A very sleep-deprived Axel Merk joins us for this special edition podcast. Axel and his team have pulled late nights over the past few days following the Brexit vote results in real-time and the ensuing aftermath.
Axel, CEO and founder of the Merk Funds, is originally from Europe and one of the best experts we know on the currency markets, as well as monetary policy. In this podcast, he explains why he sees the Brexit as a sea-change in sentiment that will have far-reaching implications for Britain, Europe, and the rest of the world — though it may take years before they are fully recognized and expressed. He expects the post-Brexit future to more market volatility, more populism as political stability weakens, more (ineffectual) fiscal spending to goose economic growth, and likely more armed conflict around the world.
We are rushing to make this special edition podcast available today given the hunger for informed perspective on this topic. As a result, the written transcript is not available yet — we will post it here as soon as we received it back from our transcription agency.
Click the play button below to listen to Chris' interview with Axel Merk (40m:21s)
Chris Martenson: Welcome to this Peak Prosperity podcast. I am your host, Chris Martenson and wow. It is June 17th, 2016 or day two post Brexit. That is what we are going to talk about today the vote to leave the EU by the UK. It sent shockwaves around the financial world. It has upended the political order and unleashed a wide range of emotions – shock, anger, glee, regret, anxiety, fear, hope. It all depends on which belief system you hold and whether that got supported or shattered to help us make sense of the Brexit decision we are very lucky today to be speaking with Axel Merk, President and Chief Investment Officer and Founder of Merk funds. Axel has been with us before and as you know he is a noted expert on world currencies, manages several mutual funds that mangae currency risk for investors. I bet he had an interesting Thursday night as well as an equity fund and a revolutionary gold fund that trades under the ticker symbol OUNZ. For years he has been an outspoken critic of US monetary policy warning investors that the current course seriously derisks valuing the dollar. Can’t wait to get his views on Brexit and that outlook.
He is also the author of Sustainable Wealth, a very, very readable, approachable guide to understanding our macro-economic environment. The risks that today’s investors face and how they can mange finances to achieve financial stability. Axel, thanks so much for taking time to join us today.
Axel Merk: My pleasure. You would like me to comment on what is happening here in the world. Let me first say you mention all of these emotions. One of the roles that I see myself in is to get people thinking on the one hand. On the other hand as far as I am concerned myself I see my primary role as not getting too emotionally involved and just accepting things. Sometimes people interpret that with me agreeing to one side or the other. I just want to know what the heck does that mean? What does it mean for my investments and what does it mean for the future?
To me the Brexit vote has broken a taboo. Until now when push came to shove the intellectuals always won out. The reasonable argument as to why you should do something whereas in this case the emotional argument has won out. The argument by Morris Johnson the lead guy for the Brexit vote says let’s take our country back this is bout the constitution that we have control over things that is far more powerful than the little details on why it should be better to remain. The implication here is this isn’t just relevant for the vote here in the US. This is relevant for things happening in Europe. This is relevant for the Middle East. This is relevant for the rest of the world. Political stability around the world is on the decline. This is kind of a huge wake up call.
Then on the other side of things I was shocked when I talked to my friends who are not in the industry how complacent they are on oh it is just another day and life will go on.
Chris Martenson: Interesting on your Twitter feed this morning you said that I’m quoting here, “Brexit is a bit like a bikini: Risque when first introduced, yet the onset of a cultural revolution.” Hey, there is no 140 character limit on this show tell us more about what you meant there – a cultural revolution that is a big statement.
Axel Merk: Sometimes those flimsy things get more attention than more profound things I suppose. Well, it goes into this theme that people are upset and let’s take the US the folks who have been supporting Sanders or Trump. They have very valid concerns. The folks who want to leave the EU have very valid concerns about the EU and now they have spoken up and the concerns have not been addressed. You can address these concerns with a left leaning or a right leaning mind. Both the “establishment” has not looked after the concerns of there citizens and now this has broken out into the open and now it is suddenly okay to say no, let’s tear this thing apart. This may well happen. Now the thing is it might take us 100 years to put it back together in a more sensible way but that is the road we are on. Think about all of this happens in the context of asset prices being expensive. Earlier this year we blamed the Chinese for the markets plunging. Now we are blaming the Brits for the markets plunging. Guess what? Markets have been due for a severe correction no matter what.
