IRA Financial’s Adam Bergman Esq. explains why “cash is trash” right now due to low interest rates and inflation concerns, and why you should be investing your money in other assets, such as real estate and Bitcoin.
This is a followup to last week’s episode talking about inflation. Because of low interest rates and what has happened to the economy this year, Mr. Bergman learned that cash is trash. After speaking with a CEO of a large bank, he learned that they have too much cash on hand. Essentially, they didn’t want our business at this time because of all the cash that has been coming in thanks to government aid and the lack of spending this year due to the COVID-19 pandemic. This podcast goes a little more in depth about why cash is trash right now and what you should be investing in instead.
Why Cash is Trash Right Now
Mr. Bergman’s friend said that right now the world is upside down and all banks have too much cash on hand and nothing to do with it. They can’t get any returns on a government overnight interest rate swap program and not enough people need loans because of all the PPP and Cares Act SBA money floating around.
He went on to say that he could even envision a negative interest rate environment, like some Europe countries, because banks are trying to persuade people to take some of their cash out of the bank. Of course, Mr. Bergman had to get a “second opinion.” Surprisingly, the half a dozen people he spoke with all said the same thing. Cash is trash (in so many words)!
Some Numbers to Ponder
Mr. Bergman then looked at the last great pandemic and the fallout that occurred a century ago. Here are some interesting facts he found.
- From early 1914 to November 1915, short-term interest rates declined, except for a period of uncertainty and tension in the summer and early fall of 1914, at the outbreak of World War I. The yield on prime four- to six-month commercial paper decreased from roughly 4.5% in early 1914 to 3.45% in November 1915. The yield on highest grade railroad bonds showed little net change during this period, averaging about 4.5%.
- During the economic boom lasting from the fall of 1927 to the fall of 1929, interest rates again moved higher. Yields on four- to six-month commercial paper rose from 4% to 6.25% and interest rates on highest grade corporate bonds increased from 4.5% to 4.8%.
- Interest rates started to decline during the Great Depression. From a level of 6.25% in the fall of 1929, commercial paper yields dropped to 2% in the summer and early fall of 1931. Likewise, highest grade corporate bond yields decreased, from 4.8% to 4.36%. Interest rates did begin to rise in late 1931.
- Interest rates generally worked lower until early 1937. The supply of short-term Government securities and other high-grade money market paper was severely limited. By early 1937 prime commercial paper was yielding only 0.75%.
Basically, history does not offer us much perspective on what could happen to inflation after a pandemic. During the 1918 pandemic, interest rates were higher than today and stayed pretty stable until the 1929 Great Depression. We have never had a negative interest rate environment, which we may be headed into.
The main difference between the 1918 Spanish flu and today is that interest rates were higher in 1918 so they had more wiggle room to navigate the pandemic. Whereas, in March 2020, we basically went from 2.5% interest rates to zero overnight and are now basically out of options or further ammunition.
Inflation is Coming
As he talked about in the last podcast, inflation is in our future. Consumers have an extra $2.3 trillion in savings since the pandemic started. There are a few reasons for this and why cash is trash right now.
- No traveling – biggest family consumption costs
- More money to spend and more stimulus coming
- Almost a certainty House will pass stimulus bill when Biden takes office
- Biden is seeking to pass a $4 trillion economic plan
What Can You Do?
It’s time to invest that cash you have collecting dust. Until this pandemic is over, travel, entertainment and the like is not happening. At some point, we will return to some sort of normalcy, which will create a big boom for the economy. But until then, it’s time to look at other assets, such as real estate, perhaps Bitcoin and even stocks.
Real estate has always been “inflation-proof” to a certain extent. Rental properties, both residential and commercial, have built in protection. You can increase rent if the economy calls for it. Another good option are short-term hard money loans. There are people that still need money. You can lend out funds and charge an appropriate interest rate.
Of course, stocks are always an option. Again, your money is not doing anything just sitting in a bank. Even a conservative slate of investments will bring you something. The stock market always finds a way to bounce back. Obviously, it’s important to work with a financial advisor to detail a plan that fits your needs.
Lastly, there’s Bitcoin and other cryptocurrencies. Surprisingly, Bitcoin continues to rise in value since March. It’s still quite volatile, but it makes sense to invest at least something there!
This will be the closest we’ve ever been to negative interest rates. The 1918 Spanish flu and subsequent Great Depression does not give us a clear blueprint of what to expect in terms of interest rates and inflation because rates were much higher at the start of the 1918 pandemic. Buckle up and be ready to navigate a world where your cash is trash!
Thanks for listening! As always, check out our SoundCloud page for all of our podcasts and be sure to tune in next week for another episode of Adam Talks!