Podcast

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Axel Merk: Why Asset Prices Must Return To Lower Levels

It's the price you pay for forcing capital to speculate
Saturday, January 24, 2015, 3:59 PM

Saying it's been a busy week and half on the central bank front is perhaps a sizeable understatement. 

First, the Swiss National Bank stunned the world (and its brethren central banks) by removing its peg to the Euro. This was quickly followed by Mario Draghi finally making good on his longtime threat of firing QE bazooka, announcing that the ECB will pursue a 60 billion Euro per month easing program for the next 16 months. And amidst all the smoke, the Canadian central bank snuck in a surprise rate cut to its interest rate.

To make sense of both the "Why?" behind these extreme moves, as well as the "What?" in terms of their implications, Axel Merk, founder and Chief Investment Officer of Merk Funds joins us this week.

In his opinion, recent events are exactly the kind the symptoms he's been expecting as the prime strategy pursued by central banks since 2008 -- to force capital into speculative assets -- approaches its natural and inevitable denouement. Indeed, he projects the surprises in store for us and the systemic instability we're beginning to see are just getting started:

Ultimately, central banks are just sipping from a straw in the ocean. I did not invent that term. Our senior economic advisor, Bill Poole, who is the former president of the St. Louis Federal Reserve taught us this: that central banks are effective as long as there is credibility.

What central banks have done is to try to make risky assets appear less risky, so that investors are encouraged or coerced into taking more risks. Because you get no interest or you are penalized for holding cash, you've got to go out and buy risky assets. You've got to go out and buy junk bonds. You have to go out and go out and buy equities.

The equity market, volatility until not long ago, has been very low. When volatility is low, investors are encouraged to buy something that is historically risky because it is no longer risky, right?

But as the Swiss National Bank has shown, risk can come back with a vengeance. The same thing can happen of course, in any other market. If the Federal Reserve wants to pursue an "exit" to its intervention, if it wants to go down this path, well, volatility is going to come back.  

Everything else equal, it means asset prices have to be priced lower. That is the problem if you base an economic recovery exclusively on asset price inflation. We are going to have our hands full trying to kind of move on from here. In that context, what the Swiss National Bank has done is it is just a canary in the coal mine that there will be more trouble ahead.

Click the play button below to listen to Chris' interview with Axel Merk (35m:23s)

Transcript: 

Chris Martenson: Welcome to this Peak Prosperity podcast. I am your host, Chris Martenson, of course. Well, 2015 is certainly proving to be a lot more interesting than 2014. Volatility has returned to equity markets. The oil market, which continues to flounder at less than half its former highs is confounding experts and currency markets. Lots of volatility there as well. Now while the ruble commanded much of the attention in 2014, falling by roughly half, it is the Swiss franc that has so far been the story of 2015.

On January 15, 2015, the Swiss National Bank broke the three year long pay that kept the Swiss franc at roughly 1.2 Swiss francs per euro. Within minutes it soared to just 0.8 francs to the euro causing a lot of mayhem to a lot of trading accounts before finally settling closer to parity with the euro at one to one. To help us understand this move, today we are speaking with Alex Merk President, Chief Investment Officer, and Founder of Merk Funds. Axel is a noted expert on world currencies. He manages several mutual funds that manage currency risk for investors.

Nobody better to talk to about this today; and for years, he has been an outspoken critic of U.S. monetary policy warning investors that the current course risks seriously de-valuating the dollar. He is the author of Sustainable Wealth, a very readable guide to understanding our macroeconomic environment. The risks today investors face and how they can manage their finances to achieve financial stability. Axel, thanks so much for taking the time to join us today.

Axel Merk: It is great to be with you, Chris.

Chris Martenson: Well, you have mentioned that there are some…. You are a critic of the policies that could lead to risk for the U.S. dollar. But let us turn our attention to what happened over in Europe and what is going on there. It is not everyday that a central bank pulls the rug out from under everybody in such a sudden and large way. In fact, as recently as just three days before the move, Swiss National Bank president, Thomas Jordan said the Swiss National Bank would be maintaining that peg. Then bam, the peg is gone. What happened?

Axel Merk: Well, we can talk about it from many different angles. Let me first take the very big picture view. The fact is that central banks have been masking risks. Risky assets do not appear risky anymore. The Swiss franc did not appear risky. As you say, they pulled the rug out. It is risky. That can happen anywhere. Now, and we can go into that in a minute.

Now, let us go a little bit more technical about what is happening here. First of all, there is one thing I agree with that is Jordan. That if you are to remove the peg, you have got to do it instantaneously. It does not do anybody any good, if he is going to say well, maybe I will remove it, and maybe tomorrow, or maybe next week sort of thing. That would call a market that is just going to pile in on that. It is going to cause some other sort of distortions and mayhem. That is no good. The challenge is he really pulled the rug out from under himself as well. The way I see it is – and remember how he got into the office.

There was this predecessor, Mr. Hildebrand, who put this policy into place except that his wife was caught currency trading. He had to resign. Then Jordan came in and as far as I can tell, he is more of a bureaucrat. He is certainly not a charismatic speaker. I do not think he was ever too much on board with this policy. He got cold feet. He basically said, “My God. This is going to get too expensive, if the European central bank is going to age in quantitative easing. Why do we not cut our losses?”

The challenge of it is that even from the Swiss Nationalist point of view, if you put yourselves into their shoes, it was not handled very well. The reason I say that, I have never been a friend of the peg in the first place. But the way it was removed, it was pretty absurd as well. Late November, for example, they lowered interest rates to be negative. Then that worked. That eased the pressure on this Swiss franc.

Well, what a prudent central bank would have done is they could have continued to lower those interest rates. If that did not work anymore, then to evaluate whether to remove it. Whereas they pretty much pulled the band-aid off and stumbled trying to explain it. I would be very surprised if Jordan is going to be in office a few months from now.

Chris Martenson: Well, as you had mentioned, not even the Swiss National Banks seemed to prepare for them. They were holding a huge position in euros at the time they announced the removal of the peg. They took an immediate 18 percent loss on that. Why did not even the SNB prepare?

Axel Merk: Well, because it is impossible in some ways. Because the thing is, you can hold a peg. You can debase your currency at any time. Because you can always print an infinite amount. The only limit to that is political. If you were to never remove the peg, you would never have to realize any losses. That is the academic theory. Now the practice as we see it, it looks a little bit different. Because most of these people do not really like the euro. They do not like to adopt the euro. They kind of like to export things. But when they were – if they were asked how would you like to join the European Union? Would you like to adopt the euro? They would say no.

