The holder of cash has an effective option to purchase more volatile assets if and when they become cheap. Thus, a willingness to hold cash when there are no obvious alternatives is the simplest way to ‘get long of the tails’, and therefore the original ‘long-vol’ strategy.
That’s from former SocGen strategist Dylan Grice. It’s kind of tautological, but it highlights an important point which, although self-evident, is likely lost on a lot of investors who abhor the notion of simply moving to the sidelines when everything looks rich: cash has a kind of embedded optionality.
One interesting thing to note when thinking about that concept is that if we do end up with a cashless society (which seems likely), policymakers will no longer be constrained by the zero lower bound. That is, if depositors can’t opt to simply hold physical banknotes, there’s no limit on how low rates can go. Thus, central bankers could micromanage the economy by simply taking rates so far into negative territory that people would have no choice but to spend.
That makes me wonder if “nothing” is really the low when it comes to the return savers can expect on their deposits.
In any event, I thought it was worth posting the following chart from SocGen which shows that at no time since the 1970s has holding cash eroded wealth more quickly…