Papagiannis: Right now there is a problem in the equity markets, especially with fundamental investors. They just can't seem to get a good return from fundamental investing. Can you explain why that might be happening?
Merk: Well, there is a reason why equities are not performing as well as they do, and that is mostly because all this, this stimulus, this recovery that we are talking about cannot happen unless we allow the market forces to play out. We have consumers who have not been allowed to downsize. They are trying to do that, but both on the fiscal and the monetary side, we do anything in our power, the policymakers do everything in their power, to try to keep them going.
It's like supporting the steel industry in the old days. And what happens is that there is very little discretionary income left to anybody who has been subsidized to maintain a lifestyle that they shouldn't be maintaining. And in that sort of environment, economic growth just won't happen strong enough for equities to be doing very well. Of course, corporations have a lot of cash on their balance sheet and so forth, but still the money is not reaching the places that it should, and instead, the money is reaching the places where you have the greatest sensitivity to these things, the monetary sensitivity.
You see it in precious metals, commodities. You see the money flow outside of the U.S. dollar to finance projects outside in the rest of the world. That won't stop the policymakers from trying. They will just print and spend even more money.
And whenever people think that this recovery will happen, these reflationary trends send back in and the money flows out into back in riskier assets. But then conversely, when we have a more somber mood and people think the end of the world might be coming, well, less money is flowing back into the U.S. dollar because we have spent and printed more money in the U.S. than in other countries. We have destroyed our balance sheet at a faster pace than other countries. And at the same time, the rest of the world is putting safeguards in place to make their systems to appear safer.
And so, as long as we fight the market forces, we have a very ineffective way of spending and printing money, and we will see a lot more of that and the U.S. dollar might suffer in the process.Read Full Transcript
Papagiannis: But you are also saying that one of the risks in equities is that they are not trading on fundamentals. They are trading based on government policies.
Merk: Yes. What we have seen is that increasingly governments are throwing more and more money at the problem. The most effective policy is when a Federal Reserve official utters a few words and the markets are moving, then come interest rates move, then come emergency interventions, then come the printing of a trillion dollars. So progressively, we have been printing and printing more money to achieve less and less of a return. On the fiscal side, similarly, the Cash for Clunkers program, very expensive, but doesn't achieve much.
But what happens is that we have investors more and more focused on what's the Federal Reserve going to do next? What's the next stimulus program going to be? ...rather than looking where is the value in the companies. And what happens as a result is that the short-term investors love that, they love to play games with the politicians, but the longer-term fundamental investors get alienated and look for other places, and they happen to have piled into the bond market. We are saying, well, not so fast, that may not be the best place, either. And I am not saying it's easy to find the right place to invest. We are trying to do our end on the currency side, and other alternative assets may also be something the investors may want to consider.