Printer Friendly

eMail Article

June 02, 2005

The Fed Opts for Growth, Ignoring Imbalances and Inflation
by Axel Merk

Dallas Federal Reserve Bank President Richard Fisher, using a baseball analogy, said the Fed is in its 8th inning, and will raise rates one more time at its next meeting. A standard baseball game has 9 innings. Then, the Fed may or may not raise rates further, "go into overtime." Fisher implies that the Fed is pretty much done raising rates. Fisher is new to his post and may have talked more broadly than he was supposed to; however, his statement was rehearsed, and the markets take it seriously.

We have long argued that the U.S. economy is too leveraged to allow the Fed to aggressively raise rates to curb the housing bubble and inflation that is creeping through the supply chain. Any forceful action would cause the housing bubble to collapse and throw the economy into a severe recession. For now, it looks like the Fed opts for continued growth rather than correcting imbalances. Inflation that has been creeping up will be fostered and entrenched in more and more sectors of the economy.

In the meantime, the yield curve is flattening. On the one hand, we have a slowing economy; on the other hand, we have an accommodating monetary policy that has contributed to numerous capital misallocations ("bubbles" in modern parlance). As long as the Fed is artificially boosting the economy, we are setting ourselves up for an ever more severe adjustment process when it does happen. Richard Russell dug up the following quote from Alan Greenspan - from 1996:

"The excess credit which the Fed pumped into the economy spilled over into the stock market -- triggering a fantastic speculative boom. Belatedly, the Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929, the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and consequent demoralizing of business confidence." Alan Greenspan, The Objectivist, 1966

One thing that certainly has not changed is the Fed's confidence to steer this economy. Market forces will prevail in the end - the question is only which valve will have to give. When the Fed manages the entire yield curve, it may well be the dollar that has to give sooner or later. For now, the dollar enjoys short-term relief.

Axel Merk
Axel Merk is Manager of the Merk Hard Currency Fund

The Merk Hard Currency Fund is a no-load mutual fund that invests in a basket of hard currencies from countries with strong monetary policies assembled to protect against the depreciation of the U.S. dollar relative to other currencies. The Fund may serve as a valuable diversification component as it seeks to protect against a decline in the dollar while potentially mitigating stock market, credit and interest risks - with the ease of investing in a mutual fund.

The Fund may be appropriate for you if you are pursuing a long-term goal with a hard 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 Fund and to download a prospectus, please visit www.merkfund.com.

Investors should consider the investment objectives, risks and charges and expenses of the Merk Hard Currency Fund 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 Fund primarily invests in foreign currencies and as such, changes in currency exchange rates will affect the value of what the Fund 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 Fund is subject to interest rate risk which is the risk that debt securities in the Fund's portfolio will decline in value because of increases in market interest rates. As a non-diversified fund, the 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. The Fund may also invest in derivative securities which can be volatile and involve various types and degrees of risk. For a more complete discussion of these and other Fund risks please refer to the Fund's prospectus. Foreside Fund Services, LLC, distributor.

Image rendition and html coding Copyright © 2000-2008 SafeHaven.com

« BullionVault.com -- Buy gold online - quickly, safely and at low prices »
« Honest Money: A History of U.S. Gold & Silver Currency -- by Douglas V. Gnazzo »

« Opinions expressed at SafeHaven are those of the individual authors and do not necessarily represent the opinion of SafeHaven or its management. Articles are available via RSS/XML. Please visit RSSHelp for instructions. »