February 03, 2008

More on 'cash is king'


Seems to be a bit of confusion on my recent call to begin deploying your cash carefully and selectively. So let me expand.

Manias, Panics and Crashes made it pretty clear what we would see, and now we're seeing it:

· The final phase is a self-feeding panic, where the bubble bursts. People of wealth and credit scramble to unload whatever they have bought at greater and greater losses, and cash becomes king.

So those of you who smartly got out of real estate before it crashed, and got to cash, you were perfectly positioned. For those of you who were out of the market on January 1, and were in cash, you were perfectly positioned. For those of you who didn't trust US$ cash and moved to gold and other currencies, you were fricking geniuses.

Why? Because now we're now seeing the "self-feeeding panic" stage, where the bubble bursts. Housing is in a historic fire sale which will go on for years. And many individual stocks have been recently and swiftly destroyed, many down 50% and some down 90%+, and you have many foreign stock markets that have seen 20%+ bear market declines, in just a matter of weeks. Ouch.

Can stocks and markets (and even a hard asset like gold) go lower? Of course. Will housing continue to fall? Yes, definitely, yes. But remember, stocks are not houses. Some stocks are tied to housing, and they got rightly slaughtered. Countrywide, IndyMac, Fannie, Freddie, KB Home, MBIA, the list goes on and on and on.

But other stocks are not tied to housing, and they got killed to, with the expectation that housing will take everything down. And indeed, the housing crash does affect almost everything, but it's a question of degrees. How bad does the housing crash hurt Exxon Mobile? Or Yahoo? Or Berkshire? Or Russia?

So, in an asset price deflationary cycle like we're seeing, where people are dumping what they have, cash is king. Why? Because only the people holding the cash can swoop in and buy the assets at the fire sale prices when the time is right. And only the assets that make sense to buy.

Would I recommend buying a condo in Miami or Phoenix that's 50% off today? HELL NO! Why? Because that condo is going to keep falling and falling in value, until the price to rent or price to income ratio makes sense, and the inventory dries up.

Do I recommend buying KB Home or Fannie or IndyMac? HELL NO! Why? Because they're likely going to go bankrupt.

But I do recommend wisely and patiently using your cash and looking for opportunities. They're out there. I'm not recommending the stock MARKET, I'm recommending you look for individual stocks and other investments.

And most importantly, with Bennie and the Inkjets debasing the currency, slashing rates, and threatening to print dollars like never before, holding US dollars is the worst cash you can hold. At least take a look at other currencies (easy via ETF's like FXY, FXE, FXF, etc) to diversify your cash. Cash earning 2% in a US bank account sucks, especially when Bernanke is destroying the dollar. 6% was acceptable. 2% sucks. You need to protect the value of your cash, since the Fed is not.

Hold your cash tightly, diversify your cash, be careful with your cash, make your cash work, make sure it's in a safe place (i.e. not WaMu or Countrywide bank), and be glad that you have cash to use when the rest of the world panics and wants to get rid of their assets at any price.

48 comments:

Anonymous said...

I'm buying foreign funds and energy with confidence

Anonymous said...

Mish, Roubini and Panzer are expecting deflation or at least disinflation:

Mish
http://tinyurl.com/yqysc7
(Expects deflation)

Roubini
http://tinyurl.com/2vsynm
(Expects disinflation/stag-deflation)

Panzer
http://tinyurl.com/282tao
(Expects disinflation or deflation)

While Schiff disagrees (see Mish's blog for a polite argument with Schiff).

http://www.safehaven.com/article-9083.htm
(Expects stagflation/hyperinflation)

It will be interesting to see who is right and who is wrong. In all scenarios except for hyperinflation, asset prices are expected to continue falling (in both nominal and real terms). In hyperinflation, nominal prices rise dramatically, but real asset prices fall.

Anonymous said...

Mish thinks M$ panicked and overpayed for Y! by at least 50%:

http://tinyurl.com/yvh4ca

I think it's way, way too early to be buying stocks (except for certain stocks on the day of the big dip in January).

Although I do think energy - oil, gas, and renewables are the future.

At the moment, I've got a $100K short position (July puts) on Chipotle (CMG) - I can't see this company maintaining its 45+ P/E or the $120+ stock price as the US falls into a potentially severe consumer led recession.

