Boring Cash May Be Only True Safe Haven
There's heightened risk in every other market category.
-- Martha Reeves & The Vandellas (1965)
Cash is an asset class to consider -- but first, a quick review.
Three weeks ago, the "Jo" discussed the allusive nature of risk, just as the market surpassed 15% YTD return, and overlaid the Fed's balance sheet with the S&P 500 ((INDEXSP:.INX) showing an 88% correlation. The piece circulated just after USA Today headlined "Bull Run Gets Solid Footing," which was a behavioral finance contrarian warning shot if there ever was one. The "Jo" two weeks ago outlined four increasingly bullish trends (A-D) stretching from the longest cyclical (4+ years) to the latest and shortest (mid-April to late May), which I called a "Buying Climax." And finally, last week's "Jo" discusssed thee increase in volatility of late (Average True Range – ATR) and illustrated how some of the momentum indicators (MACD) are showing their first signs of weakening since November 2012.
So why the review? Here's an addition. Over the years my firm has been authoring pieces to not only inform on our market stance, but to educate others about the prevailing risks inherent within the current markets' landscape. Both of these things are based on fusion analysis: the unification of fundamental, technical, behavioral, and quantitative analysis -- or simply put, a weight of evidence. These metrics, since last April, have been indicating an unusually heightened risk profile of the market.
With the markets exceedingly tumultuous during the last half of the week, there are now a plethora of investors asking, "Where to go?" -- and not in reference to Disney World. But herein lies the unique dilemma. Is anything "safe"? As illustrated below, the answer was "no" last week. Of the 12 ETFs we report on, there wasn't one showing any sign of becoming a safe haven for investors.
Breaking it down even more simply, we illustrate three charts that typically represent alternatives to the domestic equity space and provide an area for investors to take refuge. We'll let the visuals speak for themselves.
The first is the Vanguard Total Bond Market ETF (NYSEARCA:BND).
Click to enlarge
The second is the CRB (Commodity Research Bureau) Index.
Click to enlarge
The third is the iShares MSCI Emerging Markets Index ETF (NYSEARCA:EEM).
Click to enlarge
"Nowhere to run, nowhere to hide…" Years ago when working at Wachovia Securities as a branch manager and PIM (Private Investment Manager), there was a newly hired corporate-level compliance officer who felt it his responsibility to tell money managers what they ccould and could not do. During the 2001-2003 tech bubble, the portfolios I managed were 50% allocated to cash, for various reasons. The newly hired, 26-year-old with two years of experience, law school wannabe informed me that it was inappropriate to have clients allocated to this amount of cash as they were in managed portfolios and needed to be invested. After weeks of boisterous debate… well, let's just say he was no longer employed at Wachovia.
Cash, for all intents and purposes, is an investment.
Investment: "The allocation of an asset refrained from consumption."
Cash may be the most boring of assets, and it may be the least lucrative in relation to growth, but what it lacks in return, it makes up for in "real" safety. Truth be told, it's not a place to hang one's hat for an extended period, simply due to a decreasing nominal value (inflation). Yet when all other alternatives have heightened risk and deteriorating principal, sometimes the prettiest pig is the cow.
I hope this helps and finds you well
Editor's Note: Read more at Tesseract Asset Management.
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