Home' Trinidad and Tobago Guardian : April 2nd 2015 Contents BG16 COMMENTARY
BUSINESS GUARDIAN www.guardian.co.tt APRIL 2015 • WEEK ONE
Along time ago we grew
up believing that cash
was the safest form
that we can keep our
First, let us define what I mean by cash.
I am referring to deposits in the bank as sav-
ings or an income fund especially the ones
that offer a guarantee on principal.
We grew up believing that those are safe
places to put our cash. It is considered safe
because of the liquidity, accessibility and, in
the bank, it also means there is a guarantee
based on schemes like deposit insurance.
To be clear, those features of holding cash
are still there. We can access our cash in the
bank or from an income fund on demand.
Our cash is there at a moment s notice and
the schemes---like deposit insurance---have,
in fact, been enhanced over the past few
years. The business relationship and the safe-
guards associated with keeping your money
in cash have not changed.
The issue with cash is not with its custody
but rather with its purpose. If the purpose
of your cash is to spend it at some time in
the future, then holding it in cash today may
not be a safe way to achieve that objective.
In other words, what has changed is the role
of cash in your investment relationships.
The US dollar is the reserve currency of
the world and so, in effect, the US Federal
Reserve is the global central bank. Their poli-
cies affect the rest of the world.
The last time the US Fed raised interest
rates was in June 2006. That is almost nine
years ago. There are many 20- to 30-year-
olds, now 30 to 40 years old, exposed to
finance for the first time during this period
and have never invested in a period of rising
At the turn of the millennium US short-
term interest rates were at one per cent so
there is an entire generation of people who
only know of a low interest-rate environment.
This generation has also experienced two
major stock market collapses and one inter-
generation financial crisis during their invest-
ment lifetime. Such experiences do not engi-
neer confidence in the markets.
At the other end of the spectrum, there is
the generation of 40 to 60 year olds who
first started saving and investing in a mid-
single digit or even low double-digit interest
For these people cash in the bank would
double through the magic of compound inter-
est every seven to ten years.
Holding cash was not only safe but it was
also profitable and you could have held cash
and still managed to achieve your lifelong
financial objectives. For many in this gener-
ation old habits die hard and in turbulent
times they stay in their comfort zone of cash,
even if cash now has a zero per cent nominal
The financial landscape has changed dra-
matically over the past seven to 15 years but,
for many, the way we think about money
and investing has not. We remain slaves to
habits developed over time when circum-
stances were different and our needs were
different. The reality is that if we fail to evolve
our thinking and the way we treat with money
and cash, we will become extinct, at least in
a financial sense. Take stock before it is too
To illustrate the point of a changing financial
landscape, let s go back a little further than
15 years and look at the 10-year US treasury
From 1790 to 1920, the yield on the 10-
year roughly averaged five per cent. For 130
years, no investor or investment professional
had known or seen anything different.
From the 1920s to 1946 you had the Great
Depression and World War II and with it came
an unprecedented (up to that time) level of
volatility in both stocks and bonds. Most peo-
ple from that era grew up being frugal.
It was during this period (1919) that the
famed economist John Maynard Keynes writ-
ing about the wealthy in society said ".... the
capitalist classes were allowed to call the best
part of the cake theirs and were theoretically
free to consume it, on the tacit underlying
condition that they consumed very little of
it in practice."
For the next 30-odd years, interest rates
rose from two per cent in 1946 to above 15
per cent in 1981. During that time all you
needed to do was earn more, save more and,
essentially, your savings would be invested at
increasingly higher rates of return. There was
a direct link between wealth and the real
On the side of the stock market, using the
Dow Jones Industrial Average as a guide and
adjusting for inflation, stocks were at the
same level in 1984 as it was at the end of
World War II. Save money, buy bonds, hold
to maturity---rinse and repeat---was the invest-
ment thesis of that era.
High interest rates and higher levels of
inflation meant that the ability to save more
came from moving from a single income
earner in a household to having two income
earners. This change in lifestyle will eventually
have a profound impact on today s society,
as I will explain below.
From 1982 to today, interest rates fell from
15 per cent to two per cent and---for some
recent periods---under that level.
In July 1982, on an inflation adjusted basis
the DJIA was at the same level it was at in
1938. However, over the next 32 years, the
index increased nine times from the 1982
valuation. In nominal terms the increase is
estimated to be around 18 times.
For over 30 years there was a bull market
in bonds and a bull market in stocks which
lead to one major outcome. Instead of buying
and owning, people became renters and traders
of financial assets. Instead of having financial
assets as the instrument that facilitated the
growth of the real economy, growth in financial
assets directly lead to growth in the econo-
my.The means became the end and markets
became fixated on perceptions of value as
opposed to what was actually creating value.
The result of moving paper from one account
to the next and booking profits on the move-
ments ultimately lead to instability and more
frequent market crashes.
This is where we are today and investors
are like the proverbial deer staring at the head-
lights of the oncoming car. To get things mov-
ing central banks around the world brought
rates down to near zero in an attempt to force
people out of cash.
However, they were up against the forces
of fear in the form of those who no longer
trusted the market and the forces of habit in
the form of those who were accustomed to
being in cash and knew no other way.
The problem is: this game has gone on for
close to a decade. Cash has not only failed to
generate a rate of return necessary to satisfy
one s investment needs but it also has, in many
instances, generated a rate of return below
that of inflation.
The issue here is that by holding onto cash,
investors are at risk because they are unable
to meet their investment objectives. The demo-
graphic shift that took place from 1946 to 1981
compounds the problem. The two income
household meant that both men and women
embarked on the pursuit of a career. Children
born in that era grew up with the understand-
ing that regardless of gender they both could
and should pursue a career of their choice.
That has resulted in a greater focus on career
aspirations and smaller sized families.
The effect is that amongst the developed
nations and even in some emerging markets
family sizes are below the replacement rate
necessary for a constant population of 2.1 chil-
dren per woman.
It means that the generation of today are
not getting the required returns on their invest-
ments necessary for retirement by holding
onto cash but then that situation will be com-
pounded by the fact that when they retire,
there will be less people in the workforce to
support them via government sponsored retire-
In the end, consider how a war, economic
and lifestyle changes initiated 70 years ago
will still impact you 20 years from now. Appre-
ciate the interconnectedness of the economic
cycle over time. Understand that decisions
taken today will affect your financial well being
in the future and recognise whether out of
fear or habit turning to cash can actually be
more risky than you think.
Ian Narine is a broker registered with the
SEC and can be contacted at
Cash is not always safe
Cash has not only failed to generate a rate of return necessary to satisfy
one's investment needs but it also has, in many instances, generated a
rate of return below that of inflation.
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