There is always this risk of a political backlash. Clearly, well, with Draghi about to engage in quantitative easing, the question is, is it worth the risk? Now, the challenge is the arguments that Jordan gave for leaving the peg are the same arguments of why they should have never entered into it in the first place. There is a clear lack of consistent policy. That is one of the things that caught people by surprise. Also note, I have not seen any headlines of folks making hundreds of million off this trade. Everybody I see lost money at this. Part of that is that this is a risk that is all but impossible to manage. The biggest gyration was about a 40 percent move. That is unheard of in financial history to have in the major currency.

Think about if somebody – if a major bank provided liquidity for options, well you do the same thing as in the stock market. They do delta hedging. They offset their risk. Well, you cannot do that, if the next price you get is 40 percent or 20 percent away from the previous move when you are expecting on a typical day to have like a fraction of a percentage move; maybe one, two, or three percent on an extreme day. These risks were all but impossible to manage. The only way to manage that risk would have been to stay away from the Swiss franc in the first place.

Chris Martenson: Well, let us talk about managing the risk as well as a political dimension to this. It was just in November 20th that the Swiss voters turned down a referendum to have the Swiss National Bank hold more of its reserves in gold. At the time, I believe it was the Swiss National Bank president who was out there very loudly saying this would tie our hands. It would not give us very much cover. Did this move here actually – did this confirm or did this refute the Swiss National Bank stance on not wanting to hold gold? That is, did they just give political ammunition to the people who were on the pro gold referendum?

Axel Merk: It gave ammunition to the folks that say that central bankers do not what they are up to.

Chris Martenson: Yeah.

Axel Merk: The market pressures are ultimately stronger. Maybe that the best short-term policies is a prudent long-term policy. Because if you try. I mean, that the reason this quote unquote peg was put in place is because the Swiss National Bank said we do not like this exchange rate here. It hurts our exporters. Let us move it until the market comes our way. Well, guess what, the issue in the euro zone have just been dragged on. Things have not got dramatically better. You can argue whether things got better or worse. Sure enough, there was still substantial pressure on the Swiss franc to strengthen. That means that instead what should have happened, of course, is that….

One of the things by the way that Jordan had said is that this is…. We are doing a favor to Swiss businesses because they have had now a couple of years to prepare for this. Well, the opposite of this is true. In 2011, when the peg was introduced, the incentive for businesses to hedge currency risk was taken away. They trusted their government. Now, they have pulled the rug from underneath them. It caught the business off guard. They ultimately – an advanced economy cannot compete on price. They have to compete on value. When the rest of the world around is in shambles, well what do you do? Do you destroy your own economy? Do you destroy your own currency? Do you blend in better? I sometimes compare it to being in a neighborhood where everybody dumps their garbage in the backyard. To blend in better, the Swiss started to dump their own garbage in their backyard, too. It just does not make any sense.

Chris Martenson: Let us talk about this. You said that a prudent short-term policy is the same as a prudent long-term policy. Now, the Swiss National Bank move, I am interested. Do you think this is just an indication that a small central bank was caught by forces too large for it? Or, does this possibly suggest, gasp, that market forces are actually larger than any central bank?

Axel Merk: Ultimately, central banks are just sipping from a straw in the ocean. I did not invent that term. Our senior economic advisor, Bill Poole, who is the former president of the St. Louis Federal Reserve taught us this. That central banks are effective as long as there is credibility. Now that is so far as what he had said. Now, let me add to that. What central banks have done is as I indicated in the beginning. Central banks have been trying to make risky assets appear less risky so that investors are encouraged or coerced into taking more risks. To no longer have cash because you get no interest or you are penalized for holding cash; you got to go out and buy risky assets. You got to go out and buy junk bonds. You have to go out and go out and buy equities. The equity market, volatility until not long ago, it has been very low.

When volatility is low, investors are encouraged to buy something that is historically risky because it is no longer risky, right. As the Swiss National Bank has shown risk can come back with a vengeance. The same thing can happen of course, in any other market. If the Federal Reserve wants to pursue on this “exit”, and if it wants to go down this path, well volatility is going to come back.

Everything else equal, it means asset prices have to be priced lower. That is the problem if you base an economic recovery exclusively on asset price inflation. We are going to have our hands full trying to kind of move on from here. In that context, what the Swiss National Bank has done is it is just a canary in the coal mind that there might be more trouble ahead.

Chris Martenson: This is a very fascinating topic because this is central to something that I have been warning about for a while, which is that the longer the central banks have waded into and become dominate forces in the markets, they have done a number of things. The most important of which I think you have identified. It is not really the driving up of the asset prices that concerns me near as much as the compression of the risk premium.

We are seeing this now play out in the junk bond market in the U.S. shale plays, right. There were companies there obviously burning cash and obviously very risky players. Obviously exposed to a volatile commodity price; which is oil. They were paying five percent on their junk bonds, nothing even remotely close to anything historically you would recognize as normal.

Let us talk about this for a second. Because you mentioned, very important. I think this is a central concept. The central banks' effectiveness, it continues as long as they have that credibility. You are suggesting here that the Federal Reserve really is going to have an extraordinarily difficult time trying to get away from its accommodative monetary policies. Let us go further. Do you think they can even do it without suffering that loss of credibility without financial asset markets revolting?

Axel Merk: Probably not, and let us start out with the central theme of Janet Yellen these days that investors are encouraged – that the fed will be patient. Well, by saying investors should be patient, what she is really saying is that investors should be complacent. Volatility should stay low because that is the only way that they can kind of start raising interest rates. Janet Yellen has all but promised to be late in raising rates. If you look at some of the economic numbers, we can argue how good the recovery is. But there are some indications that maybe we have not turned the page yet.

Maybe we should not be because we should not be at a zero percent interest rate environment, if things are really that great. If you, as you move higher, these risk premium have to expand as the principle have to be re-priced. We cannot – obviously the Federal Reserve is supposed to focus primarily on the U.S. economy. It should not be worrying about what others do in the world. But the ripple effect, the Wall Street Journal for now has finally started to say well the strong dollar is hurting some exporters. Some people will start complaining. The lower oil prices are destroying the high paying jobs. We are creating low paying jobs.

Wages do not go anywhere. Sure, if you were – if you pushed the accelerator hard enough, we will get some growth somewhere. But I think yes, Janet Yellen is going to have a hard time. If you go back to what Bernanke always used to say. He always said is when you are faced with a credit bust such as the Great Depression the biggest mistake is to withdraw monetary policy, monetary accommodation too early. Meaning, if you tighten too early, the deflationary forces will take over again. That is why – and I am interpreting here. You have got to be late in raising rates; which means that you have to wait until inflation shows its ugly head. Because that is something that the central banks think they know how to handle.

That is why Janet Yellen will be “late” in raising rates. If you ask me whether she can raise rates? Yes, she will be raising rates. But she will be raising nominal rates. If you look at real interest rates, interest rates after inflation, they are negative in the U.S. They are negative in the euro zone. They are negative in Japan. I am almost certain in a year from now, they will continue to be negative in those regions in the world. Because even as nominal rates will go up, I would think that real interest rates will continue to be negative. They might even be more negative than they are today.

