Axel Merk: Why Asset Prices Must Return To Lower Levels

Saying it's been a busy week and half on the central bank front is perhaps a sizeable understatement. 

First, the Swiss National Bank stunned the world (and its brethren central banks) by removing its peg to the Euro. This was quickly followed by Mario Draghi finally making good on his longtime threat of firing QE bazooka, announcing that the ECB will pursue a 60 billion Euro per month easing program for the next 16 months. And amidst all the smoke, the Canadian central bank snuck in a surprise rate cut to its interest rate.

To make sense of both the "Why?" behind these extreme moves, as well as the "What?" in terms of their implications, Axel Merk, founder and Chief Investment Officer of Merk Funds joins us this week.

In his opinion, recent events are exactly the kind the symptoms he's been expecting as the prime strategy pursued by central banks since 2008 -- to force capital into speculative assets -- approaches its natural and inevitable denouement. Indeed, he projects the surprises in store for us and the systemic instability we're beginning to see are just getting started:

Ultimately, central banks are just sipping from a straw in the ocean. I did not invent that term. Our senior economic advisor, Bill Poole, who is the former president of the St. Louis Federal Reserve taught us this: that central banks are effective as long as there is credibility.

What central banks have done is to try to make risky assets appear less risky, so that investors are encouraged or coerced into taking more risks. Because you get no interest or you are penalized for holding cash, you've got to go out and buy risky assets. You've got to go out and buy junk bonds. You have to go out and go out and buy equities.

The equity market, volatility until not long ago, has been very low. When volatility is low, investors are encouraged to buy something that is historically risky because it is no longer risky, right?

But as the Swiss National Bank has shown, risk can come back with a vengeance. The same thing can happen of course, in any other market. If the Federal Reserve wants to pursue an "exit" to its intervention, if it wants to go down this path, well, volatility is going to come back.  

Everything else equal, it means asset prices have to be priced lower. That is the problem if you base an economic recovery exclusively on asset price inflation. We are going to have our hands full trying to kind of move on from here. In that context, what the Swiss National Bank has done is it is just a canary in the coal mine that there will be more trouble ahead.

Click the play button below to listen to Chris' interview with Axel Merk (35m:23s)

This is a companion discussion topic for the original entry at

Axel expresses his opinion here, which with respect, is not something I would pay money for.

  1. Academic Qualifications Advertised or Promoted

John Hussman adds the letters 'PHD' after his name in many presentations. Axel Merk includes 'magna cum laude' in his biography account. Why an apparent need to do this when they, in my view, operate essentially as speculation agents affecting others' monies? 


  1. Investment Performance Record

Both these two have, in my opinion, track records that include periods of particularly very unflattering returns.


  1. Correlation between paragraphs 1. and 2. above

I think that both the PHD and 'magna cum laude' persons above operate very much as 'speculators', rather than as investors. My view is that their returns and approaches, at times, supports this thought.  In these two cases - or more generally -  is it : the higher the academic qualifications, the stronger the indications of lower  prospective returns?


Axel Merk has always struck me as a really smart guy, and I used to actually own his MERKX in my portfolio  years ago. For a long time, the fund did well.  Even during the gold crash, Merk's fund avoided the big drop even though gold is a decent-sized chunk of the fund.
Here's a list of what the hard currency fund holds.  Executive summary: 41% EUR, 27% GBP, 20% gold, short CHF, short Yen, others.

And just for fun, here's the chart of MERKX.  You can see what its like to be short the dollar (and short CHF) during a serious dollar rally followed by the EUR/CHF unpeg.

When the buck tops out, this might be a nice fund to own.  Duration is very short, less than a year - think "money market fund" comprising of a bunch of different non-dollar currencies, including gold.  Unlike the index-based funds, he tries to avoid including currencies that are printing money, such as Japan.  I wonder what he'll do with the EUR after Draghi's annoucement.

Expense ratio is 1.3%, which is something to be aware of.

Too funny, I might know who that 40 ounces went too.

Is it only the Expense ratio that is something to be aware of ?

We can't afford to subsidise the weak and infirm? This smells like The Limits to growth curves to me.
ESAP? (Economic Structural Adjustment Program). Zimbabweans are experts on ESAP. Here is a quick and dirty precis of what it means.

