inflation goal.
In Mr. Dalio’s world, cash is either a yes or no answer. In his world, both TINA, which means “there is no alternative” to equities, and FOMO, “fear of missing out,” rule the day in unison, and no rational investor would carry an investment “cash” allocation in their portfolio as you would be guaranteeing you lose money versus inflation. At least, that’s how he felt up until October 3rd.
In the finance world, if you sit in cash and inflation is higher than your cash return, you are doomed to a “negative real return.” In Mr. Dalio’s asset allocation scheme, you would be 100% invested in something other than cash all the time.
Every day, every week, every month. You would be “all-in,” chips in the middle of the table, let the good times roll, volatility be damned, the opportunity to buy in a down market not possible because you have no cash. In Mr. Dalio’s world, the “greed factor” outweighed one’s “needs” level in the investment and allocation equation.
Investors, this might make some rational sense to Mr. Dalio personally. He is a billionaire and doesn’t need cash to pay bills. What bank in the world wouldn’t lend him a little money to meet his monthly needs? What firm wouldn’t advance him cash to buy an asset if he came to them and said he saw a great deal on a mispriced security?
However, in very few worlds, in my opinion, is “cash trash?” In very few worlds, do older investors not need cash, bonds, or cash substitutes? In very few circumstances, is it smart to be a, I’m 100% long equity asset or other risk assets as a retiree or near retiree? And I would argue this “cash is trash” or not trash theory makes little sense to the rest of us, the other 99.999% of investors who are NOT billionaires.
Let’s look at Mr. Dalio’s timing of his last three market timing calls on “cash.”
Mr. Dalio’s, Davos “cash is trash” call on January 21st, 2020, could not have come at a worse time. It could go down as one of the worst market timing calls in the last 30 years, right in front of the global Covid economic shutdowns and market plunges. His hedge fund then suffered a -20% loss in the 1st quarter of 2020.
He’s made follow-up calls like this each of the last two years, and amazingly, each time he has, within a period of 1 to 7 days, the market has declined 5 to over 25%. “Cash is Trash?” And poof, here comes a pullback, correction, or bear market in stocks each time he has been center stage saying this.
Take a look at the chart of the S&P500 in 2022 with Mr. Dalio’s, December 25th, XMAS 2021 Youtube video gift to investors marked on the chart, as well as his reversal for the first time in over 4 years on October 3rd, that “cash is no longer trash.” That TINA has been laid to waste, and 4% interest rates have buried her for good.
So far, October 3rd is almost the EXACT low in the s&P500 in both price and time during this year’s bear market move down.
When it comes to thinking about, discussing, and using cash, bonds, or other bond substitutes as investment categories, the investment team at Oak Harvest would much rather look toward another billionaire investor for an appropriate model. Who is that? That would be Warren Buffet.
As of last count, Mr. Buffets’ company had over $105 billion in cash and short-term investments, that includes short-term bonds. Mr. Buffett probably is showing small capital losses on those bonds like all retail investors are.
However, Mr. Buffet has been quoted in his shareholder letters as saying this.
“I will never risk getting caught short of cash,”
Why does he say this? First, it’s probably because Mr. Buffet, while he does not need a dime of cash given his net worth, knows that having some cash lying around in the form of short-term liquid instruments or short-term bonds gives an investor an option to buy things when things go bad for other people.
It allows one flexibility to jump on opportunities and others’ mistakes when misfortune comes to town or the overall economy hits a recession.
And secondly, and probably more important and less talked about for pre-retirees and retirees, is that Mr. Buffet knows that the sequence of an investor’s returns is almost as important to an investor as one’s total compounded return, especially for those nearing or in retirement.
Is having cash a binary decision? Cash is trash or not? Is it a yes or no decision like Mr. Dalio makes it out to be? Not in my book.
With the volatility the markets have experienced in 2022, our investment team recommends that you get on the phone and give our Oak Harvest team a call and ask to speak to one of our financial advisors and planners. Set up a meeting, sit down with one of our team, and let us walk you through how the sequence of returns can affect your retirement plan every bit or more than the average investment return your current advisor is generating.
Give us a call at (877) 896-0040 and give our investment team a chance to help you with your investment allocation and have our financial planning team model your cash needs and greed’s into and through your retirement years. Whether your cash account is yielding a few basis points or a few percentage points, The entire Oak Harvest team is here to help you navigate into and through your retirement years.
Thank you, and have a great day.
CFA®, CLU®, ChFC®
Chief Investment Officer, Financial Advisor
Chris is a seasoned investment professional with over 25 years of experience working with some of the most successful money management firms in the world. Chris has made it a point in his career to adapt as the market landscape changes, seeking to utilize the appropriate investment strategy for a given market environment. His transition from managing billions of dollars at the institutional level to helping individuals and families retire is guided by a desire to see first-hand the impact he is making in the lives of clients at Oak Harvest.