Wall Street experts don’t often advocate stripping money from stocks and bonds and keeping wealth in cash — all in the name of safety. But Mohammed El-Erian is predicting wild market volatility is coming, and that’s exactly what he’s doing.
El-Erian, chief economic adviser to PIMCO parent Allianz Group, said the central bank’s recent interest rate hikes mean cash and cash-like assets are generating strong yields, while stocks and bonds are struggling.
“Markets are intoxicated by central bank support,” El-Erian told host Claire Barrett. Given low interest rates, the market “believes that central banks will be our best friends — our best friends forever — but once inflation sets in, they are no longer our friends.”
double edge
High interest rates are a double-edged sword for the public: While it makes major purchases like housing more expensive, it also results in higher returns on savings in bank accounts.
Interest rates in Britain, where El-Erian is based, have soared in the past two years. As of December 2021, the base rate was 0.1%, rising steadily to 5.25% as of September 2023.
The situation in the United States is similar: the Federal Reserve will raise interest rates to the highest level in 22 years, currently between 5.25% and 5.5%.
El-Erian echoed previous warnings from Citigroup Chief Executive Jane Fraser, saying he believed the path to controlling inflation was that it was already rising 9.1% in June 2022 in the United States and The UK is 9.6% October 2022—The toughest time is coming.
“Inflation is likely to become sticky and interest rates will have to stay higher for longer,” said El-Erian, president of Queens College, Cambridge. Financial Times In the podcast.
El-Erian warned that the journey back to lower inflation would be “painful” and said the last mile back to the 2% target level – signaling correspondingly high interest rates – would be “complicated” .
changed the world
“From an economic perspective, the world we live in has changed,” said the former CEO of Pacific Investment Management Co. money clinic.
El-Erian noted that the “good old days” have been “reversed in a dramatic way,” explaining that stock portfolios and bonds have fallen in tandem, whereas normally they work in opposite directions, balancing risk and volatility. .
Against this backdrop, he said, it was “very, very disturbing” to see bonds, the cornerstone of the world’s financial markets, begin to falter.
The U.S. Treasury market, which underpins much of the global financial system, is currently seeing a 16-year high in 10-year Treasury yields. The sell-off is not just a headache for U.S. officials, as rising U.S. borrowing costs are also pushing up global costs.
interest rates rising
Rising interest rates may be bad news for Wall Street, but savers can look forward to a glimmer of hope thanks to help from central banks.
El-Erian added that this is a benefit that everyone should take full advantage of, as savings should always be a priority.
“What to do now if you’re worried about the market,” continued the Penn Global researcher. “The good news about high interest rates is you can actually get something for your bank deposits. I encourage people to look at different banks, different savings vehicles.
“If you’re like me and don’t feel comfortable with the stock market, here’s a really good place to park your money where you can get a 4% to 5% return, and that compounds.”
New data suggests that a large portion of the American public may indeed benefit from higher interest rates. Analysts previously believed that the funds raised by consumers during the epidemic have dried up.
However, revised government data this week showed that the pre-pandemic savings rate was lower than previously expected, thus suggesting that the post-pandemic decline was not as steep.
The update led JPMorgan analysts to raise their savings buffer forecast to $1.2 trillion from $400 billion. Bloomberg reports. “Excess savings may not be used up until sometime next year,” they reportedly wrote in an Oct. 6 note.
“I’m keeping an open mind,” El-Erian said when asked when he might increase equity stakes in his portfolio. “There will come a time when I feel more comfortable adding equity exposure, but I’ve been very cautious. “
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