Axel Merk: The Fed's Next Move? "If You're Not Concerned, You're Not Paying Attention"

Submitted by Adam Taggart via Peak Prosperity,

"If you're not concerned, you're not paying attention" say Axel Merk, founder and Chief Investment Officer of Merk Funds.

Like many, he sees today's excessive high-price, low-volume, zero-volatility markets as an unnatural and dangerous result of misguided intervention by the Federal Reserve. But Axel has additional perspective than most, as the senior economic adviser to his family of funds is a former President of the Federal Reserve Bank of St Louis and a former FMOC member:

What’s driving the excessive complacency is today's markets is monetary policy. One of the main goals of monetary policy has been to reduce the risk premium; to make it less expensive for risky borrowers to borrow money. We see that everywhere, such as when we hear about how Spain now pays the same as the US on its long-term debt. And so risky borrowers don’t pay much more than the credit worthy borrowers.

The reduction in the risk premium is what reduces volatility, and of course that spills over to other assets. We see that in the equity markets, the currency markets -- we see it everywhere. And volatility is compressed as well.

Janet Yellen was asked about this just a few days ago and she pretty much said how she’s not concerned about complacency in the market. She’s complacent about complacency. To me that’s about as significant as Greenspan suggesting houses can never go down, and Bernanke suggesting subprime loans were contained. It’s a major, major problem.

Obviously, there are plenty of challenges in the world. Usually what tips a market over, though, isn’t the most obvious thing because that’s already “priced in”. As a result, nearly anything can tip this market over. Suddenly one day people wake up and the glass is half empty, and everybody runs for the hills.

Many see the Fed having run out of bullets in it efforts to keep markets elevated. Axel's opinion is "Not quite yet":

The Fed has bought all these assets by creating money out of thin air and now they’re stuck with these. If they were to sell them (it’s much easier to buy securities than to sell them), prices would plunge and, more importantly, the Fed would sell these assets at a loss.

Now, the capital base and the equity of the Fed is very small. Odds are that the losses would wipe out the equity at the Fed.

And so the Fed would rather not sell those securities -- instead, they can pay interest on reserves. But I don’t think actually they’ll do that either, because of the conflict with Congress (if we’re going to start paying interest on reserves to somehow raise rates, that’s going to be political nightmare because we'd be paying $billions -- if not over $100 billion -- to banks to entice them not to lend).

There’s another tool that they have: it’s called reverse repos. I’m not going to explain this now in detail, but it’s essentially the same thing as paying interest on reserves with a key difference: Congress is not going to 'get it' for a year or so. And so the backlash from Congress is going to take a little longer to come. But that problem is going to come nonetheless.

As a result of these risks, Axel recommends the average investor be well-diversified outside of stocks and bonds, and maintain a high degree of liquidity. More information on the newly-launched fund (OUNZ) discussed in the podcast can be found here.

Click the play button below to listen to Chris' interview with Axel Merk (27m:11s):

Comments

[TeamDepends]

Merk Axel:  If you're not paying attention, you're not concerned.

[zorba THE GREEK]

If you are not concerned, you are not paying attention. I am concerned and I am paying attention.

[Aussiekiwi]

I'm not, after 5 years of reading this crap, i will be concerned when the Dow is under 9,000

[BurningFuld]

"We see that everywhere, such as when we hear about how Spain now pays the same as the US on its long-term debt."

Does this mean he is suprised that the US pays such a small amount of interest???

[kaiserhoff]

All of this is horse shit.

If the Fed wants interest rates to rise, they can adjust the Funds rate immediately.

What they want is to funnel another 100 billion to the big banks, in a way Congress will pretend not to GET.

[Cursive]

@kaiserhoff

Not that the Fed has that kind of control, but I agree with you that the Fed has no desire to raise interest rates.  That would be Game Over.  All the Fed can hope for now is more time, a century of low interest rates and the promise of nanotechnology or some such to jump start economic activity with organic growth....or we could just have a de-population event....

[hungrydweller]

I gave you +1.  It should be +100.

