Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Dow Stock Market Dow Trend Forecast Current State - 22nd Apr 21
Gold Rebounds Amid Positive Economic Reports - 22nd Apr 21
China's record first quarter fuels strong expansion in 2021 - 22nd Apr 21
Gold Price Next Key Level - 22nd Apr 21
Here's What to Look For When Hiring a Real Estate Agent - 22nd Apr 21
Ethereum EIP 1559 and Raven Coin - 21st Apr 21
Gold, USDX: The Board is Set, the Pieces are Moving - 21st Apr 21
World Economies Need to Find a Lot More COPPER! - 21st Apr 21
DogeCoin CRASH! Time to Start Mining BOODGIE Coin! Crypto Mania 2021 - 21st Apr 21
Pausing Stocks and Gold Fireworks - 21st Apr 21
Precious Metals and Miners Start of New Longer-Term Bullish Trend - P2 - 21st Apr 21
Looking For A Mortgage Broker? Here Is How To Hire One - 21st Apr 21
Amazon AMZN Stock PRIMEDAY SALE! Trend Analysis - 20th Apr 21
Stock Market Sentiment Speaks: You May Not Believe My 2021 Targets - 20th Apr 21
Stock Market Phase Two Projection - 20th Apr 21
Are Precious Metals & Miners Starting A New Longer-Term Bullish Trend? - 20th Apr 21
Inflation: First the Gain, Then the Pain… - 20th Apr 21
8 Stock Market Indicators in 1: Here's the Message of the Panic/Euphoria Model - 19th Apr 21
Gold - You Can Win a Battle, but Still Lose the War - 19th Apr 21
Will Interest Rates Rally Further Push Gold Price Down? - 19th Apr 21
Gold Fireworks Doubt the Official Inflation Story - 19th Apr 21
YuanPay Team Discuss The Process Of Crypto Diversification - 19th Apr 21
Central Banks May Ramp Up Gold Buying - 18th Apr 21
How to Get Rid of Driveway Weeds With Just WATER! 6 Months later NO Weeds, Ultimate Killer! - 18th Apr 21
State of the European Markets - DAX, FTSE, CAC, AEX, SMI, IBEX 35, S&P/MIB, Euro Stoxx 50, RTS - 18th Apr 21
Einvestment Fund: What You Need To Know About Investments - 18th Apr 21
Google Alphabet (GOOG) AI Deep Mind Stock Trend Analysis - 17th Apr 21
Stocks and Bonds Inflationary Slingshot - 17th Apr 21
Best Smartphone Selfie Stick Tripod Review by ATUMTEK Works with Samsung Galaxy and Iphone - 17th Apr 21
How to Give Budgie's First Bath | Easy Budgie Bathing and Water Training with Lettuce - 17th Apr 21
Record-breaking Decrease in New Passenger Vehicle Sale in Europe - 17th Apr 21
US Stocks Climb A “Wall Of Worry” To New Highs - 16th Apr 21
Gold’s Singular Role - 16th Apr 21
See what Anatomy of a Bursting Market Bubble looks like - 16th Apr 21
Many Stock Market Sectors Are Primed For Another Breakout Rally – Are You? - 16th Apr 21
What Skyrocketing US Home Prices Say About Inflation - 16th Apr 21
Still a Bullish Fever in Stocks? - 16th Apr 21
Trying to Buy Coinbase Stock on IPO Day - Institutional Investors Freeze out Retail Investors - 15th Apr 21
Stocks or Gold – Which Is in the Catbird Seat? - 15th Apr 21
Time For A Stock Market Melt-Up - 15th Apr 21
Stocks Bull Market Progression Now Shows Base Metal Strength - 15th Apr 21
AI Tech Stocks Buy Ratings, Levels and Valuations - 14th Apr 21
Easy 10% to 15% Overclock for 5600x, 5900x, 5950x Using AMD Ryzen Master Precision Boost Overdrive - 14th Apr 21
The Current Cannabis Sector Rally Is Pointing To Another Breakout - 14th Apr 21
U.S. Dollar Junk Bond Market The Easiest Money in History - 14th Apr 21
The SPY Is Nearing Resistance @ $410… What Is Next? - 14th Apr 21
The Curious Stock Market Staircase Rally - 14th Apr 21
Stocks are Heating Up - 14th Apr 21
Two Methods in Calculating For R&D Tax Credits - 14th Apr 21
Stock Market Minor Correction Due - 13th Apr 21
How to Feed Budgies Cucumbers - Best Vegetables Feeding for the First Time, Parakeet Care UK - 13th Apr 21
Biggest Inflation Threat in 40 Years Looms over Markets - 13th Apr 21
How to Get Rich with the Pareto Distribution - Tesco Example - 13th Apr 21
Litecoin and Bitcoin-Which Is Better? - 13th Apr 21
The Major Advantages Of Getting Your PhD Online - 12th Apr 21
Covid-19 Pandemic Current State for UK, US, Europe, Brazil Vaccinations vs Lockdown's Third Wave - 12th Apr 21
Why These Stock Market Indicators Should Grab Your Full Attention - 12th Apr 21
Rising Debt Means a Weaker US Dollar - 12th Apr 21
Another Gold Stocks Upleg - 12th Apr 21
AMD The ZEN Tech Stock - 12th Apr 21
Overclockers UK Build Quality - Why Glue Fan to CPU Heat sink Instead of Using Supplied Clips? - 12th Apr 21 -
What are the Key Capabilities You Should Look for in Fleet Management Software? - 12th Apr 21
What Is Bitcoin Gold? - 12th Apr 21
UK Covd-19 FREE Lateral Flow Self Testing Kits How Use for the First Time at Home - 10th Apr 21
NVIDIA Stock ARMED and Dangeorus! - 10th Apr 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

