Cash Is King

Cash is king. And not just because these are uncertain times.

For most of the post-Lehman era, cash wasn’t viable as an asset class. It was “trash,” as Ray Dalio is fond of putting it. It yielded nothing, which meant that as long as there was any inflation at all, you lost money in real terms, but more importantly, the performance disparity between cash and every other asset was typically vast. Central banks’ efforts to conjure real economy inflation didn’t pan out, but they succeeded in inflating financial assets. Holding cash meant missing the boat — or the bonanza.

Of course, the psychological scar tissue associated with the financial crisis and, to a lesser, but still acute, extent, the European debt crisis, left investors and corporates predisposed to holdings at least some cash, clutching it as one might a Linus security blanket.

As Morgan Stanley’s Andrew Sheets put it, in a new note, “The intensity of the GFC and the events that followed meant that in the darkest moments more than a few CFOs and investors likely mumbled a silent prayer: ‘If we make it through this, we will never be caught without liquidity again.'”

Only once in the last 22 years has cash been the best-performing asset class (figure below). That year was 2018, when the Fed last engaged in so-called “double barreled” tightening, leaning in with both rate hikes and balance sheet runoff.

In 2022, cash is the best-performing asset class with the (obvious) exception of commodities.

For Sheets, it’s possible that holding cash is now synonymous (or at least consistent) with efficient asset allocation. “The idea that holding cash means paying for insurance is no longer accurate,” he wrote, noting that US six-month T-bill yields are the highest since late 2007 “and offer 157bps more than the dividends of the S&P 500, 21bps more than US 10-year Treasurys and just 60bps less than the US Aggregate Bond index.”

The upshot, from Sheets: “For USD investors, cash has ceased to be a material drag on a portfolio’s current yield.”

Note that it’s exceedingly rare for T-bills to outperform more than 90% of global assets. Over the past 120 years, there are only a handful of such instances. 2022 is one of them.

The figure (above) is a snapshot of where things stood as of early last month. T-Bills were outperforming almost every asset on the planet.

At maddeningly regular intervals over the past decade, commentators have declared the end of “TINA” — the demise of the “there is no alternative” regime, wherein a lack of opportunities forced investors out the risk curve and down the quality ladder in search of yield and returns.

Typically, reports of TINA’s demise were greatly exaggerated. In 2022, though, cash does indeed appear to be a viable alternative — with caveats. As Morgan’s Sheets went on to note, term deposits and savings accounts in the US still don’t offer much, if anything. “Not all ‘cash’ is created equal,” he wrote, again pointing to six-month T-Bills as a possible best choice.

He drove it home. “Cash yields have risen sharply at a time when Morgan Stanley’s forecasts for global cross-asset returns are low, squeezed by tighter policy if economic data continue to hold up, and higher risk premiums if the data turn down,” Sheets wrote, adding that although ~3% on safe, liquid T-bills isn’t “the most exciting” investment opportunity, “sometimes it makes sense to take what the market gives you.”