Send this article to a friend:

November
29
2022

Prepare Now for the Coming Cash Tsunami
Nomi Prins

Rachel’s note: From the entire Casey Research team, we hope you had a wonderful Thanksgiving.

Now that we’re in the holiday season, you might be budgeting for gifts and extra spending…

…And wondering how to preserve your wealth amidst rising interest rates, raging inflation, and recession fears.

Today, financial expert and journalist Nomi Prins explores why investors currently hold 25% of their portfolio in cash… and how they should jump back into stocks and bonds once the Federal Reserve eases its policies.

Hint: an interest rate reduction will cause massive buying activity in the markets. And it will bring new opportunities for profit. Here’s Nomi with all the details…

When you look at your portfolio, what do you see? Are you sitting on more cash than ever?

If you are, don’t worry. You’re not alone.

It’s normal for people to move to cash when the market is in disarray. And this year has been brutal…

Most stocks or bonds are getting hammered by rising interest rates, raging inflation, and recession fears.

Alternative investments are not doing any better, either.

The crypto world is taking hard hits from overleveraged positions, some of which I’ve covered in these pages. (Catch up on the latest here.)

It feels like investors have nowhere to run or hide.

So, many have put their life savings into cash in their portfolios… even though cash depreciates quickly with high inflation.

While this economic setup looks grim, we will eventually see the light at the end of the tunnel.

That involves cash flowing back into stocks, bonds, and other investments.

And when this massive flow happens, you’ll want to have a “watch list” of investments to act on.

I’ll give you a few tips to help you get started in a moment. But first, let’s see where we are now…

Cash-Heavy Portfolios

In normal times, investors tend to keep most of their portfolios in stocks and bonds.

It’s the famous 60/40 portfolio that financial advisers often tout.

These two buckets have a history of decent returns. For instance, here are the average annual returns from 1928 to 2021:

• S&P 500 (a benchmark for U.S.-listed stocks including dividends) yielded 11.8% per year.

• U.S. T-Bonds (10-year bonds issued by the government) returned 5.1% per year.

That’s what most investors expect their portfolios to reach in the long run.

Meanwhile, the smallest part of their holdings is usually left for cash.

This cash is reserved for emergencies or temporary holdings. It’s only a liquidity buffer in case of unforeseen events.

However, markets are far from normal right now. Since the beginning of the year, the S&P 500 has lost 17%. Bonds are down 17.3%.

That’s why, today, investors hold 25% of their portfolio in cash – despite high inflation.

It’s a big jump from the 10-year average of about 17%.

In other words, investors are choosing 7-8% in inflationary pressure against steadily declining stocks and bonds.

A Signal to Unload Cash Holdings

Cash holdings spike during tough market times. We can see that in the chart below, which shows the last 10 years…

We’re now close to the 10-year high in cash holdings. But it’s unlikely to stay this way for too long.

Investors will soon begin deploying their cash into high-quality stocks selling at bargain prices.

Yet, no one is rushing.

They are waiting for lower inflation readings and a more dovish Federal Reserve. This will provide more certainty to investors as a signal to return to the stock market.

When will it happen? No one can tell for sure. But as I’ve written before, I believe the Fed is going to start pivoting in three stages.

Here’s how I put it in an earlier issue:

Stage 1 will be a reduction in the size of rate hikes. I think we could see this as early as December.

In Stage 2, the Fed will move to neutrality. That means it will pause its rate hikes. I see this happening by next summer.

By Stage 3, there will be negative economic ramifications building up, due to the higher cost of debt for the average citizen (for mortgages, auto, personal, and small business loans).

At that point, the Fed will begin cutting rates. I expect Stage 3 to happen by 2024. But the Fed may possibly expand its QE activities before that.

If this scenario unfolds, Stage 1 can be a signal for investors to unload their cash holdings. It will cause massive buying across the markets.

Investors will rush from cash to stocks or bonds. This move will bring back their cash positions from 25% to the 10-year average of about 17%.

What This Means for Your Money

During this buying phase, keeping a list of the most desired stocks to get into is essential.

That’s why, at our Distortion Report advisory, my team and I hand-pick the best stocks from five transformative sectors. These have the highest gain potential, even during turbulent markets.

But if you’re not a paid-up Distortion Report subscriber yet, that doesn’t mean you have to sit on the sidelines when the cash tsunami flows in.

Instead, you can select a broad-based S&P 500 exchange-traded fund (ETF) as a first-step substitute for cash.

The SPDR S&P 500 ETF (SPY) is a great place to start. It’s the largest and oldest ETF in the world. And it has returned 54% over the last five years.

Afterwards, you can weigh into specific sectors and names.

But wherever you decide to put your money, keep this advice in mind…

Never bet the farm on an investment – not even during the good times.

And don’t rush to allocate all your funds at once.

Take longer than usual to build your position. And spread your buying activity across a couple of months.

At Distortion Report, we often use a two-step strategy.

That means we buy a half-position when we first add a name to our model portfolio. Then we get into the second half if the stock dips by 20% or more.

This allows us to achieve a better entry point, and it’s a good way to make the market’s chop work in your favor.

After all, we’re still in a fragile and unstable market. It’s wise to be cautious.

Regards,

Nomi Prins
Editor, Inside Wall Street with Nomi Prins

 
Nomi Prins is an independent journalist, author and speaker. Her latest book is a dramatic historical novel about the 1929 crash, Black Tuesday. Her last book was It Takes a Pillage: Behind the Bonuses, Bailouts, and Backroom Deals from Washington to Wall Street (Wiley, September, 2009/October 2010). She is also the author of Other People’s Money: The Corporate Mugging of America (The New Press, October 2004), a devastating exposé into corporate corruption, political collusion and Wall Street deception, chosen as a Best Book of 2004 by The Economist, Barron's and The Library Journal.  Her book Jacked: How "Conservatives" are Picking your Pocket (whether you voted for them or not) (Polipoint Press, Sept. 2006) catalogs her travels around the USA; talking to people about their economic lives.

She has appeared on numerous TV programs: internationally for BBC World, BBC and RtTV,  and nationally for CNN, CNBC, MSNBC, CSPAN, Democracy Now, Fox and PBS. She has been featured on hundreds of radio shows globally including for CNNRadio, Marketplace, NPR, BBC, and Canadian Programming. 

Her writing has been featured in The New York Times, Fortune, Newsday, Mother Jones, The Daily Beast, Newsweek, Slate, The Guardian UK, The Nation, Alternet, LaVanguardia, and other publications.

Before becoming a journalist, Nomi worked on Wall Street as a managing director at Goldman Sachs, and ran the international analytics group at Bear Stearns in London. She is a Senior Fellow at Demos, based in Los Angeles.

www.nomiprins.com