A strong argument could be made for cash right now, but I think that's too unimaginative. On the one hand, it is important to hedge against potential loses. On the other hand, however, it is equally important to hedge against missed gains. As it concerns the latter, it appears to me that the market is seriously mispricing the odds of a fed pivot at some point throughout the summer or autumn. Let's consider a few scenarios.
Scenario #1: the steadfast fed
Powell continues to raise rates into an ever deteriorating macro climate. The USD continues to be bid against Europe and Japan. Developing countries start to default on sovereign USD denominated debt. Companies with interest rate risk start to fail. Residential real estate market collapses leaving a massive blackhole in bank balance sheets. Bank holidays start and we're full speed ahead to a currency reset that's also going to fail -- because the only thing more garbage and speculative than a shitcoin is a shitcoin founded by a central bank. BRICS, KSA, UAE, and Iran expand their sphere of influence immediately and drastically while the USA declines on the international stage with alarming alacrity -- along with Europe and the entire West.
Frankly, any money you invested in this scenario was lost as soon as the banks closed, so the only downside risk from the get-go was not having basic hedges in place such as food, protection, and sound money (but consider also the dacha, which is how many Russians survived the collapse of the soviet union https://en.wikipedia.org/wiki/Dacha ).
Scenario #2: the soft fed pivot
Confronted with the reality of tightening into a recession, saner Keynesian heads prevail and start to articulate the argument for a rate hike pause. Frankly, it makes little sense now to abandon the template fifty years after Nixon. The fed reverses course and announces a rate pause. The markets begin to rally . There was a pounding headache the morning after the punch bowl was taken away, but a little 'hair of the dog' was all that was needed to alleviate concerns of a complete market crash.
Scenario #3: the hard fed pivot
Things got really bad with the credit contraction. Cheap money flowing into the system is now undeniably more important than the fed chair's credibility. Powell and the fed chairs unanimously cut the bank rate to 0-0.25% on a Sunday night. We're on the path to 70s style stagflation buttressed by a supply-contrained oil market and a refinery-constrained diesel and gas market.
In scenario #1, all the money you had in the bank was lost. All you own now is everything you already had outside the system. It didn't matter whether you were holding cash or equities, if it was in a bank account, it's gone now. In three weeks, you'll be getting paid out in central bank digital currency. In scenarios #2 and #3, the bottom is in and the money starts to come off the sidelines. Trillions (especially institutional money) start to flow back into equities as everyone rushes to hedge inflationary pressures. This is especially true for the soft and hard commodity complexes .
So in this environment, how would one prudently structure a risk-on portfolio that is sexier than cash? The approach that I am taking is by buying cheap (and beat-up) commodity lottery tickets (e.g. oil, silver, uranium, copper) as a hedge against inflation. These equities are solid (DFS, care and maintenance, producer, developer), mostly capitalized, have a high beta to the underlying commodity, and which could rapidly appreciate if the underlying commodity moves to the upside -- irrespective of whether the commodity price move is ideosyncratic or in line with the broad market.
At the same time, I have established both long vol and short positions as a hedge against an aggressive market dip. If these volatility/short positions do become profitable, I can close them and average down on my initial commodity lottery tickets. [Psychologically, I tend to think this is important because you see some green and you can turn around and add to positions you already knew were undervalued].
It's important to consider the risk that the market may begin to run away from you and your cash. If the fed pivots (or oil/uranium blast off within a couple days), the last thing I want is to be rapidly redeploying capital trying to catch the rally. If things really start to move, Instit money is going to rapidly churn through share floats like it's March 2020. In the here and now, I don't care if I suffer a 50% or 75% drawdown on my longs. In the first place, I'm hedged. Secondly, if the fed pivots, I have the peace of mind of already being positioned. I'm not going to beat myself up about timing the absolute bottom because --at the very least-- my vol/short positions paid off.
I think now is the time to consider equity lottery tickets in the commodity complex. This is especially true for oil and uranium, and to a lesser extent PMs and copper. From a sentiment perspective, it's not quite blood in the streets, but MPs have started to wear panic buttons (https://www.cbc.ca/news/politics/mp-threats-safety-panic-buttons-1.6496243). The capitulation I'm seeing and the sentiment is, to me, a massive contrarian indicator. It takes a lot of fortitude to catch a falling knife and move against the herd. But I've tried to articulate what a Volcker moment and cryptocurrency reset would look like: you will be living at the dacha and anything you had in the bank is gone anyways (cash, equities, savings etc.).
If the world is ending anyways, I would argue it is better to hedge and not be caught blind-sighted by an inflationary impulse. Owning these shares will make looking at the gas and electricity bills much easier in the years to come.
Not investment advice. Do you own due diligence. My handle is literally "below average".ery tickets in the commodity complex. This is especially true for oil and uranium, and to a lesser extent PMs and copper. From a sentiment perspective, it's not quite blood in the streets, but MPs have started to wear panic buttons (https://www.cbc.ca/news/politics/mp-threats-safety-panic-buttons-1.6496243). The capitulation I'm seeing and the sentiment is, to me, a massive contrarian indicator. It takes a lot of fortitude to catch a falling knife and move against the herd. But I've tried to articulate what a Volcker moment and cryptocurrency reset would look like: you will be living at the dacha and anything you had in the bank is gone anyways (cash, equities, savings etc.).
If the world is ending anyways, I would argue it is better to hedge and not be caught blind-sighted by an inflationary impulse. Owning these shares will make looking at the gas and electricity bills much easier in the years to come.
Not investment advice. Do you own due diligence. My handle is literally "below average