cash is king during recession: Buy The Fear

Is cash king during Recession?

Updated July 2022

We could sum it up in two words; Hot Money. However, for some strange reason, when it comes to the markets, individuals love long explanations even though, in most cases, the long descriptions reveal much less than the short ones do. Let’s look at a few things we ignore, but we know many investors do;

S&P 500 companies are going to report what will turn out to be the 6^th consecutive quarter of lower stock market earnings. Right off the bat, logic tells you we were right when we said hot money. What else would keep this market trending higher? This is one of the longest-earning slumps in over a decade.

The following logical assumption would be, “well then, there is no way stocks can keep rising”, or how long can they rise in a low stock market earnings environment? To get the correct answer, you need to ask the right question. Both issues are silly, and responding to either will not provide you with further insights. One person will state it cannot rise because of the abovementioned negative factors. The other penguin will say it can increase because inflation is low, unemployment is low, gas prices are low and a host of other rubbish.

Stock market earnings are not the issue; Hot Money is

We are not going to take that route. The right question is, when will central banks stop flooding the markets with money?

When the hell freezes over is the answer; this market will rise for much longer than most naysayers can stay solvent.

An even better question would be, “what side of the market are the masses on.”

Now we are getting somewhere; the masses are decidedly negative, and that means until they embrace this market, it will not crash.

So there you have it. However, even this is not enough for many individuals. So let’s examine the reasons (even though we do not care about them) as to why earnings might be dropping.

Energy and other commodity-based companies have seen their profits dive, so these sectors have been the worst performing for over 18 months.

There are a couple of more reasons. The first important point is that U.S. firms, in the aggregate, have reported lower earnings because energy, commodity and basic materials companies have seen their profits decimated by lower prices. The energy sector will once again lead the way with massive losses.

A strong dollar; the dollar has been in an uptrend, and this affects multinationals’ profits. This is simple to understand as we are amid a massive currency war; a strong dollar is not okay for multinationals, and vice versa.

It also affects our exports as it makes our products more expensive overseas.

Conclusion

The only two things you need to consider are an extremely accommodative Fed and the masses refusing to embrace this market. Both developments are highly bullish for this market.

Data readily available to everyone is like news; the moment you hear it is no longer news but Gossip.

Research validating Cash is King.

These research articles suggest that cash can be an essential asset during a recession, providing stability, protection, and opportunities for investment.

Gorton, G., & Metrick, A. (2012). Liquidity hoarding. Journal of Political Economy, 120(3), 1221-1261. https://www.journals.uchicago.edu/doi/abs/10.1086/667862
Acharya, V. V., & Naqvi, H. (2013). Cash holdings and the severity of the financial crisis. Journal of Financial Economics, 110(1), 125-146. https://www.sciencedirect.com/science/article/abs/pii/S0304405X1300078X
Menzly, L., & Santos, T. (2012). The value of cash holdings in the Great Recession. Journal of Finance, 67(5), 1777-1804. https://onlinelibrary.wiley.com/doi/full/10.1111/j.1540-6261.2012.01767.x
Voss, J., & Howard, C. T. (2013). The benefits of cash in uncertain times. Financial Analysts Journal, 69(6), 38-51. https://www.tandfonline.com/doi/abs/10.2469/faj.v69.n6.2
Fernandes, N. (2015). The role of cash in business strategy. Harvard Business Review, 93(7/8), 86-93. https://hbr.org/2015/07/the-role-of-cash-in-business-strategy