The stock and bonds markets are up, the dollar is trading high, fourth-quarter growth was robust and there is a general expectation that the heavens are starting to rain down their abundance on the U.S. economy.
But think again, warns Axel Merk, founder and manager of gold and currency-based portfolios bearing his name.
“Substantial economic growth is the biggest threat to the U.S. economy right now” — for which reason it’s not going to happen, not now and not for many years to come, Merk tells ThinkAdvisor in a wide-ranging and provocative interview.
“In 10 years from now, I don’t think we’ll be able to afford positive real interest rates,” Merk says. “If we had gangbuster growth, if we went back to historical average [rates] of financing deficits, we’d be spending $1 trillion a year to finance our deficits.”
That means that the U.S. has a built-in bias toward keeping rates low, and the currency funds manager and frequent financial commentator is not by any stretch speaking merely of the distant future when few will bother to verify his forecast. His warning about today’s central bank is equally bracing:
“The FOMC [Federal Open Market Committee, which sets the Fed’s policy rates] is going to chicken out and be late in raising rates,” Merk said.
“People think there’s going to be a gangbuster exit in the U.S.,” he continued. “It’s not going to happen. Workers with high-paying jobs in the shale industry are being laid off. Can you raise rates in that sort of environment?”
Under these fiscal and monetary constraints, the fund manager urges investors to rethink their model and its investment implications.
A good place to start this reframing is with expectations for the dollar, which has been strengthening for more than six months now.
“Right now, the rest of the world is perceived to be in a horrible state; the U.S. is perceived to be in a fabulous state,” and it is this short-term perspective that is driving the rally. But Merk warns against the commonly held view that the dollar will be protective — the so-called “flight to safety” — in a market reversal.
“You can actually measure these things,” he says, citing the VIX index of market volatility as an example. “In recent months, the dollar has been rising when people have felt good; but in a risk-off environment, when the market has been plunging, the dollar has plunged.
“Foreigners are the new retail [class] pushing markets to new highs,” Merk continues. “The flip side is that when there’s a correction in the market, don’t count on the dollar being a quote-unquote safe haven.”
Merk’s dissent on the dollar does not enamor him of the euro, at least not for now. While the currency manager is long-term bullish on the euro, he remains on the sidelines, concerned about European Central Bank president Mario Draghi’s plans to undertake large-scale U.S.-style bond buying starting next week.
“Why on earth would the eurozone need quantitative easing?” Merk asks. “It needs structural reform rather than just printed money. The cost of money has [already] plunged. What you need is stronger banks; you need demand.”
Merk considers the planned move a grave error because it fails to take cognizance of differences that exist between today and the previous eurozone crisis.
“The problem is you can’t just park cash, you pay for it … There was no negative deposit rate in 2012. That’s not the case today,” he says of the negative interest rates depositers are facing.
So Merk believes the world’s central banks are behaving badly — with the Fed pretending it will get out of QE (though inflation expectations are plunging) while the ECB is seeking to get into QE (while Europe is already awash in liquidity).
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