[CIABS]

Can't the Fed just print more equity for itself if it needs to?

[El Vaquero]

Or over 20,000.  Or 30,000.  

[zerozulu]

I wonder who is benefiting by scaring us for the last five years

[Tsukato]

Why not do as the country with the largest population? Print and directly give it to the politicians, who use it to buy luxury properties worldwide? Mc Caine could use a cool billion to buy up Ipanema :) fucking crooks everywhere.

[Tsukato]

Actually. Central banks are really nothing more than massive scams. Just like small time counterfeiting rackets, just on a massive scale. When the fuck is everyone gonna wake up and stop accepting these worthless currencies, and start prosecuting these frauds? When it's too late I'm sure. Crazy thing though, is that these people don't think they're touchable. Everyone can be gotten to though. And a bullet pierces the skull of a rich fraud the same way as a ghetto kid.

[e_goldstein]

I'm getting kinda tired of paying attention...

and that is concernng.

[dirtyfiles]

can you please make someone accountable finally

there is many to choose from

do it 

[TheReplacement]

Who are you petitioning for redress?  What authority do they have?  Why do you not have the authority yourself?

[Da Yooper]

As a result of these risks, Axel recommends the average investor be well-diversified outside of stocks and bonds, and maintain a high degree of liquidity. More information on the newly-launched fund

Buy my NEW fund

Because I know it alllllllllllllllllll

Congress is not going to 'get it' for a year or so.

IF congress "GOT IT"

there wouldnt be a federal reserve IN THE FIRST PLACE

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[Aussiekiwi]

WTF?

[Ben Ghazi]

Not me - I went "ALL-IN" buying 5,000 shares GPRO @ $40.47 per share.

What could possibly go wrong?

[Mentaliusanything]

Building a better Mousetrap make the lesser ones redundant, but GPRO has been paid and passed the risk into the sheeps fleece. Sarc tag please ;)

P.s I count 3 other "action cameras" better in price / performance and Quality of lens - go figure 

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[TeamDepends]

Okay, we get the point.

[RafterManFMJ]

So he has a stutter; let 'im be.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[TeamDepends]

This man, JoBob, has passion and one can not argue (unless you are a Keynesian) with his logic.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[TeamDepends]

So how 'bout that Kate Upton?  Are those some major league yabbos or what?

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[TeamDepends]

So when ISIS arrives in the US, will they be invited to the White House?  Given purple hearts?

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[TeamDepends]

Change the lyrics to "Fed Is Dead" and I think we all can agree, we've got a hit single on our hands.http://www.youtube.com/watch?v=fJKlIfuvyCs

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[TeamDepends]

"License, registration, insurance!!!"

I'd prefer not to.

[TeamDepends]

Y'see, here's where it gets humorous.  The roidrage cop, after hearing "I'd prefer not to", completely loses his shit and blows a gasket.  With no due process whatsoever, hell, without thought of any kind, he decides to taze the innocent motorist.  But in so doing (probably because he has lost 90% of his already feable motor skills) he tazes himself in the neck!!!  He fucking tazes himself in the neck!!!  He's flopping around on the sizzling asphalt like a carp on the sand!  The innocent motorist runs him over for good measure as they flea the scene.

[WillyGroper]

Sounds itchy.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[Wile-E-Coyote]

Hey JoBob that is one bad stutter you have there.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[e_goldstein]

Can someone fix the JoBob bot?

I think it's stuck.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[socalbeach]

The Fed took care of the possibility of it being technically insolvent over 3 years ago. In normal accounting, losses reduce a capital account.  If total capital is negative, the entity is insolvent. (Or saying the same thing, one is insolvent if Assets < Liabilities since Capital = Assets - Liabilities)

What the Fed did was to transfer losses into a liability account, Amount due to the Treasury.  Normally that's a positive number as the Fed sends "earnings" from the interest it receives on Treasuries and MBS it purchases to the Treasury. So if the Fed's losses are big enough, the Amount due to the Treasury will be a negative number - in other words, the Treasury will owe the Fed money, but their capital account will still be positive.

