Email of the day on holding cash
Comment of the Day

December 19 2022

Commentary by Eoin Treacy

Email of the day on holding cash

Good morning, Eoin I would welcome your perspective if I may. I have been long only forever, 40 years and counting. In view of the current global challenges, I am thinking of taking the remaining 60% (40% currently in cash or cash equivalents) off the table and holding all in cash for the time being. I would welcome any observations you may have. I look forward to hearing from you.

Eoin Treacy's view

Thank you for this important question which may be of interest to the Collective. The biggest argument for remaining long forever is the market always comes back…eventually. Being an investor requires an optimistic mindset. That means there is always a risk of selling too late. There is also the risk that the sectors which lead a recovery are not those you currently own.

The biggest argument for going to cash is one can avoid the worst of a major decline. That requires adopting the skepticism of a trader. The risk is one fails to get back in when a recovery begins and then that one sells too early in a recovery.
The largest constituents of the Nasdaq-100 were among the most successful companies in the run-up from their 2008 lows. The Index is down 33%, so far, from the November 2021 peak. The ARK Innovation ETF is down 79.5% from its early 2021 peak so far.

The obvious bearish case rests on the assumption a slowdown in earnings is not adequately priced in. The decline to date has been mostly about valuation contraction in response to higher borrowing costs. In a recession, corporate earnings fall and that implies further scope for weakness next year.

The black swan bearish case rests in the private assets sector where leverage and high valuations have massively inflated performance and egos over the last 14 years. Higher rates and tight liquidity are not a good recipe for illiquid assets. We’ve seen multiple liquidity events in the last three months and these serve as warnings of a bigger issue to come. Ghana’s sovereign default today adds to the list of troubled borrowers. To me that makes a convincing case for being overweight cash.   

When corporate earnings roll over, the reticence to fire workers will also be revisited. I agree with Larry Summers that the unemployment rate could jump higher in a swift manner, when companies decide that reducing headcount is a necessity. That will be the catalyst for Fed easing and we could easily see a strong short-covering rally in the most depressed sectors.

If one is going to cash now, then you need to have a plan for what it will take for you to get back into the market. It’s best to have a plan now and to abide by it when the time comes. Getting back into being fully invested should be done as conditions improve and not in one fell swoop.

Personally, I anticipate the resources, infrastructure, armaments, biotech, precious metals and select tech shares will lead us out of this bear market. However, it is too early to adopt an overtly bullish tone just yet.

There will also be opportune times to buy the dip in bonds as I believe we are in a bottoming stage for the sector and the security of a guaranteed yield is increasingly attractive.

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