Ray Dalio: The Thinking Behind Why Cash Is Now Good (and not Trash)
In early 2020 amid the pandemic meltdown, billionaire investor Ray Dalio famously stated “cash is trash.” Today, the billionaire sees cash as a favorable asset for investors to consider today.
To see why, investors can start by looking at the returns being made on cash. In 2020, interest rates went from 2 percent to zero percent nearly overnight. The returns from sitting in cash were negligible.
Today, it’s a different story. Investors can earn 5 percent or more on their cash holdings. That’s with U.S. Treasuries, which are considered risk-free investments.
With inflation now near 4 percent, investors can earn a real return of 1 percent over the rate of inflation. Of course, that’s not a huge return. But, it’s a sign that holding a higher level of cash may be ideal right now.
Plus, today’s interest rates may be near a peak. That suggests that investors should consider investing in bonds now.
Bond prices got knocked down by the rise in interest rates. Bond yields on 2-year notes are up over 2,000 percent from their 2020 lows. Why? Because investors flocked to Treasury bonds during the start of the pandemic. That led to an all time low of 0.3 percent. Today, that rate is over 5 percent.
In other words, cash looks attractive as an asset class. Its returns are based on the Treasury rate, which also looks attractive now. And should interest rates drop, bond prices will soar.