Merk: Beware Quick End To Low Volatility

May 30, 2014

Complacency about low volatility, not Draghi euro debasement, is biggest market risk now.

[This interview originally appeared on our sister site,]

Axel Merk is president and chief investment officer of Merk Investments. Famed for identifying the credit bubble, he is considered an authority on currency investing, gold and macro trends.

He argues that investors should actively manage their currency risk and should do their homework when it comes to buying currency-hedged ETFs.

Rebecca Hampson, European editor at, talks to Merk about his bearish views on asset prices, how he expects gold to do well and that Draghi might be one step ahead of Europe. How will monetary policy impact the euro?

Axel Merk: The monetary policy affects the euro, but not the way most people think. It affects the euro by keeping things a lot stronger.

The ECB is just not capable of debasing the euro. The euro has been very frustrating for Mario Draghi [president of the European Central Bank] because he has not been able to push the euro weaker. The real challenge he faces is that the tools the European central banks are using are not very effective at weakening the euro.

He now wants to lower interest rates, which means imposing negative deposit rates, but the problem with this is that there are no deposits left at the ECB. The facility that is going to be punished with negative rates is almost empty

One of the things people don’t always understand is that you can have lacklustre growth and a strong currency, just look at Japan, and conversely, just because you have a problem somewhere in the Eurozone doesn’t mean that the euro is weak.

The stimulus the ECB is looking for has been coming through lower spreads. The periphery has been paying much less than they were a while ago and that is all in anticipation that Draghi will continue to do ‘whatever it takes’, which is a much stronger message than any policy action.

Sure, there might be another longer-term refinancing operation repayments (LTRO) announced, but the market has already indicated that it is lukewarm about the LTROs.

What is positive in the Eurozone is that there is demand for new credit, it is just that there is old credit is not being rolled over and that is not going to change because the world is this way now.

What they want to do with monetary policy now is introduce an ABS programme and that is not going to happen overnight. What is an ABS programme?

AM: It’s an asset-backed securities programme.

In the US the Federal Reserve had Quantitative Easing (QE) and this is the Fed buying treasury securities and paying for them by making up the money. So, for example, in a few strokes on a keyboard Goldman Sachs suddenly has a billion to use. Instead of holding the security they hold cash and they can go out and induce more economic activity, which of course hasn’t happened, they have just put the cash back at the Fed for deposit.

In Europe that doesn’t work because the credit markets aren’t as developed and what the ECB calls the ‘transmission mechanism’ isn’t working either. This is why we have had to go through the stress tests and what Draghi does differently is say that stress tests are good, but if you do it you have to have a solution for institutions that don’t pass.

What he wants to do is create a programme, which is compatible with how the Eurozone works and that is to facilitate an asset backed securities market. It was a reasonably vibrant market before 2008 and he wants to revive that.

The challenge is that Europe is so fragmented that it isn’t easy to implement something on such a huge scale that is going to help boost growth any time soon.

Draghi is extremely smart, but he might be a step ahead of the market here.



Find your next ETF

Reset All