You will work longer and harder for less money.

How ironic that the Europeans are having to take their own medicine.  As for getting the bureaucrats off our backs, that will take a revolution in our psyche.

Do these policy wonks know what low wages do for the velocity of money? Try and guess. Here is a thought experiment for your village. Ask the retail merchants if they support low wages -Noo. Ask the Real Estate spruikers if they support low wage.

Fascinating stuff- But my second cup of coffee is finished and I have mountains to see, things to climb, people to do.

"Is it only the Expense Ratio that is something to be aware of?" refers.
It may be apparent that the changing trend - refer direction of moving averages in the Chart - may be indicating it prudent to be 'short', rather than long, of the fund at this point in time. 

Great conversation Chris, really enjoyed the insights.
In particular, I liked how the conversation gave an alternative explanation to gold and silver price movements, other than that of Central bank manipulation.  A quick summary goes something like this - the Central bank eliminated volatility, which pushed capital into equity markets in search of returns. Precious metals in that case do not compare well as an asset class, so they suffered. But now that volatility has returns, price to risk ratios on equity are starting to look less appealing, bringing metals back into the picture.  Even with this understanding, I'd still like to know who is dumping those 10k+ contracts into the futures markets in the middle of the night.

Came across another interesting, related insight, a few days back. Believe it was Peter Schiff who mentioned this. The Swiss broke their peg to limit the inflationary flow from ECB QE, right? Well, what would the consequences be if China breaks the Dollar peg?  And what would cause that? QE4.  And with Greece now on the road to leaving the EU, geopoli instability spreading like wildfire, and the EU's QE experiment likely to fail (since their problem is not high interest rates), guess where the US must soon go? QE4.


It may be apparent that the changing trend - refer direction of moving averages in the Chart - may be indicating it prudent to be 'short', rather than long, of the fund at this point in time.
Yes, I believe I implied that in my post - where I said "as soon as the dollar tops out" that this might be a good fund to own.  I especially like the fact Merk works hard to avoid putting the Yen in his fund.  To me, that ends up being more of what I'd be looking for, rather than simply "shorting the buck" (which basically means going long all the counterparty currencies).

But again, only once the buck tops out.  Which it doesn't show any signs of doing just yet.

QE programs are really just zero-sum games in the long run. I was laughing at the Canadian governments quick response to the Us buck's rise, Canadian buck's fall and the fact that it is looking at a sizeable drop in oil income. When revenues drop, the Canadian government didn't waste any time reducing interest payments on government bonds - 0.7%. It's time to revue 'financial repression'. and its real effects.
I just happened to review our Church's revenue, which has remained steady since 1994. When you adjust for inflation, the trend falls off to the right at the same rate as inflation. If the Central banks continue to think that printing bank notes will help world economies. . . Think again. At least the German society is earnest in pursuing "productive renewables'! If you're going to print imaginary dollars, you might as well spend them solar and wind!

Love the comments that follow this article - Argh!! Is everything a conspiracy?

Neither of the mainstream solutions will work, they both lead to the same place. The false choice of the dichotomy we are presented with is which prong of the fork you would like to die upon. "Structural" reforms, made to sound like something real is happening has the same effect as money printing, which is made to sound ephemeral. Both are ugly, because there are real "structural" problems that neither of these solutions can address.  The age of macro economic solutions that any large central bureaucracy, whether private central banks, global corps, central governments is over.  Both have been tried with equally poor success, because we are culturally obsessed with material wealth and short term results.
The good news is of course that we can act individually and locally in small communities now.  We can vote with our dollars, feet, and actions and build sustainable solutions that solve the problems that global macro economics can never solve. The old industrial models that concentrate wealth and power based on the cheap energy are collapsing along with the macro economic systems that feed them, that's why there are no "good" solutions that the "best minds" can come up with.  All the good solutions are outside the box. The center will be no where and the edge will be everywhere.  As the permaculturist have taught us, the edge is the most productive part of an ecological system.  That is where we are headed.


My point is to emphasise that the fund has been performing badly for more than FOUR years, with seriously pronounced weakness recently - a point which is not apparently highlighted by the Member Comments. Therefore, it may be that viewer attention needs to be directed accordingly.

