Investing in Disturbing Times (2) – Cash!

Investing in Disturbing times (2)- Cash

We suffer from a one sided love affair with cash. This bits of coloured paper with numerals on them are the reason we wake up every weekday and have hurried breakfasts. Our reason for being is to amass as many pieces of banknotes as possible, and we judge a persons stature by how much they have amassed so far, as well as how much they may amass in the future. Women have it twice as bad because they are also judged on how they look while amassing cash, mostly by other women.

In times of trouble, cash becomes the safety net or security blanket of choice for most people. The motto being, ‘……….when unsure, do nothing. Maybe it will go away……….’

The truth is sadly, a little more harsh than that. Cash is an asset class, and its value changes. When it keeps buying more stuff than before, for the same amount of money, economists jump from tall buildings, screaming “DEFLATION!!”. When it buys less stuff than before, for the same amount of money, newspapers say “INFLATION IS UNDER CONTROL, SAYS THE GUVNOR”, and we go about our business, as we are used to inflation, unaware that it is a monster that continuously erodes our net worth around the clock, making us poorer even though our bank accounts looks the same, till one day we wake up and see CNN calling us the new and slightly improved Zimbabwe.

If you live in the Klang Valley, you will be forgiven if you see 5% as the annual inflation rate. We hit an official rate of 11% as recently as last year, and a 6% annual inflation rate looks to be a reasonable number to pray for, at least for the next decade or so. If our prayers are answered, it will mean that every 100,000 you have amassed, will be worth 50,000 of today’s ringgit in 2022, and 25,000 in 2034. If a rate of 11% becomes the norm, then the stash is worth 50,000 in 2017 and 25,000 in 2024. I have no idea what 25,000 ringgit buys today, apart from a used Proton, and I really hope that 25,000 of today’s ringgit will buy at least a couple of years worth of petrol for the trusty rusty Proton in 2024.

When you choose to hold cash, in a climate where governments and monetary authorities are using inflation as means of reducing their debt, printing ever more money to service their loans, calling them bailout or stimulus packages, then you have chosen to invest in the continuing inflationary actions of the same governments and monetary authorities as the vehicle of choice to transport your net worth from today to a date in the future.

With a 6% annual inflation rate, the vehicle you have chosen loses half your wealth for every dozen years it travels. Not only that, governments are in a race to inflate their respective currencies in such a way that they remain competitive in the global market, i.e. other nations can still afford to import their goods and services. This is a race to zero, which is the final value of all fiat currencies aka currencies by decree. The Euro for example is actually the third re incarnation of the Deutschemark in the past 100 years.

I am sure you have read about the demise of the US dollar by doom casters, but the real truth is that nearly all currencies participate in this race to zero, so the prospect of returning to a gold/silver standard is a real possibility, perhaps even in our children’s lifetime. If that happens, Governments will probably enact laws to force the citizenship to relinquish all the Gold and Silver they own at a price determined by the Governments. This has happened before, and certainly may happen again, for the greater good.

“Undue analysis causes paralysis”, should be the motto of choice for everyone. During the last depression, a writer, whose name escapes me now (Gerard M Loeb), wrote a book(The battle for investment survival) on how to survive financially in a depression. You can read an essay on it here,

http://www.dailyreckoning.com/Issues/2008/DR090308.html#essay

The cash you hold should be enough to cover 6 months to a year’s worth of expenses, so any disruption in your income stream i.e. wages/job will still mean that you have at least 6 months to get another income stream set up. This is a general rule of thumb, your financial adviser is the best person to advise you on what to hold in cash.

The rest of your money must be put to work to battle the villain inflation which carries a negative 6% effect on all the years of hard work you have done so far, or to put it in another way, you lose 21 days of income/savings for each year you have worked, every year. You must understand that there is no safe middle ground, or panacea to protect your wealth, but there are ways in which you can not only protect your overall wealth, but also make it grow.

Money is not your master, you are money’s master. Become a true master, and sit with your financial adviser to allocate your wealth in all the other areas that are needed, in insurance, investments, speculative investments and short term instruments. If fear makes it difficult to let go of the security blanket feeling that cash gives you, I suggest you watch your children while they are asleep, and think whether it is more important for you to ‘feel’ warm and safe, or for you to ensure that your children will be warm and safe.

This may have been unpleasant reading for some, but understand that time is of the essence, and inflation is an affliction that affects everyone, but sadly many will find their net worth reduced to a fraction of its original, because they chose inaction over action, and neglected to do what is necessary. In the words of a great investor, understand this, “the incredible urgency of now!”.

To end the second part of this series, I leave you to ruminate on a quote from Mr Keynes, the father of the prevailing economic theory, and someone who will one day be viewed more as a villain than a hero, and rightfully so.

“By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some….There is no subtler, no surer means of overturning the existing basis of society than to debauch the             currency. The process engages all of the hidden forces of economic law on the side of destruction, and does it in a manner that not one man in a million can diagnose.” – John Maynard Keynes ~ Economic Consequences of the Peace, 1920

Go here to calculate the effect of inflation on your cash savings,

http://www.iaworldnet.com/services/calculators/inflation.htm

Part 3 will follow.

Jeevindra Kumar