It's a scam, but do you think any Congressman is going to understand it?  Unlikely. And even if they did they probably would keep quiet about it.

Ac-cent-tchu-ate the Positive: The New Accounting at the Fed

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[Ben Ghazi]

JoBob, I sold all of my gold and silver.

Bought TSLA and TWTR instead, am I diversified?

Which do you prefer, stocks and bonds or gold and silver?

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[Atomizer]

Log out of Zerohedge. Clean out your cashe. 

This posting event represents a mentally challenged event. Our time is 2014, not 1995 

[JoBob]

Thanks for the advice. I am already "Well diversified outside of stocks and bonds." Gold and silver are the only viable - and sane - options left.

[socalbeach]

Special Ed?

[The_Ungrateful_Yid]

Full retard

[Atomizer]

Message flooding bot. Used it on MSN Chat site back in the day. This dumb shit bag must of just downloaded it. Fucking 20 years old. Kiddie script. 

[Landrew]

Doesn't matter what you comment from now on you will be DOWN voted forever!

[Ben Ghazi]

Does anyone have any strong opinions about buying gold and silver?

[TrulyStupid]

Dear blojob:

I think your dick is stuck to the enter key. What have you been doing?

[Wile-E-Coyote]

The nurse turned up and pulled the plug.

[Goldilocks]

Sabre Dance - Aram Khachaturian
http://www.youtube.com/watch?v=gqg3l3r_DRI (2:24)

[NDXTrader]

Wipe out the equity of the members of the Fed? Whaaaaaat? They'll just print more...there will be no losses for them - they create the measuring stick by which gains and losses are measured. Stuff like this really makes me shake my head. After the last 6 years does anyone really think they have limits or won't go to any extent to get their desired result, damn the consequences. Is it conceivable that we'll wake up one day and hear that the Fed members say, "Whoops, we're broke" and ride off into the sunset? They will, by what's considered legal means or not, make sure their accounts are freshly topped off no matter what happens and who is going to stop them?

[blindman]

insolvency.
.
A Hole in the Bucket by Harry Belafonte and Odetta
http://www.youtube.com/watch?v=AthT8kw7CIo
.
[KR620] Keiser Report: Russell Brand talks revolution with Max & Stacy
Posted on June 28, 2014 by Stacy Herbert

Read more at http://www.maxkeiser.com/#gHwrq5DyzBugDk4g.99
.

[Atomizer]

If you like your blackpool investment, you can keep your HFT Agroithm.

[I Write Code]

he said:

The reduction in the risk premium is what reduces volatility,

Say what?  Risk premium can be high or low, responsive or unresponsive, but that's not volatility - that's not REAL-WORLD volatility.  Does Merk think that "volatility" is what the HFT's make it, that something becomes "high risk" for eleven seconds, and should spike and crash in response?

Actually, I'm not sure that volatlity as such has much of any kind of foundational meaning in market dynamics, especially not as a good thing.  It is loosely related to liquidity, I suppose, but liquidity is foundational, volatility should follow not lead.

[blindman]

is jo bob a machine, orwhat?

[TheMeatTrapper]

No, he's just well diversified outside of stocks in gold and silver. They're the only sane options left these days, ya know? 

[TrustWho]

Trapper,....all contracts are just a promise and everyone is lying whether they know it or not. Physical Silver and gold may address the promise issue, but people do not need silver and gold, except to trade. The only sane options are buying productive assets that produce goods society will need.

[TuPhat]

I'm just stupid I guess but what might those productive assets be when the world falls apart.  A lot of farms went belly up in the 30's as well as manufacturers of goods.  Your comment is good but I really wish I knew more about those assets.

[blindman]

those assets?
organization.
water.
fuel.
food.
parts.
mostly, "love and a shovel" to
mine ingenuity.
.
anyway poems *

[MrSteve]

a considered reply, thank you Blindman. Farms and other real estate were financed with balloon mortgages in the thirties and that's why when the ag markets and all others dried up (Dust Bowl allusion), the banks foreclosed on operations with insufficient cash flow to meet loan payments or fund a rollover. Ditto for manufacturers who couldn't generate cash flow to cover their cost of lots of invested capital. The thirty year mortgage we can to know after WWII was a reform of past mortgage lending which had caused too many foreclosures.

