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When Cash is King, Volatility is the Queen

In the financial world especially in the investment part of it, there is a phrase that is used repeatedly “cash is trash”. Well, last year cash has been King. It is difficult to know when it is assumed that markets only go up but it becomes easier to know when you track the phase of the market that is mostly defined by the volatility indices.

The phase gets more backing when it is been followed in real life by the largest banks and investment institutions throughout the world. At present, USA banks are keeping $2.2 trillion with Federal Reserve as overnight reverse repo earning 3.08% annually. Along with this global funds are holding cash at levels not witnessed in many quarters.

Though it will not remain like this forever it does indicate that markets and the economy are estimated to fall further in near future. This becomes the point where all this liquidity flows into the market and economy. Another piece of this puzzle is knowing the exact time it happens. If looked at historical data these moments are in existence for a month or two. But unfortunately, many investors at that point do not have enough cash to deploy to make up for a larger reward.

Holding such levels of cash also leads to illiquidity in financial markets, especially in long-term bonds that fuel a large risk to financial stability. Thus it is important to know the phase of the market by tracking the volatility index especially now as there has been no instance to date where inflation has come down from present highs with a long downturn in the economy and markets.


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