Published November 30, 2012
Firm: Merk Investments, Manager of the Merk Funds
Title: President & Chief Investment Officer
Assets Under Management: More than $600 million
Years in Business: 18
First Job in Biz: Dropped out of PhD program to start Merk Investments
What is the dominant theme you are seeing that will impact the market over the next year, and how do you use it?
The good news is that I don't think we have a European crisis; the bad news is that I believe we have a global crisis. As Europe may continue to be resilient in its own dysfunctional manner, Japan may come into focus, with the Japanese yen acting as the canary in the coal mine. We already see signs the yen is losing its appeal as a "safe haven." Japan's massive debt level may finally matter as foreigners will need to be tapped to finance the country's deficit starting next year. Stars are aligning against Japan: not only is Japan's population aging, but the exit from nuclear energy and escalating tensions with China bode poorly for Japan's balance of trade. Shorting the yen may well be the best way to play this theme.
What is the most important economic indicator you are looking at over the next month/quarter?
Non-farm payrolls, together with labor participation rates will be the most important economic numbers to watch in the foreseeable future. That's because the Federal Reserve is moving away from focusing on inflation, and focusing on employment instead. The presidential election ultimately was not about shuffling taxes: had Romney won, Fed Chair Bernanke would have become a lame duck as his term expires in early 2014. Instead, Obama might appoint the first woman to the post, the über-dovish Janet Yellen, who believes lowering unemployment is the paramount job of the Fed. As such, expect inflation to rise, and the dollar to resume its long-term decline versus just about all but the yen. That is, unless we get a miraculous surge in employment.
What is the biggest issue outside the U.S. that could impact the U.S. stock market?
The world markets used to look at the NYSE for guidance. Now we increasingly look at China. China has indicated it will focus on "convertibility" of its currency. That means a further opening of China's markets. While we are distracted by political infighting, China will be open for business. China's continued diversification of its reserves outside of the U.S. may put downward pressure on the greenback. And note that the riskiest thing to happen to the U.S. may well be an economic recovery: it would throw the U.S. fixed income market into a bear market, causing foreigners to reduce U.S. Treasury holdings. There is no such thing as a safe asset anymore and investors may want to take a diversified approach to something as mundane as cash. For example by diversifying through a basket of currencies, like central banks do (be aware that you will be introducing currency risk, but that risk may be worth pursuing).
What are you not worried about?
The fiscal cliff. In the scheme of things, the fiscal cliff is a distraction. If the cliff were to happen, our deficit would still exceed 3% of GDP, and we still wouldn't have solved the problem of unsustainable entitlement expenses. Differently said, we would adopt European style austerity. The only language policymakers understand is that of the bond market; as the U.S. bond market continues to be "well behaved," we don't expect much meaningful long-term deficit reduction from the fiscal cliff negotiations.
I'm also not worried about Bernanke's resolve. The Bernanke put is firmly in place. But what I am concerned about is whether his resolve is good enough should inflation show its ugly head.
What is the most important article you read in the past week? Why?
Argentina is in the news in a billion-dollar showdown: a federal court of appeals in New York ordered Argentina to pay hedge funds money they are owed in an ongoing dispute related to Argentina's default a decade ago. It matters because we have too much debt in the world -- much of it will need to be "renegotiated" in years to come. This case changes the nature of sovereign defaults as "voluntary restructurings" may be a thing of the past. For years to come, think eurozone, Japan, England and beyond with long-term implications reaching all the way to the favorite holdings of money market funds in search of yield.