Bernanke - It's Complicated!
Get ready for more money to be printed - this time not to subsidize an overly indebted American consumer, but to stem against the credit destruction caused by the Federal Reserve (Fed) itself. Tuesday evening at the International Monetary Conference in Atlanta, J.P. Morgan CEO Jamie Dimon gave a laundry list of changes that have already incurred in the banking system, including
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No more Special Investment Vehicles (SIVs)
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No more sub-prime, no more "Alt-A" mortgages
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No more CDOs
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Higher underwriting standards
On top of these changes, the Fed now wants to introduce 300 new regulations. Has anyone at the Fed studied what impact these regulations will have on credit?
A fair question, to which Fed Chairman Bernanke stumbled, "it's Complicated!" He then admitted that no such study has been undertaken and that, indeed, tradeoffs have to be made and that the impact on credit will have to be carefully monitored.
For practical purposes, we believe we should expect more easy money; Dimon is correct that headwinds caused by upcoming regulations, as well as those already introduced since the onset of the financial crisis, are enormous. To keep the economy moving ahead nonetheless, more money may need to be printed than even the Fed expects.
Unfortunately Bernanke misses the obvious: if it is so complicated, make it simple. Keep It Simple Stupid is a paradigm that should not only apply to monetary policy, but also to regulatory policy. In our humble opinion, regardless of regulation imposed, bankers will remain one step ahead of regulators. They simply have greater resources to find loopholes - introducing fancy terms like "macroprudential supervision of financial institutions" won't change that, either.
Regulators should embrace the challenge by working with market forces, rather than over-regulating the system, thereby stifling economic growth. There are simple levers that can be employed. For example, we believe that speculators should not be prevented from making dumb decisions, but processes should be in place that dumb decisions do not cause systemic risks. Such a policy is fairly straightforward to implement by imposing margin requirements on leveraged bets. Add transparency and mark-to-market accounting and you have already achieved a more stable system, with incentives to use less leverage. There are additional measures that can be implemented to force banks to de-leverage their balance sheet should the market, rather than regulators, believe banks engage in behavior that's too risky (e.g. by requiring banks to issue substantial amounts of staggered, long-term subordinate debt; should the cost of refinancing be unattractive, banks need to shrink their balance sheets, but can do so in an orderly fashion).
Some concluded from Bernanke's talk that there is no additional round of quantitative easing, a QE3, in sight. Our view is that the Fed is simply baffled that all the money printed has not worked, and will wait and hope... for now. But because things are so complicated, sprinkling more money on the problem may be the weapon of choice in the not too distant future...
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Author: Axel Merk
Axel Merk
Manager of the Merk Hard, Asian and Absolute Return Currency Funds, www.merkfunds.com
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.
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.merkfunds.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 advice. Foreside Fund Services, LLC, distributor.
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