Axel Merk’s 2018 Outlook: “What Can Possibly Go Wrong?”

The comments above & below is an edited and abridged synopsis of an article by Axel Merk 

With the stock market and Bitcoin reaching all-time highs, what can possibly go wrong? In offering his thoughts on 2018, Merk reminds investors to stress test their portfolios. Some things to ponder:

Equities: Merk doesn’t like where equities are, and he will seek returns elsewhere.

Treasuries: Many think that long-term rates ought to move higher, and that reducing the Fed’s balance sheet will lead to higher long-term rates. Merk is not convinced. He thinks the Fed’s actions (together with fewer global central bank purchases) will lead risk premiums to expand. So, just as Quantitative Easing caused risk premiums to come down, Quantitative Tightening will push risk premiums higher, causing headwinds for risk assets. There may be a flight to Treasuries. Together with higher short-term rates, this is a flattening of the yield curve and a sign of tighter financial conditions to come.

Gold: It has been resilient, despite higher rates. The Fed funds rate has been low, thus real yields have stayed low despite nominal rates inching up. More relevant may be that gold is the easiest diversifier. Merk calls it such because, in his analysis, the correlation to equities since 1970 is around zero. To get non-correlated returns, you need to move to cash or embrace sophisticated long-short strategies.

The dollar: Once again, there’s talk about the dollar rallying because growth prospects are better in the US. But the dollar rallied for years on the prospect of Fed tapering. When it began, the dollar fell. Now there’s talk of tapering at the ECB, but it is also a drawn-out affair, and the euro may have become a funding currency. As such, the euro may be a diversifier for those concerned about risk assets.