Minimize

Welcome!

Axel Merk interviewed by Gold Eagle

January 6, 2016

Here is a recent interview conducted by Gold Eagle with our friend Axel Merk. He discusses the US dollar and issues around the world to what investors could be doing to protect their money.

Gold-Eagle:  In 2008 the world experienced the worst economic collapse in 80+ years. This collapse triggered a global stock market crash that erased $30 trillion in wealth…when US stocks plummeted more than 50% in only 16 months.  Since that time the US Fed has pumped up the money supply like a drunken sailor, which fueled irrational exuberance in creating one of the longest periods of rising stock prices in the history of Wall Street.  Moreover, collectively Central Banks have cut interest rates over 600 times and have printed over $15 trillion in new money… money that has failed to generate sustained economic growth…but rather has been successful in propelling stock prices to all-time highs. In light of the above, do you believe we are paving the way for another stock market crash?

Axel:   In 2007, I warned about complacency in the market as a leading indicator for major turmoil; I sold just about all my equity holdings at the time. In a bubble, investors under-appreciate the inherent risks in investments, bidding up risky assets. And why shouldn’t they: rational investors perceive investments as relatively safe, borrowing money to boost returns. And just as rationally, when investors – professionals and retail alike – realize their investments were risky after all, they reduce their leverage. In 2008, there wasn’t sufficient liquid collateral and a major selloff turned into a financial crisis.

Today’s environment isn’t all that different: for years, equities were rallying on the backdrop of low volatility. Investors were ‘buying the dips’ because what could possibly go wrong? As this bull market has lasted for many years, investors afraid of not keeping up, have not rebalanced their portfolios; they are left with an outsized allocation to risky assets. As volatility surges – for whatever reason – I believe investors will realize that they did not sign up for this, heading for the exit. They will be increasingly concerned about capital preservation rather than losing out on rallies.

A key driver of the complacency that has built up in the markets is the Federal Reserve: excessively accommodative monetary policy lowers “risk premia” – one sees this in low yields for bonds and low volatility in equities, amongst others. As the Fed is trying to extricate itself from its policies, risk premia should rise again.

If my analysis is correct, then the great undwinding started last summer. The surge in volatility in August was the first jolt. Any rally since has been rather meager in a classic sign a serious top has formed. How it will unfold should be interesting, as this bull market had many professionals that were bearish on the markets are loading up on stocks: based on my discussions with some of them, they went against their own principles because they scrambled to retain clients as their defensive strategies were under-performing.

You are asking me whether we will see a crash?  Last summer, I started to short equities. I have since increased my short position. I believe the stock market is ready for a major downturn; we should see much higher volatility, higher than last August. Crash may well be a word that historians will use for the simple reason that Dodd Frank is discouraging banks to speculate; that’s relevant because this has taken liquidity out of the markets. So who is supposed to buy when the selling starts?

Gold-Eagle:  In light of the US Fed driving up US stocks prices via the levitating action of Quantitative Easing (QE), do you foresee an imminent crash in the DOW and S&P500 Indices during 2016?  And If so, what percent do you expect US equities to crash? 

Axel: Imminent is a strong word. My own process in getting ready started earlier: I first decided to hedge my equity portfolio with put options – I did that for about 18 months. But I wasn’t the only one trying to buy protection: indeed, lots of people wanted to participate in the upside, but buy protection in case things turn sour; as a result, such protection was not cheap. Ultimately, the much simpler – and possibly more “honest” strategy is to pare down risky assets; so I did. As indicated, I have since gone even further, and not only sold my equities, but started to short the markets. (Note that none of this is investment advice, and both options and shorting the markets can be rather risky strategies).

When I look at the markets, I see an overwhelming number of warning signs that a crash may be coming soon. I already mentioned the Fed. Corporations missing revenue estimates is another. Earnings struggling to beat despite bright minds at work conducting financial engineering. Rising rates (the argument that it’s only after a couple of rate hikes that the market is in danger doesn’t convince me as this rate hike has been signaled better and longer than any that I remember). Rising rates, by the way make share buybacks less attractive; they may also be associated with multiple (P/E ratio) compression, i.e. lower prices for the same earnings.

But imminent? I have no crystal ball. But, speaking for myself, I would rather be prepared as if it were imminent.

Gold-Eagle: And in the event of a US market crash, how will this affect stocks in the Euro Union? Indeed, can the Euro Union even survive?

Click here to read the rest of this interview.