I do not believe that - given this historical underperformance - huge confidence in related investment management ability should be engendered, as may be the case given existing comments, with respect.     


I do not believe that - given this historical underperformance - huge confidence in related investment management ability should be engendered, as may be the case given existing comments, with respect.
"Historical underperformance" versus what?  You are telling me this fund has underperformed other funds that are more or less long euros, long CAD, long AUD, long gold, and short the buck?  Let's see your charts.  I'm willing to be convinced.  Compare vs. FXA, FXC, FXE, FXJ.  Those are the competition.  (And those funds are in bank deposits, not sovereign bonds, exposed to counterparty risk: i.e. subject to bail-ins).

It has been a bad idea to be short the dollar since 2011, and most especially in the last six months when the dollar has rallied extremely strongly.  And I see that you are working hard to emphasize that this (short dollar) fund has done poorly since 2011, and recent performance (during the dollar's recent amazing move) has been terrible.

We are in violent agreement.  Shorting the dollar recently has been a bad idea.  I'm not advocating going short the dollar, nor buying this fund at this moment in time - or for the past few years.

At some point, shorting the dollar will be a good idea.   I believe this fund will do well at that time.  I like the way he has structured it.  Its a short term bond fund in foreign currencies.

But it will not do well until the dollar tops out.

Re. your ' You are telling me … '

That Merk Fund is a hard currency fund - so, all hard currency funds ( not just those you indicate above ) become it's relative performance benchmarks, including those that, relatively successfully, went long US dollars, and short gold during the last four years.

It's a case of : 'I want a manager who can correctly speculate on currencies/related assets over a five year period'.

Based on Axel Merk's recent four year history, could one really include him in considerations for  future associated investment management, despite what you state you 'like' in your second-to-last sentence quoted above, and in your statement in Comment #1 'Axel Merk has always struck me as a really smart guy … '

I just wish him luck that he gets the market right, for his fund holders benefit too.  


It's a case of : 'I want a manager who can correctly speculate on currencies/related assets over a five year period'.
Alas, what you describe is not what the fund is set up to do.

It sounds like you want a manager who takes your money and "does the right thing", whatever that might be.

I like a fund manager with a plan.  I want my long-only funds to go long, and my short-only funds to go short.  I like my gold funds to invest in gold, my long term bond funds to invest in long dated bonds, and my short-term bond funds to invest in bonds that will pay off soon.

I like Merk's predictability.

That way, I can make the call, rather than the manager, if the timing is right to own that particular fund.  Otherwise, they may go off in some wild goose chase for returns in a way I don't expect them to, perhaps using leverage.

If I buy CEF, I know it has gold and silver bars.  I don't want the manager of CEF to engage in shorting gold and silver futures in an attempt to "correctly speculate" on gold-related assets.

I requested in the last post for you to actually help us all out, and present other short term foreign currency bond funds who structure their investments with an eye towards avoiding money printing that have done really well over the same time period.

Still waiting for those examples.

Of course, one intends to make money from investments , that's behind my ' It's a case of … '.
Contrary intentions/indications I find very difficult to understand  - that is (as may be seen from your sentiments), can one yet be happy with a fund that has a plan but consistently loses money over the last four years ? Note that the Fund value is at 2010 levels now.

You say you like his 'predictability' … that is predictable over the last four years in being wrong !!! … I really don't understand ?

Plenty of examples of funds presenting short gold and/or long US Dollar possibilities - that addresses your concerns about your intentions ACTUALLY being implemented in a fund - that is, refer your "That way, I can make the call" comment.

Nice chatting, but I am leaving this topic aside now - my mind is made up, given the facts that his management ability as reflected in his performance negates all other positives there may be.

All the best with investment results.


