Sunday, January 29, 2012

Cash is Trash? Or is it?

Two meme's out there in this morning's round up. At MarketWatch Chuck Jaffe says "Cash is Trash" (link1). Roger Nusbaum at his blog cites the Barrons cover story "Don't Lose It" (link2).
many Gen Ys don't trust stocks and so have a high portion in cash
(Gen Y is born between 1976-1995 or 1988-2001 depending on who you ask)

Anecdotally, it is not just Gen Y's. I was having coffee with a friend talking stocks and a woman in her 60s felt the need to tell us "I think the stock market is rigged." Over on the PCGS coin forum, the precious metals folks often say the same (link3). I observe the Bogleheads on their forum (link4)continue to like Ibonds and TIPs that offer some inflation protection, and continue to "stay the course" on their base asset allocations.

Tops in the bond market continue to be called, though some bond bears threw in the towel on the recent Fed announcement of low interest rates until 2014. At some point the rubber band snaps, and interest rates rise dramatically. I thought bonds were topping a couple of years ago and am with that large crowd that was wrong.

Thankfully, I mostly traded bonds on sentiment not what my logical mind or gut was telling me and have traded bonds mostly from the long side during the last couple of years. I can't take credit for being aggressively long, considering TLT was the best performing major asset class for 2011 up 29%, but for the most part I avoided being short and down that 29%. My recent adventures in GDX puts point to how quick and large losses can be for an aggressive option trader on the wrong side of a move.

Some folks are moving towards riskier assets. I see the occasional mention of high yield or junk bonds (HYG, JNK). I see many more about high yielding stocks (VIG) even preferred stocks (PFF). Of course all these come with risk, and as long a person understands the risk they can go in with their eyes open.

It is a strange time, with basically zero interest rates for money markets, under 2% for 10 year Treasuries, TIPS at a negative yield. In the 2012 Barrons roundtable Bill Gross had this interesting quote about the physics of money going from Newton to Einstein as rates approach zero. If someone as smart and as expert as Gross got it wrong, and continues to struggle with these questions, far be it for me, to pontificate on the issues.

Like the rest of the world, it is a struggle, how much risk to take, how much yield to chase, when to think of leaving the party, because it seems a sure thing that the cops are coming to take away the punch bowl, it is just a matter of when. Like the way I tend to trade, the middle way, moderation, hedging is the course I tend to chart.

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