Where to Invest: Let’s Break Down 3 Major Asset Classes…

Mike Maharrey: Greetings. I'm Mike Maharrey, a reporter and analyst here at Money Metals, and I'm today with Axel Merk. He is the president and chief investment officer of Merk Investments and a well-known and in-demand macro analyst. Axel, I really appreciate you taking a little bit of time to talk to me today. How are you?

Axel Merk: Good to chat with you again. Good, good.

Mike Maharrey: Well, so we've been stuck in this no man's land for several months between the Fed is going to cut rates and the Fed's not going to cut rates anytime soon. And we've seen several big central banks including the EBC, European Central Bank, make cuts. Do you think the Fed is going to deliver a cut or two before the election or are they going to hold it off?

Axel Merk: Well, a few things. First of all, I think the easing bias matters. Mr. Powell would love to find an excuse to cut rates. And ever since that bias changed, and I put that at last October, I believe he gave a mission accomplished speech. Many others put it in December. In any case, I think the bias matters and we can talk about that. The market currently prices in a, as we're talking, a 77% chance of a rate cut in September actually, and a full rate cut in October and then a second rate cut in December. I think that's possible. We are all reading tea leaves here, so take it for what it's worth.

Mike Maharrey: Right.

Axel Merk: The reason why it's possible is if you look at the most recent non-farm payroll report, that was reasonably okay. The one thing I think many people don't realize is that the market loves this report because it's so quickly after the end of the month. However, there is a lot of modeling that goes into that. The bureaucrats, the economists, they're trying to do the right thing, but they need to figure out who is not responding to the surveys, whereas which businesses are dying. And just historically speaking, when the economy turns, that modeling isn't very good. And so if you believe the economy has turned, then these rate cuts are obviously more likely. I happen to think that there are several reasons why this economy is finally weakening. Now obviously this is the most forecast recession ever, so we have to take it with a grain of salt and whatever, but the market seems to be getting tired on the general risk side and whatnot. Now all of that is critical data dependent to use that wonderful things.

Even inflation data come in much worse than expected. If other metrics come in better than expected on the economy, then the Fed is going to have a very difficult time cutting rates. Especially we've had some Fed officials now come out and saying, well, maybe we aren't such a tight environment anyway. And so that's why the broader scope of the Fed's easing bias I think is quite relevant.

Mike Maharrey: Yeah. It's interesting because I've been making the case that things aren't nearly as tight as we might be led to believe. They're certainly tighter, but you can look at things like the Chicago Fed's Financial Conditions index and other things. I just saw the other day that M-II money supply is starting to increase a bit. What do you think about that? Are we really tight and has the Fed really done enough to slay the inflation dragon?

Axel Merk: First of all, you mentioned the Chicago Fed Financial Conditions index. I think that's one of the better indices. A lot of people quote other indices that are mostly just different ways of phrasing the VIX. This particular one doesn't look at the VIX. It looks at credit spreads, as it should. And indeed, yes, the credit spreads have not blown out. Now the reason why this economy is holding up better than expected, I think I've been well discussed, the fiscal stimulus is a big one. The area that I don't think gets enough attention is that the Fed has provided the Fed put by giving a rescue line to the small banks. If that had been allowed to play out, we would've had a much worse economy. And so we have increasingly been moving towards an environment where the Federal Reserve is micromanaging the economy, which means all these indicators are providing less information, right? Because if you always catch the stuff where things go bad, then yes, I mean the market force are not going to fully play out.

It will have other implications including inefficient capital allocation, increased political meddling, because if the Federal Reserve meddles with capital allocation, which they shouldn't, monetary policy should provide aggregate credit but not steer the credit, you have more political backlash, you elect more populist politicians and so forth, but it makes it more difficult to predict when the next downturn is. Now, as far as our space here, gold and precious metals are concerned of course, inefficient capital allocation means more money needs to be printed to get the same stuff done. Obviously we haven't talked geopolitics and so forth. The other drivers that are so supportive of that. Ultimately the reason why I said at the outset the bias matters is because the markets are forward-looking.

Mike Maharrey: Mm-hmm.

Axel Merk: And so if you discount something that has easing down the road, you come to a different result than when you discount something that has higher for longer down the road. Even if the practical result is the same, the rates haven't changed, but part of the reason the price of gold has gone up is because of that change in bias.

Mike Maharrey: Yeah. Yeah, for sure. Let's talk about silver for a second. When do you think that silver might finally "have its day?" [inaudible 00:06:08]-

Axel Merk: It had its day.

Mike Maharrey: It's done. Okay. No, I mean there are certainly a lot of dynamics. I mean if you're just look at, there are some looming supply constraints, there is increasing industrial demand with the whole green energy revolution. We have a pretty wide gold-to-silver ratio spread. There's a lot of things that seem to say be bullish silver, but I mean I guess if you really look at it, it has been a laggard over the years, it's only 60% of it's 2011 high. What do you make of the silver market right now?

