The Cost of Holding Cash in the Current Market

The video discusses the low cost of optionality and its implications for investment strategies. It highlights market behaviors, such as the unexpected bounce back from Brexit, and the role of cash as an insurance policy. The discussion covers the bond rally, US economic growth, and the Federal Reserve's interest rate policies. It also examines the cost of holding cash for corporates and the strategic decisions they face. Finally, it addresses risk management, emphasizing the importance of diversification and understanding asset correlations.

What is a key challenge for investors holding large amounts of cash?

• Inflation

• Lack of investment opportunities

• Market unpredictability

• High interest rates

What is one reason the bond rally is unlikely to burst soon?

• Low secular growth in the US

• High inflation rates

• The Fed is expected to raise rates

• A growth spurt in the US economy

What might corporations do if holding cash becomes costly?

• Invest in riskier assets

• Increase cash reserves

• Reduce liabilities

• Focus on short-term gains

What is a challenge in achieving diversification in a portfolio?

• Regulatory restrictions

• High transaction costs

• Finding non-correlated assets

• Limited asset classes

What is a potential risk when switching from duration risk to floating rate bonds?

• Higher interest rates

• Decreased liquidity

• Exacerbating credit risk

• Increased inflation risk