We go to our excuse. Let’s sell the hell out of it. What the hell does it have to do with a bikini? Not so much directly, of course. Except that yes, this is a change in town. A change in the fabric of how we look at things. We no longer look at things rationally necessarily, but emotionally instead. The reason I say rationally is because from an economic point of view the headwinds that are going to be unleashed are rather severe and at the same time of course if you are in the countryside in England and that is where most of the [00:05:33] have come from they didn’t think about those issues. They don’t give a darn about Wall Street. They don’t give a darn about the city of London. They worry about what they think is right and what they think is wrong.
Chris Martenson: Now this is fascinating to me I have spent the last 48 hours trying to understand this better. I was surprised. I thought given the fear tactics and the fire power of the stay or the Remain side I thought they had it in the bag. Like a lot of people I had a very sleepless Thursday night as I was trying to figure out what this really meant. I am seeing this now – I just had a conversation with a very smart gentleman yesterday. He was really adopting this view that this was an unfortunate decision by ignorant people who had been played the race card and all this, but when I talk to people who are on the Leave side directly they say no this was about self determination. This was about really being unhappy with the way the EU had been configured politically. Very unhappy with the loss of self determination and destiny. And really saying no. We would like to have some control back in our lives.
To me that seems reasonable and realistic. The emotions are still thundering across the airwaves out there trying to paint this as a regrettable, unfortunate, bad backwards decision. How do you see this?
Axel Merk: They are both right. The thing is the grass isn’t necessarily greener on the other side. Think about any hot button issue in the US and then suddenly Washington comes along and it poses something on you. You are going to hate it. The thing – the world of politics the way politics works is you take your favorite politician and when something goes wrong they never blame themselves. They blame the opposition and they blame somebody else. In Europe it has always been popular to blame Brussels for everything that is bad. There was 20 years already – 25 or 30 years already. It is now – the thing is the Brits have a bunch of problems of their own. By being outside of the union it doesn’t solve it. One of the things was immigration. Well there are lots of Polish workers that have come to the UK and work for a low wage and work very hard. Kind of some similar to folks from Latin America are coming into the US. Guess what? They are hard working people and they contribute to the economy. Well, let’s kick them out. That doesn’t make the Brits more competitive suddenly. It doesn’t solve any of the issues. The Brits have a major budget deficit. They have a major current account deficit. Maybe some of it improves with the weakening currency. They have their own currency, but the issues aren’t going away.
Similarly, in the US when you have a major, major disagreement with something – Texas not agreeing to what comes down from a Democrat administration what do you do? Do you try to solve it locally or try to leave the Union? If you were to leave does that solve the issues that you have? So the frustration is very well warranted, but the question is what is the solution to this? The European Union has shown that they don’t have the institutional flexibility to address those. The Brits say hey, let’s cut the cord and let’s do something else. Yea, that is kind of nice but what the heck is this something else? That is the problem is that there is the alternative hasn’t been all that well planned out. And that is the sort of thing that we are getting. We are getting a rise in popular sentiment that means we are fed up with the scientific or intellectual explanation of why the status quo is better than the alternative. Says what the heck we have had enough.
In a world where that happens increasingly we are going to elect more populous leaders. They are going to have more simple solutions and in that process we will destroy many, many things. Hopefully, we will build something better.
Let me kind of give you my not so rosy outlook. There is a reason why the Great Depression ended in World War II because as this happens throughout the world the one thing that people want they want to blame somebody else for all the mistakes that are out there. One of the calls you have heard is we have to ignite these economies again. We have got to have more fiscal spending. What happens in countries where you have a hung Parliament or Congress? If you can’t get up fiscal spending by building bridges, roads or walls what are you going to do is you are going to build up military spending. You find an enemy. Then you are going to be able to justify the increase in spending. I am not saying the US is going to go to war, the UK is – but we have the same issues anyway in the world. Think about the Chinese, the Japanese, the European Union, Africa, North America, South America. Somewhere you do see that we are moving towards an environment where political stability is on the decline. You have the rise of populous leaders and the sort of choices that will be made are not necessarily going to be in the sphere that we happen to view as learn to become to be the rational ones. And so that has changed now. The taboo has been broken. We are now going to go towards the easy solution. The easy solution might be rather rocky for the financial markets where I try to win my bread every day.
