It's 2020: A Look Back at the 2013 'Recovery'

By: Axel Merk | Wed, Sep 11, 2013
Print Email

It's September 2013 and the U.S. is contemplating military action against Syria. As fear is mounting, investors shrug off the dangers ahead. It's only with the benefit of history that we will know how events unfolded: how stocks, bonds and the U.S. dollar fared.

Before we dive into this analysis, be forewarned that we are writing from the fictitious viewpoint of 2020. We have no way of knowing whether what we write will happen. We did not come back from the future and events might unfold differently. Proceed at your own risk.

As the U.S. was getting ready for military action in September 2013, the warning signs were abundant:

Bubble indicator flashing

The bubble indicator referred to above cautioned about tech stocks in the late 90s and suggested easing on stocks in 2013. The indicator measures complacency: when everyone thinks they know where the market is going, implied volatility in that asset class goes down. The dogma of "stocks for the long run" becomes reestablished and a rising equity market becomes self-reinforcing. The more stocks rise the more popular they become and the more risk becomes mispriced.

Looking at a long-term chart of the VIX index, a popular measure of implied volatility in the U.S. equity market, equities look to be very close to the low end of their range at a time when stocks are near all time highs.

Caution: the sections "October 2013 Flash", "Great Recovery" and "Dollar Crash?" are entirely fictitious. While it may be possible for events to unfold as discussed, we have no way of knowing. The discussion serves as an illustration of the sort of risk scenarios that might unfold, but is not to be construed as investment advice.

October 2013 Flash

Stock investors in October 2013 felt like gold investors earlier that year. Someone decided to take profits from what appeared to have been an endless rally. And this time around, others did not pile in to "buy the dip." In fact, high frequency trading algorithms noticed the unusual pattern in the market and opted to pull their bids. It first appeared like a flash crash as prices plunged. But past flash crashes had the habit of rebounding within seconds- this one was different. It was painful. The bids didn't come for what seemed to be an eternity. Margin calls followed, further extending the pain. It became known as the October 2013 Flash, or simply the "Flash."

Great Recovery

The doomsday predictors didn't like it, but we recovered from the Flash. It took a while, but the pundits got what they were asking for: economic growth. Except that it didn't play out the way the cheerleaders wanted it to. As the economy picked up steam, bonds continued to slide. We were told that it was good news as the economy was healing. We will spare you the details, but someone finally looked up the numbers: in 2001, the average cost of borrowing for the U.S. government to borrow money in the market was over 6%. In August 2013, that average cost dipped below 2%. It didn't happen overnight, but it's now 2020. We won't spoil the surprise for you, but the market started to have concerns that meaningful entitlement reform wouldn't happen. It's 2020, and it didn't. Now interest rates are not only high, but the average cost on all debt servicing has moved up. How much? Kids may be reading this, so we can't put these numbers in print. The details, in fact, don't really matter, as it is the perception that counts. Once confidence was lost that the U.S. could service its debt in real terms, the market didn't care about the rhetoric of policy makers that the U.S. wouldn't ever default because it can print its own currency.

Dollar Crash?

And as the Federal Reserve was called upon to help finance government deficits, we could tell you what unfolded. We could tell you whether the dollar crashed. But we don't want to spill the beans for our readers. Let us just ask: what's your assessment of the risk of this scenario unfolding?

By the way, the 2020 Olympics took place all right, but the IMF had to step in as Japan was unable to finance the completion of construction. Athletes had to pledge their sponsorship deals as collateral as the IMF would have otherwise been unable to access funding.

Back to Reality

Okay, we got ahead of ourselves. It's utterly unrealistic for the IMF to step in to finance the 2020 Olympics. To distinguish fiction from reality, let's not veer that far into the future, but look at what is next for the dollar in the context of the Fed's taper talk.


Please register to join us for our Webinar entitled, "What's Next for the Dollar? #Taper" to continue the discussion on the fallout for the U.S. dollar and currencies of Fed policy.

Also make sure you subscribe to our newsletter so you know when the next Merk Insight becomes available.



Axel Merk

Author: Axel Merk

Axel Merk
President and CIO of Merk Investments, Manager of the Merk Funds,

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

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 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 ©