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Allianz's Mohamed El-Erian says official sector biggest threat to bitcoin; equity investors are chasing 'rational bubble'

According to the economist, there are two timing mismatches that the financial markets are currently facing.

February 16, 2021 / 01:58 PM IST

Chief economic adviser at Allianz, Mohamed A El-Erian, believes the difference of opinion between the private and the official sector could lead to an "accident" in bitcoin.

In an interview with CNN Business, the President of Queens' College, Cambridge said that the risk for digital assets come from the official sector which may finally draw a line on bitcoin.

"The risk comes from the official sector. On one hand, the private sector is embracing bitcoin, both as a form of payment and as a way to invest," El-Erian said.

"The Tesla announcement of putting $1.5 billion of their cash management into bitcoins and saying they are going to accept bitcoins as payments is a perfect example of that." But the stance of the official sector will be a key monitorable as they may say "enough is enough."

He expects more companies to take Tesla's lead and invest in digital assets as they don't know how else to mitigate risk. Hence, it is a result of "distortions in the financial markets."

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At the time of writing this copy, bitcoin was trading up 3.01 percent at $48,754.32 on Coindesk. It touched a 24-hour high of $49,950.93 and a 24-hour low of $47,088.84. Year to date, the digital currency is up about 66 percent.

On being asked what he thinks of the current bull run in the wake of unprecedented liquidity, El-Erian said investors are chasing "rational bubble".

"Investors know the asset prices are very high, but there is a reason for them to go even higher because in addition to massive central bank liquidity injection there real prospects of massive fiscal injection as well."

"Investors are comfortable riding what is a massive historic liquidity wave," he added.

According to the economist, there are two timing mismatches that the financial markets are currently facing. One is in the real economy.

"Economist make a difference between notional demand (what we'd like to do) and effective demand (what we're able to do). As we open our effective demand goes up to our notional demand. So there will be a lot more demand in the economy but supply may not respond as quickly," he said.

Second is that bond prices start to move before actual inflation. "Bond prices move on the expectations of inflation, which will put the US Federal Reserve in a difficult position."

"What does it (US Fed) do? does it let yields go up and risk equity market disturbances, or alternatively, do they get pulled even more in intervening and distorting the market?"

According to him, the chances of the latter happening are more.

"The more you distort markets, the more you distort asset allocation, the more you reduce efficiency and productivity. Hence, there will be a lot of collateral damage and unintended consequences."

El-Erian further added that the market was dangerously close to a "market accident" in the wake of commotion created by Reddit, Robinhood and certain stocks which would have ultimately spiralled across the financial markets.
Moneycontrol News
first published: Feb 16, 2021 01:54 pm
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