The markets $SPX500 opens a little higher today as well as our portfolio with big gains from Parsley Energy $PE and Diageo $DGE.L . Despite the good earnings of yesterday, Skyworks Solutions $SWKS is down by about 0.5%.
Cash is Trash in 2020 says Ray Dalio
Ray Dalio, founder of Bridgewater Associates - largest hedge fund in the world, says in Davos on CNBC that Cash is Trash. What does this really mean? Should we buy stocks? Why is Warren Buffett $BRK.B sitting on $128 billion in cash?
The argument set by Ray Dalio is that Central Banks all around the world has been printing a lot of money. There are two ways governments print money, the first one if through Quantitative Easing. They create money out of thin air to buy financial assets. In the US, the Fed is buying treasury bonds while in Europe and Japan it's worse. The ECB is buying corporate bonds while the Bank of Japan is buying ETFs holding stocks. The Federal Reserve System has been increasing the size of its balance sheet since 2008 and then they stopped until there has been a lack of liquidity in the repo market, and they had to inject capital once again. The other way they print money is by lowering interest rates. Actually, they don't create the money themselves but make the economy in such a way that it facilitates money creation. In 2008, they were forced to do all of that because of the global financial crisis but right now the economy is great. There is no need for low interest rates and quantitative easing.
Sooner or later, this will lead to inflation. Inflation is low right now because of technological innovations with companies such as Amazon $AMZN and Facebook $FB making price of commodities go down. But at some point, this will stop. Innovation will no longer be able to keep up with all the money printing and then high inflation will happen.
Should we buy stocks? Money printing keeps pushing stocks up and at some point this will either create a bubble that will burst or inflation will be too high that holding stocks won't make much sense. Ray Dalio says that we should consider gold $GOLD as an investment. Gold is an asset that maintains its value over time. Ray Dalio was asked about Bitcoin $BTC and he said that it is too volatile and didn't prove itself yet. Central Banks are more likely to buy gold than Bitcoin in case there's inflation. The other alternative is to buy stocks in countries where they are cheaper, for example China or Russia.
Why Warren Buffett is holding so much cash? If you look at the $800 billion assets of Berkshire Hathaway, the cash is only 16%. He holds cash because of the insurance business and also because the company is too big right now that it is hard for him to find good investments. When Warren Buffett was younger, he was doing a lot of arbitrage. This is my alternative to cash. Whether you need to keep cash or not depends on you. If you have to buy a house next year, you need cash. If you have a large cashflow, you don't need cash.
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