Fed - Inflation, Inflation, Inflation

By: Axel Merk | Tue, Dec 14, 2010
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In August, Federal Reserve (Fed) Chairman Bernanke stated inflation was too low; in October, the Fed's Minutes lamented that the market appeared not to take Bernanke's August statements seriously enough. In our assessment, today's Fed statement of the Fed's Open Market Committee (FOMC), with an almost verbatim repetition of the previous FOMC statement, screams: "markets: trust us, we mean what we say."

When former Fed Chairman Volcker raised rates in the 80's to root out inflation, initially, the markets didn't take him seriously. But persistence eventually made the market price in lower inflation expectations. Similarly, as the markets appear slow to embrace the Fed's at higher inflation target. We have little doubt, however, that the Fed will succeed in raising inflation expectations.

Today, there is a key difference to the early 80's: at that time, both inflation and inflation expectations were high. In the current environment, current inflation may be low, but future inflation expectations are not; until Bernanke's August speech, future inflation expectations were within historical norms. Since then, however, future inflation expectations have been moving up to levels we believe are not consistent with price stability.

The risk, in our view is, that the Fed will get more than it is bargaining for. Having said that, it's a problem for tomorrow and the Fed has rarely been accused of being too far-sighted.

 


 

Axel Merk

Author: Axel Merk

Axel Merk
President and CIO of Merk Investments, Manager of the Merk Funds,
www.merkfunds.com

Axel Merk

Axel Merk wrote the book on Sustainable Wealth; peek inside or order your copy today.

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.

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.

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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. Merk Investments LLC makes no representation regarding the advisability of investing in the products herein. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute investment advice and is not intended as an endorsement of any specific investment. The information contained herein is general in nature and is provided solely for educational and informational purposes. The information provided does not constitute legal, financial or tax advice. You should obtain advice specific to your circumstances from your own legal, financial and tax advisors. As with any investment, past performance is no guarantee of future performance.

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