Merk Investments: Credit and Money Supply Indicators: One Week After Capital Injections

By: Joseph Brusuelas | Tue, Oct 21, 2008
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Credit and Money Supply Indicators:

The injection of capital and elimination of caps on swap lines between foreign central banks and the Fed have engineered modest improvement in credit indictors over the past week.

In addition, to our close observation of Libor fixings and the LIBOR-OIS spread, we also pay close attention to the TED spread as an indicator of financial health. The TED spread has narrowed by 169 points, but the elevated reading of the VIX indicates continued fears in market. However, the improvement in the TED spread is an indication of the market slowly beginning to function.

Unfortunately, the improvement has not been paralleled by the LIBOR-OIS spread. This spread has only compressed by 60 basis points and is another indicator of continued stress in credit markets.

Commercial Paper

There is a modest signal that lending has restarted on the back of the Fed program to purchase commercial paper. Through the end of the week, the major target appears to have been the commercial community, as the non-financial community continues to suffer.

Bank Assets

Commercial banks see an increase in assets and a modest restart to lending with consumer still drawing on home equity.

Fear still pervades among financials. Banks are holding excess reserves which is an indicaton that banks are horading cash in the aftermath of the Treasury’s annoucement one week ago.

Monetary Aggregates

MZM declines while adjusted monetary base skyrockets. With velocity of money declining and Fed mopping up excess liquidity in the market, risk of inflation has substantially moderated in the near term. However, given the sharp increase in the adjusted base the market should closely observe continuing Fed action to sterilize those increases.

 


 

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.

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 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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