Good article - go to cash now?

[GG999]

Hi all

I thought that this was a well reasoned argument and do you think you should sell out during these risky times?

Funds Flowing, But For How Long?

 

[explod]

thanks for posting up GG999. The punch line, money today is debt, assets are debt and to hold it all up we need to continue to create debt. Problem is the US Fed connot sustain the exponential rise in the repayments as the rest of the world is fed up with propping them up by buying thier debt.

Oh another thing, most financial institutional assets are debt. Once apon a time debt was matched by deposts.

David Potts was saying in the Age yesterday, look out below on gold if inflation gets going. The printing of money is inflation and that is why gold is going up.

Few seem to get it but we are sure going to experience the problems soon. IMHO

 

[robots]

Hello,

explod, but when you sell the gold you arent any better off though are you?

thankyou
professor robots

 

[explod]

Hello,

explod, but when you sell the gold you arent any better off though are you?

thankyou
professor robots

When I sell the gold Robots you will beg me to swap it for one of your properties. And mind you, property in the long term is as safe as gold too and would not change it for anything else.

Go down to Wrights coin dealers (lonsdale st) and buy a few silver coins, that way we can still go for a coffee now and again to discuss your St Kilda ranches.

 

[nukz]

For the meantime i would prefer gold but property is still good. I'm definitely not going to sell my gold like marc faber says "as long as we have bernanke in the fed" i will never sell

 

[GG999]

thanks for posting up GG999. The punch line, money today is debt, assets are debt and to hold it all up we need to continue to create debt. Problem is the US Fed connot sustain the exponential rise in the repayments as the rest of the world is fed up with propping them up by buying thier debt.

Oh another thing, most financial institutional assets are debt. Once apon a time debt was matched by deposts.

David Potts was saying in the Age yesterday, look out below on gold if inflation gets going. The printing of money is inflation and that is why gold is going up.

Few seem to get it but we are sure going to experience the problems soon. IMHO

Yes, interesting
I was hoping to hear from people that disagree with the article - but clearly everyone on here agrees with it

 

[professor_frink]

Yes, interesting
I was hoping to hear from people that disagree with the article - but clearly everyone on here agrees with it

Alright then I'll bite

There is absolutely nothing in that article that could help you come to the conclusion to move money out of shares and into cash right now. I'm not saying that you should or shouldn't be in cash now, just that the article doesn't really give any helpful information at all

 

[nioka]

These articles keep coming up. they are not new. the same arguments have been put forward on this forum for years now. Had I taken any notice I would have missed out on the best years i have ever had financially. Here's why:

1. The cash earns interest which is immediately taxable. After tax the interest is lucky to equal inflation. After a few years of this the cash has deteriorated to a point that the money that supported you in the beginning will no longer do that job.

2. If the money is invested in shares that have a tangible asset backing it is not too much of a problem if the SP drops or even if the asset value drops. You still hold a share in that asset and eventually the value of that asset will be reflected in the SP.

eg; At the start of this latest fiasco there was a massive drop in the value of CER. At no time did the NTA get below the market cap. This meant that you could buy a tangible asset for much less than replacement cost (and you still can). this has allowed me to average my price down to a point where I am up more than 500% on my investment. Had that money been in cash deposit it may have broken even. The same applied to many stocks.

3. Assets that do not become redundant and that are a life's necessity are a much better investment than cash at any time. Cash is only the medium used to barter when a straight swap for goods and services is not possible.

4. It is not only the Nigerians that are scamming for your cash. There are legal scammers working flat out to get your assets from you. Some are politicians and some are the big banks.

So my view of cash is that it is a temporary means to an end, nothing more, nothing less.

 

[Julia]

1. The cash earns interest which is immediately taxable. After tax the interest is lucky to equal inflation. After a few years of this the cash has deteriorated to a point that the money that supported you in the beginning will no longer do that job.

That depends on your tax situation. If the cash is in the pension phase of a SF there is no tax payable.