How to Profit from the Yellen Fed

Stock-Markets / US Federal Reserve Bank Feb 25, 2014 - 05:30 PM GMT

By: Axel_Merk

Stock-Markets

Janet Yellen might have the most powerful job in the world, as the Federal Reserve (Fed) she now chairs controls what may be the world’s most powerful printing press. We take a closer look at what her reign might mean for investors’ portfolios.


Yellen’s half pipe dream: hope is not a strategy?

Serving on the Federal Open Market Committee (FOMC) in 2008 as President of the Federal Reserve Bank of San Francisco, Janet Yellen has been praised for grasping the severity of the financial crisis early on. Leaving aside that 2008 was a little late to prepare for the crisis, let’s try to find out what type of central banker Yellen is.
There’s the dreamer: back in 2003, the then head of the European Central Bank (ECB) said: “We hope and pray that the global adjustment process will be slow and gradual” – this served as the catalyst for us to re-engineer our investment advisory business: if central bankers revert to hopes and prayers, so I thought, it’s time for investors to take precautions. The “global adjustment process” is a codename for the U.S. current account deficit; the “slow and gradual” is a thinly veiled reference to a possible U.S. dollar crash.

There’s the ivory tower academic. Ben Bernanke, in turn, was a student of the Great Depression. He had a guiding philosophy: when faced with a credit bust, forcefully deploy monetary policy to reflate the economy. On various occasions, he emphasized that raising rates too early during the Great Depression was one of the biggest policy mistakes of the time. Our interpretation: the Fed all but promises to be late in raising rates, wants to err on the side of inflation. That’s because, according to our interpretation of Bernanke’s philosophy, taking the foot of the accelerator too early may cause deflationary forces to take over, undoing any “progress.” We call it an ivory tower academic view as the theory does not take into account the side effects, namely other bubbles that might be created along the way; we further think the theory is altogether broken, as we believe monetary policy affects prices, but does not generate wealth.

There’s the Yellen Fed. So what about the Yellen Fed? A couple of observations:

  • Janet Yellen is humorous. In the recently released transcript of the December 16, 2008, FOMC meeting, she said: “An accounting joke concerning the balance sheets of many financial institutions is now making the rounds, and it summarizes the situation as follows: On the left-hand side, nothing is right; and on the right-hand side, nothing is left.”

  • In the January 21, 2008 FOMC meeting, she was explicit about her concerns about the economy: “I think the risk of a severe recession and credit crisis is unacceptably high.”

  • However, during the June 24-25, 2008 FOMC meeting, she talked about raising interest rates: “I favor alternative B with the proposed wording. Given the forecast and the risks around it, our next move on the funds rate is likely to be up...”

  • During Yellen’s confirmation hearings in late 2013 to become Fed Chair, she stated the Fed might return to a more normal monetary policy when the economy is back to normal. We have pointed out that this is an oxymoron, as we don’t think the economy can return back to normal when the Fed meddles with the price discovery process and the process of efficient capital allocation.

  • Janet Yellen is a labor economist and has taken keen interest in looking at unemployment numbers at a deeper level than headline unemployment numbers reported. During Yellen’s testimony to the House of Representatives this month, she consulted with colleagues when asked what the definition of a part-time employee is according to the number of hours worked. Given that different definitions are used by the Department of Labor and, for example, what is used in the Affordable Care Act, Ms. Yellen should be excused for consulting with colleagues when grilled by Congress and under oath; however, given that her home turf is the labor market, her hesitation did raise some eyebrows.

  • Janet Yellen is on record supporting a “modified Taylor rule” in setting monetary policy. Unlike the Taylor rule that defines the level of interest rates based on inflation, Yellen’s preferred metric heavily emphasizes employment. However, during the above-mentioned testimony, she distanced herself from the modified Taylor rule. Yellen argued that a sensible approach requires a qualitative assessment given that the Taylor rule (or a modified Taylor rule) would have required negative nominal interest rates.

  • Merk Senior Economic Advisor and former St. Louis Fed President Bill Poole has pointed out that, according to his recollection, Yellen has never objected to being called a monetary dove.