Chris Martenson: This is a fascinating idea. Because the central theme and the narrative that you just outlined is look we have got to be patient. Bernanke has said the big mistake is just to come out of this stuff early. Let us talk about Japan for a second. Has Japan not basically proven to the whole world that a central bank can go actually too far and still not achieve its inflationary aims?

I mean, the Japanese bond market, it is now recognized as being completely dead leaving the Bank of Japan as pretty much the sole participant. They have an enormous increase in the monetary base. That has been achieved. Yet, nothing of note is really happening with inflation itself, inflation expectations or economic growth. What is going to be different this time in the U.S. and in Europe?

Axel Merk: I do not think we have seen anything yet with the Japanese by the way. They are taking a step back for now. But they have not handed out cash to citizens yet. There are all kinds of things they will try. I mean, they have Kuroda and Draghi get together. They will talk of something of what else they are going to do. Just because the policy does not work, it does not mean they will not double down. Of course, that causes ripple effects in other markets. Now the one thing that everybody thinks is that okay, the Japanese have printed money. The currency weakened.

The stock market went up. Draghi is going to do the same thing. I am not so sure whether that is actual going to happen exactly in the same fashion because of the headwinds that the Federal Reserve is going to create. I do not think the Federal Reserve will be able to tighten significantly. But they will try. Just the attempt is going to cause ripples around the world. Everybody who knows exactly the playbook; and it is going to play out because it has happened like this before is going to be in for a surprise. That is one of the reasons why volatility is back. As we discussed earlier, volatility is the enemy of inflated asset prices.

Chris Martenson: Indeed, well, it is certainly, we have got volatility coming back. Then let us turn to today's leaked announcement, today being Wednesday. What do we have here? The 21st, and today's leaked announcement was the European Central Bank's quantitative easing program, the QE is now going to pegged at fifty billion euros a month. I guess that is six hundred billion euros a year. Mario Draghi has said with this quantitative easing that Japan has tried and hasn’t worked. The U.S. has tried with questionable results. He says he is trying to fix inflation, which is too low. First, why is low inflation exactly bad for the people of Europe? Second, is that what he is really targeting with QE?

Axel Merk: Yes, a couple of things. First of all we are the day before the actual announcement. We have had just so many leaks about the program that we think we know everything. The only thing Draghi is going to add in the actual announcement is that he is going to potentially modify the program. He has said in the past, he is willing to modify the size, composition, and the pace of the balance sheet. With that he is going to threaten to do more. His bazooka is bigger and so forth. Now, to your question, though. What is he achieving?

Well, that is a fabulous question. Because last time I checked, German five year notes were at negative yields. Even the borrowing costs of the European periphery has plunged. Low interest rates are not the problem that Europe is facing. Europe is facing a lack of structural reform. The one country that has done structural reform is Germany. They are doing actually quite well. They do not need QE. The other countries that should have structural reform, want QE. But once you have, of course, the asset purchase by a central bank, you have a disincentive to engage in structural reform.

What Europe needs is banks that are not impaired. They are working on it. But it takes time. Because in Europe, lending goes to the banking sector rather than to the credit markets. Banks are the traditional way that people get loans. Those are the ones you need to fix. If you want to boost European growth and you want me to get rid of sanctions against Russia. I am not saying politically that is a good or bad decision. I am saying that economically that would boost the European economy.

Printing money does not solve anything. The one thing that printing money does is it puts pressure on the euro even though even there, the announcement of QE, at least with regard to the fed has been far more effective than the actual money printing. In the Bank of Japan, the printing itself also weakened the yen. But the program was magnitudes larger than anything that is proposed anywhere else in the world. It is really questionable how effective is going to be to do what Draghi says. The reason that he is doing it. He says that inflation expectations are too low. He wants to move back up at two percent.

Then, back to your question are low inflation expectation – is low inflation a bad thing? Well, it depends on who you ask. Now, if you have a lot of bet, you want inflation. If you are a saver, you do not want inflation. The interest of governments are not aligned with the interests of savers. That is really the core problem. In the U.S., inflation expectations have also come down, not quite as much as in the euro zone. Bernanke would have spooked by now. But now it said lower oil prices is not the problem. In the U.S. actually some businesses do suffer from lower oil prices, the shale industry. In Europe, the euro zone is an oil importer. Europe benefits greatly from lower oil prices. They should be happy about it. But Draghi is using it as an excuse because weakening the euro is a stimulus that makes the European region, and periphery in particular more competitive. It is far less painful than telling folks that they have to cut their salaries to be more competitive.

Chris Martenson: When you said inflation benefits debtors more than savors; obviously, it hurts savers and benefits debtors. Is that not really actually true, if and only if you have rising income at the same time? I mean, if I am holding a big piece of debt, and we have general inflation. That is costing me more in terms of I do not know my healthcare costs more or tuition costs more. Food and fuel costs more, but my income is not rising. That actually harms me even in the inflationary environment, right?

Axel Merk: Of course, I mean, high inflation has never led any country to prosperity. But it is the path of least resistance. When you have a lot of debt, would you not love it, if the value of your debt was debased? Now, clearly your income has to grow at the same time, otherwise it does not work. In practice, of course, that does not happen. It goes and printing money does not – it does not create real income, and real wages, and so forth. But it makes you live one other day. It eases the pressure. If you can have a magic wand to call the printing press, it is so much more pleasant than if you actually have to engage in structural reform. If you have ever tried or sort of watching your local community when they are trying to take a benefit away. How much of a fight that is. Or, think about international scene, cutting pension benefits is a major battle. Well, why not just have a handout, and print some money? Politically that is much easier.

What has happened, of course, in Europe is that many of the political parties have suffered. More popular and smaller parties are on the rise. That is really one of the dangers when you drag on structural reform that the smaller parties that are on the fringe are crowding out the bigger mainstream parties. The policies those guys want do not necessarily make things better. That means we are going to have a political disintegration. You might have chaos down the road. Then Draghi thinks, well printing a little bit of money, it might not be the bad of, the worst of all choices. He says he is not political because he is just sticking to the legally mandated inflation target of two percent. But, of course, everything he does is highly political.

Chris Martenson: Of course, now for the benefit of myself and some other listeners. When you say structural reform, give us a couple of examples. You might have mentioned a few there with pension reform or things like that. But when you say structural reforms, Germany has undertaken them. Other countries need to. What do you mean?

Axel Merk: Well, structural reform is such a wonderful, benign term. But it really means that countries need to get their act together. It means that it should not take you 12 months to get a license to start a business. It means that you need to balance your book on the government's side. It means that you need to be competitive on a global stage. You need to be, locally be able to balance your books. You can do that by raising revenue or cutting expenses. Well, most of these countries already have very high taxes.

