“We follow governments’ monetary policies and fiscal policies, and quite frankly I’m scared.”
The stark comment accurately summed the roundtable discussion hosted by Merk Funds’ president and chief investment officer Axel Merk on Monday in Denver. Titled “Currently Wars and Competitive Evaluation,” Merk (left) sounded off on a number of topics related to currency, economies and central bank actions worldwide.
Although Merk was nervous about the relative strength and actions taken recently by global policymakers, the strife nonetheless represents opportunity, he stressed.
“Cultural differences often dictate whether countries will, or will not, significantly add to their balance sheets,” Merk began. “For those that don’t like the bad guys adding to their debt, they will really like Australia, who is busy mopping it up.”
Moving to a discussion the Federal Reserve, he noted that regional presidents are mainly academics, and will often disagree. The institution’s governors, on the other hand, are more in lockstep and tend not to disagree.
“This year is one of the most dovish years for voting members,” he explained. “Although he didn’t use the term ‘irrational exuberance’ in the recent speech, that’s what he meant. The markets reacted poorly and he walked it back.”
The trouble the Fed is seeing, he added, is the underlying trouble with employment, in that more part-time jobs are being added and less full-time jobs, something that has little to do with the health of the economy and everything to do with Obamacare, Merk claimed.
“We might be the cleanest of the dirty shirts, as so many pundits like to point out, but we underperformed the euro last year as well as year to date. That means this is a financial boom, and not, say, a housing boom. So what happens when mortgage rates rise?”
Traditionally, Bernanke never really worried about long-term unemployment figures, Merk continued, because of the aging demographic and “that’s just what happens. Someone at the fed then showed him the raw numbers. It turns out that isn’t happening; people are working longer and not retiring. That’s a real problem.”
Bernanke, Merk claimed, wants to leave a legacy of “he saved the world during and after the financial crisis. It may not be true but that’s how he wants to pass the baton to the next guy or gal.”
Returning to Japan, he noted that after 2008, the yen was the best performing currency, but it’s status as a safe haven has eroded in conjunction with the country’s current account balance.
“If the government is dysfunctional, the yen goes up,” he explained. “The reason is that dysfunctional governments can’t spend money. But now the same party controls various houses of government. The Japanese think a weaker yen is their path to prosperity. The issue is a weaker yen allows them to export without having to innovate. There’s no incentive. Japan didn’t invent the iPhone, and that is a problem.”
The larger meaning is that “Japan is no Cypress,” and when they have a crisis it ripples through other economies.
“Japan is likely the next crisis, but it could also be the Brits or even us.”
He argued that real wages in many countries “have gone nowhere. “ When that happens discontent grows and populist governments are elected. Populist governments rarely deal with underlying problems. The path of least resistance is usually inflation.
When asked for his thoughts on the next Fed chairman, Merk cited vice-chairman Janet Yellen as the most likely candidate, but also mentioned former Treasury secretary Tim Geithner and Larry Suumers, as well.
“Yellen does not have much managerial experience, which you need when herding the cats on the FOMC. She did, however, gain kudos from the press when they recently released the transcripts of the 2007 meeting in which she pretty much predicted everything that happened in 2008.”
Geithner, Merk claims, thinks he saved the world during the financial crisis, and has signaled that he won’t end QE for five to eight years.
“Geithner won’t rock the boat, but he oversaw the IRS during the campaign, so Republicans would love to grill him on that.”
As for Summers, Merk calls him the greatest debater he’s ever met, but he still retains the mark of scandal for comments made while president of Harvard about women’s suitability for the higher echelons of science.
“Critics will ask why President Obama chose this ‘sexist’ over Yellen, even though Yellen was obviously qualified.”
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