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As the coronavirus rages on, financial markets must make complicated decisions without fully understanding the risk factors. Sometimes those decisions don’t pay off, as it did recently with investor Ray Dalio.
Ray Dalio, the American billionaire founder of Bridgewater Associates, the largest alternative investment fund company in the world, had sent a very specific message to the billionaires and CEOs present at the World Economic Forum, held in Davos last January.
His famous message was as follows: “ Cash is trash “. He had spread a lot of ink then, denigrating the power of cash and continuing, “Get rid of your cash.” There is too much wealth held in liquidity in the market ”.
But two months later, liquidity turned sovereign in global markets and Ray Dalio’s hedge fund has since fallen 20%.
Indeed, companies and investors are now rushing for liquidity, because the current health crisis is creating a real panic on the markets. More than 200,000 cases of coronavirus have been confirmed worldwide and the WHO has qualified the Covid-19 epidemic as a pandemic.
As stock markets around the world are plummeting, investors are turning to the safety of liquidity. US money market funds have reportedly seen inflows of $ 87.6 billion over the past ten days. Bank of America said last week investors placed a total of $ 136.9 billion in cash.
The American banking system has entered a position of strength in the health crisis and is proving to be much more resilient than it was able to be during the financial crisis. Last Sunday, the U.S. Federal Reserve took new steps to further protect the U.S. financial system from the coronavirus, with a $ 700 billion quantitative easing program.
As stocks tumbled last Thursday, the yield on 30-year US Treasuries rose sharply, while the value of gold fell. Bitcoin, which some presented as a safe haven, also collapsed. The US dollar in cash has since been particularly in demand, and borrowers around the world are even starting to pay extra for it.
Companies have also made sure that they have a sufficient stock of liquidity. Aircraft maker Boeing decided last week to use a line of credit worth $ 13.8 billion, obtained from banks about a month ago. Other companies like Hilton, Wynn Restorts and Seaworld Entertainment, which are seeing their businesses slow down sharply due to Covid-19, also called on lines of credit last week. It also appears that private equity firms are looking to use their lines of credit to deal with the current crisis.
The major US banks that fund these lines of credit, such as Citigroup, JPMorgan Chase and Wells Fargo, have all decided to suspend their share buyback programs in order to conserve liquidity.
Some US states have also decided to dip into their relief funds to help businesses deal with the coronavirus pandemic. The state of Washington draws in particular $ 200 million from its coffers, mainly to support the efforts of the medical profession.
But the rush for cash also includes physical cash. Last weekend the New York Times reported that a Bank of America branch in Manhattan ran out of $ 100 bills for a short time, with customers withdrawing tens of thousands of dollars at a time. Likewise, Bloomberg News reported that a Chase bank office in the Hamptons had asked for $ 30,000 in cash to meet customer demands.
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