Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
A Simple Way to Preserve Your Wealth Amid Uncertainty - 11th Aug 20
Precious Metals Complex Impulse Move : Where Is next Resistance? - 11th Aug 20
Gold Miners Junior Stcks Buying Spree - 11th Aug 20
Has the Fed Let the Inflation Genie Out of the Bottle? - 10th Aug 20
The Strange Food Trend That’s Making Investors Rich - 10th Aug 20
Supply & Demand For Money – The End of Inflation? - 10th Aug 20
Revisiting Our Silver and Gold Predictions – Get Ready For Higher Prices - 10th Aug 20
Storm Clouds Are Gathering for a Major Stock and Commodity Markets Downturn - 10th Aug 20
A 90-Year-Old Stock Market Investment Insight That's Relevant in 2020 - 10th Aug 20
Debt and Dollar Collapse Leading to Potential Stock Market Melt-Up, - 10th Aug 20
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Economic Depression Investing – Which Currencies to Hide in?

Economics / Investing 2009 Mar 10, 2009 - 06:41 AM GMT

By: Axel_Merk

Economics Best Financial Markets Analysis ArticleThe world's a mess and in our eyes policy makers are inadvertently doing their best to worsen a bad situation. Let's assume you've had it and want to hide somewhere safe to ride out the storm. Unfortunately there appears to be no such thing as a safe asset anymore. Therefore you may want to consider taking a diversified approach to something as mundane as cash. Sure, U.S. Treasury Bills are the one “safe” asset – at least by regulation.


But will Treasury Bills retain their purchasing power as the U.S. government raises almost $3 trillion in the debt markets this year? As the debt to be raised is going to be in the range of 12% - 15% of GDP (some estimates the Treasury Department take seriously go as high as 18% of GDP), increased U.S. savings simply won't be enough to fund the shortfall.

Let's consider the potential outcomes:

  • Those loaning money to the U.S. could be rewarded by higher interest rates, but this would mean long-term interest rates would need to rise; – something the Federal Reserve (Fed) does not want because of the negative impact on growth.
  • The Federal Reserve could print the money and buy up Treasury Bonds. This may keep the cost of borrowing low, but likely weaken the U.S. dollar substantially. In our view, this is the Fed's preferred scenario; in his testimony to Congress, Fed Chairman Bernanke reiterated his view that the most important steps to get out of the Great Depression were guarantees on bank deposits and the devaluation of the dollar. The banking system has been guaranteed this time around, but the dollar has not yet devalued.
  • A crowding out of private sector investments may also allow the financing of all the debt that needs to be issued. Basically, the $3 trillion to be raised is money not available to the corporate sector – or the states – or municipalities – or other sovereign countries. It is very difficult for anyone but the government to raise money. Indeed, Warren Buffett in his annual letter to shareholders, points out that the cost of borrowing for his AAA rated enterprise is higher than for broken businesses that have received government support through implicit or explicit government guarantees. The government with all its well-intended efforts is destroying healthy companies, substituting rather than encouraging private sector participation.

You would think that gold is the place to hide with so much money being printed. Yet despite the immense amounts being “thrown at the system”, the inefficiency of the policies themselves makes little of the money stick. The administration's spending package includes bailouts for some homeowners, yet a reduction in the tax deductibility for others. Does the government want higher or lower home prices? Similarly, the government is pulling the rug from under Sallie-Mae, the agency in charge of providing student loans, presumably because the system is to be replaced with a different, grant-based system; is that new system up and running or are we simply taking away a source of funding for students? This isn't about arguing which of these programs are good or bad, but to highlight that it is extremely difficult to make investment decisions when you don't know what the policy is.

There are many other conflicting ideas in the spending program; in the end, there is only one clear message: if you make a lot of money, your taxes will go up. Importantly, there are no investment incentives for businesses; or other policies for that matter that encourage more prudent financial decision-making by individuals. On that note, with the shambolic state of the banking system, you would think the government would do what it is required to do by law – the FDIC improvement act of '91 (FDICIA) requires prompt and decisive action to address insolvent institutions, requiring the government to choose the least expensive option for taxpayers. Instead, policy makers continue to apply (very expensive) Band-aids.

