𝗧𝗵𝗲 𝗖𝗮𝘀𝗲 𝗳𝗼𝗿 𝗖𝗮𝘀𝗵 𝗶𝗻 𝗮 𝗖𝗿𝗲𝗱𝗶𝘁-𝗧𝗶𝗴𝗵𝘁𝗲𝗻𝗶𝗻𝗴 𝗖𝘆𝗰𝗹𝗲

In case anyone has any doubt that we are currently in a credit-tightening cycle, just take a look at the total US monetary base over time. The monetary base was growing nicely at a pretty constant rate before the Great Financial Crisis in 2008. Then with Ben Bernanke at the helm of the Fed, the self-proclaimed student of the Great Depression unleashed a bold experiment upon financial markets. As a result, the monetary base jumped and expanded multiple times over the last decade. There was an attempt to reduce the monetary base but when COVID-19 struck, what took months of tightening was quickly reversed and then some. Of course, this led us to where we are today, with inflation not seen for the past 40 years.

Total US Monetary Base

This bold money printing experiment led some to believe that we are in the "everything" bubble where all asset classes were blown to exaggerated levels. During this bubble-blowing phase, cash is trash since interest rates are low and cash does not earn any return.

Now that central banks are fighting inflation by removing liquidity from the market, it is not difficult to imagine that cash is now king. Although cash still does not generate any return, it is still better than suffering negative returns from holding assets that are deflating from the over-valuation. At the same time, with higher interest rates, deposits are starting to look attractive again.

For those who say shorting is the way to go, I can only say that there is no telling the extent to which central bankers are prepared to go to prop up asset prices, despite inflation. After all, Bernanke already set the precedent. On top of that, shorting carries financing costs unless you are using futures.

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