Is 100% in cash safe?

I hear many individual say the world is so uncertain at the moment it is best to be 100% in cash.

Two main points.

Uncertainty always exists. Sometimes people pay attention to it, sometimes they don´t.

Often the media is the trigger that determines how much investors are concerned by uncertainty. When the media continuously talks about cancer you may be more fearful about getting cancer, but your probability of catching cancer has not changed by much (it may change a little after your reading if you change your lifestyle, i.e. stop smoking or put sun cream on at the beach). The same is true with investing. There is little you can do to stop uncertainty - hence it is uncertain.

The way we fight uncertainty (the only sensible way uncertainty can be fought in our opinion) is by buying securities with a large margin of safety, i.e. buy cheap. If we don´t pay for growth in a company we think can grow nicely, we don´t get harshly punished if the growth rate the market expected is not achieved due to some unexpected factor!

However, back to cash.

We must remember, as we have discussed in past blogs, we are in a capital destruction environment. Too much capital was created, lots of it was unproductive, it must diseappear to encourage new investment - hence it must be destroyed. The capitalist system allows this to occur.

Depending on the path the capital destruction takes, different asset classes will perform differently.

Debt destruction via haircuts would merit having a large cash position in the portfolio, whilst excessive money printing to keep economies from paying their debt would be a catalyst for equities.

Capital is like water. eventually it will reach its targeted goal. Capital must be destroyed and if governments are against the idea of writing down sovereign debt it will happen via other means including currency devaluation, reduction in wages, reduction in asset values etc.

Note how your cash would perform if:-

The currency was excessively printed?
Your economy was to leave the eurozone?
Inflation kept rising whilst interest rates were kept artifically low?
Your bank went bankrupt?

There are a number of extreme scenarios for normal times that are becoming more common in the capital destruction era we find ourselves in. In this era cash is by no means a risk free investments that allows you to maintain your quality of life. You must be aware of this.

The value contained in being a 100% cash holder is being tapped by the authorities and distributed elsewhere. This is what money printing effectively does. Being 100% in cash is partially equivalent to being 100% invested in the authorities.

Though we are ourselves large holders of cash in a number of currencies (on average 20-25% of portfolios due to our belief that debt writedowns are required in a number of economies) we hold the other 75 - 80% of assets in the securities of companies that are off bank balance sheets.

Note cash can also be held off the bank balance sheet via money market or short term government bond funds (we hold some with an average duration of less than 1 month holding maninly German, Swiss and Dutch debt).