Considering cash as an asset class!

In a recession cash is king! We might also add, and debt is a disaster! This old stock market adage might seem inappropriate at a time of new record highs on Wall Street and the recent performance of the bond market.

But as Marc Faber points out in his latest article on AME Info the phenomenon of having both equity and bond markets rising at the same time ought to be ringing alarm bells among investors. For when equities rise bonds usually fall and vice-versa, so something is not right here.

Dr. Faber turns this argument on its head and suggests that both equities and bonds could be heading for a fall in the near future, although with the amount of liquidity in the system at present he is hesitant to risk market timing.

Stagflation

What he does note is that inflation is probably going to be worse than expected, eventually upsetting bond prices and causing a downturn in equities as profits come under pressure.

In this scenario we are back to the stagflation of the 1970s - higher inflation and lower growth. This was a terrible decade for investors, and the best performing asset proved to be none other than good old cash.

What has happened thus far in the 21st century has been an inflation of asset prices and a depression of the US dollar to compensate. This could continue for a while. But once something happens to upset this party - it could be a geopolitical event or the US housing slump - then the reverse will be true.

Asset classes will be sold for cash. This flight to the US dollar as a safe haven will produce an upward revaluation of the greenback. We saw this in May this year when financial markets had a wobble, and the effect on the dollar will be even bigger if markets suffer more than a wobble.

Cash to buy bargains

In any case if major asset classes fall, then in relative terms the US dollar is automatically worth more. It is this simple: you can buy more with your dollars after a financial shake-out than before. Therefore, save your dollars on deposit for a rainy day, and remember that in a recession cash really is king!

But most people will have just seen their paper wealth dissolve into dust. They will not have the ready cash to take advantage of bargain basement prices.

Alternatively buy precious metals as these become currency instruments at times of financial crisis, and the supply will not keep pace with demand in such an environment jacking up prices.