Why Cash Is King

In investing, the hardest thing to do is nothing. There is always the hot new stock or sector that demands our attention. In investing as in life, the hardest thing to do is usually the right thing.

Significant trends, where the big money is made, always appear to be moving in slow motion. This is what we’re seeing in the U.S. dollar. The fundamentals were in place long ago for the current rally, but only now is the trend becoming obvious. When a major trend long in the making starts to acquire steam, the best thing to do is get out of the way. For foreign investors who bet on a weak dollar and perpetually low interest rates in the U.S., this means unwinding their carry trades. For those of us located in the U.S., it is a little easier: we just need to accumulate dollars.

When I look across the landscape of assets, there’s nothing that screams to me as a buy. Real estate in many parts of the country is still trading below replacement costs, but it is not a double from these levels in my opinion. Stocks are going to do very well, but they are not so severely undervalued to suggest more than a medium-term trade. Of the two assets, stocks are preferable in large part because of liquidity. In times like these, cash is king.

Opportunities will arise, but only a crisis will uncover them. The real value of holding dollars rises as latent and unresolved global debt issues accumulate. There is no easy way to calculate opportunity costs, but compressing yields in other asset classes mean dollars are increasingly valuable. Something is going to crash, and this time around it will probably be bonds, not real estate or stocks. The panic that will ensue automatically creates opportunities. Maybe it will be in gold, maybe emerging markets, but a home run investment will appear that can only be profited from with cash on hand.

In reality, this dollar rally to this point has been relatively mild, but it has already contributed to the decline in commodities and gold. We have seen nothing close to a spike high, which I think is coming. In other words, gold can potentially crash rather dramatically. The best thing to do right now is sit and wait.

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