What you need to do is you need to be able to balance your books in a way that does not make everybody suffocate. It means you need to allow people to work. It means pension benefits. It means minimum wages are very harmful and that. If minimum wages are high, many jobs are not being created. If the pension age is too high or if healthcare benefits are too high; and so, clearly we are talking here about very important social issues. It is politically extremely difficult to make some changes here.

Ultimately what it comes down to however is that we have mad promises. With we – I am referring to Europeans, to Americans, and to Japanese. The developed world has made promises they cannot keep. That is the problem. Structural reform is to try to bring in line the liabilities together with the assets. Revenues and expenses are brought back in line at least in the way that they are sustainable. Most of these countries do not think they are going to be debt free. But you have got to be able to live another day. Many of these countries have policies where they can have deficits of say two, three percent, if they were able to achieve it. That might even work for an extended period, if they can get three percent growth. But they have aging societies. But if they do not – and pursue some of these steps and reform, they can never get the growth back. They will just drown in the debt they have.

Chris Martenson: An excellent response. Thank you for that. That really helps clear it up. I think I have got a picture now. The Swiss National Bank has spent three years defending this peg. It is increasingly expensive for them. It is providing limited returns back to their country in terms of export competitiveness, and other things like that. The risk that the cost return ratio, it starts to go a little upside down on them.

Then, Jordan has to be looking forward and saying, my goodness. It looks like Draghi is serious about this QE. This QE thing is going to happen that is only going to increase the pressure. He has got to get out before the – while the getting is still relatively good. In this story, does the potential Greek exit weigh into this at all for him?

Axel Merk: Only that because these fundamental issues in the euro zone have not been resolved, that does create opportunities for crisis to come up. Obviously, we have an election in Greece coming up. Odds are that the current opposition party is going to get huge gains. With that, there is a threat that they are going to be default on their debt. I am actually quite certain that is going to happen at some point and time. They will need to restructure their debt. The question is what are the implications for the euro and for the world?

The big thing that has changed is that a couple of years ago it was the European banks that held the Greek debt. Those were risk adverse investments. In the meantime, everybody knows that Greek debt is risky, which means at least from outside of Greece, the folks holding Greek debt are hedge funds. They are risk friendly investors. That means if Greece is to restructure its debt, it is not going to have – it is not going to cause a financial meltdown. I am sure there might be some nervousness in the market. We have seen that as the markets have turned negative in Greece including the bond markets, the other European markets were pretty much shielded.

There was not a so-called contagion. But, of course, that does not mean that Jordan did not – and the swiss national bank – were not afraid that it might. You just do not know what is going to happen. It comes back to this thing. You need to have a longer term philosophy on how you approach those things. Clearly, the Swiss National Bank did not have it. The summary you just gave; if Jordan had given that summary, I think he would have gotten away with it. Instead, he looked like a school child who did not get his homework done when he gave his press conference.

Chris Martenson: I know that was pretty awkward. Maybe, as you mentioned, you might not be the best public speaker. Let us talk about what this means going forward. From my perspective in my lifetime, it seems to me like central banks have gone from sort of quiet background stewards of fairly ho-hum monetary policy to very active in market engaged individuals to the point that this might be a false perception. You could have a different one. But it appears to me that every time the market seems to have a little bit of weakness, one fed official, or a central bank official, or another comes out and says calming words. This might be on a one percent or a two percent decline; very nominal, tiny down moves.

It feels to me in my seat that it looks like the central bank officials are now so caught up in this narrative of propping markets, of shepherding them, and of being the stewards of them, of rising asset prices. They feel responsible. I might have this wrong. But that is how it looks to me. They feel responsible for things that were not typically in their kitchen such as maintaining market stability and even targeting rising asset prices as if there is a correct value they know. Is that a misperception? If not, where does this mean we are headed?

Axel Merk: I think the perception you are describing is one that many people have. If you ask any fed official, they will deny it. They might not even do it intentionally, at least some of them not. There are a few folks that they seem to have press secretaries these days, these regional fed presidents there to go out and speak on CNBC, and whatnot as much as they can. That is historically not their role and the job that they have. You are absolutely right. They have gotten very involved.

The problem with even in the fed minutes to state that one of the “benefits” of the fed policy has been rising asset prices. They owned the problem. When asset prices come down, everybody is begging the fed to print more money. That is not the role of a central bank. But that is exactly the sort of policies we have put in place. I mean, you have seen all of these tweets and studies that the balance sheet of the Federal Reserve is highly correlated with a length of the FOMC statement and things like that. Things should not be that complicated. That is though the world we have gone to that the central banks manage things more and more.

I mean, basically what has happened is that we have printed all of this money. We have created this amazing asset bubble. The folks who have assets have benefited from that. The folks who do not have assets have been left out. Now we have a call for policies to tax the rich and give it back to the poor. I mean, it is all absurd. Instead, we should have had policies in place that help one build a solid business without any of the distortions of the central bank whereas we are creating these distortions. Then policymakers come in and said, my God. We have got to fix it. Because there are some people that are abusing the system. Of course, people abuse the system because the federal – central bank pretty much forces you to engage in speculation.

Chris Martenson: Yes, very well said. That is pretty much my view at this point and time. As I look at this, everything is hinging then on this central bank credibility. By the way I think they have already lost their credibility with me. Because I do not think you can. They are trying to have the tail wag the dog, right. If they can just engineer these inflated asset prices, the rest will take off. Look, Axel, how many years into this experiment are we?

We have some growth. There is a little bit more in the U.S. than elsewhere. But when you average out global growth, you get fairly anemic numbers. That seems to be mirroring the example in the case of Japan; which basically says once you get yourself over a certain threshold of indebtedness, it becomes very difficult to foster the kind of growth we have had in the past that would be justification for the levels of debt we are taking on and holding. Follow that circle around, and to me it seems quite likely that the fed has – they tried like the dickens since 2008 to give us a return and resumption of the credit market heydays that we had prior to that crisis. We did not get there.

As you mentioned, we will probably double down before they give up. But in that process, what are the chances you think of them, the central banks in the developed world engineering this to a happy place versus the chance of them engineering this to a very unhappy place?

Axel Merk: Well, you have got to define what is happy and unhappiness. I say that –

Chris Martenson: Here is happy then – three percent inflation, two to three percent inflation, six percent nominal GDP, and three percent real.

Axel Merk: I talked to a current fed president. It was a private conversation. I am not going to name his name. Kind of told him that I do not think that we can afford positive real interest rates over an extended period over the next decade. We have negative interest rates now. In a decade from now, they kind of – and if we had economic growth, it would be impossible to finance our deficit. Because we would have a trillion dollars potentially more in interest expense alone, if our interest rates went back up to historic averages and so forth.