Keith seems to think that the Fed's mad attempt to create another bubble means that it must be "a good time to buy", if you can correctly pick which assets or stocks will benefit. People like Mish are arguing that the Fed's attempt to reinflate will fail because the banks are insolvent, and consumers are maxed out. Mish is always right, and Keith is often right, but early. :-)

It's going to be interesting.

Стивен said...

Be careful about the expenses, Keith:

Rydex's CurrencyShares ETFs: The Expensive Truth

And peaky currencies too: FXC looks wobbly. Even FXE may "end in tears".

Aside from going directly to a FOREX broker, the ETFs are cheap compared to:

Everbank: 1% conversion fee both ways.

Direxion Dollar Bear Fund (DXDDX): 1.68% expense ratio(!) Small capitalization ($12M).

For what it's worth, Jim Rogers is telling people to go long on the Renminbi (FOREX:USDCNY) and Swiss Francs (FXF).

Big Cheese said...

Hey Keefer, why don't you use a picture of Swiss Francs or Euros since you keep lambasting the US Dollar?

Anonymous said...

Keith, You are moving this blog in the right direction. Investment ideas, as we are all well aware of the housing disaster but I find most dont know whats the next opportunity.

I along with many fiends read your blog all the time, we remain anonymous as we are fairly high profile in the financial trading world. Thanks for your insights.

Now I'm sitting on a ton of cash and here are my ideas which I would love to see feedback on.

1. Gold on pullback to $850
2. Oil on pullback to $70
3. Financial stocks Summer/Fall 2008
4. Asian Equities (Malaysia, HK, Taiwan)
5. Yen on pullback to 108
6. Euro on pullback

As you can see many of the best ideas have run up too quickly and are overbought, so be careful not to get burned getting in now on the best ideas

Anonymous said...

Benny & the Inkjets. Thats great LOL.

Anonymous said...

Everyone here is talking crash. I still don't see it. The houses that are for sale on the MLS are still the same prices for the last 2 years in the area that I am using as a measure. Croydon, Pennsylvania. 60 houses for sale, 57 of them for sale for the last 2 years, not one lowering of price. Same wooden shacks, same lack of improvements since the day they were built and all asking an average of $200K or more, with a few that are ready to fall down at around 150K to 200K.
No takers, yet no lowering of prices, and this area is nothing special, in fact it has declined over the years. (seems a lot of immigrants have suddenly shown up, especially from south of the border.)
Perhaps in places where there was a BIG run up as in California, Arizona, Florida, etc. Yes , prices came down, but they simply came down from SPACE to the STRATOSPHERE. They are still not in line with income.
So, where is it?

Buzz Saw said...

Cash is king? What kind of cash? If you answer dollars I will go: BWAHAHAHA!!

WINGS said...

I don't have a lot of dough.

I don't want to be a vulture like those So Cal greedmeisters.

I want to protect what little stash I have like a rabid dog.

Good luck men, you're on your own now.

God speed!

michael said...

cash is still king IMHO.

still waiting.

Anonymous said...

We have all at least heard the story of grand parents hiding cash between the pages of books and in other odd places. A friend of mine found 20's and 10's in each one of his grandfather's suit lapel pockets. The generation that lived through the depression, didnt throw things away and held onto as much cash as possible. A few years ago I laughed at stuff like that. Now, I have a safe with dollars, euro's and im going to the depository to get my first (few) gold coins. My grandmother is still alive, and I have plenty of questions for her, she is my new financial advisor.

stockman said...

"And many individual stocks have been recently and swiftly destroyed, many down 50% and some down 90%+, and you have many foreign stock markets that have seen 20%+ bear market declines, in just a matter of weeks. Ouch."

those drops mainly hurt the most recent buyers of stock since hershey stock, for example, split many times and thus, for long term share holders, even a 50% drop only undoes a single split.

Anonymous said...

Great advice Keith!

I'm one of those vultures circling overhead too. Not sure if it's quite the time to pick through the carcasses yet.

Anonymous said...

It's all about expected future cash flows and risk vs reward. Right now, there is a negative expected future return on RE, so most people are staying out of the market unless they get super deals.

pwnd said...

iTulip was on CNBC saying that infrastructure was the next bubble.

MGU

is where I'm putting some of my dollars.

check it out

keith said...

