Wealthy investors are stockpiling cash at levels we haven’t seen since 2001, in the wake of the Dot Com crash. The cash slush pile is larger even than in 2008 when investors fled the market during the Lehman collapse. According to a recent survey, large investors, including asset managers and institutional investors, have almost six percent of their holdings in cash. The amount of cash being squirreled away by just the world’s billionaires, not solely in the U.S., but worldwide, is estimated to be as high as $1.7 trillion dollars. That’s ten percent of the entire U.S. GDP.
There are a lot of reasons that the investment world has retreated to cash, but this is the first time it’s happened when there was no clear ongoing economic disaster. In other words, seasoned investors are behaving as if there’s been a market collapse at a time when equity markets continue to march higher—when to all outward appearances we’re in a boom.
It’s All About the Risk
Equities are risky investments. That’s why your broker insists that you check the little box that says you’ve read the prospectus before your buy order gets executed. If you’re in your forties or fifties you’ve seen at least two market meltdowns that set your investments back between five and seven years. The last, in 2008, was epic in scope and Biblical in its devastation. Investors watched twenty, thirty and forty percent of their paper wealth vanish in a matter of days. That kind of memory leaves a scar.
Baupost's investment process involves "never-ending" gleaning of facts to help support investment ideas Seth Klarman writes in his end-of-year letter to investors. In the letter, a copy of which ValueWalk has been able to review, the value investor describes the Baupost Group's process to identify ideas and answer the most critical questions about its potential Read More
Blame Central Banks
So why are so many people taking their cash off the table and stockpiling it? When you’re wealthy beyond measure, there’s no need to risk heavy losses in the stock market. In normal times, that means wealthy investors kept a lot of their money in bonds, but the bond market has been beaten into the ground by expansionary monetary policy. What that means is that central banks around the world keep interest rates low and buy corporate bonds directly in an effort to juice the economy into growth. But since expansionary monetary policy has stopped working, many central banks have upped the ante on irrational policy—charging institutional investors for holding cash with negative interest rate policies. That aggressive move has thrown the normally boring (and safe) bond and money market sectors into absolute chaos.
Too Rich to Have to Risk
What we’re seeing today is investors saying they’ve had enough of all the central bank nonsense. Part of what’s driving higher stock market prices is the lack of any alternative. People with a lot of money simply are not going to risk a thirty percent downside in the stock market because of poor bond yields. Instead we see them keeping thirty percent of their wealth in cash and accepting the losses due to inflation and currency devaluation. Unlike you and me, they don’t have to risk their (already considerable) wealth in the market just to make enough to survive through retirement.
The Government Doesn’t Like People Hoarding Cash
Governments don’t like people holding cash. People carrying large amounts of cash, or even keeping it in their homes, are assumed to be criminals by law enforcement. The government would much rather see you move that money back into the economy, either by spending it or investing it. (In other words, what’s yours isn’t really yours, according to the government—but that’s a gripe for another day)
As bad as the carnage was in 2008, the government was fairly confident people would put their money back in the stock market. But today that confidence doesn’t exist, so count on the government and Federal Reserve to find some way to punish individuals and institutions holding large amounts of cash with fees or possibly outright revaluation.
This is one time when smaller investors have an advantage. You can protect your personal wealth and savings by converting them into liquid hard assets like gold and silver, thus making it impervious to the inflation and devaluation that threaten cash. And no amount of government overreach can inflict negative interest on gold’s lasting value.
It’s crazy out there right now and you owe it to yourself to protect the value of your hard-earned money.