Asset Prices Can Collapse at Any Time at Any Time-Axel Merk

Wednesday, April 2, 2014
By Paul Martin

By Greg Hunter
April 2, 2014

Money manager Axel Merk thinks new Fed Chief Janet Yellen can’t do much to improve the labor market even though she claims she’s most interested in helping Main Street and not Wall Street. Merk says, “Yellen is from Berkley, our neighborhood, and it’s all about warm and fuzzy feelings. Ultimately, of course, there is only so much the Fed can do for Main Street. My view is the Fed is the major contributor of the growing wealth gap we have in the U.S. You have free money, easy money, hedge funds can do great with it, but when lured into credit, you can fall down into the cracks. Yes, she wants to help Main Street, which conversely means she may be far more interested in regulatory policy to force banks to do certain things. . . . She is more interested in regulation than worrying about interest rates.”

Merk also points out, “The reason why the Fed wants to boost asset prices is because millions of home owners are underwater, and by pushing up asset prices, they are no longer under water. The reason why this is relevant is the U.S. economy is very consumer dependent. Consumers under water in their home are not good consumers. That’s why they want prices to go up, and, sure, the stock market goes up at the same time. If you have assets, if you have money, you have done great with this Fed. . . . The reason why they are pushing up asset prices is to bail out home owners.”

But don’t think the American home owner is in the clear and lives happily ever after. Merk says, “Home price inflation is not sustainable. It’s a very fragile policy because it can evaporate at any time. The moment the ‘taper’ talk started, new home sales, existing home sales deteriorated because, guess what, as interest rates move up, you have to pay more for your home. Now, interest rates have come down a little bit, but the signaling is out there; and home buyers are not coming, and that is a big problem for the Fed. It’s one of the reasons why we are not going to see an exit anytime soon.” Merk goes on to say, “The Fed is not going to reverse course until it’s way too late. They have already decided to be behind the curve . . . they have agreed and promised to be behind the curve in raising rates if inflation becomes a bigger problem. The best thing that can happen to us is that we will continue in the muddle through environment. The worse thing that can happen is economic growth, that we have some of these economic policies succeed. Look at the Japanese to understand what is happening. If they are rebuilding Tokyo for the Olympics, if they are going to ramp up military spending, what do you think is going to happen to the bonds over there? Bond prices will plunge, and it will make it impossible to finance government debt.”

On the possibility that the economy could suddenly collapse, Merk said, “What could possibly go wrong when the stock market goes up every day? Asset price inflation means asset price inflation can reverse. You can have a collapse in asset prices at any time. You saw it in gold a little bit in April of last year. There was just no bid out there. The same thing can happen in the equity markets. . . . Meltdown is an over statement. I think we can certainly have a crash, but central banks are there to prevent meltdowns. Central banks can keep the zombie banking system afloat because they can always provide liquidity. They cannot provide solvency but they provide liquidity. That’s what happened with the Fed in 2008.”

On the Ukraine and sanctions from the EU, Merk says, “There is not going to be any significant sanctions with all these different European businesses dealing with Russia. The one takeaway from the Russia situation is that over time, Russia will sell more gas and oil to the East than the West. They are going to use the renminbi or other currencies, and it’s just not something that you flip a switch, it’s something that’s happening gradually, that’s been happening. Think about a frog in a boiling pot of water. The dollar has been on decline for many, many years, and it’s going to continue to happen. There are lots of reasons why the dollar could weaken. It may not happen, but there is a risk that could happen.”

On the possibility of war in Ukraine, Merk says, “I think this particular incident is going to fizzle out. Putin shows you how it is done . . . and the sanctions are not going to happen. To the broader point, I think Ukraine is a symptom of an increased political instability throughout the world. Ukraine has a problem no matter if they are associated with the East or the West. They have too much debt. We have too much debt in most parts of the world. . . . Policy makers never blame themselves, they always blame somebody else . . . and that sort of thing increases instability throughout the world.” Merk says he holds core assets of physical gold and silver, “mostly gold.”

Join Greg Hunter as he goes One-on-One with Axel Merk of

After the interview:
Axel Merk said another problem in the world economy is “real wages have been stagnant globally for 10 years.” He also added there is another risk for having extreme amounts of global debt. Merk contends, “There is a reason the Great Depression ended in World War II. We are setting ourselves up for a much bigger problem in the future.” He did not predict when war would happen, but inferred chances are good there will be another world war.

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