Chris Martenson: Absolutely. I was caught by a tweet by John Hussmann who said think of the EU in its current malstructured form as a kind of ponzi scheme and Britain is the guy who just asked for his money back. I like that. Very pithy. But you are saying that there is a structural problem. We have all known there has been a structural problem. In the Euro itself is a monetary union with a structural problem built in. I mean do you agree with that? Secondarily, what does this mean for the Euro as a currency?
Axel Merk: First of all, we have structural problems everywhere. We like to point the finger at the easy solution. We got [00:11:36] problems in the US, in UK, in EU, in Europe. I do like to point out one of the reasons why the UK was able to kind of go to Leave. By the way they have only voted to Leave. They haven’t given formal notice. I don’t know if they actually think they will do that for an extended period and so forth. It is so much easier for the UK to leave than any member of the Eurozone. If Spain or Italy or Greece were to leave then anybody who has money in these countries would take their deposit and move it over to Germany or one of the other countries. You get the money we sucked out of the financial system and yes, now in recent days banks have declined in value more so than the overall indices. You would see a far more severe capital flight if that were the case. Now it is just “bad for financial markets”. It would be truly catastrophic for the countries in those – to actually leave. That is why Greece hasn’t left. They haven’t had the guts to pull the plug. You would argue it would be less painful for them to leave but they would see a collapse of their financial system. For the Brits that is not going to be the case because they are outside and they have their own banking system, they have their own regulatory environment, they have their own currency. So for them they just have to deal with the consequences.
Breaking the Europe apart is not something that is going to happen at the beginning of this road. It might happen at the end of this road if many bad turns are going to happen. Many people the optimists say oh people are going to wake up and finally they are going to make the right decisions. I like to hope that. Having said that there have been plenty of opportunities during the peak of the Eurozone crisis to make the right decisions. Yes, that has happened through a coerced kind of movement to force governments to do some of the right things. The underlying structural reform I haven’t seen how the EU is capable of doing that and that means that Europe is around for 1000 years, Euro obviously not quite as long. It will be around in some form or another. The question as an investor is where do you want to be in that game? Do you want to be where everything is “right” and perfect and realize it isn’t so perfect either? Or do you want to be where there is blood on the street and have good value. You should buy things right now, but it is not always that easy to say hey, it is a mess over there. I have to stay away from this.
Chris Martenson: Let’s talk about that mess a little bit. This is part structural. I’m interested in exploring how this is a little bit like 2008. I know there are some big differences and similarities. I would love to get your views. I am looking at some real hemorrhaging in the bank, insurance and brokerage stocks. Especially the European counterparts for the US – issues over there. This is starting to – it feels to me like there is a lot of smoke coming out of the banking sector with – I mean I am looking at the stocks here STOXX. There is quite a bit of hemorrhaging going on with the sub issues under there. Really maybe even some flames going along with the smoke. Deutsche Bank a number of others. What is the chance that yes there are some political issues, but what is the chance there is a real financial accident brewing here?
Axel Merk: We know the playbook of central banks, right? They provide liquidity. Central banks can keep a zombie banking system afloat. They have shown that in Japan. They have shown it in the Eurozone in the aftermath of 2008. They have shown that in the US. They have also shown that they cannot fix structural issues. When you have easy monetary policy. That is okay maybe for a short-term thing. You cannot fix structural issues with monetary policy and similarly of course the Brexit is absolutely a structural thing. You cannot fix that with money. That won’t stop central banks from trying. Especially today’s breed of central bankers. Can bad things happen where we are? One of the reasons why so few people slept from Thursday to Friday including us is because you such a tremendous amount of derivatives outstanding. So many things outstanding. People bought protection. Maybe you bought put options. And put options got expensive. You use these proxies to do things. As people are unwinding some of these positions a lot of kneejerk action is going to happen with the banks. Now do I think the banking system is going to blow up as part of that? I don’t think so in this context because we have taken – or we have forced banks to take on so much less risks.
