Ray Dalio says “Cash isn’t Trash Now?”

Ray Dalio Comments:

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.

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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 fell over 25% in a little over 9 months. And finally, on Oct 3rd about 6 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 I wanted to 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. Before I do, 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. Dalios 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 the last 18 months.

But the question is should retail investor’s 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 its not and they should think of the world in terms of “TINA”, there is no alternative.

If you have taken ever 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 does not either have pricing power to raise prices and offset inflation or maintain their 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 is “there is no alternative” to equities and FOMO, that’s “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, 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.

Viewers, 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 assets 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 3 market timing calls on “cash”.

Cash:

Mr. Dalio’s, Davos “cash is trash” call on Jan 21, 2020 could not have come at a worse time. It could go down as one of the worst market timing calls 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 2020. He’s made follow on calls like this each of the last 2 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.

Here’s a chart of the S&P500 in 2022 with Mr. Dalios, Dec 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 has 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 bill 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,”

Side view old man posing indoors

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 a 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 importantly and less talked about, for pre-retiree’s and retirees, is that Mr. Buffet knows that the sequence of an investors 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 and sit down with one of our team and let us walk you through how sequence of returns can affect your retirement plan every bit or more than the average investment return your current advisor is generating you.

Thank you and have a great day.