“It’s not going away, it’s going to get worse,” is how PIMCO’s Mohamed El-Erian warns Yahoo’s Lauren Lyster about central bank policy and the currency wars that are so much in discussion currently. Central banks have been compelled to undertake unconventional measures, things they haven’t done before, because other policymakers are not stepping up to take responsibility on the fiscal side. These implicit devaluations and beggar-thy-neighbor policies force a lot of liquidity into the system and by pushing up asset prices, central banks believe, create a ‘weath effect’. It can also trigger “animal spirits” – we get all excited and invest more.
The hitch, El-Erian says, is that in the process, central banks may “break” something. A currency war would fall into this camp. So it’s “high-risk, high-reward and no one can tell for sure which way it’s going to tip,” he says.
In terms of equity markets, El-Erian says investors are split into two camps.
- One camp believes that everything will go higher and central banks will succeed in their efforts.
- The other camp believes asset prices are going to come down to meet the fundamentals.
El-Erian puts himself in the second camp.
“We think that prices are artificially high, that maintaining them here is going to be hard as central banks become less effective, and that it’s time to book some profits and to wait for some better entry points,” he explains.
He clarifies that this is not a “Lehman moment.” But “prices that have gotten way ahead of what policy can deliver,”
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