I'm not a currency expert but I do like Swiss Francs and Jap Yen (FXF and FXY)

I don't like GB pounds - their bubble was bigger than ours and they'll be cutting rates soon

Euros are interesting - inflation roaring in some Euro countries and others are seeing a housing collapse. Will probably be in a holding pattern for a bit.

Currencies should be just a part of your "cash" holdings. Gold is cash. Silver is cash (GLD, SLV). Commodities are cash (DBA). Hell, oil is cash. Little pieces of pretty colored paper that can be printed by the trillions seem silly right now compared to real things like a barrel of oil or a bar of gold, don't they?

Houses would be cash if there was an efficient market for them - which there is not.

I do see a future 100 years from now where paper is gone, and it is back to gold worldwide (yes, a one-world currency). You'll know how much gold you own, your "credit card" will be tied to your gold stash, and you'll be able to trade anywhere in the world on one fractional gold platform.

What Benny and the Inkjets are doing and are about to do might be the death of currency as we know it.

Anonymous said...

"But other stocks are not tied to housing, and they got killed to, with the expectation that housing will take everything down. And indeed, the housing crash does affect almost everything, but it's a question of degrees. How bad does the housing crash hurt Exxon Mobile? Or Yahoo? Or Berkshire? Or Russia?"

Really Keith?

May be u r not as smart I thought u were....

Stuck in So Pa said...

Anonymous said...
Everyone here is talking crash. I still don't see it. The houses that are for sale on the MLS are still the same prices for the last 2 years in the area that I am using as a measure. Croydon, Pennsylvania. 60 houses for sale, 57 of them for sale for the last 2 years, not one lowering of price.
============================

Good grief! Checked out Croydon on the MLS. There MUST be something special to the area, for old 1930-50's era shacks on postage stamp lots that would almost fit in my living room to have sellers ask those prices.

If the shacks are paid for, and the sellers don't really need to sell, that would explain why prices don't come down, but WHY are they that high to start with? Something doesn’t ring true! Are you sure that they are not building an army base, or major industrial/distribution center nearby? That's crazy!

Rich Cashman said...

Cash in the form of precious metals is king. However, watch out for that Euro in the coming months, something big is going to happen. I won't get into specific predictions but the currencies are all showing massive pressure lately.

Rich
http://goldequalsmoney.blogspot.com/

Anonymous said...

I don't believe in a gold currency. Although gold cannot be printed, it can be mined. So they can keep creating more gold coins and bars as long as people are digging. Does that make gold worth less when more gold is mined?

Anonymous said...

.


My best friends grandparents, born in the 1890's,
in their mid 30's during the depression.

Very frugal, raised on farms, learned the value of the dollar and saving.

Story goes the grandfather at one point in time or another bought gold and saved silver coins, and lots of it! Then buried it on the family farm (they think) in northern Ill.

He lived to 94!

To this day,

No one knows where it is buried

.

keith said...

"So they can keep creating more gold coins and bars as long as people are digging"

- Uh, ever hear of a printing press?

Geeze, think people!

Frank@Scottsdale-Sucks.com said...

But ... but ......

A realtor told me it's a great time to buy a house!

LOL

Sorry, couldn't resist, yesterday we went to heckle the same realtor who does the same open house every single weekend for $1.1M and it's too much fun to continually drop in and remind him that we leased the nicer house next door for $3,600/month.

Mr. Realtor, we should pay $1.1M for yours ... why?

Luvthatbush said...

· The final phase is a self-feeding panic, where the bubble bursts. People of wealth and credit scramble to unload whatever they have bought at greater and greater losses, and cash becomes king.
----------------------------------
Sorry Keiffer. Thats not the way it works in America these days. The mega-rich get the government to bail them out.

Socialism for the Rich.

Capitalism for everyone else.

Anonymous said...

jeeebus - total disconnect here... the major banks would be bankrupt if they had to mark everything to market today - they would take a lot of stockbrokers with them, the insurance funds are microscopic compared to the losses they would have to cover - a major derivatives player goes LTCM, citi goes northern rock, runs on money market funds - and we haven't even seen the losses from the alt-a/prime mortgages yet - know what happens to your cash if it is in some account at a firm that goes bankrupt - that seems to me to be the priority right now...

