Interview With Axel Merk: Is This A Suckers' Rally?

Mike Gleason: It is my privilege now to welcome Axel Merk President and Chief investment officer of Merk Investment 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 always great to have him back on with us.

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

Axel Merk: My pleasure.

Mike Gleason: Well Axel, we want to get your thoughts here as the market seemed to be in a bit of flux. A few months ago, pretty much everyone was looking at three or four rate hikes and for Quantitative Tightening – the reduction of the central banks bond holdings – to continue, but then the higher rates and prospects of further tightening finally caught up to the equity markets. We had three months of sustained selling in stocks late last year and suddenly Fed officials are singing a very different tune. Today they are signaling a much more dovish policy, however we've seen a big rally in stocks, it isn't clear what to expect. Since the equity market seems to be a major factor when it comes to FOMC policy. Tell us what you're expecting here and before we get too much into Fed policy, moving forward which I'll ask you about in a moment, tell us is the selling we saw in the fourth quarter all behind us or is this a bit of a sucker's rally in stocks.

Axel Merk: Sure. Well, I think your timing is right talking about the expectations we had the end of the third quarter last year about a lot of tightening and to talk market terms, there were very substantial positions on short treasuries, short bonds betting on higher rates. And as investors then looked out towards this year, 2019, they repositioned. Or you can say there was a short squeeze, and you had a significant rally in treasuries. Suddenly this took on a life of its own and the media is never afraid of putting a story into market a move and say "Oh my God! The world is falling apart!" And sure enough, the scare made it all the way to the Fed and our Mr. Powell, who was walking in his dark room and said "Alright, alright. The market once had it a certain way and now it doesn't" and then the moment that switched the market then started on rallying.

A few things here, the U.S. consumer is doing just fine. Maybe they’re going to fall off a cliff, we don't see that yet. Inflation impressions are increasing no matter what everybody is telling you, wages are going up, not just for the C.O. (level), but all the way down the corporate ladder. Yes there are issues in the rest of the world and yes we are late in the economic cycle. And so, what all of that means is that higher rates to me automatically translates to more volatility. So, the high volatility is just natural. Obviously, it may have been exasperated, you can blame the algos, whatever you want, but yes higher volatility is with us. Historically, we don't have a bear market, most of the time anyway, unless there is a recession and I just said I don't think the recession is imminent.

Now that doesn't mean there isn't a risk of one, that doesn't mean volatility isn't high, it doesn't mean investments aren't going to diversify but certainly long in the tooth on this expansion and so everybody may well be prudent to kind of trim things back on their risk exposure and that’s exactly what's been happening. But for the time being, I do think this economic cycle is not over yet. We are late in it. I also happen to think, I mentioned inflationary prices, the Fed is not done tightening. We've gone overboard on that and I think we will likely see two more rate hikes later this year.

So, this back and forth is likely going to continue and it's going to be a bit of a rollercoaster because also, I mentioned higher wages. That obviously hits corporate earnings. Corporate America is exposed internationally, so yes they'll have some headwinds but in the meantime, the consumer seems to be spending happily. Maybe not on housing but on many other things.

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