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Dear Diary,

The Dow lost 251 points, or 1.5%, on Friday. Gold was flat. What’s ahead? Up? Down?

Our best guess is we’ll have more up and more down in the months ahead. Pressure on both sides is increasing.

Downward pressure is coming from the collapse of oil, the $4.6 trillion parked in bonds yielding negative interest rates and the slowest rate of growth of world trade in 35 years.

On the upside, Fannie Mae is offering mortgages with 3% down, and the Bank of Draghi is pumping more credit into the world economy at the rate of €60 billion ($68 billion) a month.

Actually, we don’t know which of these things should be on the downside and which should be on the upside. The economy has been turned on its head so often, we no longer can tell down from up.

Trashing Cash

Last week, we met members of our family wealth advisory, Bonner & Partners Family Office, at our annual members-only event here at Rancho Santana in Nicaragua.

On the table was a question: What should a multigenerational family do with its cash now?

Cash is not without its risks, explained our old friend and strategic partner on natural resource investing Rick Rule.

“There’s a Motel 6 on the road that I take when I drive to work,” he told our members.

“When I drive to my office on I-5, I pass a Motel 6. And I remember, in my 20s, it was called Motel 6 because you could get a room there that cost $6.

“I amuse myself every day driving past Motel 6 because they have variable rates depending on occupancy. And I have seen the sign advertising rooms for $59, $69, $99 and $119.

“Let’s take the low number – $59. That’s a tenfold rise in the price in 40 years.

“There can only be two reasons that happened. The first, of course, is that a room at Motel 6 exhibits nearly 10 times the utility that it did 40 years ago.

“I don’t know if they have gotten new sheets in over 30 years. A room is certainly not 10 times the size that it was 30 years ago.

“That would suggest to me that the purchasing power for the denominator – the US dollar – in the context of a room in Motel 6 has declined by 90%.”

Cautionary Adverbs

Probably is a word that can’t be overused in the financial world.

Even a simple calculation of how much prices have risen over the last four decades needs a cautionary adverb or two. Maybe. Could. Perhaps. Around. About.

At the Diary we use these words whenever we wish to express doubt or imprecision. Probably, too, is a handy way to tell you not to be too sure.

Not only are we unsure about how much US consumer prices have risen over the last 40 years (between 10 times and 15 times gives you a good range), but also we’re unsure about how much you would have lost had you held cash.

Because it depends on what kind of cash you held. And how you held it.

If you had held cash in its most traditional form – gold – you would be ahead of the game. The price of a night at Motel 6 may be up 10 times in the last 40 years. But so is the price of gold, more or less.

How to Sleep Better

Our editor-in-chief, Chris Hunter, presented a chart showing that US-dollar cash was one of the worst asset classes you could have owned over the last 20 years.

A 20-year investment in 3-month T-bills earned higher annualized returns than stocks in Asian emerging markets (dragged down by China) and Japanese stocks. But versus every other asset class, it was a loser.

And yet, what does Rick suggest you do with your money?

“Cash!”

Over the long run, cash may be a loser – no need for a probably.

Hold cash and you give up whatever gain you might have made from putting it to work in other asset class. That forgone gain is a cost. So is the attendant loss of purchasing power.

“Holding cash almost guarantees a loss of purchasing power over the long term,” Rick concluded, “but it also does something very special. It gives you the courage and the ability to buy quality assets at steep discounts when markets crash.”

Cash may be especially unhelpful when credit is expanding – as it has been for the last 40 years. But it may be especially useful when the credit contraction begins.

“Not only that…” continued Rick, “cash settles your nerves. I sleep better when I have a lot of cash.”