For the time being, investors are running for the hills as a result and gold is retreating from its recent highs. In our assessment, the inefficiency of the programs will delay any recovery and make it very, very expensive. Eventually, we believe some of that money will stick, economic growth may resume and all the money in the system will prove inflationary. Indeed, because the policies do not encourage consumers to reduce their debt levels, we believe that if and when inflation breaks out the Fed may be unable to contain it – we simply don't think it is realistic that the economy would be strong enough to institute Volcker-style policies (Volcker was the Fed Chairman from 1979 to 1987 and drove the Federal Funds rate to 20% in 1981 to weed out inflation).

While we believe that inflation will ultimately haunt the U.S., we are presently in a phase of inefficient government policy with the threat of deflation outweighing the threat of inflation. Moreover, we are in a period where a depression, if not a long and drawn-out recession, is a very realistic probability. So where should investors hide? Investors may want to consider adding a diversified selection of currencies to their portfolios. To this end we have some thoughts on currency investing within a depression scenario:

The euro. If, as we believe, the euro zone will not follow in the U.S. footsteps to try to devalue their currency, growth may lag, but the currency could be strong even in face of a serious recession or depression. However, the solvency of the banking system in Europe raises some serious issues. For more details, please see our recent discussion on whether there are any hard currencies left .

The Swiss franc. The Swiss franc has benefited from its reputation as a safe haven. Don't take our word for it, but the market's: since last fall, the Swiss National Bank (SNB) has been issuing Swiss franc denominated Treasury bills at par. Investors are willing to lend the Swiss government money at 0% (the return is negative after commission). In the U.S., yields were near zero or dipped negative at the height of the credit crisis, but in Switzerland, this has become the norm. Initially, the SNB was reluctant to issue debt at 0%, but has since opened the floodgates and accepts anyone looking for these bills. One of the criticisms of gold has always been that it doesn't pay interest; but is the Swiss franc as good as gold?

The Swiss National Bank is working hard to dilute its status as a safe haven. A few weeks ago, the SNB started issuing U.S. dollar denominated Swiss Treasury bills; the yields are a tad higher than Treasury bills issued in the U.S.; for the SNB it is an inexpensive way to fund the dollar denominated guarantees extended to the Swiss bank UBS. However, it does create dollar denominated liabilities, a potential vulnerability.

Switzerland is affected by Eastern Europe's affection with low interest rates: many Eastern Europeans financed their homes with Swiss franc mortgages; as the currencies in Eastern Europe have plunged, there has been a scramble to obtain Swiss francs. This challenge is not limited to Switzerland (Japan, Sweden and the euro zone face the same challenge), but the Swiss have been particularly proactive in providing temporary credit facilities to Eastern Europe. This, too, may come back to haunt Switzerland, but is perceived the lesser of the evils as it helps prop up Swiss banks (most affected are Austrian banks as they not only extended loans, but were leaders in buying Eastern European banks).

Then there is the issue of whether some of the financial institutions are “too big to bail”. Sweden is suffering from this challenge as their banking system does not enjoy the safe haven status, but has extensive exposure to Eastern Europe in particular. Switzerland, for now, is enjoying its safe haven status. However, the SNB's active efforts to talk down the Swiss franc is troubling to us; we are less excited about the Swiss franc than we once were.

The Norwegian krone. Norway may replace Switzerland as the place to take refuge in Europe. Norway is a surplus country, an enviable position to be in should we face an extended depression. Norway can afford to get through this crisis; Norway can fix any problems in its economy or banking system. The Norwegian krone is not particularly sexy; indeed it is highly correlated with the euro and Swiss franc; and if the markets recover, risk friendly money may move towards other currencies again. However, in our assessment, the Norwegian krone may be the most appropriate depression trade. If one expects a cascading effect of trouble with further challenges in the banking sector or trouble in giants like General Electric, then investors may want to consider adding Norwegian krone denominated government debt.

