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All Securities Issued Are Always Held By Someone

I am seeing the demonization of holding cash all over the place this week. But here’s the reality of cash’s existence – someone, somewhere holds a cash position at the end of the day. Saying that cash is “bad” is a fallacy of composition. This is why I found Adam Nash’s attack on Schwab to be so misleading.

The fact is that some broker dealer with a banking unit will end up holding cash at the end of every day. Nash wants you to think that you’re being charged a fee just because broker dealers with a bank necessarily hold some level of cash at the end of the day and sweep it into their bank unit. But his argument is wrong because the banking system, in the aggregate, cannot choose to get rid of its cash. Nash wants you to think there’s something nefarious going on here just because Charles Schwab doesn’t recommend a 100% non-cash position and also happens to be a bank that sweeps cash.

Well, ALL broker dealers with a bank end up holding cash at the end of the day and implicitly recommending a cash position to its clients while also sweeping the cash. Does this mean that every broker dealer with a bank unit is being underhanded? Of course not.  They don’t even have a choice in the matter! If Schwab somehow eliminates their cash (which they won’t be able to) then some other broker dealer with a bank unit is being nefarious by no choice of their own by holding cash and not recommending that you eliminate it (which you can’t, you can simply move it to some other broker dealer who will end up with the same “conflict”)….

And this brings us to an important understanding of the financial markets – all securities issued are always held by someone (until they mature or are retired). To argue that cash is always bad is to argue that all other securities are always good. And remember, “cash” in a brokerage account is just another type of financial security issued by various financial firms. So, when you buy stocks you are selling your cash. When someone sells stock they are buying cash. Cash is not just a position. It is one of the most dominant positions in the aggregate financial universe.

This is part of what makes a bull market so difficult to handle. Someone, somewhere is always sitting on the opportunity cost of holding cash relative to other assets. Of course, this looks silly when there is a bull market, but the relative value of cash also rises during a bear market. But in general, someone is always holding cash for some purpose either enjoying its liquidity or regretting its relative performance.  Of course, we probably wouldn’t be having this same discussion in 2008 or 2009. This sort of irrational demonization of cash tends to happen well into a bull market when so many feel like they’ve lost out by sitting in cash.