He kind of interrupted me and said that is not really possible. Because that would not be a – there would not be a stable equilibrium. I said a side effect of that is that interest rates will have to be low. That federal reserve has an incentive to keep real interest rates slightly negative. My answer to that was I never said this would be stable. This is something that we have. We always…. In Economics 101, or maybe 201, they tell you that a central bank is supposed to be an attendant. They are supposed to only talk about inflation and so forth.

As long as the fiscal side is doing a prudent job, we can have central bank independence. But once the fiscal side is in disarray, it just does not work. When it does not work, then we have got to find out how are we going to proceed? What are we going to do about it? Ultimately, there are always the central banks that cave in and try to inflate their way out of it. That is really the problem. We do not have a path forward that is going to have a happy ending. Because we are not going to get huge entitlement reform in the U.S. The structural reform in the euro zone is going to haphazard. We already see in Japan, the sort of reforms that are in place are not really working.

Chris Martenson: Alright, so a final question then is as we look into the future around this, what is the role of gold in all of this given what you see probably transpiring with ECB, the fed, Bank of Japan, and all of that?

Axel Merk: Well, gold is a brick, right. It is a shiny brick. The good news about gold, and it is the same as the bad news about gold. It does not pay any interest. Well, when cash is being penalized through negative real interest rates or outright nominal interest rates that might be negative in some parts of the world, then suddenly a brick becomes quite an attractive an alternative. That is really – the thing is that the reason why – and first of all we – gold had soared. Obviously, 12 years in a row it went up. That means the people had piled on with leverage. Then as that normalized, gold plunged quite a bit. But ultimately, and then the question is how are we going to have this great exit in the U.S.? Still now, the U.S. dollar is much stronger versus the major currencies, and versus six, seven months ago. But gold has been keeping up.

The reason gold has been keeping up is not just because Greece might have an election that we do not like. I do not think so. No, gold has been holding up because the Federal Reserve will be patient. Because real interest rates in the U.S., even if they pick up are going to continue to be negative. Because we are going to have the next economic downturn in my view anyway because before real interest rates are going to be positive. In a decade from now, real interest rates will also be negative.

Gold, in my view is one of the easier investments. There is no easy answer. Completely safe, it is not either, if your daily expenses are U.S. dollars. Then people have seen that very painfully as the price of gold has come down. But the reason why I like gold, and we like gold in our business is because of these issues that when everybody is debasing their currency; well gold, that is more difficult to debase meaning increasing production is more difficult. It is looking like quite a decent competitor.

Chris Martenson: Yeah, fantastic. Last we talked, you had just launched OUNZ, your flagship gold offering. How is that going?

Axel Merk: Very nicely so, I mean, the Merk Gold Trust is an exchange traded fund where investors can buy gold through an ETF. One of the nice things is that investors can take delivery of the gold. We just completed today another delivery. Somebody took 40 ounces of gold to their home. We hold London bars in London; but at the time we take delivery, the people can exchange it. ETF.com just nominated it to as one of the most successful or innovative, I believe ETF launches of 2014.

The one thing that investors may want to be aware of that taking delivery of the gold in itself is not a taxable event. What that means is that you are just taking a delivery of what you already own. With the other gold ETFs, you would have to sell your ETF, potentially pay taxes. Then with the proceeds you can buy your coin. Whereas with OUNZ, you can just request that the gold is sent to you that you already own through the shares. Your original cost basis when you acquired the shares is going to be retained. If the price of gold depreciates, that is a feature that some investors may appreciate.

Chris Martenson: That is a fantastic feature. Thank you so much. We have been talking with Axel Merk. You can find out more at Merkinvestments.comcom. If you do that merkinvestments dot com slash insights, you can follow some of his latest writing. You have got a piece up today on the 21st of January, very good. Also follow him at Twitter.com/axelmerk. Axel, thank you so much for your time. Is there any other place that we should direct people, if they want to find out more?

Axel Merk: No. Please come to our website. Follow me on Twitter or follow our newsletter, that is – we would love to have you as a follower.

Chris Martenson: Yeah. Great insights there, I learned a lot reading your piece today on the euro zone. Axel, thank you so much for your time today.

Axel Merk: My pleasure.

About the guest

Axel Merk

Axel Merk is the President and Chief Investment Officer of Merk Investments, manager of the Merk Funds.

Founder of the firm bearing his name, Merk is an expert on macro trends as well as an innovator in gold and currency investing. He is a sought-after speaker, contributor and author; Axel Merk's book, Sustainable Wealth, describes how the greater economic universe works, how it might affect your finances, and how to manage those finances to seek financial stability. Axel Merk holds a B.A. in Economics (magna cum laude) and a M.Sc. in Computer Science from Brown University.

Axel Merk's insight and expertise have allowed him to predict major economic developments. For example, Axel Merk identified the credit bubble and moved his clients out of real estate and the faltering U.S. dollar, into hard currencies and gold ahead of the equity and credit market collapse of last decade. Axel Merk puts his money where his mouth is, often investing alongside his clients.

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19 Comments

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
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Posts: 5063
merk hard currency

Axel Merk has always struck me as a really smart guy, and I used to actually own his MERKX in my portfolio  years ago. For a long time, the fund did well.  Even during the gold crash, Merk's fund avoided the big drop even though gold is a decent-sized chunk of the fund.

Here's a list of what the hard currency fund holds.  Executive summary: 41% EUR, 27% GBP, 20% gold, short CHF, short Yen, others.

http://www.merkfunds.com/fund/mhcf/

And just for fun, here's the chart of MERKX.  You can see what its like to be short the dollar (and short CHF) during a serious dollar rally followed by the EUR/CHF unpeg.

When the buck tops out, this might be a nice fund to own.  Duration is very short, less than a year - think "money market fund" comprising of a bunch of different non-dollar currencies, including gold.  Unlike the index-based funds, he tries to avoid including currencies that are printing money, such as Japan.  I wonder what he'll do with the EUR after Draghi's annoucement.

Expense ratio is 1.3%, which is something to be aware of.

travissidelinger's picture
travissidelinger
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Posts: 19
OUNZ

Too funny, I might know who that 40 ounces went too.

Intromerge's picture
Intromerge
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Posts: 6
Axel Merk

Is it only the Expense ratio that is something to be aware of ?

 

Arthur Robey's picture
Arthur Robey
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Posts: 3936
Secular Problems

We can't afford to subsidise the weak and infirm? This smells like The Limits to growth curves to me.

ESAP? (Economic Structural Adjustment Program). Zimbabweans are experts on ESAP. Here is a quick and dirty precis of what it means.

You will work longer and harder for less money.

Me.

How ironic that the Europeans are having to take their own medicine.  As for getting the bureaucrats off our backs, that will take a revolution in our psyche.

