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Don't Believe the Hype


Cash remains king even as pundits tout one "historic" opportunity after another.


Yesterday, for the third time in as many weeks, the US Government sold Treasuries at a yield of zero, as investors sought no interest in exchange for getting their money back in 4 weeks' time. And as a consequence, I can already hear unscrupulous financial advisors around the country rehearsing their scripts:

"Mrs. Jones, with your cash now earning nothing and stocks down 40% from a year ago, isn't it time to jump back into the stock market, or at least into longer-dated Treasury bonds? How about corporate bonds, given what they're yielding over Treasuries?"

Yes, Mrs. Jones is going to hear an earful. And with Federal Reserve Chairman Bernanke reiterating how long he intends to keep interest rates at zero -- a not-too-subtle message to push savers out of risk-free cash investments -- I'm sure she won't be alone. In fact, I expect a lot of retail investors to be dragged at pen point down the Trail of Tears into taking risk.

Candidly, I can see the temptation. After 15 months of often steep declines, everything feels like a bargain. And, honestly, from the perspective of every US recession in our lifetime, these truly are bargain prices.

Unfortunately, unless you're in your eighties, what we're living through today doesn't in any way resemble an event from your past. This one is global - and it is secular, not cyclical. And, while they can put a higher floor on the bottom than would otherwise be the case, history suggests that central banks and governments are limited in their ability to counteract this unwinding deflationary cycle.

What this crisis requires is time. And despite all the price cuts we've seen, not enough time has passed to say with confidence we've reached the bottom. At best, I'd offer that we're only now just seeing the second derivative of the financial deleveraging that's underway. And, unfortunately, there are more hard times ahead.

With the passage of time, the pressure on Mrs. Jones and her peers, all earning zero on their savings, will intensify. And I expect many will succumb to the impulse to take on more and more risk, particularly as benefits like the 401(k) match are cut and the need for return in order to one day retire grows.

As much as I wish it were done, I don't believe it is. In fact, I fear the next 12 months will require even more courage and discipline than the previous 12. During this period, doing nothing (i.e. staying in cash and maximizing liquidity) will feel increasingly lonely as pundit after pundit shills one "historic" opportunity after another.

But in reality, nothing about this crisis is particularly historic. In fact, the first chapter of Charles Kindleberger's Manias, Panics, and Crashes is "Financial Crisis: A Hardy Perennial." In it, he goes on to say that "chain letters, bubbles, pyramid schemes, Ponzi finance and manias are somewhat overlapping terms."

So sorry, Bernard Madoff, but the history books are filled with your ilk.

Once again, I'd offer the same quote Will Rogers did during the Great Depression - that "the return of principal is far more important than the return on principal." Until further notice, cash remains king.

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