Doug Casey has said for decades that the worst time to look for liquidity is when you need it. He’s right. And the corollary is just as true: the best time to acquire it is when it’s cheap.
Let’s put some numbers on it. Say you have a stock with a P/E ratio of 50. You’ve got $100 tied up for every $2 that the company earns. It is likely they aren’t even sending you any of that $2 each year. Management is probably building their empire with those earnings. Right now, you could sell that stock for $100, stick the cash in a money market account, and get $4 paid to you each year. Or you could wait until there is a credit collapse and sell that stock for $20. In other words, achieving the same $100 of cash liquidity will have become far more expensive.
Liquidity is cheap when nobody particularly wants it. In a credit crunch, everybody wants it.
By increasing your cash liquidity now, you may miss some more ridiculous increases in the price of the stock. That’s the cost of having cash liquidity when you need it. But cash isn’t dead money. It’s financial optionality—ammunition for the next panic.
Why Cash Liquidity, Why Now
If you have read my writing, you know I suspect there will be a credit deflation and a currency inflation. The credit deflation will be triggered by some unpredictable failure in one party in the financial chain, leading to cascading failures among its counterparties. That will cause asset prices to fall, potentially fast and far, as people run to cash. Then the Fed and government will flood the market with currency units (currency inflation). This will come in the form of bailouts of crony friends alongside throwing some cash out into the hands of the hoi polloi so they don’t bitch too much.
To my read, that is the most likely scenario. The politicians and central bankers did it before, and the next time I expect they will have to go bigger.
We don’t know when things will fall apart or how fast. And we don’t know how much the financial wizards will be able to control it.
We know there are busts after booms, and that malinvestment gets unwound sooner or later. So we need cash liquidity to get through the busts—and hopefully to buy at the fire sales later, when there is blood in the streets.
Accumulate Cash Liquidity
How much liquidity is needed? Everyone’s needs are different. But I recommend: 1) Maintain an emergency fund sufficient for at least one year of essentials that will pay your mortgage, put food on your table, and buy your fuel and electricity; 2) build dry powder so you can buy low during the next big opportunity.
Cash (dollars) is what we need in our emergency fund. But there is other liquidity available, including gold, silver, and perhaps bitcoin. Short-term Treasuries too, if you can stomach lending to the government. This type of liquidity is good to have for your dry powder.
Keep in mind, when there is a credit collapse, people will need those dollars and some will sell their stocks, bonds, bitcoin, gold, and silver to get more dollars. So it is dollars that you should make sure to have enough of.
How do you, practically, get cheap cash liquidity?
Three ways:
1) borrowing at fixed low interest rates, such as a mortgage;
2) selling stocks that have bubbled up because of inflationary pressures/dollar debasement. Stocks in companies that you know aren’t worth what people are paying for them. Stocks you hold not because the company is ever going to earn money, but because other people keep buying them. Stocks of companies whose P/E ratios are through the roof are a good place to start looking for candidates to sell.
3) Sell stuff you don’t need. Boats, cars, a storage room full of old furniture. Sell the junk.
Credit expansions end and people will rush for liquidity. Consider selling the high-flier story stocks now, before the rest of the crowd does. In the past it was Peloton and Pets.com and Global Crossing. Now, it seems to me, it is AI.
The subscribers who spend the next few months selling shares in companies that have bubbled up to the moon will be able to write checks to buy at the fire sales later.
Sincerely,
John Hunt, MD
Editor, Doug Casey’s Crisis Investing
"Cash isn’t dead money. It’s financial optionality—ammunition for the next panic." Absolutely true and good to keep us readers tuned to the dangers of hanging on to the rising stock price tide right over the cliff when the far horizon has become the waterfall cascading down. I don't think it will happen all at once or across the full spectrum of publicly traded companies but, no doubt, the dumb luck crowd who hadn't invested carefully will be caught unaware and unprepared with dry powder and storage sheds full of junk. Keep hitting the drum and warning us friends. I appreciate it.
Good advice.