Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
UK Population Growth - Latest ONS Immigration Statistics and Consequences - 24th Mar 19
The Fed Follows Trump's Tweets, And Does The Right Thing - 24th Mar 19
Yield Curves, 2yr Yield, SPX Stocks and a Crack Up Boom? - 24th Mar 19
Risk/Reward in Silver Favors Buying Now, Not Waiting for Big Moves - 23rd Mar 19
Similarities Between Stock Market Today and Previous Bull Market Tops - 23rd Mar 19
Stock Market DOW Seasonal Trend Analysis - 23rd Mar 19
US Dollar Breakdown on Fed Was Much Worse Than It Looks - 23rd Mar 19
Gold Mid-Tier GDXJ Stocks Fundamentals - 23rd Mar 19
Which Currency Pairs Stand to Benefit from Prevailing Risk Aversion? - 23rd Mar 19
If You Get These 3 Things Right, You’ll Never Have to Worry About Money - 22nd Mar 19
March 2019 Cryptocurrency Technical Analysis - 22nd Mar 19
Turkey Tourist Fakes Market Bargains Haggling Top Tips - 22nd Mar 19
Next Recession: Finding A 48% Yield Amid The Ruins - 22nd Mar 19
Your Future Stock Returns Might Unpleasantly Surprise You - 22nd Mar 19
Fed Acknowledges “Recession Risks”. Run for the Hills! - 22nd Mar 19
Will Bridging Loans Grow in Demand and Usage in 2019? - 22nd Mar 19
Does Fed Know Something Gold Investors Do Not Know? - 21st Mar 19
Gold …Some Confirmations to Watch For - 21st Mar 19
UKIP No Longer About BrExit, Becomes BNP 2.0, Muslim Hate Party - 21st Mar 19
A Message to the Gold Bulls: Relying on the CoT Gives You A False Sense of Security - 20th Mar 19
The Secret to Funding a Green New Deal - 20th Mar 19
Vietnam, Part I: Colonialism and National Liberation - 20th Mar 19
Will the Fed Cut its Interest Rate Forecast, Pushing Gold Higher? - 20th Mar 19
Dow Jones Stock Market Topping Pattern - 20th Mar 19
Gold Stocks Outperform Gold but Not Stocks - 20th Mar 19
Here’s What You’re Not Hearing About the US - China Trade War - 20th Mar 19
US Overdosing on Debt - 19th Mar 19
Looking at the Economic Winter Season Ahead - 19th Mar 19
Will the Stock Market Crash Like 1937? - 19th Mar 19
Stock Market VIX Volaility Analysis - 19th Mar 19
FREE Access to Stock and Finanacial Markets Trading Analysis Worth $1229! - 19th Mar 19
US Stock Markets Price Anomaly Setup Continues - 19th Mar 19
Gold Price Confirmation of the Warning - 18th Mar 19
Split Stock Market Warning - 18th Mar 19
Stock Market Trend Analysis 2019 - Video - 18th Mar 19
Best Precious Metals Investment and Trades for 2019 - 18th Mar 19
Hurdles for Gold Stocks - 18th Mar 19
Pento: Coming QE & Low Rates Will Be ‘Rocket Fuel for Gold’ - 18th Mar 19
"This is for Tommy Robinson" Shouts Knife Wielding White Supremacist Terrorist in London - 18th Mar 19
This Is How You Create the Biggest Credit Bubble in History - 17th Mar 19
Crude Oil Bulls - For Whom the Bell Tolls - 17th Mar 19
Gold Mining Stocks Fundamentals - 17th Mar 19
Why Buy a Land Rover - Range Rover vs Huge Tree Branch Falling on its Roof - 17th Mar 19
UKIP Urged to Change Name to BNP 2.0 So BrExit Party Can Fight a 2nd EU Referendum - 17th Mar 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast March to September 2019

Investors Fight the Inflation Boogeyman, Protect Your Wealth from Fed Money Printing

Stock-Markets / Inflation Oct 03, 2012 - 07:29 AM GMT

By: Axel_Merk

Stock-Markets

Best Financial Markets Analysis ArticleInvestors are concerned about inflation. But how can investors attempt to inflation-proof their portfolios? Buy TIPS? Short Treasury bonds? Stocks? Real Estate? Commodities? Gold? Currencies? Or should investors regard those warnings about inflation as fear mongering?


Indeed, as the Federal Reserve (Fed) announced its latest round of quantitative easing (“QE3”), gauges of future inflation expectations spiked. In our assessment, the market reacted strongly as it became apparent that the Fed is moving away from its focus on inflation to a focus on employment. We believe the Fed wants to raise the price level so as to bail out millions of homeowners that are ‘under water’, i.e. owe more on their homes than they are worth. Fed Chair Bernanke considers a healthy housing market to be key to healthy consumer spending (see our Merk Insight Don’t worry, be Happy).