That is the most interesting question to me.  It was not hard to read between the lines of the podcast that Axel does not like money printing and is a believer in "structural" adjustments.  Because the policies that he believed would be most effective were not followed, he shorted the dollar.  This is the same mantra that you hear from the likes of Peter Schiff, over and over again, one trick ponies with one solution for everything.  That analysis has been consistently wrong, for the short term anyway.  Why?
I think that there are very fundamental concepts underpinning a lot of our economic assumptions that are unexamined and fundamentally wrong.  Neoliberal economic policies were tried in South America and the middle east and they have been unequivocal failures.  There has been a lot of commentary here over the years about market fundamentalism, I think the general consensus has been that markets are not self regulating, lack of regulation leads rampant corruption, malinvestment and drives honest players to the margins. Steven Keen has spent many pages diligently documenting why free markets don't tend towards equilibrium, but tend towards bubbles and then collapse.  Yet structural adjustments - balancing government books and "freeing markets" to do there thing, are still the backdrop upon which many financial "experts" use as a yard stick to measure currency performance of any particular sovereign nation.

Secondly, we have devolved into a condition where culture does not matter any more.  Economic policy seems to be the only thing that matters and I would go as far to say that economics has displaced culture entirely.  Whether a country tends towards or is capitalist, socialist, and communist is its only important characteristic.  In this country we have completely conflated democracy with capitalism to the point that they are used interchangeably.  And by culture, I don't mean the number of museums and theaters, but a set of commonly shared values, aspirations and ideals that tie a nation together.  Here in the USA monetary values (I think there is a lot of unarticulated resistance to this) have supplanted cultural values.  After all greed is good, if I drive my for my own personal gains at any cost, my accumulation of wealth will raise all boats, so the twisted logic goes anyway.  I would argue the reverse, with a strong culture, economic systems almost become irrelevant, what is good (if I may be so bold to use that word) will be done regardless of the system.

And lastly, if we are playing in the reductionist sandbox of economic performance, we have to stop conflating what works with what is fair.  The abhorrent systems of forced labor are completely unfair, but they are bang up effective from an economic point of view (if net profits is your yardstick, isn't that all wall street cares about?).  The only requirement for their economic success is that you need separate markets to sell and manufacture in. (I would argue that the disappearance of "some other market to sell into" just like there is no "away" anymore to through our garbage into is one of those paradigm changing issues that never get figured into our economic calculus).  Small classes of people have done very very well for themselves for generation after generation with horribly unfair economic systems (and caused unimaginable suffering for generations as well).  Money printing, particularly if you are the owner of the worlds reserve currency, is damned effective monetary policy in the short run (short is not measure in terms of months either).  You get to collect a tax globally from all the dollar holders and you don't need their consent.  If you run into problems, you have the most powerful army in the world to back you up. And you can bet dollars to donuts that is how this latest drop in oil prices will get paid for.  They must be cackling like hens, they are taxing the very people they are punishing as they consolidate money and power.  In a culture that is obsessed with monetary success, how could they possibly resist such a scheme.

One of the things that is best about this this site is it's founding premise of the three E's, nothing makes sense in isolation. As difficult as it is the needs be a place in the analysis for the softer side of things, whether you call it art, culture, religion, spirituality, or just plain love.  If we stay on the side of the analysis which can be mathematically expressed only, we will continue to head into the dark abyss that we are currently pointed towards. 

The dollar is only,  "strong" relative to the basket of currencies against which it is measured.

The US Dollar Index (USDX) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies.[1]

It is a weighted geometric mean of the dollar's value relative to other select currencies:[2]

So this defines the hall of mirrors within which the word, "strong" has it's meaning.  Is the dollar strong in a sense that the US fiscal policies are sustainable?  No.  Is the dollar strong in a sense that there is no visible loss of it's use as the world's reserve currency?  Certainly not.. there is some kind new Yuan swap facility or de-dollarization news almost daily.  The dollar is strong because the Euro, and the Yen, and the Franc have been weakening.  As well, commodities are down and hence commodity-rich countries like Canada have been punished.  Does this mean that there is anything good, or sustainable, about the dollar?  Not in my book.  

We are in the endgame for almost all of these fiat currencies… Central Banks are orchestrating the purchase of more and more of the debt emitted by Governments so that the game can go on a little longer.  Meanwhile Steve Keen tells us that our monetary system could possibly work without further exponential expansion based on some model he made? Preposterous!  How is he helping me to survive what is coming?          

