Cash And Commodities Reign As ‘Everything Bubble’ Implodes

Cash is trash. Just ask Ray Dalio, he’ll tell you. That’s one of his favorite clichés. Or “principles,” as it were.

But one man’s trash is everyone else’s treasure in 2022, a year so far defined by some of the worst returns for stocks, bonds and credit in history.

And not just modern history, either. All history. Although it depends on how you measure and, in some cases, your affinity for arcana and extrapolation, you can make the case, however tenuous, that the first half of this year was the worst ever for American assets.

The figure (below) shows 2022 is on track to be singularly bad for the S&P in real terms. This is a “since forever” year, to lapse into colloquialisms.

Bonds weren’t just no help, they were a severe drag. The first five months of 2022 were the worst for 10-year Treasurys or comparable securities since 1788, according to one stitched-together index.

Those aren’t high bars to clear. So it’s no surprise cash is hurdling them with ease. A positive nominal return is a rarity this year. A positive real return is a Herculean lift. Only raw materials have managed both feats. In addition to negative returns for US equities and Treasurys, global investment grade and high yield credit are down 16%, emerging market stocks 18% and REITS 21%. Crypto is on the brink of oblivion. The so-called “everything bubble” is well and truly over.

“After several years of cash being a clear drag on portfolio returns due to strong asset returns in the US or negative rates in Europe, larger cash allocations have significantly helped nominal portfolio returns YTD,” Goldman’s Christian Mueller-Glissmann wrote, in the bank’s second half asset allocation outlook. The figure (below) illustrates the point.

90% of global assets have underperformed T-bills over the last six months, a threshold rarely breached in 120 years.

“The backdrop for multi-asset investors in H1 2022 was one of the worst in a century,” Mueller-Glissmann went on to say.

This year has been especially cruel to 60/40 portfolios. The 20% drawdown rivals 2008 and the dot-com bust among the worst years on record for that “safest” of strategies (figure on the left, below).

“The 60/40 drawdown YTD is one of the largest over a 12-month period since the 1960s, especially in real terms,” Mueller-Glissmann lamented.

The figure on the right (above) shows that a “simple” risk parity strategy is now mired in the worst drawdown ever. Goldman added plenty of caveats. “This is a simplification as most multi-asset portfolios and risk parity strategies include commodities and are more broadly diversified, or they could have reduced duration more aggressively, by shifting to value, high dividend yield stocks or dollar cash,” the bank wrote.

Of course, that kind of dynamic adjustment isn’t an option for most of the staid mutual funds and ETFs that house Americans’ retirement savings. For standard funds, “there are limits on how fast and large shifts can be” Mueller-Glissmann remarked.

On a three-month horizon, Goldman described their asset allocation as “relatively” defensive. I’d use “decidedly” if I were in charge of adjective selection. They upgraded bonds to Neutral citing, among other factors, recession risk, and are Overweight just two things: Commodities and Cash.