The problem with that of course is they are not liquidity providers right now, which means you can have more severe movements in the markets and the “blow up” might happen elsewhere. It might not happen in the Federal Institution that the Fed, the ECB or the Bank of England is supervising, but it might happen in a commodity trading house that is not supervised. It might happen in some insurance companies that is outside of some the regulation. It might happen elsewhere where you end up looking for the actual trouble. And while we are discussing oh it is going to happen here something else is brewing and some other disaster, Black Swan, is going to happen elsewhere. So that is the sort of thing when you have these more pronounced moves that you want to be on the look out these days. And overall again as I said earlier this all happens on the back drop of markets that are expensive. Central banks have pushed up asset prices everywhere. So now we are letting the steam out from that. Of course that is going to have ripple affects as well. There we have the similarity to 2008 where we have to liquidate things. Other bad things will happen as well. You are going to liquidate what is most liquid rather than the bad stuff. To just get us a step further, you mentioned some specific names I don’t want to endorse any of these or talk badly about any specific one, but why would you want to work for any of these banks these days? If you are in the city of London you might lose your “passport” to do business in the rest of EU. So they will set up a subsidiary in Dublin maybe. You don’t want to do it in Frankfurt because they’ve got a transaction tax. You don’t want to do it in Paris because your income might be taxed at over 100%, but Dublin has awful weather.
The folks in London these hot shot young guys that are very smart maybe they just don’t want to move and work in banking anymore and they want to move to other industries. In the long-term that might be a very good thing that they will do real things rather than financial engineering. That is going to cause an industry to suffer. It is going to be a brain drain and again, in a world that needs liquidity we are not going to have it as much anymore. A credit driven society is dependent on a well-functioning banking system. We can hate the banks all we want but if we live in a credit driven society we are kind of stuck with them and so we better make sure this stuff works and I don’t see much moving in a direction that is actually fixing the things that we need to fix these days.
Chris Martenson: Speaking of that well-functioning banking system I have to confess a lot of Europe doesn’t make a lot of sense to me. Like Italian sovereign debt yields. Particularly as of before Brexit up to three years negative yields on Italian debt. When I hear that Italian banks are sitting on some 360 billion euros of bad loans I think Italy’s banking system has a solvency problem not a liquidity problem. And yet the ECB just keeps pretending if more liquidity and higher bond prices will do the trick. I mean good lord, the footsy Italy bank index is down 27% since the Brexit vote. Again, isn’t this telling us that there might be a fire along with all that smoke?
Axel Merk: There is certainly a problem. I had a discussion with a former Fed[ph] president a few months ago who kind of told me I mentioned earlier that Main Street doesn’t give a damn what Wall Street does. We were discussing this thing why does Janet Yellen support raising a rate because raising a rate tightens financial conditions. Well, that just happened, right? Earlier this year. It was of course too much. Why would a Fed or the ECB be concerned about having asset prices come down? The S&P coming down shouldn’t be an issue for the Fed. He said well except if they traded a bubble, then it is a problem. He just left it at that. He didn’t say that we created a bubble. What is happening now at the ECB is that we mentioned Bloomberg just said that globally we have now more debt yielding negatively than the entire global corporate bond market. And that is just stunning. Obviously it is the sovereign debt that is mostly negative.
One of the things that Dragi is saying you mentioned Italy and so forth is saying that oh we got to buy corporate debt now. Guess what? The liquidity isn’t there. There isn’t enough debt around. And so guess what? Because they know the ECB is going to buy stuff let’s buy derivatives, let’s buy CDS. And that didn’t work out so well in those days. More importantly even because they push markets to such extremes and coerced investors to go out and buy longer dated at risk securities than they otherwise would if we have ever have this market turn guess who owns the problem? The central banks that own the problem. The question is whether they can go and fix it. So back to your question whether there is – if there is fire where there is smoke well yea it is kind of – we are in a – it is quite smoky out there. The question is what sort of things will break and so forth. I just happen to think that the banks themselves they can be kept alive. The fall out is going to be elsewhere. The fall out we are seeing right now is capital misallocation. All this is inducing investors to put money in the wrong spots. And yes, that can have a violent unwinding. Will the system itself collapse? Maybe, but that is not my best case scenario right now.
Chris Martenson: Here is something I don’t understand I am hoping you can address. If the ECB does take some losses on its balance sheet how does it true those up?
Axel Merk: My silence was there for a second answers the question. Technically the EU says that the member countries have to pay more capital in order to make up for the losses. That is the theoretical answer. In practice. Rules are there to be broken. A central bank if you didn’t have that arrangement there is nothing that says that a central bank cannot have a negative net worth. The bank of Israel has had a negative net work for over 20 years. The fear is all just accounting entries. So a central bank is perfectly allowed to have losses and so forth. It is just the EU has these rules. Now what we have seen in Europe the accounting rules can be changed. I will leave all this stuff to maturity. We don’t have the market. We don’t do this or that. Oh we will offset that with future gains. I mean what happens in practice we will see. And some of these things we have had these transfers to Greece and they say oh the Germans are on the hook. If we had a true fiscal union we would have these as bona fide payments to the weaker countries and now it is a potential loss. Does it really matter? Politically, there are different implications for it, but yes. Losses have incurred and somebody has got to pay for them.