Do these policy wonks know what low wages do for the velocity of money? Try and guess. Here is a thought experiment for your village. Ask the retail merchants if they support low wages -Noo. Ask the Real Estate spruikers if they support low wage.

Fascinating stuff- But my second cup of coffee is finished and I have mountains to see, things to climb, people to do.

Intromerge's picture
Intromerge
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Posts: 6
Axel Merk

"Is it only the Expense Ratio that is something to be aware of?" refers.

It may be apparent that the changing trend - refer direction of moving averages in the Chart - may be indicating it prudent to be 'short', rather than long, of the fund at this point in time. 

ChandOne's picture
ChandOne
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Posts: 30
Offered a good explaination for gold and silver movements

Great conversation Chris, really enjoyed the insights.

In particular, I liked how the conversation gave an alternative explanation to gold and silver price movements, other than that of Central bank manipulation.  A quick summary goes something like this - the Central bank eliminated volatility, which pushed capital into equity markets in search of returns. Precious metals in that case do not compare well as an asset class, so they suffered. But now that volatility has returns, price to risk ratios on equity are starting to look less appealing, bringing metals back into the picture.  Even with this understanding, I'd still like to know who is dumping those 10k+ contracts into the futures markets in the middle of the night.

Came across another interesting, related insight, a few days back. Believe it was Peter Schiff who mentioned this. The Swiss broke their peg to limit the inflationary flow from ECB QE, right? Well, what would the consequences be if China breaks the Dollar peg?  And what would cause that? QE4.  And with Greece now on the road to leaving the EU, geopoli instability spreading like wildfire, and the EU's QE experiment likely to fail (since their problem is not high interest rates), guess where the US must soon go? QE4.

davefairtex's picture
davefairtex
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Posts: 5063
aware of

intromerge-

It may be apparent that the changing trend - refer direction of moving averages in the Chart - may be indicating it prudent to be 'short', rather than long, of the fund at this point in time.

Yes, I believe I implied that in my post - where I said "as soon as the dollar tops out" that this might be a good fund to own.  I especially like the fact Merk works hard to avoid putting the Yen in his fund.  To me, that ends up being more of what I'd be looking for, rather than simply "shorting the buck" (which basically means going long all the counterparty currencies).

But again, only once the buck tops out.  Which it doesn't show any signs of doing just yet.

Uncletommy's picture
Uncletommy
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Posts: 474
Chasing our tail again?

QE programs are really just zero-sum games in the long run. I was laughing at the Canadian governments quick response to the Us buck's rise, Canadian buck's fall and the fact that it is looking at a sizeable drop in oil income. When revenues drop, the Canadian government didn't waste any time reducing interest payments on government bonds - 0.7%. It's time to revue 'financial repression'. and its real effects.

I just happened to review our Church's revenue, which has remained steady since 1994. When you adjust for inflation, the trend falls off to the right at the same rate as inflation. If the Central banks continue to think that printing bank notes will help world economies. . . Think again. At least the German society is earnest in pursuing "productive renewables'! If you're going to print imaginary dollars, you might as well spend them solar and wind!

Love the comments that follow this article - Argh!! Is everything a conspiracy?

 http://www.greenenergyfutures.ca/episode/94-why-germanys-energy-transition-great-success

treebeard's picture
treebeard
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Posts: 590
Nothing will "work"

Neither of the mainstream solutions will work, they both lead to the same place. The false choice of the dichotomy we are presented with is which prong of the fork you would like to die upon. "Structural" reforms, made to sound like something real is happening has the same effect as money printing, which is made to sound ephemeral. Both are ugly, because there are real "structural" problems that neither of these solutions can address.  The age of macro economic solutions that any large central bureaucracy, whether private central banks, global corps, central governments is over.  Both have been tried with equally poor success, because we are culturally obsessed with material wealth and short term results.

The good news is of course that we can act individually and locally in small communities now.  We can vote with our dollars, feet, and actions and build sustainable solutions that solve the problems that global macro economics can never solve. The old industrial models that concentrate wealth and power based on the cheap energy are collapsing along with the macro economic systems that feed them, that's why there are no "good" solutions that the "best minds" can come up with.  All the good solutions are outside the box. The center will be no where and the edge will be everywhere.  As the permaculturist have taught us, the edge is the most productive part of an ecological system.  That is where we are headed.

 

Intromerge's picture
Intromerge
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Axel Merk - currency fund ... actual performance .. Davefairtex
davefairtex wrote:

intromerge-

It may be apparent that the changing trend - refer direction of moving averages in the Chart - may be indicating it prudent to be 'short', rather than long, of the fund at this point in time.

Yes, I believe I implied that in my post - where I said "as soon as the dollar tops out" that this might be a good fund to own.  I especially like the fact Merk works hard to avoid putting the Yen in his fund.  To me, that ends up being more of what I'd be looking for, rather than simply "shorting the buck" (which basically means going long all the counterparty currencies).

But again, only once the buck tops out.  Which it doesn't show any signs of doing just yet.

My point is to emphasise that the fund has been performing badly for more than FOUR years, with seriously pronounced weakness recently - a point which is not apparently highlighted by the Member Comments. Therefore, it may be that viewer attention needs to be directed accordingly.

I do not believe that - given this historical underperformance - huge confidence in related investment management ability should be engendered, as may be the case given existing comments, with respect.     

davefairtex's picture
davefairtex
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Posts: 5063
historical underperformance

intro-

I do not believe that - given this historical underperformance - huge confidence in related investment management ability should be engendered, as may be the case given existing comments, with respect.

"Historical underperformance" versus what?  You are telling me this fund has underperformed other funds that are more or less long euros, long CAD, long AUD, long gold, and short the buck?  Let's see your charts.  I'm willing to be convinced.  Compare vs. FXA, FXC, FXE, FXJ.  Those are the competition.  (And those funds are in bank deposits, not sovereign bonds, exposed to counterparty risk: i.e. subject to bail-ins).

It has been a bad idea to be short the dollar since 2011, and most especially in the last six months when the dollar has rallied extremely strongly.  And I see that you are working hard to emphasize that this (short dollar) fund has done poorly since 2011, and recent performance (during the dollar's recent amazing move) has been terrible.

We are in violent agreement.  Shorting the dollar recently has been a bad idea.  I'm not advocating going short the dollar, nor buying this fund at this moment in time - or for the past few years.

At some point, shorting the dollar will be a good idea.   I believe this fund will do well at that time.  I like the way he has structured it.  Its a short term bond fund in foreign currencies.

But it will not do well until the dollar tops out.

Intromerge's picture
Intromerge
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Posts: 6
Axel Mark - Davefairtex ... performance relatives
davefairtex wrote:

"Historical underperformance" versus what?  You are telling me this fund has underperformed other funds that are more or less long euros, long CAD, long AUD, long gold, and short the buck? ......  I like the way he has structured it.  Its a short term bond fund in foreign currencies.