Anonymous said...

"No one knows where it is buried"

When the flaw comes, I will drive up there with my metal detector and find it for them. For a fee or a split of course, or they could just buy one themselves and spend their weekends looking for grand daddys treasure.

Good luck!!!

Anonymous said...

I'm totally confused.

Inflation - deflation.
Buy stocks - not buy stocks.
Buy gold - not buy gold.
By euro - not buy euro.
Cash is king - cash was king.
Good time to buy - bad time to buy.

Screw it. I'll keep my savings in US dollars, it's fine with me.

Double cheeseburgers are still $0.99, whooper juniors are still $0.99
Electronics is getting cheaper every day. We spend about the same amount every month for food.
Gas is getting more expensive? F*ck it! I can afford to pay extra $100 month for gas, not a big deal.
Gold is getting expensive? I don't care. I don't need gold.

Maybe it's just be but I don't feel any inflation. Where is it? Please explain.

Anonymous said...

To Stuck in So Pa: No, there is no base being built, no industry moving in and no casino. This is just people looking to cash in on the "gold rush" of housing. Remember, these houses have been for sale for years!
They are ugly. They are also just bungalows. Keep checking. When you see these go below 100K, that is how you will know that the crash has finally reached the Joe Six Pack mentality.
By the way, most of these homes have the water pipes buried in the concrete floors. When they spring a leak, you have to bring in the jackhammers into the living room. NO BASEMENT.

Anonymous said...

Is there any real danger in keeping my life savings in a 5% CD at WaMu? Seriously....

Anonymous said...

Janszen (iTulip) predicts inflation ("Door Number Two") and has a rebuttal for Mish (deflation):

http://tinyurl.com/22c4f8

Note that most of the arguments, whether for inflation or deflation, predict recession, and (except for hyperinfation) continuing falls in asset prices (real estate, stocks, commodities - but not gold).

Timing It Right In OC said...

I told my broker back in '04 to buy gold. He didn't & I was too busy to figure it out on my own. It was about $300/oz. then. I've always wanted to invest in it, but am clueless -- buy coins, and if so, which? Buy mutual funds that invest in gold? How does one start? (BTW, I bought in '90 -- never used my home as an ATM; just sold this past Dec. -- cash, and alot of it, is in a 5.1% CD with the local credit union).

Anonymous said...

Gold shouldn't be written off because it can be mined. Aside from money and jewelry, we use a helluva lot of the stuff in hi-tech electronic work, coatings, etc. It's a marvelous metal for certain applications (like dental posts) and has actual, useful value.

I'll bet more of it gets back into cars (it was used in ECU connections for many years) as more hybrid development takes place. Hybrids are the best answer for reducing the carbon footprint (they aren't all about MPG...that is only secondary to their value). Its physical durability is part of what makes gold coins nice....the damn things don't wear out very easily!

And for those who don't believe in cash...try buying a tank of gas or a roll of toilet paper when the computers are down and your card won't read. I see so many people who have NO cash...I wonder what they'll have to offer for barter (which is only what all money is, anyway).

Anonymous said...

I'm totally confused.

Inflation - deflation.
Buy stocks - not buy stocks.
Buy gold - not buy gold.
By euro - not buy euro.
Cash is king - cash was king.
Good time to buy - bad time to buy.

Screw it. I'll keep my savings in US dollars, it's fine with me.

Double cheeseburgers are still $0.99, whooper juniors are still $0.99
Electronics is getting cheaper every day. We spend about the same amount every month for food.
Gas is getting more expensive? F*ck it! I can afford to pay extra $100 month for gas, not a big deal.
Gold is getting expensive? I don't care. I don't need gold.

Maybe it's just be but I don't feel any inflation. Where is it? Please explain.

Apparently you eat at Burger King 24/7. Try a trip to the grocery store once in a while. Write down the prices. $4/gal for milk, $3/loaf of bread, $2/eggs or more.
Imported grapes from Chile $6.99 a lb. that used to be $3.99/lb.

You are in Whopper World. Don't worry, be happy. Reagan made catsup and pickles into vegetables. You will be just fine.

Anonymous said...

.
Grandpa's Buried Gold,

Well if you want to bring your lil metal detector and walk 274ac plus another 35 and 17......be my guest!

You won't be the first!


.