Gold should be the universal reflector of unbacked fiat currency weakness… but it's effectiveness as the canary in the coal mine has been sidelined through official manipulation in my view.  Gold is working pretty well if you are viewing it from the standpoint of a currency other than the dollar actually.     


You say you like his 'predictability' ... that is predictable over the last four years in being wrong !!! ... I really don't understand ?
Truer words were never spoken.

I give up.

treebeard, jimH-
I believe that Shiff et al are correct at one level - the level of all of us attempting to run households in a sustainable way.  Expenses shouldn't exceed income.  If you eliminate everything else from the argument, it stands to reason we shouldn't be spending more than we take in.  Thats true in every arena - environment, economy, energy.  That's my own personal philosophy.

However, when this philsophy gets translated into the big bad world, this worldview of ours seemingly stops working - from the standpoint of the Dollar.  Things absolutely haven't worked out the way I thought they would back in 2008.  Right now, they're working in exactly the opposite way.  Hard money currency countries get shellacked, and money-printers like the US are apparently rewarded.  WTF??

Jim would say that's due largely to manipulation of the gold market.  If only gold weren't manipulated, then Shiff et al would be correct.  (Jim?  If I'm wrong, please correct me)

Here's what I think happened.

A bunch of dollar-denominated debt was taken on, aided by low rates here in the US, and the money sent overseas as a direct impact of globalization.  Capital ran to the third world, where it could find cheap labor - together they made "beautiful music together" from a corporate profits standpoint.  As an unpleasant side effect, the US labor force got arbitraged and we here in America lost many of our formerly good jobs.  During that time, the buck fell - the mark of currency flowing from the US overseas.

During this extended period, every time we got a slowdown, the Fed did its rate control magic to keep the debt machine working, and it sure did work.  The debt got ever larger - not just here, but in Europe too.  Dollar-denominated debt grew to massive proportions, but again much of it didn't stay here, plenty of it went overseas, pushing the dollar ever lower.  Then in 2007, things max out.  A multigenerational debt bubble pops.

Debt bubble pops are inherently deflationary.  And there's all that US currency flow overseas that now reverses, and all that dollar debt that needs to be repaid.  The world panics and reflates.  It works for a couple of years, but after the reinflationary surge in 2009-11, deflation reasserts itself, because the reflation actually made the debt problem worse, not better.  (Wait, more drinks don't cure the alcoholic?)

Once deflation reappeared - turns out, commodities perform terribly during deflation.  So "hard money" currencies (Canada, Australia, Russia) get whacked - money flees commodity currencies, back to the "mother ship."

While this is going on, Japan is working hard to destroy its own currency - harder than anyone else.  They look to be succeeding.  Money flees Japan.

The Euro would be doing well from the standpoint of currency management, except it has a massive debt overhang and it has a "multiple personality disorder" (northern vs southern) - the combination of which creates an existential threat to the Euro as both a currency and an organization.  Brussels responds with behind-the-scenes political manipulation "for the good of the union."  Eventually, that stops working.  So the Euro gets sold too.  Who wants to be bailed-in?

Which leaves the US dollar.  Money that formerly went to the high yielding hard money currencies is coming back home, as they drop interest rates as a result of plummeting commodity prices.  Money from the Eurozone is fleeing bail-ins to the one safe place (with deep markets) left.  Money is leaving Japan because the BOJ really is printing like crazy.  And the rise in the buck is encouraging everyone else with dollar debt to frantically repay as much as they can, "while they still can."  Russia is a great case in point.

The strong dollar is about all of that together.

Its debt overhang, the order of failure (periphery to the core) flight to safety, the reversing of previous currency outflows, debt repayment, deflationary debt bubble pop, all taken together.  And then, things take on a momentum all by themselves.

Of course at some point, the rest of the world will sort out their debt problems.  And that will be when the US will face the music for all of its sins.  Shiff will probably eventually be right - but only after a massively confusing and immense capital flow first makes him (and those who believe along with him) look very foolish in the interim.

The Great Depression of the 30s savaged every investment hidey-hole in turn, leaving nobody left intact.  That's just what debt bubble pops do.

Well that's my story anyway.  Hope you enjoyed it.

Sorry there wasn't more "gold manipulation" in there for the faithful.  :slight_smile: