The $100 trillion managed globally as your pension and active investments is primarily discretionary. The human does the job. But the future is about machines managing your pension and investments because humans have a poor track record. Machines have a lot of problems to solve, starting from bias to teaching investors how and why to trust the machine and how and when to go Cash.
But before machines do the job, we need to educate them about Cash, which is an essential element in the portfolio, that can be used tactically, can save a portfolio from extreme drawdowns and long recovery periods. The $35 trillion that is managed passively assumes a long-only world, where all crashes eventually come to an end, so why worry about Cash.
Ok! that’s a good assumption to work within a world without survivorship bias. The long-only road is full of bankruptcy, junk, fraud, and instrument failures. Passive or active, there is no free lunch. We are in an equity correlated world and equity is the preferred asset class, which means, it’s united we stand, united we fall. Hence, to Cash or not to Cash is an important question for the active $65 trillion too.
When A Machine Should Think Cash
1: CAPE Cash [1]. When CAPE reaches historical extremes.
2: Growth Cash. When Growth as an investment style delivers 2X vs. Value style (2008).
3: When Short Sellers Get Relentless About Extreme Valuations.
4: Robinhood Cash: When the law of ruin [2] fails and trading platforms go free, one should think before buying into trade for free today and become rich tomorrow.
5: Commodities Cash: When there is a shift from paper to hard assets.
6: Agro Cash [3]: When Agricultural inflation happens at 0% interest rates.
7: Emerging Cash [4]: When emerging markets reach a secular underperformance extremity.
8: % Mutual Fund Cash [5]: Asset managers herd-like everything else in nature. At market tops, the majority of asset managers are invested and vice versa.
9: Cash is trash Cash [6]: When everyone knows Cash is trash, it’s in a deep discount.
10: When Machines only talk about investing and trading, not about Cash.
Teaching Machines to understand and know Cash involves understanding history and how asset, economic, cultural, and the multiplicity of cycles operate together and how being systematic about Cash, needs more than information.
Once the Machines of the future learn when to Cash, they will figure out the deployment.
AlphaBlock Team
Bibliography
[1] CAPE, Robert Shiller
[2] Jovanovic, Franck & Poitras, Geoffrey. (2006). A 19th Century Random Walk: Jules Regnault and the Origins of Scientific Financial Economics.
[3] Cash and Crash Cycles, M. Pal, Business Standard, Oct 2007
[4] All-roads-lead-to-china-and-emerging-markets, CFA Institute, 2018
[5] Ned Davis Research
[6] Ray Dalio Still Thinks ‘Cash Is Trash’, Bloomberg, April 2020