In trying to use a positive word to summarize these observations, let me choose the term “pragmatic.” “Freestyle” may be another way of coining her approach to monetary policy. As her June 2008 comments suggests, however, her forecasts are not always right. And neither would one expect that from any human being. Unfortunately it is fallible human beings controlling the printing presses of the world. When they make mistakes, it may have major implications. It’s one reason why we believe printing trillions may not be prudent, because there just might be unintended consequences. Of course no physical currency has been printed, but virtual currency is created literally with the stroke of a keyboard when the Fed buys Treasuries or Mortgage-Backed Securities (MBS).

Here’s the problem with a “freestyle” approach: the market doesn’t like uncertainty. It’s not aided by the fact that the Fed itself may be flying blind. That’s because the Fed is manipulating its own gauges to assess the health of the economy. By buying Treasury securities throughout the yield curve (short-term, as well as long-term Treasuries), the Fed is looking itself in the mirror. Instead, the Fed has to look at backward looking indicators, i.e. read the tealeaves on unemployment numbers. That lack of certainty, the lack of predictable leadership is fertile ground for volatility.

Yellen’s freestyle approach hazardous to Emerging Markets?

As we discussed in more depth in a recent Merk Insight, weak Emerging Markets might be the biggest victim of Yellen’s freestyle approach. Lacking the liquidity of developed markets, an uptick in volatility may cause investors to run for a small exit. We have seen much of that unfold since last spring when the Fed “taper” talk first flared up. In a nutshell, countries that had major inflows of money when the Fed’s policies were highly expansionary, but had few investment opportunities, saw a bidding up of local government securities. As the tide appears to have turned, it’s comparatively easy to sell these securities – except, of course, that these markets aren’t all that liquid to begin with, so any selling may cause significant headaches to investors.

The more advanced emerging markets are far better equipped to handle the volatility, as money was more likely invested in real projects. In our assessment, countries are better off that have features such as a reliable rule of law, a mature banking system, a domestic and offshore fixed income market, sound monetary policy, and a reliable regulatory environment. The more advanced Asian economies have many of these features.

Weaker countries like Brazil and South Africa may lose out, however, there may be exceptions among the weaker players. We are more positive on India, notably because of ongoing structural reform and comparatively low asset prices.

A country worth mentioning is China: the volatility of its currency, while still low compared to that of free floating major currencies, has spiked, causing some hot money to run for the hills. However, the increased volatility is very much in line with the goals of China’s foreign exchange regulator. Increased exchange rate volatility encourages the market to find an equilibrium rate at which there are buyers for every seller and sellers for every buying, among non-central bank participants. For the roadmap that China’s regulator has laid out, please read the December interview with Yi Gang, Deputy Governor of the People’s Bank of China and administrator of the State Administration of Foreign Exchange (SAFE).

Can investors position their portfolio to win a medal?

In most events in the winter Olympics, skill and speed appear pre-requisites to win a medal. If skill corresponds to a high beta (risk) investment, anyone aiming at speed better have skill. Now think of Janet Yellen altering your race course, except that she won’t tell you the modifications she is making. To survive such a course, it may be prudent to slow it down a bit.

The challenge is that you are competing with others that have learned full speed is the way to win the course. Translating this to the world of investing, I believe it was John Hussman that first said, “the problem with bubbles is that they force one to decide whether to look like an idiot before the peak, or an idiot after the peak.”

In our assessment, there is too much complacency in the markets (for an in-depth discussion on complacency, please read our February 11, 2014, Merk Insight). The stock market, as well as various economic indicators, very much build on asset price inflation the Fed has engineered. The trouble is that asset price inflation can evaporate rather quickly. The time to take the chips of the table is before, not after a bubble bursts. If Facebook’s acquisition of WhatsApp is not the sign of a bubble, I don’t know what is. Keep in mind, however, the old market adage that markets can stay irrational longer than investors can stay solvent. As such, taking chips off the table may be prudent.

But if one does not participate in an event (if one is out of stocks), how can one win a medal? In our upcoming Webinar this Thursday (click to register), we will discuss specific investment opportunities. A couple of thoughts to leave you with here:

  • Warren Buffett was ridiculed for not investing in tech stocks in the 1990s. Yet, at the end of the day, he did just fine.

  • In our assessment, investing is about finding values, not chasing trends. Those chasing trends are destined to invest at the top, only to lose money when markets correct.

  • With central banks heavily engaged in the markets, asset prices may not reflect fundamentals. That’s the bad news. The good news is that we think our policy makers are reasonably predictable. Even Yellen can be understood – she just may be tougher to read than Bernanke. But studying her and other policy makers might provide clues to help position one’s portfolio.

  • The gold and currency markets may be the purest plays on what we call the “mania of policy makers.” Gold may benefit as policy makers in the U.S. and abroad continue to “kick the can down the road,” and currency investing may allow investors to stay a step ahead of the game in currency wars.

To learn more, please register to be notified when we hold a webinar; our upcoming Webinar this Thursday will specifically expand on the question on how to profit from a Yellen Fed. Also don’t miss another Merk Insight by signing up for our newsletter.

Axel Merk

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

Rick Reece is a Financial Analyst at Merk Investments and a member of the portfolio management

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