The Cost Of Carrying Cash

January 2021 Newsletter | Many investors realise that there is a cost of carrying cash. It is the opportunity cost associated with returns foregone if the cash were invested elsewhere. However cash also provides optionality, such as when a market dislocation creates an opportunity to invest at distressed prices, and cash provides liquidity, a means of buying goods and services if you have an unexpected reduction in income. Cash is considered a safe asset, but over time the cost of holding cash can vary considerably. When assets are cheap, and interest rates are low, the opportunity cost of holding cash can be very high. Ironically these are the points in time when cash holdings tend to increase. 

In this newsletter we discuss the cost of carrying cash in the current environment, and ponder the impact of the growing money supply on asset prices.