Anonymous said...

Ive been following Faber for a few years. He did say "I expect that in my lifetime I will see gold at !0,000 oz. Wherever the Dow will be in the future, one oz of gold will buy the Dow. Dow 8000, gold 8000oz."

While the stock market may go up, has it really gone up?

THey will inflate themselves out of this mess. A Condo in San Fran will still be worth 700k, in 10 years from now because 700K will be like 300k in real terms.

Gold.....

Anonymous said...

I told my broker back in '04 to buy gold. He didn't & I was too busy to figure it out on my own. It was about $300/oz. then. I've always wanted to invest in it, but am clueless -- buy coins, and if so, which? Buy mutual funds that invest in gold? How does one start? (BTW, I bought in '90 -- never used my home as an ATM; just sold this past Dec. -- cash, and alot of it, is in a 5.1% CD with the local credit union).

BUY PHYSICAL GOLD AND HOLD IT YOURSELF.

Frank@Scottsdale-Sucks.com said...

And for those who don't believe in cash...try buying a tank of gas or a roll of toilet paper when the computers are down and your card won't read. I see so many people who have NO cash

My girlfriend asks why I don't use cash when I always carry a big wad of it with me ... I tell her because then I wouldn't have cash when I might actually need it.

Until then, everything goes on the Amex.

Anonymous said...

Permabear says "don't be a hero" - stay away from stocks.

http://tinyurl.com/36cfjk

Grantham said he expects stocks to reach a bottom in 2010.

"There are plenty of bad things left in this cycle," he said.

-

The Japanese stock market fell for years even as they took interest rates to zero - will the the US be different?

I also read an article (I can't find it at the moment) which graphed the historical performance of the US stock market with rate cuts highlighted - in the past, rate cuts have not stopped stocks from falling.

Of course, "this time it's different" may really be true for the US, but don't assume that Helicopter Ben will be able to get banks to lend or consumers to spend.

Plenty of economists, commentators and investors with good track records (Roubini, Mish, Schiff, Rogers) are calling a recession either NOW or soon.

Are stocks at today's prices good value if most people are still arguing about whether there's going to be a recession, or if they think rate cuts will push stock prices up?

If you can't tell, I'm anti-stocks, and will remain so probably for months, or perhaps even longer.

I have two six-figure short positions - put options - (1) on Chipotle, and (2) I'm still buying, but I'll let you know in a few days... Anyone who reads Mish's blog can guess what it is.

My track record so far: cashed in 150% profit, from put options on banks, retailers and companies depending on discretionary spending.

Disclaimer: I'm not an economist, or a high flying investor, and if I'm wrong I'm going to lose a lot of money, so take anything I say with a grain of salt.

Anonymous said...

Apparently you eat at Burger King 24/7. Try a trip to the grocery store once in a while. Write down the prices. $4/gal for milk, $3/loaf of bread, $2/eggs or more.
Imported grapes from Chile $6.99 a lb. that used to be $3.99/lb.

LOL. I eat at Burger King one or two times a month. We cook at home because it's way cheaper.
I don't know prices in the grocery store because my wife takes care of it.
Apparently I don't see any inflation because we live way below our means and we just do not feel the increase in prices.

Believe me I've seen inflation before when I lived in Russia. It's when prices for EVERYTHING get higher EVERY month or even every week, and they go up significantly. For some reason I just don't feel it here yet.

BUT, whooper juniors for $0.99 is still a great deal. :)

Michael said...

Keep in mind that what we are trying
to do is time the markets. The classic problem with timing the markets is getting out too early and jumping back in too late such that your gains end up being no better than those who stayed in.

I bought my house here West of Boston in the spring of 1992. It turned out to be close to the bottom of the market after the mid-80's minicomputer slump here.
I had to wait until 1995 before prices started to climb again and had several friends who where underwater for those years. It payed off well for those who held on.

I believe the wide pullback in the stock markets is due to the selling of assets needed to recapitalize the banks. The banks may not come back for a while but I believe the selling pressure on stocks could start to ease soon. If I'm right, the time to buy stocks at a discount may be coming to an end.

Anonymous said...

frank in scotsdale... i know where you can get a nice house for just the costs of your rent...maybe your in sheepleville? croydon pa...is that the place with the underground coal fires that do not go out? not realy looking to run my private electrial utility...and besides gid you ever try to get a building permit?