Re. your ' You are telling me ... '

That Merk Fund is a hard currency fund - so, all hard currency funds ( not just those you indicate above ) become it's relative performance benchmarks, including those that, relatively successfully, went long US dollars, and short gold during the last four years.

It's a case of : 'I want a manager who can correctly speculate on currencies/related assets over a five year period'.

Based on Axel Merk's recent four year history, could one really include him in considerations for  future associated investment management, despite what you state you 'like' in your second-to-last sentence quoted above, and in your statement in Comment #1 'Axel Merk has always struck me as a really smart guy ... '

I just wish him luck that he gets the market right, for his fund holders benefit too.  

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
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Posts: 5063
a manager with a plan

intro-

It's a case of : 'I want a manager who can correctly speculate on currencies/related assets over a five year period'.

Alas, what you describe is not what the fund is set up to do.

It sounds like you want a manager who takes your money and "does the right thing", whatever that might be.

I like a fund manager with a plan.  I want my long-only funds to go long, and my short-only funds to go short.  I like my gold funds to invest in gold, my long term bond funds to invest in long dated bonds, and my short-term bond funds to invest in bonds that will pay off soon.

I like Merk's predictability.

That way, I can make the call, rather than the manager, if the timing is right to own that particular fund.  Otherwise, they may go off in some wild goose chase for returns in a way I don't expect them to, perhaps using leverage.

If I buy CEF, I know it has gold and silver bars.  I don't want the manager of CEF to engage in shorting gold and silver futures in an attempt to "correctly speculate" on gold-related assets.

I requested in the last post for you to actually help us all out, and present other short term foreign currency bond funds who structure their investments with an eye towards avoiding money printing that have done really well over the same time period.

Still waiting for those examples.

Intromerge's picture
Intromerge
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Posts: 6
Fund set-up ... plans and performance

Of course, one intends to make money from investments , that's behind my ' It's a case of .... '.

Contrary intentions/indications I find very difficult to understand  - that is (as may be seen from your sentiments), can one yet be happy with a fund that has a plan but consistently loses money over the last four years ? Note that the Fund value is at 2010 levels now.

You say you like his 'predictability' ... that is predictable over the last four years in being wrong !!! ... I really don't understand ?

Plenty of examples of funds presenting short gold and/or long US Dollar possibilities - that addresses your concerns about your intentions ACTUALLY being implemented in a fund - that is, refer your "That way, I can make the call" comment.

Nice chatting, but I am leaving this topic aside now - my mind is made up, given the facts that his management ability as reflected in his performance negates all other positives there may be.

All the best with investment results.

 

treebeard's picture
treebeard
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Posts: 590
Why were dollar shorts wrong?

That is the most interesting question to me.  It was not hard to read between the lines of the podcast that Axel does not like money printing and is a believer in "structural" adjustments.  Because the policies that he believed would be most effective were not followed, he shorted the dollar.  This is the same mantra that you hear from the likes of Peter Schiff, over and over again, one trick ponies with one solution for everything.  That analysis has been consistently wrong, for the short term anyway.  Why?

I think that there are very fundamental concepts underpinning a lot of our economic assumptions that are unexamined and fundamentally wrong.  Neoliberal economic policies were tried in South America and the middle east and they have been unequivocal failures.  There has been a lot of commentary here over the years about market fundamentalism, I think the general consensus has been that markets are not self regulating, lack of regulation leads rampant corruption, malinvestment and drives honest players to the margins. Steven Keen has spent many pages diligently documenting why free markets don't tend towards equilibrium, but tend towards bubbles and then collapse.  Yet structural adjustments - balancing government books and "freeing markets" to do there thing, are still the backdrop upon which many financial "experts" use as a yard stick to measure currency performance of any particular sovereign nation.

Secondly, we have devolved into a condition where culture does not matter any more.  Economic policy seems to be the only thing that matters and I would go as far to say that economics has displaced culture entirely.  Whether a country tends towards or is capitalist, socialist, and communist is its only important characteristic.  In this country we have completely conflated democracy with capitalism to the point that they are used interchangeably.  And by culture, I don't mean the number of museums and theaters, but a set of commonly shared values, aspirations and ideals that tie a nation together.  Here in the USA monetary values (I think there is a lot of unarticulated resistance to this) have supplanted cultural values.  After all greed is good, if I drive my for my own personal gains at any cost, my accumulation of wealth will raise all boats, so the twisted logic goes anyway.  I would argue the reverse, with a strong culture, economic systems almost become irrelevant, what is good (if I may be so bold to use that word) will be done regardless of the system.

And lastly, if we are playing in the reductionist sandbox of economic performance, we have to stop conflating what works with what is fair.  The abhorrent systems of forced labor are completely unfair, but they are bang up effective from an economic point of view (if net profits is your yardstick, isn't that all wall street cares about?).  The only requirement for their economic success is that you need separate markets to sell and manufacture in. (I would argue that the disappearance of "some other market to sell into" just like there is no "away" anymore to through our garbage into is one of those paradigm changing issues that never get figured into our economic calculus).  Small classes of people have done very very well for themselves for generation after generation with horribly unfair economic systems (and caused unimaginable suffering for generations as well).  Money printing, particularly if you are the owner of the worlds reserve currency, is damned effective monetary policy in the short run (short is not measure in terms of months either).  You get to collect a tax globally from all the dollar holders and you don't need their consent.  If you run into problems, you have the most powerful army in the world to back you up. And you can bet dollars to donuts that is how this latest drop in oil prices will get paid for.  They must be cackling like hens, they are taxing the very people they are punishing as they consolidate money and power.  In a culture that is obsessed with monetary success, how could they possibly resist such a scheme.

One of the things that is best about this this site is it's founding premise of the three E's, nothing makes sense in isolation. As difficult as it is the needs be a place in the analysis for the softer side of things, whether you call it art, culture, religion, spirituality, or just plain love.  If we stay on the side of the analysis which can be mathematically expressed only, we will continue to head into the dark abyss that we are currently pointed towards. 

Jim H's picture
Jim H
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Posts: 2379
As Treebeard says, "nothing makes sense in isolation".

The dollar is only,  "strong" relative to the basket of currencies against which it is measured.

  http://en.wikipedia.org/wiki/U.S._Dollar_Index

The US Dollar Index (USDX) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies.[1]

It is a weighted geometric mean of the dollar's value relative to other select currencies:[2]

So this defines the hall of mirrors within which the word, "strong" has it's meaning.  Is the dollar strong in a sense that the US fiscal policies are sustainable?  No.  Is the dollar strong in a sense that there is no visible loss of it's use as the world's reserve currency?  Certainly not.. there is some kind new Yuan swap facility or de-dollarization news almost daily.  The dollar is strong because the Euro, and the Yen, and the Franc have been weakening.  As well, commodities are down and hence commodity-rich countries like Canada have been punished.  Does this mean that there is anything good, or sustainable, about the dollar?  Not in my book.  