Judging from the market reaction to QE3, fears about future inflation are warranted. Having said that, market fears about looming inflation have calmed down a bit since the initial flare up. Could it be this calming of the market is due to the fact that the Fed is intervening in the TIPS market? TIPS are “inflation protected” Treasury securities that are linked to the Consumer Price Index. Investors buying TIPS do so in the hope that their purchasing power might be protected. When the Fed intervenes in the market to buy TIPS (or any other security for that matter), such securities are intentionally over-priced, raising doubt as to whether investors are truly “protected” from inflation. It’s not just investors that now have more limited access to measuring inflation expectations – it’s also the Fed itself. By managing the entire yield curve (short-term through long-term interest rates), we believe the Fed has blindfolded itself, as it has taken away one of the most important gauges about the health of the economy. Aside from the Fed’s intervention in the TIPS market, the government is free to change the inflation adjustment factor employed in TIPS before the securities mature. TIPS payouts are adjusted using the consumer price index (CPI), which has seen methodology changes many times. When the recent debt ceiling impasse was discussed, both Republicans and Democrats talked in favor of changing the CPI definition so that it would nominally live up to inflation linked entitlement promises while clearly eroding the purchasing power of such payouts. Even without such gimmickry, the CPI may not be reflective of the basket of goods and services consumed by investors as they approach retirement given, for example, that healthcare may comprise an ever-increasing part of one’s spending. Alas, much of investing is about trying to preserve purchasing power and, alas, buying TIPS may not provide adequate protection.

If one is negative about the inflation outlook, why not simply short Treasuries, either directly or through ETFs? While we are pessimistic about the long-term outlook of Treasuries, it can be very costly to short them, given that – as a short seller – one has to continuously pay the interest of the securities one shorts. If one buys an ETF shorting Treasuries, the cost of the ETF is to be added. Shorting Treasuries might make sense for investors that are good at market timing. However, calling the top in major bubbles is rather difficult, just reflect on former Fed Chair Alan Greenspan’s “irrational exuberance” speech years ahead of the stock market collapse in 2000; similarly, those that saw the bubble in the housing market coming didn’t necessarily get the timing right.

If TIPS don’t provide enough bang for the buck, and shorting Treasuries can be costly, what about buying stocks? Bernanke appears to use every opportunity possible to praise the benefits QE has on rising stock prices. While we agree that QE has pushed stock prices higher, it may be dangerous for the Fed to praise this link given that it raises expectations of more Fed easing whenever the markets plunge (see Merk Insight: Bernanke Put). For example, how many investors buy Cisco 1 shares because of the great management skills of CEO John Chambers as compared to those who buy because of QE3? We pose this question because stocks are rather volatile; not only are stocks volatile, but the volatility of stocks can be all over the place. Historically, the annualized standard deviation of the S&P 500 index hovers in the mid 20% range, with outbursts into the 40% range in 2008. So why are investors taking on the “noise” of the stock market, when the reason they invest is because of QE? Indeed, our analysis shows that investors appear to be ever more chasing the next perceived intervention by policy makers rather than investing based on fundamentals. That’s not only bad for capital formation (these misallocations are summarily referred to as “bubbles” these days), but also suggests that we might want to look for a more direct way to take a position on what we call the “mania” of policy makers.

Talking about policy makers: you might not agree with them, but if there is one good thing to be said about our policy makers, it is that they may be quite predictable.


“If there is one good thing to be said about our policy makers, it is that they may be quite predictable” – Axel Merk


What about real estate? In the U.S., depending on where one lives, the real estate market has bottomed out or appears to be bottoming out. With what appears to be the Fed’s razor sharp focus on real estate, it might be foolish to bet against the Fed. Indeed, yours truly bought a property in Palo Alto in late 2009. Unlike other real assets, keep in mind that real estate is often purchased with borrowed money; as such, it is prone to speculative bubbles such as the most recent episode. Investing in REITs might allow one to allocate a smaller share of one’s portfolio to real estate; a downside of REITs is that they tend to be highly correlated with equity markets. As policy makers steer equity prices, everything appears to be ever more highly correlated, investors may want to look for something that offers low correlation to other investments.

That brings us to commodities. In a world where policy makers appear to favor growth at just about any cost, commodity prices have been beneficiaries. As we have seen in recent weeks, it is not a one-way street, as dynamics within the market can be rather complex. The dynamics for commodities within agriculture differ from those in metals or energy. There are special considerations in storing and delivering many commodities, creating challenges for investors. We agree that commodities might do well in the long run, but urge investors to consider all the risks that come with investing in commodities. Notably, commodities can have stretches of low volatility, luring investors to jump in, only to be greeted with a jolt that can be rather hazardous to one’s wealth. As a simple rule of thumb: if you can’t sleep at night with your investment, you own too much of it.

Gold is worth singling out as the one commodity that has arguably the least industrial use. Rather than writing gold off as a barbaric relic, we like gold: its relative simplicity might make it the investment purest in reflecting monetary policy. In the medium term, we believe gold may be a good inflation hedge. But, again, keep in mind that price movements can be rather volatile. Even staunch gold bugs rarely have all their assets in gold.

