The Swiss wealth management firm examines the broad approaches investors should take at a time of an eroding dollar, a more activist and unpredictable set of government policies.

Investors and their advisors must confront a time of rising fiscal policy dominance – aka, bigger government – and debasement of money, which often translates into inflation. This means “real assets” – equities, property, gold and land – become more attractive. Witness the rising price of gold. The yellow metal has surged by 47 per cent over the last 12 months to more than $4,000 per ounce. Gold is a classic safe-haven asset and that suggests safety is top of mind for many people.

In the following article, GĂ©raldine Sundstrom, who is head of investment offering at Pictet Wealth Management, part of Geneva-headquartered Pictet, considers a number of topics: monetary debasement; sustainability of public finances; government meddling in private sector business and interference with certain institutions – raising worries about whether people can rely on public data, with certain assets being at a premium. 

As always, while the editors are pleased to share such commentary, we don’t necessarily endorse all views and invite readers to reply and suggest ideas. To do so, email tom.burroughes@wealthbriefing.com a and amanda.cheesley@clearviewpublishing.com

Financial markets’ growing concerns about debt sustainability, mainly but not solely in the US, are taking us into an era of fiscal dominance. This is essentially political pressure to keep interest rates down as a wayof coping with ballooning government borrowing. As recently as 2014, central bankers were dubbed “Alchemists” (1) and hailed as the most powerful people on the planet, whose monetary remedies brought the world back from the brink during the Great Financial Crisis (GFC). Now, they are bullied and fighting to control their own policies. They are at the sharp end of fiscal dominance.

Since the GFC, the US has departed from its traditional pattern of expanding deficits at times of war, and reducing them during times of peace. The current US administration is accelerating this trend, and pushing the reliance on debt towards a tipping point. This is shown by the One Big Beautiful Bill Act (OBBBA), which extends expiring tax cuts and creates new ones, and which the Congressional Budget Office estimates will add over $3 trillion to the national debt by 2034.

The US administration is also intervening with institutions such as the US Federal Reserve. The administration is not only leaning on Fed policymakers to cut interest rates, it is pressing for some of them to quit. This is with a view to appointing its favoured picks and effectively controlling the Fed.

Undermining the institutional status quo extends to other US public institutions, as shown by firing the chief of the Bureau of Labor Statistics (BLS). Staff cuts at the BLS have reduced its capacity to collect actual price data – developments that are calling into question the credibility of US data. Such a fraying of confidence in these leading US institutions is problematic for a fiat currency – one that derives value from faith in its issuer, rather than being pegged to the price of a commodity such as gold.

The upshot of the new US policy agenda is an erosion of the value of money, and the depreciation of the dollar. Dollar debasement is negative for holders of US cash and fixed income assets – as the market has little control over the policies that underpin, or undermine, trust in the dollar. 

Investors are piling into equities and other “real assets” – such as gold, private assets, real estate and bitcoin – as the debasement of money pushes them away from cash and government bonds. As a result, equities have just enjoyed their best five-year period of outperformance versus bonds in over 40 years despite all the uncertainty and political moves that would have rocked markets in the past. Gold hitting record highs is acting as a warning sign about the future of the fiat monetary system.

Furthermore, in the corporate world, an uptrend in profit margins is being driven by a sustained shift towards knowledge-based industries, reduced corporate taxes, efficiency gains, and improving productivity. This may help explain why markets seem to be so resilient to the increasingly unorthodox policies being pursued by the US administration, such as ramping up trade tariffs and politicising public institutions. Moreover, the OBBBA can be expected to stimulate the US economy and support growth from next year.

For investors, the key here is to be nimble. The equity bull run could continue, or it could break. In this context, it is essential to keep an open mind while maintaining sensible risk-reward parameters. In these abnormal times, markets may exhibit strange behaviour and equity valuations may diverge from fundamentals. 

However, the rise of fiscal dominance and the associated debasement of money serve to highlight the case for real assets. For some investors that means gold, for others equities, and for some cryptocurrencies as an alternative store of value. In other words, keep it real.

Footnote

1,  Neil Irwin, The Alchemists: Three Central Bankers and a World on Fire, Penguin, 2014