Anonymous said...

I don't believe in a gold currency. Although gold cannot be printed, it can be mined. So they can keep creating more gold coins and bars as long as people are digging. Does that make gold worth less when more gold is mined?
------------------------------------------
####
To anonymous who says gold can just be mined.
Unlike paper for currency, gold gets much more expesive and harder to find each and every year and the amount of fuel/oil it takes to extract gold goes up as they have to dig deeper and in more remote areas thus using more fuel/oil $ per gold ounce.
So gold's value holds a much larger part of the value of oil/fuel it takes to extract it unlike paper
currency.

Anonymous said...

"Does that make gold worth less when more gold is mined?"

Good question. Gold is mined, increases approximately 3 percent annually (historically). This is normal inflation, not what we have in the dollar where M3, yes it is still calculated, is growing at approximately 15%.

cobra2411 said...

Sigh...

Gold isn't cash... Have you ever been able to buy groceries with gold??

Gold is a hedge against hyperinflation and political instability...

And as for Benny and the Inkjets? It's cute, but I've got some bad news for you...

Ben can't print money...

The FED is a private bank not too different from WaMu or Countrywide except they loan to banks, not people.

The Treasury is where the money is printed.

Ok, so you say the FED is cutting rates and killing the dollar....

Yes and no. The currency market is reacting to the FED playing games, but Ben is following the credit markets. They want you to believe he's in control and leading things, but once you know where to look you will see that he just follows.

Take a look at the slosh report.
http://www.gmtfo.com/reporeader/OMOps.aspx

Notice that on Jan 30 there was a 17 billion injection to defend the 50 cut... Notice how it's bleed off pretty quickly and we're back at the precut level?

Look a little farther back to the emergency 75 cut... only 10b added... A 75 cut should take 100b to defend, not 10.

So what does this mean?

He cut because the slosh was going to zero. After that the FED needs to do one of two things to defend rates. Lower the target rate OR pledge assets and borrow from the member banks.

How would people react if the FED borrowed money to defend the rate? My guess is that it would be total chaos because people believe the FED is government run and that's where all the money's at.

So he cut the rate.

Better question is why?

The credit markets have locked up because there is no trust in the system anymore. The only way to fix that is for the banks to come clean.

Want another fun page to look at?
http://www.federalreserve.gov/releases/h3/Current/

Notice that for the Jan 30 numbers the non-borrowed reserves for banks is negetive 9 billion...

non-borrowed reserves are bank deposits... The money in your checking / savings account... Your CD's and money market accounts... ie your money...

Notice too that all of the banks reserves and then some are from the TAF auction... Not good.

This isn't to say that all the banks are bankrupt, they've just loaned out the money they had (your deposits) and couldn't attract any new money in from traditional sources. So they went to the lender of last resort... The FED.

Their other option? Get seized for violating their reserve requirements.

The end of all this is a massive fire sale on anything that will sell. At any price.

The world is about to go on clearance sale... And I'm sitting on just shy of 1 million dollars... US dollars... Just waiting...

And don't worry... The US dollar will do just fine. The US isn't the only one with problems, we're just the first one to show it...

Anonymous said...

Reminds me of Heinlein's words in the Lazarus Long (and family) stories. You only need three things to control a society.

1. Money, so the people can exchange goods and services.

2. Centrally controlled Banks, so you can control the value of peoples money, for your own ends.

3. Religion, with a promise of a messiah, to comfort the people when you take away all they have gained.

I'm afraid I don't remember the exact words, but that's the gist of it. Prophetic words from the grand master, when his mind was still sharp and time had not taken him away from us.

My advice is to listen to Douglas Adams and "Don't Panic" (and have a towel, a coin, and a bag of peanuts).

BananaRepublicrat said...

"Hybrids are the best answer for reducing the carbon footprint "

Wrong. The best answer would be: STOP DRIVING EVERYWHERE!

Sorry, green consumption fantasies are a pet-peeve of mine.

Anonymous said...

> (2) I'm still buying, but I'll let you know in a few days... Anyone who reads Mish's blog can guess what it is.

And (2) is... IYR

(Not IYR itself, but put options on IYR)

Do a search for "commercial real estate" on Mish's blog.