Don't Shoot the Messenger

By: Axel Merk | Mon, Aug 8, 2011
Print Email

Don't shoot the messenger. The downgrade of U.S. government debt by S&P is the result of policies pursued over many years that rely on the U.S. being the world's reserve currency. Policy makers have forgotten that the status must be earned; it's not a birthright.

Some thoughts on the downgrade, as well as recent ECB actions:

With large-scale bond purchases announced, the ECB is moving closer to how the Fed operates in a crisis. In 2008, then NY Fed President Geithner conferred with Treasury Secretary Paulson whether to "foam" the markets. That referred to massive liquidity injection by buying Treasuries.

Now the ECB may buy bonds of the largest European bond market, the Italian. The ECB has indicated it would sterilize any purchases, i.e. not print money on a net basis.

Last Thursday, when the ECB announced it would reopen its six-month funding facility, the central bank may have received a heads up from S&P of the looming U.S. downgrade. The ECB is concerned about a shock that would shun Italy and Spain from the funding markets.

Let's not forget that some of the market tension comes from U.S. money market funds having dumped commercial paper issued by European banks after a lot of scrutiny (we added to that). This is more a re-pricing of funding costs, adding to the pressure that European banks should raise capital, a process long overdue.

Some more thoughts on S&P downgrade;

Long term, more pronounced damage is likely to occur in the bond market, but like a frog in a boiling pot, the pundits will likely shrug off this view, as the initial bond market reaction may not be too severe. Politicians will simply complain, but not change. And that will cause further downgrades...

At Merk, our hard currency strategy saw substantial shifts last Thursday and Friday with reductions in the Canadian, Australian and New Zealand dollar, with money re-allocated to the Euro, Norwegian Krone and Japanese Yen. We did not foresee the timing of the downgrade, but positioned ourselves for further global de-leveraging and long-term dollar weakness. The downgrade is a symptom, not a trigger, of the environment we are in.

Having said all this, the situation may be fluid and we may also change our minds. The market is never wrong... Sometimes a bit early or late...

 


Ensure you sign up to our newsletter to stay informed as these and other dynamics unfold.

 


 

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.

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. 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.

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com

SEARCH





TRUE MONEY SUPPLY

Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
austrian-money-supply/