Still Easy After All These Years

The other day I was listening to some hedge fund manager or market strategist making the bearish argument for risk assets. He went through his points and then finished with what he deemed as the final knife to the heart of the bulls - “to top it all off, you are now getting paid 2% in cash. We haven’t seen that level in years.”

 

Sure. No denying that fact. USD cash has gone from yielding zilch in years following the Great Financial Crisis to a rate where an investor might actually notice the interest in their account. Maybe that bearish pundit is onto something. Maybe investors will pile out of risk assets into cash. Maybe this is the tipping point where investors retreat from out the risk curve back to safe assets.

Then again, maybe not… Like Paul Simon used to sing, I think these bearish forecasters are leaning on those old familiar ways. They are listening to the whispering in their ears about the next 2008 crisis that is just around the corner.

I don’t know if stocks will crash. I am not sure if risk assets are overpriced. But I know one thing - the cash return is not nearly as attractive as these bearish pundits are making out.

Just looking at cash without taking inflation into account is disingenuous. I know we haven’t had any meaningful inflation for a long time, but that doesn’t mean investors should stop thinking about the real level of interest rates.

Although the Federal Reserve has been steadily raising the cost of borrowing, the real level of Fed Funds is rising nowhere near as quickly as the angst amongst investors.

 

Accounting for inflation, Fed Funds are still firmly negative! So yeah, maybe nominal short rates are much more positive than a year ago, yet on a real basis, the Federal Reserve is barely keeping up with inflation.

I know, I know - we are late-cycle and the economy is about to roll over… I know all the bearish arguments. Well, based on current fiscal and monetary policy, I just don’t see the ominous storm clouds on the horizon.

1 2
View single page >> |

Disclosure: None.

How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.