Cash is expensive

Whether it’s property, equities, bonds, jewellery, art or even rare coins – there is often an opinion forthcoming whether it’s consider to be cheap, fairly valued or expensive..

Cash seems to miss out on falling into these categories. Cash is referred to as “king” in times of worry and “lazy” when everything is booming. You’re can be either “cash rich”, “cash poor”, “cashed-up”, “strapped for cash” or it can be “burning a hole in your pocket”.

The cost of money can be cheap or expensive when you are borrowing it but why can’t cash be expensive or cheap when valuing it as an investment?

Today, I think cash is expensive!

Notwithstanding the ebbs and flows of investment markets in the near-term, when compared to other asset classes, it’s probably very expensive.

The Earnings Yield

When scanning for what I refer to as a “Fertile Investing Habitat”, I take the Earnings Yield of an equity  index (which is the inverse of the Price/Earnings Ratio) and compare it to the government 10 year bond yield and the interest earned on bank cash deposits in that particular country when trying to initially determine whether that “habitat” is potentially cheap.

For example, the P/E ratio estimate for the current fiscal year of the ASX 200 Index is 12, the inverse of this figure and thus its earnings yield is 8.3%. The yield for the Australian government  10 year bond is 4% and a generous at-call bank deposit would earn 5%.

From this I may deduce that the ASX 200 equity index might offer a better return proposition over nest few years versus the return prospects of cash?

To figure out if my investment in cash is actually expensive, simply invert the 5% bank deposit interest and your conclusion is a Price/Earnings (P/E) Ratio of 25. This is twice as expensive as the ASX 200 equity index!

What about the United States?

The S&P 500 has a P/E of 12.5 which equals an earnings yield of 8%. The 10 year govn’t bond’s yield to maturity is 2.1% (P/E of 47) and the Fed Fund rate is 0.25%, giving you a P/E of 400.

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