Dialogue. Cash is Not Trash, Inflation Hedges, Portfolio Strategy

**Alex** (0:06)
Welcome to The Synopsis, a business and investing podcast. Today, I'm here joined by Drew, and we are talking about inflation. He dropped another video on Adobe that's doing well. For some reason, the people of YouTube love Adobe and software stocks and the AI revolution, but I'm here to talk about something a little more boring, a little more historical, and I'm happy about it.

**Drew Cohen** (0:30)
Great, I'm glad you're happy about it. It's all about making sure that Alex is getting what he needs in order to keep hosting.

**Alex** (0:37)
You're right. I really, we should be catering more to my interests at this point, so that's what we're going to be doing, and we're going to talk a little inflation, a little overall investing strategy. I think it's going to be a bit of a meander, but I think people don't handle the topic of inflation well. I think you did a really compelling YouTube video, and I loved you starting off with the concept that cash is trash, and I think so many people will utilize that and they'll say, oh, I've got $100, and again, this is hyperbole, oh, I got $100 in my bank account, I need to put it in stocks right away because cash is trash and it's depreciating. And I feel like they learn a little surface level about inflation and investing.
And again, it's kind of a sentence that is true, that is then taken to an extreme, that then makes it dangerous and unuseful. So why don't you push back on the concept that cash is trash?

**Drew Cohen** (1:28)
Yeah, so Ray Dalio was someone who was kind of famous for saying this. And then when interest rates went up and financial assets went down in price, he wished he had more cash. Because the concept of inflation really should be split up between the consumption side, when you spend money and on the financial side, when you save money. And so when you are spending money and the prices of the items you're buying are going up, that is certainly inflation. However, within your savings, you don't necessarily experience inflation the same way. And that is because what tends to happen initially, when we do get inflation, is that interest rates tend to rise. Now, this isn't always the case, but it is by and large the case, especially what we can expect to happen in the US. If inflation does increase or continue to stay strong, we should expect to see rate cuts, in which case what happens to financial assets is they fall in value. That is the overwhelming impact to financial pricing, much more so than any purchasing power degradation from inflation.
This idea that cash is the worst thing you should own in inflation is true only on a longer time horizon because if, for instance, we see inflation kick back up right now in the US, what we're going to see is rate hikes. When you see rate hikes, what you can expect to happen, generally speaking, is stocks fall in value and bonds fall in value. In fact, basically all assets that are liquid or just generally too fall in value. The illiquid assets don't fall because they don't price them as such. Usually for a while, they don't update those pricings and then play games with that. That is a different video.
That is the big take though that I want to push right now. Yeah.

**Alex** (3:11)
No, I think it's a, again, it's a time horizon situation which is yes, if you were in 1980 and you had $100 in savings and you held your $100 for 50 years, that will have a negative outcome.
But I do think this notion that, oh, I can't have any cash ever. Again, it's kind of the other extreme. It is interesting in these hyperinflationary environments, presumably when cash is, quote unquote, the least value because every time you, each day you have a dollar if you think about, hyperinflation is 30 percent a year, then technically by the end of the year, your $100 has $70 of purchasing power. So again, you're not staying constant in what we call real terms, right? Which is inflation adjusted dollars. But as Drew pointed, and I think that this was such an interesting atmosphere to live through, because a lot of investors didn't see rate hikes like that since, you know, obviously the hyperinflationary period of the 70s. But to see the re-rating of everything dramatically, which is essentially if you look at how DCFs work and everything, they're all based on the discount rate and the discount rate is tied to interest rates. The interest rates goes up, the discount rates go up, and then, you know, if you want to say your terminal value goes way down or your multiples go down.