The Fed Opts for Growth, Ignoring Imbalances and Inflation

By: Axel Merk | Thu, Jun 2, 2005
Print Email

Dallas Federal Reserve Bank President Richard Fisher, using a baseball analogy, said the Fed is in its 8th inning, and will raise rates one more time at its next meeting. A standard baseball game has 9 innings. Then, the Fed may or may not raise rates further, "go into overtime." Fisher implies that the Fed is pretty much done raising rates. Fisher is new to his post and may have talked more broadly than he was supposed to; however, his statement was rehearsed, and the markets take it seriously.

We have long argued that the U.S. economy is too leveraged to allow the Fed to aggressively raise rates to curb the housing bubble and inflation that is creeping through the supply chain. Any forceful action would cause the housing bubble to collapse and throw the economy into a severe recession. For now, it looks like the Fed opts for continued growth rather than correcting imbalances. Inflation that has been creeping up will be fostered and entrenched in more and more sectors of the economy.

In the meantime, the yield curve is flattening. On the one hand, we have a slowing economy; on the other hand, we have an accommodating monetary policy that has contributed to numerous capital misallocations ("bubbles" in modern parlance). As long as the Fed is artificially boosting the economy, we are setting ourselves up for an ever more severe adjustment process when it does happen. Richard Russell dug up the following quote from Alan Greenspan - from 1996:

"The excess credit which the Fed pumped into the economy spilled over into the stock market -- triggering a fantastic speculative boom. Belatedly, the Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929, the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and consequent demoralizing of business confidence." Alan Greenspan, The Objectivist, 1966

One thing that certainly has not changed is the Fed's confidence to steer this economy. Market forces will prevail in the end - the question is only which valve will have to give. When the Fed manages the entire yield curve, it may well be the dollar that has to give sooner or later. For now, the dollar enjoys short-term relief.


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 ©