Cash as a Scarce Asset

Money's too tight to mention
--Simply Red

Peter Atwater makes the case that cash is the most underinvested asset class out there. Low cash positions in stock and bond mutual funds and ETFs are at about 20% of total assets. In 1982 they were more than 80%.

Low fund cash levels refute the notion that there's lots of cash 'on the sidelines' waiting to be put to work.

Atwater also thinks that it is unlikely that money comes out of bonds and into stocks because lower bond prices (like we're seeing) motivate redemptions, and bond funds often hold illiquid instruments--meaning that funds will need extra cash for redemption purposes.

He wonders whether the more likely scenario is one where stocks and bonds both fall while cash balances rise. Note that this missive is about two weeks old and we have since seen precisely this.

Tell people that you are holding lots of cash and you're likely to be the subject of ridicule, suggests Peter. This zero rate environment has conditioned people to believe that 'cash is trash.' You need to trade out of your cash to get some yield or to protect your purchasing power from being destroyed by the monetary printing press.

After being biased toward deflationary resolution to this situation and a high cash balance , I've admittedly become more sympathetic to the inflationary cash is trash argument myself.

One reason is that it is seems increasingly clear that policymakers will not pick up their toys and go home in the event of another correlated price decline a la 2008. They will go all in. This means circumventing the 'credit money' system and sending money to people in boxes (or electronically to their banking accounts as the case may be).

So although cash may be a scarce asset out there (per Peter Atwater), central banks could easily make it as common as air. This to me seems the likely endgame--even if in the interim we get another whiff of deflation where cash is dear.

Regardless of whether you lean toward inflationary or deflationary resolution, we are in the midst of financial oppression. All scenarios lead to ugly outcomes.