Coming soon: Axel Merk discusses 6 reasons to buy gold: register to be notified when the report is available

This leads us to currencies as a potentially attractive way to diversify beyond gold. The Chinese have long diversified their reserves to a basket of currencies, in an effort to mitigate their U.S. dollar exposure. Some say currencies are difficult to understand. We argue that it is far easier to understand the dynamics of ten major currencies, as well as others worth monitoring, than to understand the dynamics of thousands of stocks. Importantly, we believe the currency markets might be an ideal place to take a position on the mania of policy makers. Indeed, as we believe that the Fed might want to debase the U.S. dollar (Please see Fed may want to debase dollar), why not express that view in the currency markets? Unlike their reputation, currencies are far less volatile than equities: if one does not employ leverage, a move in the euro by 1 cent is rather small on a percentage basis. The U.S. dollar index has historically had an annualized standard deviation of returns in the low teens; in 2008, that volatility rose a tad, approaching the mid-teens. For investors looking for predictability on the risks in a portfolio, the currency markets have historically shown a far more consistent risk profile than equities or many other asset classes. A corollary is that during market downturns, unlevered currency strategies may offer some downside protection given the lower risk profile. This clearly doesn’t mean an investment in currencies is safe; but managed currency risk can be seen as an opportunity given the purchasing power risk taken by holding U.S. dollars.


“Hedging inflation risk isn’t about being right about the future; it’s about the risk of being right. “ – Axel Merk


If investors agree that the Fed: a) may want to have – or at least accept - higher inflation; and b) may not readily see the warning signs of higher inflation, then it appears to us prudent to take the risk of higher inflation into account. Indeed, for those managing money on behalf of others, it might be their fiduciary duty to take that risk into account. Those that ignore the risk of inflation might do so at their own peril. Many investors might feel they can take action once inflation is obvious. “Obvious” is in the eye of the beholder: just as we preferred to be early in warning about the crisis in 2008, it appeared rather challenging to reposition one’s portfolio in October 2008. Gold has gone up by a factor of about 7 since its lows. The dollar has fallen relative to a basket of currencies over the past 10, 30 and 100 years: in our assessment, we simply have the better printing press. Hedging inflation risk isn’t about being right about the future; it’s about the risk of being right.

Please sign up to our newsletter to be informed as we discuss global dynamics and their impact on currencies. Please also follow me on Twitter to receive real-time updates on the economy, currencies, and global dynamics.

Manager of the Merk Hard, Asian and Absolute Return Currency Funds, www.merkfunds.com

Axel Merk, President & CIO of Merk Investments, LLC, is an expert on hard money, macro trends and international investing. He is considered an authority on currencies. Axel Merk wrote the book on Sustainable Wealth; order your copy today.

The Merk Absolute Return Currency Fund seeks to generate positive absolute returns by investing in currencies. The Fund is a pure-play on currencies, aiming to profit regardless of the direction of the U.S. dollar or traditional asset classes.

The Merk Asian Currency Fund seeks to profit from a rise in Asian currencies versus the U.S. dollar. The Fund typically invests in a basket of Asian currencies that may include, but are not limited to, the currencies of China, Hong Kong, Japan, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand.

The Merk Hard Currency Fund seeks to profit from a rise in hard currencies versus the U.S. dollar. Hard currencies are currencies backed by sound monetary policy; sound monetary policy focuses on price stability.

The Funds may be appropriate for you if you are pursuing a long-term goal with a currency component to your portfolio; are willing to tolerate the risks associated with investments in foreign currencies; or are looking for a way to potentially mitigate downside risk in or profit from a secular bear market. For more information on the Funds and to download a prospectus, please visit www.merkfunds.com.

Investors should consider the investment objectives, risks and charges and expenses of the Merk Funds carefully before investing. This and other information is in the prospectus, a copy of which may be obtained by visiting the Funds' website at www.merkfunds.com or calling 866-MERK FUND. Please read the prospectus carefully before you invest.

The Funds primarily invest in foreign currencies and as such, changes in currency exchange rates will affect the value of what the Funds own and the price of the Funds' shares. Investing in foreign instruments bears a greater risk than investing in domestic instruments for reasons such as volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. The Funds are subject to interest rate risk which is the risk that debt securities in the Funds' portfolio will decline in value because of increases in market interest rates. The Funds may also invest in derivative securities which can be volatile and involve various types and degrees of risk. As a non-diversified fund, the Merk Hard Currency Fund will be subject to more investment risk and potential for volatility than a diversified fund because its portfolio may, at times, focus on a limited number of issuers. For a more complete discussion of these and other Fund risks please refer to the Funds' prospectuses.

This report was prepared by Merk Investments LLC, and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute investment advice. Foreside Fund Services, LLC, distributor.

Axel Merk Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules