Is It Time to Go to Cash?   (April 21, 2010)

Maybe everything's as great as advertised; but maybe not.

I've got a bad feeling about the current stock market. It's just an intuition, and certainly not advice (please read the HUGE GIANT BIG FAT DISCLAIMER below to remind yourself this site is the freely offered ramblings of an amateur observer), but I have a funny feeling that all the lies, manipulations, misdirections, obfuscations, frauds, ginned-up statistics and feel-good propaganda is about to come apart at the seams.

Courtesy of frequent contributor B.C. of the Imperial Economics blog, I present a chart which offers a historical, cyclical basis for the feeling that the Great Unraveling is about to begin in earnest.

Before I show you the chart, let me restate the Great Ripoff at the heart of the Triumvirate's (Federal Reserve/Treasury/too-big-to-fail banks) strategy: by paying cash and savers nothing and paying banks 3% for their reserves, the Triumvirate is effectively pushing everyone from pension funds to small investors into risky gambles offered up by Wall Street--gambles which reap them enormous fees--in order to earn any return at all.

Banks can offer risky "investments" because they have already been backstopped (promised protection against losses) by the Fed and Treasury, so while they have literally no risk, their clients and customers are taking on huge risks to play in Wall Street's utterly unproductive games.

It's not like the big investment banks are using the deposits and "investments" to build a 100-square mile solar electrical generating plant in the Nevada desert, or some other real project of potential future value which is thus inherently risky; their "investments" are simply electronic churning which generates gigantic fees on both ends.

As Goldman Sachs so ably demonstrated, the big investment banks package risky assets as "safe" with the collusion of toothless Federal regulators, craven credit rating agencies, and others in the criminal conspiracy. They then sell these to clueless counties, pension funds and other clients who feel they have no choice but to trust (heh) the big investment banks.

Recall that since cash earns nothing, and pension funds' entire sustainability depends on earning 8% a year, they have been forced by zero-interest rates to accept stupendous risks and deal with the "pushers" of Wall Street. You have a monkey on your back, your friendly Wall Street pusher is happy to oblige your need --for a fee, of course, and your silence and complicity.

The investment banks' other "we have no choice" clients, the hedge funds and private capital, then turn to the IBs to structure some high-return "low-risk" gambles at the fixed roulette wheels and rigged card games. (As every casino knows, you need to take care of your biggest clients.) So they arrange a side-bet against the toxic crap they sold the pension funds, towns in Sweden, counties in Florida, etc. to sell to the hedge funds and private capital pools.

It doesn't get much sweeter than this: fees on both ends of a deal, and a Federal backstop against any potential losses.

If there is a God, or Karma, then the U.S. financial system deserves to implode and take everyone who has been complicit down with it. While we won't hold our breath (God works in mysterious ways), this chart suggests the Instant Karma might be building:

Thank you, B.C., for your permission to reprint this insightful chart.

While the Fed would dearly love to transmogrify the current Secular Deflationary Bear Market into an Inflationary Bear Market, as I have noted in Deleveraging and the Futility of "Printing Money" (April 2, 2010), they haven't "printed" enough or created enough end demand for credit to escape the event-horizon of a deflationary Bear Market.

The data for the chart was drawn from this spreadsheet on Robert Shiller's website. As B.C. noted, monthly prices are averaged, not the monthly close, and returns are price-only and do no include dividends.

Hmm, sure looks like going to cash might be the safe bet here. A number of readers have been kind enough to note that last February, I suggested the Dow Jones Industrial Average (DJIA), which was plumbing the depths around 6,600, could climb up to the 10,800 level before topping out. It has since overshot to the 11,100 level, roughly the 200-day moving average and the 11,200 61.8% fibonacci retrace of the entire fall from the October 2007 top to the March 2009 lows.

Maybe the wonderful corporate/global America earnings will goose the markets a few points higher; let's be generous and grant that the major (U.S., EU, China, Japan, et al.) governments' $10 trillion stimulus spending over the past two years did "trickle down" to global corporations. Having slashed and burned their headcount, global corporations have been banking hefty profits. So maybe there is 5% upside for those willing to pass the lighted stick of dynamite around.

Or maybe not. Why risk yet another 40% meltdown in one's portfolio by getting greedy enough to believe the hype and propaganda? Could it be that everyone else playing the game hopes you'll accept the sizzling stick of dynamite just before it explodes?

Insiders have been selling like no tomorrow for months. Those who believe that "sell in May and go away" has proven to have merit have cashed out two weeks in advance of May's arrival; why take chances that the dynamite's fuse might not last until May 1?

Everyone hates cash because chasing yield is the game we've been corralled into by the Fed'a ZIRP (zero-interest rate policy). But in a deflationary environment, cash doesn't lose 40% of its purchasing power; it gains purchasing power even at zero interest.

I only influence one account other than my own: my sister's 401K retirement. She has a small short position against the Dow and the majority is in cash.

Think about that 5% potential gain promised by the financial carnies pumping equities and the potential destruction of 40% of your wealth, and ask yourself if you feel lucky. If not, please remember that this freely offered site gratefully accepts donations when you're patting yourself on the back for getting into cash before the Great Unraveling began.

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