2. If the money is invested in shares that have a tangible asset backing it is not too much of a problem if the SP drops or even if the asset value drops. You still hold a share in that asset and eventually the value of that asset will be reflected in the SP.

I think that's rather too categorical a statement. Yes, you'd hope eventually there will be a recovery in the SP, but we've seen plenty of examples where that just hasn't happened.

Depends on your appetite for risk, I suppose. I'm more for preserving capital as a priority.

So my view of cash is that it is a temporary means to an end, nothing more, nothing less.

Essentially I agree, though will always keep a portion of total funds in cash even in a healthily rising market.

 

[Tysonboss1]

1. The cash earns interest which is immediately taxable. After tax the interest is lucky to equal inflation. After a few years of this the cash has deteriorated to a point that the money that supported you in the beginning will no longer do that job.

I have done some calculations on this point a few weeks ago. As long as the inflation rate is kept within Target levels (less than 3%) and your Tax rate is less 30% or less.

If you keep your cash in a high interest Bank account ( >6% ) it should still grow it's buying power after tax and inflation by about 1% / year.

Which makes cash much less attractive than income producing assets, But Better than gold longterm.

Gold on the other hand after transaction costs, and annual storage fees will lose buying power at a steady rate over time.

All the gold bugs will probally be shouting that gold goes up in value so it's better than cash, But gold may go up but it will also go down and just meet inflation over time.

I believe income producing land and income producing assets is a much better store of value, than a lump of gold.

 

[Tysonboss1]

These articles keep coming up. they are not new. the same arguments have been put forward on this forum for years now. Had I taken any notice I would have missed out on the best years i have ever had financially. Here's why:

1. The cash earns interest which is immediately taxable. After tax the interest is lucky to equal inflation. After a few years of this the cash has deteriorated to a point that the money that supported you in the beginning will no longer do that job.

2. If the money is invested in shares that have a tangible asset backing it is not too much of a problem if the SP drops or even if the asset value drops. You still hold a share in that asset and eventually the value of that asset will be reflected in the SP.

eg; At the start of this latest fiasco there was a massive drop in the value of CER. At no time did the NTA get below the market cap. This meant that you could buy a tangible asset for much less than replacement cost (and you still can). this has allowed me to average my price down to a point where I am up more than 500% on my investment. Had that money been in cash deposit it may have broken even. The same applied to many stocks.

3. Assets that do not become redundant and that are a life's necessity are a much better investment than cash at any time. Cash is only the medium used to barter when a straight swap for goods and services is not possible.

4. It is not only the Nigerians that are scamming for your cash. There are legal scammers working flat out to get your assets from you. Some are politicians and some are the big banks.

So my view of cash is that it is a temporary means to an end, nothing more, nothing less.

Essentially I agree, though will always keep a portion of total funds in cash even in a healthily rising market.

Here's warren speaking on this subject, I think you both would aggree with his philosopy on cash.

http://www.youtube.com/watch?v=2epTX1LtCuU&p=20435182155EF4DE&playnext=1&index=19

 

[nioka]

I think that's rather too categorical a statement. Yes, you'd hope eventually there will be a recovery in the SP, but we've seen plenty of examples where that just hasn't happened.

The answer lies in the choice of stocks. Using fundamental principles to choose stocks that have assets that are sound, ie, valued below replacement cost and not likeky to become redundant there is little risk. Nothing is without risk. Banks and other financial institutions do fail. To hold cash as cash and not as interest bearing investments will have inflation eat it away.

 

[nioka]

. As long as the inflation rate is kept within Target levels (less than 3%) and your Tax rate is less 30% or less. .

