JP Morgan |  Oksana Aronov: JPMorgan's Aronov ignores choir 'cash is trash'

JP Morgan | Oksana Aronov: JPMorgan’s Aronov ignores choir ‘cash is trash’ – Mail Bonus


It is a common motto among investors: Cash is rubbish. But Oksana Aronov, head of marketing, another kind of fixed income at JPMorgan Asset Management, says not so fast.

“I’ve heard of investors losing money in cash and that cash is rubbish for as long as I’ve been in this industry,” she said in this week’s episode of What Goes Up. “But the reality is that if you’ve had cash for the last five years, you’ve actually been better than the Bloomberg Aggregate index from year to day, over one year, three years, and, day after day, yes, even five years. . ”

Below are the slightly changed and condensed highlights of the conversation.

What does the increased credit market pressure suggest to you? Is it as obvious as a recession on the way or is it more nuanced?
I’m going to zoom out and express some doubts about the ability of the bond market to be such a predictor. Because if that were the case, the yield would have been lower and lower and at a new record low for so many years indicating a contraction, I guess, if we really believe in the indicator or forecasting of the bond market. Of course, that has not happened – or we got a pretty spectacular dip around the pandemic, but it was a very mystical event. Apart from that, we have not really seen a contraction that the bond market would have predicted with this record low yield each year. Of course, this is only related to the enormous interference of the central bank. It has frankly distorted the ability of the bond market to be these forecasting or forecasting systems.

That said, we see inflation expectations leveling off. The 10-year equilibrium limit has remained in the middle of the second second, but you can see it climbing up – in terms of 2-year and 5-year equilibrium – so that inflation expectations there continue to rise or continue to rise. We still do not have a positive real return on the 2-year part of the career. That is, by the way, something that Powell and the Fed are emphasizing.

But to take a step away from that for a second to talk about the load – yes, we’ve seen the distribution widen. But to put it in context, the last time we had a walking circle and a tiny bit of inflation was the walking circle in 2015, 2018. We had inflation that was barely over 2% maybe, unemployment was higher and the walking cycle was incredibly good. We still saw a high interest rate spread go into the middle of the 5s. We are barely crossing that threshold right now with inflation at a four-decade high. No one can really tell you if it is actually set, or it will continue to rise.

The unemployment rate is also well below what we were in the last very benign walk. So I think we call this an opportunity to invest, to call this a purchase from a distribution point of view, I think we are far from that. At this point, all the carnage we have seen in the bond markets, whether it is in its interest rate sensitive segment or less interest rate sensitive segment such as high yields, has all been interest driven. Very, very little of it has actually been distributed or credit risk driven. We need to see this hit to start talking about opportunity.

We have talked before about going into cash, but in a 10% inflation environment you are losing money on that money. So what do you do?

I have heard that investors lose money sitting in cash and that cash is rubbish as long as I have been in this business. But the reality is that if you’ve had cash for the last five years, you’ve actually been better than the Bloomberg Aggregate index so far this year, over one year, three years, and, by day, yes, even five years. And for up to three years, there is a positive return versus a negative return. So I think we have to let go of these universes.


This is one of the craziest things for me, to be honest, about how our industry works, because in fixed income you have very recognizable peaks. When the 10-year was at 50 points, it had nowhere to go but to rise. So why aren’t widespread alarm bells ringing about this? Do you remember hearing that? No. The rhetoric was the same – cash is rubbish and you should invest, and because something else returns more than the Treasury, you should buy it, even if the valuation there is just as overpriced.

So instead of resorting to these universal values, we need to think carefully about what is priced. We have to think about inflation right now, it’s a serious problem, and yes, you’re earning 8% in high returns against even significantly less money. But what is your price increase, or what is the potential for capital retention? And which of them matters most to you? Again, for those of us who invest with absolute returns, we first focus on maintaining capital.

Given all the push and pull forces in the markets today, we look at it and we say that we believe the risk is skewed. So we would rather have a lot of liquidity in our portfolio because now it serves as a free option, in fact, on any asset class in the world. We believe that the opportunity will continue to improve in balance, just as it has done for the past six months. We have been hearing people invest in January, February, March and April and it continues to recover. And we believe that the burden will continue to increase.

For us now, again, as absolute return investors who are trying to manage and perform better than cash, regardless of whether the government is benevolent for bonds or not, we are not investing against market risk driven benchmarks. We are investing against capital protection. We believe that the emphasis on capital preservation remains justified and we choose to be in a very fluid structure at this point in the mix of liquidity, high-quality floating interest rates – we will continue to do so in this business as well. In fact, for us, this is still part of the cycle of conserving capital, although I believe we are closer to its end than it was a few months ago.

Probably in the next month or two we will switch to a start-up-to-be-aggressive, start-to-go-after-they-return part of the cycle, probably in the next month or two where we see stress widening and some of these bearish expectations are reflected in the price. But at this point, we believe that financial protection is still the name of the game.

Why not go for a very highly valued investment class, very cheap bonds?

We have no problem with anyone doing that. In general, right now, scoring is an approach that we do not really have much trouble with. I think that where investors are going to fight is, to be honest, mutual funds because mutual funds have a permanent maturity. Unlike the physical relationship you have, there is no development in which you grow up or down. You are so stuck on that price until the market gives you better. This is in fact the reason why the losses that investors in mutual funds have suffered are a real loss. If they went and tried to sell now, they would turn this paper loss into a real loss.

But we do not have a problem with someone buying deep bonds at this point and putting them in a portfolio. We think that’s okay. Very discounted content, there really is not a ton of it out there at this point. If something is very discounted now, then there is generally a pretty good reason why it is to shop at that price. Some of the market segments we have been looking at and we believe are starting to look better for getting investments are around the margins of fixed income and have more equity related risks. So things like convertible funds, closed-end funds – both of which tend to better monitor equity risk and have a higher beta for equity. We are seeing significant discounts there. It may be at the top of our shopping list in the foreseeable future. But we’ll see how the rest of this market plays out.


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