Guess what? It is going to be the taxpayer in the end. And to just take it a step further we would love to talk about Greece and the Europeans - -globally governments have too much debt. And governments that have too much debt have interest in defacing the value of that debt. That is very different from your interest or my interest as an investor. We have savings. We want to preserve the value of our investments. And so the messaging in all of that is we may love or hate of what our politicians do but they don’t work in our interest. They are trying to preserve the status quo and that works in different measures. Don’t count on the central bank bailing you out. They will bail out their respective governments. Unfortunately, today’s governments have different interests than the citizens of the people. That is one of the reasons we have this populous uprising. To you as an investor it means that yea, don’t think your government is going to take care of you. You have to take care of yourself.
Chris Martenson: I totally agree. I am just confused how financial repression could possibly work mathematically on a global scale because everybody can’t devalue their currency at the same time, right? Except against what? I don’t know what. Commodities. We just had I think the worst return in commodities in 80 plus years in this most recent period. How does – I’m still confused about how that – how you devalue globally? I don’t get that.
Axel Merk: Well if you’re not confused you are not paying attention. Take the Dark Ages – things didn’t work so well during the Dark Ages. Things were dysfunctional during the Dark Ages. Bad things can happen. I am not suggesting bad things will happen, but what really the defacement of the currency hasn’t worked so well and the Japanese have learned that. At the same time you can induce inflation and you can induce inflation in many different places. The question is where do you seek protection as you pointed out? Commodities have not done so well. Gold has done reasonably well. We have also seen gold can come down from 99 bucks to near a thousand right? So there isn’t one thing that will do well.
The one thing that does happen when you have financial repression and the sort of environment we are in you have to adjust your portfolio asset allocation to throw out the risk free component. There is no place to hide. You live in a risky world and your investments are risky. You have to navigate through that. The short of that is that if you are sophisticated you can deal with it, you have a portion of gold, a portion diversified whatever it might mean but if you are the mom and pop saver you are going to lose out. Similarly I happen to believe if you do a traditional asset allocation and say oh everything is going to be dandy if I a such have 60/40 allocation equity to lose, I happen to believe that you are going to lose out because everything “has been pumped up” in asset prices so “everything can deflate”. You want to look for things that have a low correlation to the stuff that has been inflated. And has a positive return expectations. One of the reasons gold comes to mind it has a low correlation and then if you think about financial repression that means real rates are 0 to negative. That means this brick that doesn’t’ pay anything might not be so bad.
Of course most people don’t have everything in gold so what else do you do? Very quickly you go to more complex strategies that you have short things – you have a long, short strategy and that is the sort of thing that most people are not comfortable with and that makes this thing very, very difficult. And so part of the goal of central banks has been to push people to take on risk, but it has backfired badly and we see people that yea, now we got the Brexit thing coming up. That is a deflationary course where there’s more turmoil and I think it is going to be a while before we come to our senses.
Chris Martenson: Now let’s talk about gold in that context – one of my favorite topics. It seems to be doing well here. It is notably decoupled from the dollar. We had I think in pound British pound terms one of its best showings in decades. Hedge funds and managed money – boosted their holdings of gold to a record. Right in the days before Brexit they seem to have gotten that right.
First, your views on gold going forward. Second, did the bouillon banks finally get it wrong?
Axel Merk: Well when everybody piles into gold I kind of get a little bit concerned are we over doing something? Are we due for a correction? Having said that, pile into gold for the right reasons, right? We have a world that is less stable but you have got to be careful about a short-term pullbacks. I never really like to buy gold because of an upcoming event because you have a revolution somewhere this or that. We tend to look beyond that at some point. In this case though I happen to think that we have changed the dynamics globally to where it been broken and therefore we will have more events like the Brexit vote and so from that point of view I very much sympathize with that.
We have seen interest in gold broaden. I think that is – and also think about gold is one of the things in my view anyways, cheap compared to many other things and so yea. Just form a pure justification point of view there might be reason for that.