I do not have much faith in the inflation rates quoted by the powers that be. They never seem to reflect the true price increases that I am faced with. The index they use includes many items that I do not purchase and the weighting does not reflect my pattern of expenditure. I guess I am not Mr Average but then who is. My personal inflation index/percentage, whatever, is more like 8 to 10 %. My largest single item, rates have increased by around 18% per year for the last 5 years. Even though the percentage rate increase is supposedly pegged new "extra" charges keep appearing (a trip to the local dump now has a "landfill" surcharge added to the usual high dumping charge). Then we get revalued every three years so the same rate in the dollar is rated over many more dollars. Another large cost is medical benefits, they have increased faster than the inflation rate.
It is common for parking charges to be levied where there were none in the past. We used to get a sticker that allowed us to park free at the local airport. That has now been changed and it is now $2 per hr with $2 min. Try parking in the city, I used to park all day in Ann Street, Brisbane for free in the 50s. It costs an arm and a leg to park anywhere near there now.

 

[Tysonboss1]

. Try parking in the city, I used to park all day in Ann Street, Brisbane for free in the 50s. It costs an arm and a leg to park anywhere near there now.

As long as we are comparing things to the 50's.

I would just like to point out that there are hundreds of consumer products and food items that have decreased in cost relative to peoples earning power over the last 60 years. So you may have to pay for parking in Ann street, but generally we are all alot better off.

This is offcourse different argument to inflation though.

 

[c-unit]

Just ensure your portfolio isn't relying on any US recovery to gain its returns IMO. China doesn't need the US. They have enough domestic savings and demand to replace American consumption with their own domestic consumption.

The world is going into an unknown place at the moment. International conflicts may become more prominent as the West becomes weaker and less significant. At the moment I'm sitting with about 20% cash, 80% equities with a bit over half my equity allocation weighted towards energy and commodities. Wouldn't touch fixed interest right now. At least equities (in particular resource/commodity stocks) provides some degree of an inflation hedge.

The only concern I have for Australia is the effect of the inevitable Great Ponzi Scheme (housing) collapse. Will be some serious bankruptcies.

 

[explod]

These articles keep coming up. they are not new. the same arguments have been put forward on this forum for years now. Had I taken any notice I would have missed out on the best years i have ever had financially.

Well said nioka. I post rarely now as the message is here and has arrived if one wants to see it.

Money, as Robert Kyosaki told us some years ago now, is trash. Only those holding unencumbered real assets will survive the next few years with a stake to support themselves.

Keep up the good work nioka.

 

[Smurf1976]

I have done some calculations on this point a few weeks ago. As long as the inflation rate is kept within Target levels (less than 3%) and your Tax rate is less 30% or less.

The real difficulty there is working out what, exactly, is the true rate of inflation as it applies to prices?

Some time ago, I looked at various consumer items and fairly consistently came up with a figure around 4.3% over the past 20 years, substantially higher than the RBA claims the offical rate to have been.

I don't actually need a new TV every year or even every 10 years. If times get tough, it's food, fuel, basic clothing, compulsory fees like council rates etc that I'm going to be worried about. How much a mobile phone or some other fancy gadget costs just won't be on my mind if it comes to the point where I actually need to be seriously worried about money. Looking at essential purchases, inflation seems to be quite a lot higher than 2 - 3% until perhaps a year or two ago, since which time many prices have actually fallen.

 

[Smurf1976]

I would just like to point out that there are hundreds of consumer products and food items that have decreased in cost relative to peoples earning power over the last 60 years. So you may have to pay for parking in Ann street, but generally we are all alot better off.

This is offcourse different argument to inflation though.

Can't argue with that.

30 years ago it was still "normal" to have only one car per house. Just like people had one TV in the lounge, plus maybe a second B&W one in another room. VCR's were new and not many people had them, just like very few had computers at home. Air-conditioning wasn't common and mobile phones were still science fiction.

We're certainly a lot better off these days in terms of consumer gadgets etc and I doubt that many would willingly go back even to 1980, and certainly not to 1960 or 1950 in that regard.