We are in the endgame for almost all of these fiat currencies... Central Banks are orchestrating the purchase of more and more of the debt emitted by Governments so that the game can go on a little longer.  Meanwhile Steve Keen tells us that our monetary system could possibly work without further exponential expansion based on some model he made? Preposterous!  How is he helping me to survive what is coming?          

Gold should be the universal reflector of unbacked fiat currency weakness.. but it's effectiveness as the canary in the coal mine has been sidelined through official manipulation in my view.  Gold is working pretty well if you are viewing it from the standpoint of a currency other than the dollar actually.     

davefairtex's picture
davefairtex
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you really don't understand

intro-

You say you like his 'predictability' ... that is predictable over the last four years in being wrong !!! ... I really don't understand ?

Truer words were never spoken.

I give up.

davefairtex's picture
davefairtex
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Posts: 5063
dollar shorts

treebeard, jimH-

I believe that Shiff et al are correct at one level - the level of all of us attempting to run households in a sustainable way.  Expenses shouldn't exceed income.  If you eliminate everything else from the argument, it stands to reason we shouldn't be spending more than we take in.  Thats true in every arena - environment, economy, energy.  That's my own personal philosophy.

However, when this philsophy gets translated into the big bad world, this worldview of ours seemingly stops working - from the standpoint of the Dollar.  Things absolutely haven't worked out the way I thought they would back in 2008.  Right now, they're working in exactly the opposite way.  Hard money currency countries get shellacked, and money-printers like the US are apparently rewarded.  WTF??

Jim would say that's due largely to manipulation of the gold market.  If only gold weren't manipulated, then Shiff et al would be correct.  (Jim?  If I'm wrong, please correct me)

Here's what I think happened.

A bunch of dollar-denominated debt was taken on, aided by low rates here in the US, and the money sent overseas as a direct impact of globalization.  Capital ran to the third world, where it could find cheap labor - together they made "beautiful music together" from a corporate profits standpoint.  As an unpleasant side effect, the US labor force got arbitraged and we here in America lost many of our formerly good jobs.  During that time, the buck fell - the mark of currency flowing from the US overseas.

During this extended period, every time we got a slowdown, the Fed did its rate control magic to keep the debt machine working, and it sure did work.  The debt got ever larger - not just here, but in Europe too.  Dollar-denominated debt grew to massive proportions, but again much of it didn't stay here, plenty of it went overseas, pushing the dollar ever lower.  Then in 2007, things max out.  A multigenerational debt bubble pops.

Debt bubble pops are inherently deflationary.  And there's all that US currency flow overseas that now reverses, and all that dollar debt that needs to be repaid.  The world panics and reflates.  It works for a couple of years, but after the reinflationary surge in 2009-11, deflation reasserts itself, because the reflation actually made the debt problem worse, not better.  (Wait, more drinks don't cure the alcoholic?)

Once deflation reappeared - turns out, commodities perform terribly during deflation.  So "hard money" currencies (Canada, Australia, Russia) get whacked - money flees commodity currencies, back to the "mother ship."

While this is going on, Japan is working hard to destroy its own currency - harder than anyone else.  They look to be succeeding.  Money flees Japan.

The Euro would be doing well from the standpoint of currency management, except it has a massive debt overhang and it has a "multiple personality disorder" (northern vs southern) - the combination of which creates an existential threat to the Euro as both a currency and an organization.  Brussels responds with behind-the-scenes political manipulation "for the good of the union."  Eventually, that stops working.  So the Euro gets sold too.  Who wants to be bailed-in?

Which leaves the US dollar.  Money that formerly went to the high yielding hard money currencies is coming back home, as they drop interest rates as a result of plummeting commodity prices.  Money from the Eurozone is fleeing bail-ins to the one safe place (with deep markets) left.  Money is leaving Japan because the BOJ really is printing like crazy.  And the rise in the buck is encouraging everyone else with dollar debt to frantically repay as much as they can, "while they still can."  Russia is a great case in point.

The strong dollar is about all of that together.

Its debt overhang, the order of failure (periphery to the core) flight to safety, the reversing of previous currency outflows, debt repayment, deflationary debt bubble pop, all taken together.  And then, things take on a momentum all by themselves.

Of course at some point, the rest of the world will sort out their debt problems.  And that will be when the US will face the music for all of its sins.  Shiff will probably eventually be right - but only after a massively confusing and immense capital flow first makes him (and those who believe along with him) look very foolish in the interim.

The Great Depression of the 30s savaged every investment hidey-hole in turn, leaving nobody left intact.  That's just what debt bubble pops do.

Well that's my story anyway.  Hope you enjoyed it.

Sorry there wasn't more "gold manipulation" in there for the faithful.  :-)

pinecarr's picture
pinecarr
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How about another "E" for "Empathy", Treebeard?

Treebeard said:

And lastly, if we are playing in the reductionist sandbox of economic performance, we have to stop conflating what works with what is fair.  The abhorrent systems of forced labor are completely unfair, but they are bang up effective from an economic point of view (if net profits is your yardstick, isn't that all wall street cares about?).  ...  Small classes of people have done very very well for themselves for generation after generation with horribly unfair economic systems (and caused unimaginable suffering for generations as well).  Money printing, particularly if you are the owner of the worlds reserve currency, is damned effective monetary policy in the short run (short is not measure in terms of months either).  You get to collect a tax globally from all the dollar holders and you don't need their consent.  If you run into problems, you have the most powerful army in the world to back you up....

One of the things that is best about this this site is it's founding premise of the three E's, nothing makes sense in isolation. As difficult as it is the[re] needs be a place in the analysis for the softer side of things, whether you call it art, culture, religion, spirituality, or just plain love.  If we stay on the side of the analysis which can be mathematically expressed only, we will continue to head into the dark abyss that we are currently pointed towards. [bold mine]

I really like the point you make here, Treebeard.  My suggestion: how about adding another "E" for "Empathy"? 

(1) This basically encompasses the "Golden Rule", "Do unto others as you would have done to yourself".  This would add a moral/spiritual dimension to our model of the world, which in turn adds visibility and accountability for how the 3 E's are achieved. 

(2) The other thing I like about adding "Empathy" is that it is the lack of Empathy that is one of the signature characteristics of Sociopaths and Psychopaths (which many argue are over-represented in the top levels of people in power).  Sociopaths and Psychopaths do whatever they want to get whatever  they want, because they just don't care how their actions impact others.  They are incapable of caring.

We measure what we value.  I agree with you, that as long as we don't add some measure for the level of humanity with which we live in this world -how we achieve our ends- then our model implies (or at least leaves open the interpretation) that the ends themselves are all that matter, no matter how they are achieved. 

 

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