Now what is going to happen from here onward? Who knows. It really depends on whether the market is going to shrug this off and move on. I happen to think it is a rather unlikely scenario that finally we found a way why the market should deflate and if it is not this I can give you a very different reason why the markets are going to tumble in the not so distant future. For the time being, yes I do think that the diversification to gold has made a lot of sense to a lot of people. Now whether the bouillon banks have gotten it wrong? You might want to clarify what you mean with that because you probably are eluding to some conspiracy theories. Before you answer that question maybe give me some more detail and I will try to address that.
Chris Martenson: Oh now when I just tracking the commitment of traders you know, when the commercials get this short they very, very rarely lose. There is almost always – they always seem to win. If that is a conspiracy I don’t know. When the commercials get this short it is – you are usually due for a big pullback int eh price of gold, but not this time. It seems like they might have gotten caught on the wrong side of event. I am just wondering your views on that.
Axel Merk: The commercials are usually – well by definition not speculating, right? So they do these things for business reasons. They need to hedge their expenses. They need to do this and that. Even if they “lose” they do it so that they can be in business. One of the things that has been changing is that if for many years the mining companies, for example, their key interest was to increase the number of ounces. They didn’t worry about profits. They didn’t do this or that. And now the price of gold had come down quite a bit down there scrambling many of them to survive. So some of them have introduced hedges again and so forth to just be more prudent in their risk management in their own operations.
Now as investor we may not appreciate it because we want these things to do great when the price of gold goes up. But that is just – it is just one of the reasons why investing in mining companies is different from investing in the metal. You take on different risks and sometimes you only know with hindsight what sort of strategies the commercials have undertaken.
Chris Martenson: I am a big fan of gold for a variety of reasons. I don’t invest in it because of inflation. I invest in it because of financial uncertainty. To me it was a guarantee that at some point we are going to have a variety of currency accidents and Minske moments and maybe institutional failures and maybe a sovereign default somewhere along the way. To me that is just the outcome of what happens when you expand underlying debt in the global economy. Two, sometimes as high as three times the underlying rate of income growth in the overall economy. To me you just have a math problem at some point. The only question is how does that resolve. Heck, I don’t know. So gold to me is the insurance against the idea that eventually there is a pin. All bubbles are in search of a pin. Was Brexit a pin? Maybe. You know, it is not a fundamental pin. There is no fundamental reason why Brexit is going to change the earnings outlook for Caterpillar three years down the road. To me.
Axel Merk: If I can chime in on that just for a second. You are talking about sovereign defaults. I have long thought that entire morphing of the Eurozone is about getting the Eurozone strong enough to be able to stomach a sovereign default. I think we have come a lot closer to that. If Greece were to become bust now I think the Eurozone would survive that much more. Ultimately as I said earlier and I think you would agree we have made too many promises and we have too many obligations out there. Those obligations will need to be renegotiated and different regions in the world different countries will do that renegotiation differently. In the US we like to use the printing press, the German’s like austerity, the Japanese like the three arrows. And so this will have different implications for different sort of markets. As an investor you want to decide where you want to be on some of these things so this thing that is renegotiated that you end up on the better side of things.
Yes. Gold is a simple answer for that because gold doesn’t in itself have counter party risk – it does have counter party risk the moment you touch it or try to store it or try to do something else with it. But in itself it doesn’t have counter party risk. Clearly, when assets the kind of validity of assets be it the currency or sovereign debt – yes, gold does quite well. But again, you can do some of these things by buying timber, you an do all of these things by buying commodities. And as we – or even equities to an extent because you have an ownership in a company. But as we have well seen as well that commodities can go down. Equities – well maybe equities can down. I used to think they can never go down again. I happen to think that yea, you want to still have a prudent way to diversifying these assets. And you and I probably have a big allocation of portfolios in gold than may others. It doesn’t mean the price of gold will go up every day and investors when they think about the risk profile that they have in their own portfolio they always need to be aware am I comfortable with that sort of exposure. If the price of gold were to plunge substantially would I be okay with that? And if not then you are already exposed to it. If you are okay with that then usually that happens when you have other sources of income. Well, then that’s fine. You can have a much bigger than usual allocation to something.
