Fourteen days to mayhem.
The U.S. Strategic Petroleum Reserve (SPR) is being drawn down at an aggressive rate during the Iran ceasefire drama and is now at its lowest level since 1983. (Think Reagan, Hinckley Jr., Iran Hostages… Paul Volcker and interest rates edging toward 20%.)
Estimates now show 14 days of oil left before the oil supply buffer between the closure of the Strait of Hormuz and your gas tank is gone.
That makes the global energy markets unusually susceptible to a new round of price spikes and speculation.
At the same time, on Wall Street, funds are carrying historically low cash reserves:
Cash reserves at Wall Street funds have reached one of their lowest readings for the millennium (to date). (Source: Bank of America)
Professional investors carrying so little cash make the market more vulnerable to a sudden selloff.
Fund managers typically keep some cash on hand to handle redemptions, rebalance portfolios, or buy stocks after a decline.
According to the Bank of America survey cited above, cash allocations have fallen to 3.5%, one of the lowest levels since 1998, right before the crack-up boom in dotcom stocks.
In part, learning from that experience, BofA treats cash levels of 4% or below as a contrarian sell signal, suggesting investors are already heavily committed to stocks.
The logic is simple: when fund managers are “all in,” there are fewer buyers left on the sidelines. If something goes wrong — an AI trade breaks, a speculative energy spike, a big hedge fund blows up, or the market simply gets spooked — those same managers need to sell stocks to raise cash to cover down positions.
The resulting cascade of bad news triggers more selling, exaggerating a decline and making it worse when everyone is trying to find liquidity at the same time.
The 56% overweight-equities figure reinforces the same point. Fund managers are not just low on cash. They are also heavily tilted toward stocks. That means positioning is crowded.
This scenario is precisely why, at $367 billion in cash, Berkshire Hathaway is sitting just 8% from its all-time high reserves. “Be fearful when others are greedy,” Warren Buffett famously wrote to his shareholders in 1986, “and greedy when others are fearful.”
Holding cash when investors, globally, mind you, are all in on stocks allows you to keep the powder dry until the inevitable correction happens.
In our Grey Swan Investment Fraternity model portfolio allocation, we currently have 20% in cash. That’s a level that would get most professional fund managers fired. Especially when all the cool kids are in the pool.
So what? We like to get a solid seven and a half hours of sleep at night. And when cash-strapped funds start a fire sale to raise cash, sitting in cash and cash-generating assets gives you an opportunity to buy.
Further, when you own investments that throw off cash, you can use that cash to buy companies you like at a discount. Here’s a way to “panic now, avoid the rush,” as our friend and mentor Bill Bonner would say.
Today’s Grey Swan Pro recommendation is a money market ETF designed to maximize yield. Grey Swan Portfolio Director Andrew Packer lays out how much to invest in this fund now, and the market condition that would warrant exiting this fund and buying riskier stocks.
~ Addison
P.S. Grey Swan Live! returns tomorrow with Jennifer Stevens of International Living.
If reviewing our time during the pandemic has driven any idea home, it’s the idea that you also need your own personal bolthole. And that the safest place to bolt may be in a different country.
In our first chat, Jennifer reviewed the top global real estate markets. We’ll take a look at where the best opportunities are, whether you’re looking for a second place to live part-time or full-time, or whether an investment property overseas – which may eventually become a retirement or bolthole – is best for you.
But that’s not all!
On Friday, we have a special event – a conversation with our friend Nick Buhelos at Prime Corporate Services. Nick can show you how to best structure your investments to reduce your tax liabilities in the U.S. – a great idea whether you want an intrusive government like the one during the Covid-era or not.
