Real assets get their day in the sun

WE LIVE in unusual times. Many of the constants that defined the post-Cold War global economic framework are falling away. In the emerging economic order, central bank independence is under threat, the US dollar’s dominance is fading, and deficits are hitting levels normally associated with times of recession, or even war.

Much of the change is driven by unconventional US policies that are normalising the abnormal. This morphing economic framework is causing financial markets to adjust. Their reaction is expressed via the falling US dollar, rising long-dated government bond yields, rising precious metal prices, and the development of cryptocurrencies as an alternative store of value.

The rise of so-called “fiscal dominance” and the debasement of currencies are defining this emerging financial era.

In short, the confluence of policy and macroeconomic forces in today’s global markets is increasing the attractiveness of real assets – those with intrinsic value derived from their physical properties, such as precious metals, real estate, infrastructure, and public or private equities, rather than relying on trust in a fiat currency that derives value from faith in its issuer.

Rise of fiscal dominance

Financial markets’ growing concerns about debt sustainability, mainly but not solely in the US, are taking us into an era of fiscal dominance, which is essentially political pressure to keep interest rates down as a way to cope with ballooning government borrowing.

As recently as 2014, central bankers were dubbed “alchemists” and hailed as the most powerful people on the planet, whose monetary remedies brought the world back from the brink during the global financial crisis (GFC).

Now they are bullied and fighting to control their policy compass. They are at the sharp end of fiscal dominance.

Since the GFC, the US has departed further from its traditional pattern of expanding deficits at times of war, and reducing them during times of peace.

The incumbent 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 US$3 trillion to the national debt by 2034.

Meddling with institutions

Going hand in hand with fiscal largesse is the US administration’s interference with institutions, such as the 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 thereby effectively controlling the Fed.

The undermining of the institutional status quo extends to other US public institutions, as shown by the firing of 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 case for real assets

The upshot of the new US policy agenda is an erosion of the value of money, and the depreciation of the greenback. 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 US dollar.

Investors are piling into equities and other real assets – such as gold, private assets, real estate and Bitcoin – as the lack of confidence in currencies pushes them away from cash and government bonds. Gold hitting record highs serves as a warning sign about the future of the fiat monetary system and the US dollar.

Throughout history, gold has acted as a safe haven and store of value. This is not to say that the US dollar is going to collapse but, rather, that its ability to act as a store of value is increasingly challenged by a number of forces, most noticeably fiscal indiscipline.

This investment case extends to equities, which are de facto real assets and as such protect purchasing power.

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.

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 in the face of 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.

The way ahead

For investors, the key is to keep an open mind. The equity bull run could continue, or it could break. Hence, 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 appear to diverge from fundamentals.

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.

The writer is head of CIO office and macro research, Pictet Wealth Management