The global economy is at a crossroads according to Mohamed El-Erian, chief economic adviser at Allianz Global Investors.
The former Pacific Investment Management Company chief executive blamed central bank asset purchases (QE) for creating a distortion between the price of assets and their fundamentals.
We whole-hardheartedly agree with EL-Erian up until that point, but then he continues…
As a result El-Erian believes cash is a valuable asset to hold.
Arguing that cash allows you to be flexible and adds resilience to your portfolio during stressful times.
While cash certainly does allow flexibility, it defies his original argument about central banks distorting asset prices.
Is El-Erian not aware that central bank policy influences the value of cash?
Surely he understands that the zero percent interest rate policy and quantitative easing programs from the Federal Reserve erode the value of the dollar.
If that doesn’t get you thinking, then have a listen to Kyle Bass who was advised by a government official that the plan to get the United States out of the growing economic crisis would be a move to ‘kill the dollar’.
With the U.S. dollar being a fiat-based system it is not backed by anything other than a bankrupt governments promise.
As former Fed chairman Alan Greenspan stated, the government can guarantee cash benefits to be paid out but it cannot guarantee their purchasing power.
Clearly these two statements from Bass and Greenspan correlate with El-Erian’s original concern that the value of assets are being distorted, but the latter doesn’t seem to realize that the value of the currency can and will be distorted in times of government need.
El-Erian went on to say, “Central banks are finding it harder and harder to repress volatility in financial markets, and any jolts, such as currency devaluation in China or political events, such as Brexit, result in wild swings in the markets.”
Well he was right about the Brexit to cause wild swings, global stocks have tumbled on the outcome of the EU referendum, with Britain leaving the European Union.
Perhaps El-Erian is reading the articles we’ve been writing on the exact same issue of central banks losing control.
Speaking of the Federal Reserve specifically El-Erain said:
“The Fed is data-dependent and data have been all over the place. Data have been moving so quickly and signalling different things that the Fed has no choice but to react to it. And this has a huge implication on financial management.”
Essentially this confirms the notion that central banks are now in reactionary mode. They are being dictated by the market and not the other way around.
With central banks losing grip many predict that we will see interest rates drop into negative territory around the world as we are already beginning to see and also the firing up of the printing presses again, which in turn will destroy the value of cash.
If the Fed fails to do so we will enter a major global recession.
Either scenario seems to favor gold as a form of wealth preservation, particularly over fiat currency.
Today gold hit a high of $1,358.20 on the back of the Brexit news, if this is a sign of things to come, and it looks like it is, you may want to consider putting some of your savings into gold for safe keeping.
The government can’t print any more gold, but they can certainly print more cash.