But all of that is assuming you can first afford a roof over your head and food to eat, something which is still a problem for many in 2010. The high cost of housing relative to ordinary working incomes is the single greatest economic and social problem in this country in my opinion.

Either you earn a well above average hourly rate, work ridiculous amounts of overtime (or have two jobs), or you are essentially locked out of home ownership with the price to income ratio way out of whack with historic norms. It works for some, but by definition most won't be earning a well above average hourly rate, and most workers don't have ready access to large amounts of overtime either. The situation may well have made some nice $ for many, but it has come at a huge social cost.

 

[ROE]

Just ensure your portfolio isn't relying on any US recovery to gain its returns IMO. China doesn't need the US. They have enough domestic savings and demand to replace American consumption with their own domestic consumption.

The world is going into an unknown place at the moment. International conflicts may become more prominent as the West becomes weaker and less significant. At the moment I'm sitting with about 20% cash, 80% equities with a bit over half my equity allocation weighted towards energy and commodities. Wouldn't touch fixed interest right now. At least equities (in particular resource/commodity stocks) provides some degree of an inflation hedge.

The only concern I have for Australia is the effect of the inevitable Great Ponzi Scheme (housing) collapse. Will be some serious bankruptcies.

Dont worry too much about macro factors, good for commentators do very little to your compounding machine

I never hold cash more than a 5%, always in equity never seem to effect me GFC, Dotcom, name your crisis here XXXX

that 5% usually coming from dividend payment then it quickly find its way to another rock star business

if you buy truly great business you can see none of this stuff matter too much, they keep chucking along, pay dividend year in year out that
outstrip inflation

most people got burned buy into business they don't understand and panic when price drop...got margin call ..force to sell etc...
burned for life and so the moto goes Cash is King

If my business tank in price I buy some more ....easiest way to compound high rate of return on quality business...

I double up a few holding during the GFC ....now get close to double digit in dividend payment, another decade it give me another chance to double up again

The key is quality business not dodgy Asciano, Centro or some leverage to prosperity stock

 

[Julia]

The answer lies in the choice of stocks. Using fundamental principles to choose stocks that have assets that are sound, ie, valued below replacement cost and not likeky to become redundant there is little risk.

Perhaps. But you've previously conceded that seeking out these stocks (most of which when you've nominated what they are I'd find too risky) is an interest and a hobby for you.
We don't all share the desire to do this, and prefer to give our energies to stuff other than shares.

Nothing is without risk. Banks and other financial institutions do fail. To hold cash as cash and not as interest bearing investments will have inflation eat it away.

You will just never concede a point, will you, Nioka! The likelihood of our Australian banks failing is next to zero.
And if my cash is earning 8%, and I'm paying no tax, inflation is at an acceptable level as far as I'm concerned given the 'sleep test' of not worrying about safety of funds. And in the meantime, I'm not fretting about preservation of capital.
We still don't know what will happen re the US's basket case economy, or the European situation.
If you imagine that a double dip recession globally won't affect Australian shares, then I'd just simply disagree.

It might be good if just occasionally you could acknowledge that others take a different approach from yourself, and they are not necessarily wrong for their personal situation.
No need to be so insistent that what is right for you is right for everyone else.

But all of that is assuming you can first afford a roof over your head and food to eat, something which is still a problem for many in 2010. The high cost of housing relative to ordinary working incomes is the single greatest economic and social problem in this country in my opinion.

So true.

The situation may well have made some nice $ for many, but it has come at a huge social cost.

Thanks for the reminder of the bigger picture, Smurf. It's all fine for those of us who have the capacity to invest, who are secure in our housing etc., but there are hundreds of thousands of ordinary Australians out there who are really struggling.

Quadrupling of power prices e.g. in the next few years is going to cause extreme hardship and I've yet to find any member of government, or social agency for that matter, making any sort of loud protests about this.

It's so easy to be smug when we are OK. The greater and more important aim is to ensure a levelling out of the two speed economy, the 'haves', and the 'have nots'.