Is it time to hold more cash?
Warren Buffett once wrote that “cash is a bad investment over time. But you always want to have enough so that nobody else can determine your future.” We agree. And with most investors having migrated away from cash, we see some good reasons why holding more looks like a good idea right now.
This article first appeared in The Australian over the weekend.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Julius
:
Roger, I am pretty sure you are right. However, if the property bubble results in a crash, will having your cash in a bank such as one of the big 4 be any more safe than having it in another asset class? If the property bubble bursts, what stops it from taking out the banks and your 2.5% term deposit? It is a scary world we live in.
Roger Montgomery
:
Hi Julius, you’re proposing that the APRA mandated increases in CET1 (Common Equity Tier 1 ) capital to 10.5% by 2020 (ANZ is already at 10.1%) under thier requirement that the banks be “unquestionably strong”, and that their stress testing success under a 40% fall in house price scenario, is inadequate. For the reasons alluded to above, I currently think we can rule out a failure of the big banks under a house price correction scenario. That’s not to say they couldn’t endure a very tough period of course, but a failure of the sort that sees depositeors lose money is most extreme.
Roger Gibson
:
Why turn to cash? Short dated senior debt corporate bonds over multi-billion dollar companies may not be as secure as stuffing it under the mattress but are far removed from shares in those very same companies and can be more liquid than a term deposit; and offer two or three times the return. I think the fixed interest array of investment opportunities are the way to go.
Roger Montgomery
:
as long as you go floating rate or very short duration, you could be ok Rog.
Anthony
:
Dear Roger,
Thank you for the article. My post is more of a question rather than a comment. The issue is the capacity to pay obligations. You have two classes of assets, appreciable and depreciable. The former could be investment in shares and property while the latter could be shares and property, cars and equipment. We could also latter class of loan which is could to include recurrent expenses.
You mentioned that if a ‘person’ (or entity) cannot repay their obligations when there are rising interest rates and falling values it puts a strain on the financial system. Consequently, the ‘person’ (or entity) may have their loans recalled. There is problem if there is a mass of people facing this problem.
Two questions:
However, what happens if the person has the capacity to pay their obligations yet the bank may still recall the loan for an asset when the asset’s value declines. Yet there is no issue when a person has a loan for a depreciable asset the bank does not recall that loan for an asset’s falling value. For example buy a brand new car or piece of equipment, take it out of the showroom door, it significantly falls in value. The ‘person’ (or entity) still has the capacity to pay and the loan is not recalled.
On the other hand, isn’t the banking system similarly strained when loans for depreciable assets or loans for recurrent expenses are not met?
Thank you,
Anthony of Belfield
Peter M
:
Hi Roger,
I think that you have hit the nail on the head and that we are at the 11th hour. John Hussman has also published a great weekly comment this week in respect of US equity markets – http://www.hussmanfunds.com/wmc/wmc170501.htm
The news surrounding Home Capital Group should also be viewed as another indicator given the similarities between Aus & Canadian property markets.
Keep up the great work!