Merk Market Outlook: Reduced Gasoline Prices Provide Relief, But May Not Change Consumer Outlook

By: Joseph Brusuelas | Fri, Oct 17, 2008
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Gasoline prices have seen a steep decline over the past three months. Since hitting a peak on July 20, the national average price for a gallon of gasoline has declined 52 cents, which should inject approximately $120 to $130 billion into the pocketbooks of consumers, with more expected on the way. Although, the decline in the cost of energy and other commodities will somewhat offset the overall fall in the rate of personal consumption, the US consumer is well on its way to pulling back the reins on spending in a manner that has not been seen since the early 1980's.

Real personal consumption looks to be on a pace to decline -3.0% in Q3'08 and will almost certainly see a second consecutive negative quarter during the final three months of the year. If consumption were to decline at a similar rate during the final quarter of the year it will be the first time since 1951 that changes of that magnitude have been observed in real personal consumption.

The combined impact of falling housing prices, the reduced value of equity portfolios and bleak job and income prospects are in the process of reshaping consumer expectations despite the positive impact from reduced gasoline prices on the bottom line of consumers. Recent data on retail sales provide tangible evidence that the consumer is in the process of a once in a generation retrenchment.

The primary question outstanding is not if consumers will cut back spending, but where and how. We anticipate that the majority of the reduction in consumption will occur in the ex food and energy category, with particular emphasis on imported goods. On a monthly basis, demand for imported goods declined from $194.94bln in July to $188.54bln in August. Inside the goods category that declined -3.3% in August, demand for computer accessories, household electronics and appliances all experienced declines.

Going forward we expect the consumer to begin increasing her rate of savings over the next year as individuals adjust to a diminished employment and income picture. Reduced demand for goods overall and imported goods in particular, will hit the retailers quite hard and curtail overall growth. The approximately $300bln output gap that the majority in Congress appear to be targeting with their new proposal will not provide direct rebate checks to consumers, but looks to be aimed at bailing out states and municipalities and focused on job creation vis-à-vis infrastructure projects. Thus, the largest decline in retail prices that have been recorded in the post war era looks to have little impact over the remainder of the year and well into 2009 on the behavior of the consumer.



Joseph Brusuelas

Author: Joseph Brusuelas

Joseph Brusuelas
Chief Economist
VP Global Strategy
Merk Investments LLC

Bridging academic rigor and communications, Joe Brusuelas provides the Merk team with significant experience in advanced research and analysis of macro-economic factors, as well as in identifying how economic trends impact investors. As Chief Economist and Global Strategist, he is responsible for heading Merk research and analysis and communicating the Merk Perspective to the markets.

Mr. Brusuelas holds an M.A and a B.A. in Political Science from San Diego State and is a PhD candidate at the University of Southern California, Los Angeles.

Before joining Merk, Mr. Brusuelas was the chief US Economist at IDEAglobal in New York. Before that he spent 8 years in academia as a researcher and lecturer covering themes spanning macro- and microeconomics, money, banking and financial markets. In addition, he has worked at Citibank/Salomon Smith Barney, First Fidelity Bank and Great Western Investment Management.

Mr. Brusuelas lives in Connecticut with his wife and St. Bernard.

Merk Investments LLC is the manager of Merk Mutual Funds, including the Merk Asian Currency Fund and the Merk Hard Currency Fund. 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.

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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

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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 advise nor a solicitation or an offer to buy or sell any products or services. Foreside Fund Services, LLC, distributor.

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