Cash and the Hunt for Safety

Cash and the Hunt for Safety

Trading Features / Strategies from Simon Denham of Capital Spreads.

The hunt for safety is becoming ever more problematic. The recent fallout in commodity values has reminded those who had forgotten that (as the adverts say) “prices may also fall and past performance gives no certainty of future returns”.

Government treasuries from the US to Germany and the UK have had a pretty grim week as well as 10 year notes record their worst week in three years. The long rush to safety in State debt seems to have suddenly hit a brick wall as investors now worry about inflation and over issuance. The Fed and ECB are printing money on an heroic scale in an attempt to free up the credit markets and, along with the Bank on England, all three are now having to prop up ailing banks with public funds. The question being asked is who is going to buy this rising tide of paper?

This brings us to third ‘safe haven’...Cash. Another difficult decision… As in… where to keep it? Suddenly those pillars of the western world, the major banks, do not look quite so sturdy and as the HBOS saga showed. Even other banks are very willing to believe in the instability of their peers, that is shown in another way, by their unwillingness to lend to each other. The value of cash can now be seen from the fact that the banks are willing to pay considerably over base rates to acquire it. There is one overriding reason above all others that causes somebody to pay over the odds for an asset. Scarcity.

Much of the world’s worth is tied up in non-cash assets of one form or another. Bonds, Property, Equity etc much of it controlled by Pension Funds, Insurance Companies, Hedge Funds etc, most of it is currently falling in value and most of it is also quite difficult to, quickly, turn into folding stuff at prices remotely close to ‘book value’.

The recent destruction of capital worth across the planet has been quite astounding, eg Bear Stearns which swiftly turned $15bn of savings into virtually zero in two weeks. Peloton and Carlyle (just two out of innumerable Hedge Funds) wiped out £13 billion of other peoples money. A quite staggering sum of money. And these are the ones we have heard about.

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Unfortunately the growth of the world economies is often tied up in how well the wealthy are doing. A sad indictment of the capitalist system. And at the moment, unless they are sitting on a commodity asset, they are doing rather badly.

So banks are short of the one thing that they always need to meet various regulatory hurdles... cash.

The problem is that the various central banks (aside from the BOE) have now done virtually everything they can to free up the wheels. There is not a great deal left in the armoury. It would almost seem that the never ending negative trade balances of the west have finally drained the well.

So where do you put your money? I have heard that the Private Swiss banks have started to come back into popularity. Companies and individuals do not want secrecy but they do want to put their money in an institution that is not tainted by the Mortgage or Derivatives markets.

The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.

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'Cash and the Hunt for Safety' edited by SD, updated 29-Mar-08

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