I heard again right after the market plunged in the aftermath of the Brexit oh don’t worry. Don’t panic. Don’t sell. Well the time to sell is before the panic. After the panic has happened you have lost a substantial portion of your net worth and you cannot afford to invest in as risky of a portfolio anymore. And then yes, it is prudent to take things back rather than to double down even though the markets might rebound.
It is about the sort of risk that you can bare and if you can afford the risk of being something that is potentially expensive like Bay Area real estate where I live well then go for it. If you can’t afford it take your profits and move away.
Chris Martenson: Absolutely. Tell us in the time we have got left what are you keying on? What are you watching for in this week as it unfolds? What has got your attention most?
Axel Merk: I do want to see whether this market rolls over. I called for a, early August last year I said I am coming out as a Bear and that was before the turmoil in August. Then we have gotten very close to reaching the highs of last year and then the Brexit so-called bailed me out, we are now again having a bigger chance of a bear market than the resumed bull market. I still happen to believe we are in a bear market. We do have to firmly get into bear market territory in the S&P 500 I believe to get some sanity back into this. I really don’t think it would be healthy for the markets if they shrugged this off. I do think that this is so fundamental that it will have to – it will have to topple over. I do think equities will be – are going to see how they act.
Clearly, this is what happens when you have a severe volatility market. You also have these snap back rallies, so it is going to be interesting to see how that unfolds. It really depends on what type of investor you are whether you want to focus on the short-term or the long-term. But in the short-term there is going to be volatility in many of these markets. This is the time where investors want to look at what stuff did well and what stuff did poorly and have a really honest discussion with one’s self am I diversified. If somebody preached to you hey, am I diversified if you are in both technology and healthcare I guess you haven’t been diversified. Are you diversified? Do you have enough things in your portfolio that will get you through what might be a rough ride ahead.
What we do internally, we look at sensitivity analysis. We said alright these are the sort of diversifications we have and this is what we expected would happen. Now we do a cross check oh this stuff was much more volatile than we anticipated is that likely to persist and if so do we make adjustments in our portfolio.
Chris Martenson: It has been fascinating to me to see the degree of correlation across the world markets. For a while on Thursday night I got confused whether I was looking at the chart of the British pound or the S&P futures because they were so similar just in appearance. How does one – really you talk about being really well-diversified and you are not diversified if you have oh I don’t know healthcare and technology shares. Are you even really diversified if you have you know a good smattering of bonds and stocks from across the globe at this point in time. What would an average investor who wants real – a real diversified portfolio need to do at this point besides hunker down in cash and have a few high quality bonds, a little gold and hope for the best?
Axel Merk: Stress test your portfolio. I think that is really it. And I – I mean I have been quoted when I said oh you need to have at least 20% of your portfolio in alternatives, I think that is way too low actually especially in the current environment. Some university endowments have 60/70% in alternatives. It is a - -you mentioned in the introduction that we own equity funds. Well we shut that down before I came out with my call to be bearish to market last year so I can still short the markets. I didn’t want to do something I don’t do for my investors. And so I’ve been short the equity markets since last August. Obviously, we do some risk management in between and increasing and decreasing those things. Now most investors I cannot advise the general public to go short the equities because A. I am not allowed to give specific investment advice and B. You have what is called a negative carry, right? There is a dividend yield and so you are really fighting the market by being negative on that. That is why the entire industry always tells you to be long. What you can do is you can reduce your risk profile. You mentioned cash. I don’t like dollar cash but it is probably better than many other things out there. It is not the worst decision that you can make.
Gold. Yes. I like gold. Investments should look whether that is appropriate. Whether more than the kind of what is often mentioned the 5% allocation is appropriate. I happen to have much more than 5. Again, I can’t give specific investment advice. As indicated very complicated. We do long/short currency strategies. Hey, I love that stuff. Most people don’t understand it. Can I tell people you got to have that in your portfolio? You got to be careful because you are telling people to have things they don’t understand and that is probably worse than being in something that might go down in price. There is no easy solution to what investors can do. They can listen to folks like you to try to get educated and then try to make smart decisions. If they don’t like what they see, yea. If nothing else raise some cash because at least you are only losing the purchasing power of that cash.
Chris Martenson: Alright. Well fantastic. I am sure you got a very full plate today. I know I aught you on the West Coast you are talking to us very early your time. I do appreciate it. Thank you, Axel for just an illuminating discussion. I can’t wait to see how this all unfolds. You are just a gem. Thank you so much.
Axel Merk: My pleasure. Have a great week.