Axel Merk: “Economy To Die A Traditional Death…Inflation Is Going To Move Higher”

By Mike Gleason
May 10, 2019 | Listen to the Podcast Audio: Click Here

Mike Gleason: It is my privilege, now, to welcome in Axel Merk, president and, chief investment officer at Merk Investments and, author of the book Sustainable Wealth. Axel is a well-known market commentator and, money manager and, is a highly sought-after guest at financial conferences and, on news outlets throughout the world and, it's great to have him back on with us.

Axel, it's always a pleasure and, thanks for joining us again.

Axel Merk: Thanks for the kind introduction.

Mike Gleason: Well, Axel, we'd like to get your thoughts on the recent escalation in our trade war since that seems to be the big news. Tariffs on China were increased to 25% on about two hundred billion dollars in goods. The president is getting lots of support for his effort to level the playing field with China and address their theft of intellectual property and so forth. But, now is, we think, where the rubber starts to meet the road.

Prior to now, the impacts of tariffs have been limited for U.S. consumers. You mentioned something insightful on Twitter recently. There is discussion about how U.S. firms will respond to tariffs on goods they import. Some may be able to source goods elsewhere, some may absorb the higher costs and some may raise prices. But, there is another possibility that isn't getting much consideration, that being that some U.S. firms won't be able to do those other things and, will wind up going out of business.

So, what do you make of the quality of discourse over tariffs? Do you think people, including the President, have a good handle on the repercussions of tariffs and, do they have the fortitude to endure what may be coming?

Axel Merk: Oh my God, how many hours do you have?

Mike Gleason: Loaded question, I know.

Axel Merk: Well let's maybe start off with what you said. The President has lots of support and, I'm not questioning this or, endorsing it but, that's really the gist of it. It's all about politics.

Now, if you're a politician, obviously if you're the worker who has to shut down his business or, lose your job, it's a little different. But, if you think about it, just from a political point of view, tariffs are good politics. I'm not a fan of tariffs, just as a background but, from a political point of view, its good politics. Now the challenge Trump faced was that the negotiations were going well, he was accused of being too soft, also had he had an agreement, it might have been out of the news come election time.

And so, in order to be in the news at election time, he needs to have a solution later and, call my cynical but, that's just the nature of politics. So, he has an incentive to drag this out, and you can argue whether he does the right or wrong things but, just from a political point of view.

Now, the other thing you mentioned is about kind of shutting down business. The biggest loser in this is small business and the reason small business, U.S. small business is the biggest loser is that, if you're a big business, you can change your procurement channels, you can substitute goods, and whatnot but, if you're smaller, you don't have the financial flexibility to resources to change as quickly and stomach the period where things are more uncertain. And also, these price swings, you might not be able to absorb the shock and the temporary losses you might have if you're a small business.

Now, the question is, what do we care about any of this? And, since we're talking, we care about commodities, we care about the economy as a whole and so, from a big picture point of view, the initial tariffs are really geared at hurting the Chinese. Now, almost by definition, the more tariffs you put in place, the less you can tailor them to actually hurt the Chinese and so, you're going to hurt more U.S. companies as well and, so forth.

And, if you do something like the famous thing is, if you buy a toaster, well you buy a toaster from Malaysia or, maybe you buy one made in the U.S. but, other goods you cannot quite as easily substitute from somewhere else and, it's more disruptive.

From a market point of view, what you really want, ultimately, is clarity. Give me the rules of the land and, I'll deal with them. The uncertainty that comes with the kind of rule by Tweet type of thing is not very helpful in my view.

Now obviously there's a strategy behind it, you want to rattle the cage in order to get things done, and some people like it, some people don't like it but, if you want to induce change, that is a fair point of view.

As far as something like gold is concerned, sure, that may go up in times of uncertainty, especially when people are kind of fleeing risk assets. But then again, a lot of people, I believe, continue to believe that this is pasturing, this is to get a deal and things will settle down. And then of course, if that's the case, well, then there will be some temporary damage to economic growth and depending on how you think it's going to pan out, maybe we're going to have structure reform but, more importantly, this noise is going to abate over time.

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Gary Anderson 4 weeks ago Contributor's comment

Axel has it wrong. The American economy is actually more dependent on trade than is the Chinese economy because China makes most of what it consumes and the USA does not!