The Japanese yen. We consider the Japanese yen the “panic trade” currency. It is noteworthy that the Japanese banking system is one of the healthiest in the world right now; as a result, when there is fear of an implosion of the global financial system, the yen may benefit. However, this benefit requires that there is no intervention by the Bank of Japan. The current composition of the BOJ has not intervened in the markets. Indeed, the finance minister recently resigned when he appeared to be drunk at a G7 meeting in Italy; as long as the leadership in Japan is weak, there may be little intervention. However, the Japanese economy is deeply in depression mode with industrial production down 42.5% from peak levels (in comparison, industrial production fell 55% during the Great Depression in the U.S.); exports are down around 50% to the U.S., Europe and Asia.

There is one area we are in agreement with Fed Chairman Bernanke: those countries that devalue their currency may recover more quickly from a depression. Rather naturally so: if the purchasing power of your savings is slashed, you have a great incentive to work again. Because of high savings levels, the Japanese have so far been able to absorb the implosion, however painful. This is, by the way, our reason for being more optimistic about the euro than many: unless you have a severe current account deficit like the U.S., you don't necessarily need to have growth to have a strong currency. 

We do believe that the “panic trade” is fading out. That's because policy makers throughout the world have provided guarantees to the banking system and shown they are willing to do anything – including sacrificing their currencies – to protect the financial system. That sharply reduces a disorderly adjustment of the financial system. Instead, we are now faced with either pursuing an orderly adjustment, i.e. a deep recession or depression; or whether we reflate the system. As these forces play out, the panic scenario may move to the background. In a global depression, surplus countries such as Norway may be the ones losing the least; there is really no winner in a depression, but Norway is better positioned than most.

There may be another depression trade – the Chinese yuan. To learn why and be informed as we discuss further currencies, including currencies that may benefit as the world tries to reflate, subscribe to our newsletter at www.merkfund.com/newsletter . We manage the Merk Hard and Asian Currency Funds, no-load mutual funds seeking to protect against a decline in the dollar by investing in baskets of hard and Asian currencies, respectively.

To learn more about the Funds, or to subscribe to our free newsletter, please visit www.merkfund.com .

By Axel Merk

Chief Investment Officer and Manager of the Merk Hard and Asian Currency Funds, www.merkfund.com

Mr. Merk predicted the credit crisis early. As early as 2003 , he outlined the looming battle of inflationary and deflationary forces. In 2005 , Mr. Merk predicted Ben Bernanke would succeed Greenspan as Federal Reserve Chairman months before his nomination. In early 2007 , Mr. Merk warned volatility would surge and cause a painful global credit contraction affecting all asset classes. In the fall of 2007 , he was an early critic of inefficient government reaction to the credit crisis. In 2008 , Mr. Merk was one of the first to urge the recapitalization of financial institutions. Mr. Merk typically puts his money where his mouth is. He became a global investor in the 1990s when diversification within the U.S. became less effective; as of 2000, he has shifted towards a more macro-oriented investment approach with substantial cash and precious metals holdings.

© 2009 Merk Investments® LLC

The Merk Asian Currency Fund invests in a basket of Asian currencies. Asian currencies the Fund may invest in 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 invests in a basket of hard currencies. 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 hard or Asian 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.merkfund.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.merkfund.com or calling 866-MERK FUND. Please read the prospectus carefully before you invest.

The Funds primarily invests in foreign currencies and as such, changes in currency exchange rates will affect the value of what the Funds owns 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.

The views in this article were those of Axel Merk as of the newsletter's publication date and may not reflect his views at any time thereafter. These views and opinions should not be construed as investment advice nor considered as an offer to sell or a solicitation of an offer to buy shares of any securities mentioned herein. Mr. Merk is the founder and president of Merk Investments LLC and is the portfolio manager for the Merk Hard and Asian Currency Funds. 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