So pay cash for your assets as debt is a killer in a deflationary depression. Leverage is another word for debt, so watch out for that Pied Piper. In Weimar Germany's currency destruction, only precious metals and agricultural enterprises held on to their value. Manufacturing depends on raw materials which became unaffordable and unavailable.

Look at prepper sites and back to the landers, organic farming, etc if you have a family to raise.

[TheMeatTrapper]

That's very true. My response above was a bit tongue in cheek based on JoeBobs spam. 

One thing I can add to your premise of buying productive assets is to master the skill needed to use them effectively. A welder in the hands of someone who doesn't know how to turn it on is simply scrap metal. In the hands of a knowledgeable user - it is a tool of creation and repair. 

I've mastered the art of trapping. I've been a trapper for 15 years now. I'm getting a late start on gardening, but I'm finding out that there is as much to learn about growing your own food as there is to catching your own food. 

My day job is in IT, but I'm thinking about going to night school and learning either welding or machining. 

[sheikurbootie]

Hey JoBozo, go fuck yourself

[Atomizer]

Tyler. Run your IP logs. As you know, I was a blackhat that moved to whitehat. 

Check the ZH logged people. It's one of those intuitive feelings. Generally I am never wrong. Winks.

[Laughing Stock]

"Aside from talk of the possible IPO, the summer of 1999 was the quietest in recent history on the NYSE trading floor, says Bernie McSherry, a longtime floor broker, as he walks briskly through a maze of brokers' booths, trading posts, and telephone clusters mounted on poles. "

http://nymag.com/nymetro/news/bizfinance/biz/features/2057/index1.html

How'd that work out a year or so later?

[blindman]

if you're not struggling with post despondency
and associated feedback you have just begun to
pay attention to concerns.

[moneybots]

"Now, the capital base and the equity of the Fed is very small. Odds are that the losses would wipe out the equity at the Fed."

That is what happens when leveraged up over 50 to 1.

[moneybots]

Axel Merk: The Fed's Next Move? "If You're Not Concerned, You're Not Paying Attention"

I am not concerned about the FED's next move.  I am concerned about the FED's last move, which has brought us to where we are now.  It is way too late to be concerned about their next move, as they already baked their cake and we now will have to eat it.

[My Days Are Get...]

Let the Fed set the example and market all assets to market.

[Born2Bwired]

ZH could prevent same post content from same user, would fix easy to do double posts as well as scripts. JoBob what think??

[rosiescenario]

"Now, the capital base and the equity of the Fed is very small. Odds are that the losses would wipe out the equity at the Fed."

....not going to be a problem....the government will create new equity.

[AdvancingTime]

Modern Monetary Theory often referred to as MMT to its many believers removes much of the risk ahead and guarantees that we will always be able to muddle forward. MMT also known as neochartalism is a economic theory that details the procedures and consequences of using government-issued tokens and our current units of fiat money.  Newly acquired tools like derivatives and currency swaps  allow us to print and  manipulate away problems.

While reading an article about the growth of debt in China's non-financial sector I was forced to reflect on how debt is effected by the interest rates. In Europe the ECB had to step in to halt the economic collapse of Spain, Italy and several other countries that were on the brink. What you pay in interest on debt does matter except in the manipulated land of MMT. Have we been lulled into complacency by the extraordinary actions taken by central banks and governments over the last six years? This is a key question we must face. More on this subject in the article below.

http://brucewilds.blogspot.com/2014/01/have-we-been-lulled-into-complace...

[Chuck Knoblauch]

The Federal Reserve may want widespread civil violence at this point.

To provide cover for either their failure or their victory.

It all depends on what the mission was in the first place.

[McRocket]

I see NO EVIDENCE that this guy was once the President of the Federal Reserve Bank of St Louis.

Shame on zerohedge for not checking things out better before posting.