Axel Merk: Well, I was only half joking when I said it had its day because we did see that run up briefly and many people thought, oh my God, this is it. This is it. I mean, the curse of silver is of course that it has this heavy industrial component that gold does not have.

Mike Maharrey: Mm-hmm.

Axel Merk: And so on the one hand, we're always hoping that the economy weakens. The Fed has to cut, that means gold and silver do well, and gold tries a little bit and then the economy is holding up and we're still producing and then we're realizing, oh my God, the economy is tanking anyway and that means less industrial use. And so I think I've mentioned on your program as well, I'm a simpleton. I like gold because it's so much easier to figure out. But if you want to get really frustrated, do go invest in silver. You can get plenty frustrated with gold, but the dynamics are just very, very difficult. Now, obviously on the fundamentals and so forth, there are many good reasons why silver should be doing very well, but trying to predict silver on a short-term basis is very, very difficult.

Mike Maharrey: Yeah, yeah. I agree completely. I think here in the United States we tend to be a very myopic society. Basically it's what's the Fed doing, what's the US economy doing? And of course there's a whole another world out there. And of course there's been a lot of turmoil in Europe recently. There's some political upheaval in France, we've had the ECB with the rate cut. What does some of these things that are going on in Europe, how do you see them playing on the broader market as we move forward?

Axel Merk: First of all, I think it's very rational that we are as "myopic" as you think because the Fed does have the bazooka, not just for the US but for the world.

The Fed sets the global benchmark of the so-called risk-free assets. Now of course we can argue how risk-free it is when you lose the purchasing power, but things are priced around that. And while on the fringes there are some concerns about that, there isn't really anything else to take its place at this stage. And that's why that is super relevant. Now, when you look at the rest of the world, the question is always does it make a difference or is it a tempest in a teapot? Let's take the Gaza conflict for example, right? Huge human tragedy, major headlines, people argue about it. And there are two ways of looking at it, right? You can say, hey, on a global scale, it's still a very small economy, and so it doesn't really matter. But you can also say, hey, it's happening back there, but look at people going on the streets here in the US.

It does have an impact locally. Actually, the way I happen to look at that particular incident is what does it mean for the greater region in the medium term? And as far as I can tell, the Arabs have a far greater interest in building a relationship with Israel than with the Palestinians. And then more broadly speaking, at least as relevant, the Arabs have a very keen interest on establishing better ties with China because the US is losing somewhat less energy that the Chinese are importing a great deal. And so that Chinese element I think has big, big implications. But on the geopolitical uncertainty side, how safe are the global seas anymore, right?

And when they're less safe, it means higher cost of procuring goods, which means higher net inflation, right? The inflationary pressures are higher. If you look at Europe, which is of course a mess of its own, I think the two main drivers, one is the utter incapability of the Eurozone of getting anything done other than churning out more red tape, which impacts growth.

And then these idiotic, and I'm sorry for using these technical terms that you only learn in your CFA exam, policies on energy where you just got to be kidding me, and how much worse do you want to make it food for the industrial base there? And so they're all shooting themselves in their own foot, but somehow they are able to continue operating. You're not going to get great dynamics out of it. Obviously you've got this very significant conflict in Ukraine, which threatens food supply more in Africa than anywhere else in the world because they're historically a big food exporter. I think the one lesson from a US point of view is global arms production will continue to increase.

And so there's money going into that. The Europeans are finally figuring out they need to spend more on it than the US, we're spending more on it in many other countries, and that's in a context of big deficits, right? And so all of that is a less stable world. It's a more inflationary world. None of this will tell you what gold is or the S&P is going to do tomorrow, but I look at that as a backdrop of the world we're in. And it comes back to, I don't know whether I've mentioned on your program, but gold is an asset you always have. You had yesterday, you never quite know why you'd want to have it tomorrow. Well, I have it for tomorrow because I don't know how all this is going to play out.

Mike Maharrey: Right. Yeah, eventually tomorrow will be yesterday.

Axel Merk: That's right. Yeah.

Mike Maharrey: Let's talk about the stock market a little bit. Sometimes I look at it and I think, well, we can't possibly have any more rise in stocks, and yet we get another all-time high. And I think the AI boom has really helped keep the whole stock market elevated. But on the other hand, we're seeing a situation where American consumers are starting to look like maybe they're getting tapped out. The debt is high, and you're starting to see people put the credit cards away. Inflation is putting the squeeze on folks. Is the stock market, in your opinion, is it really a bubble or is this a legitimate increase in value? How do you view the trajectory of the stock market right now?

Axel Merk: Well, some people say a bubble is a bull market that you're not participating in. And I do think that this stock market has many hallmarks of being at the, it's certainly not at the bottom of a bull market. I think we can all agree on that. Greenspan warned about irrational exuberance in '96 and the rally lasted to 2000. Calling it top is very difficult. That said, and of course we now have a few multi-trillion dollar companies and valuations, maybe that's just a sign that the benchmark, the US dollar has come down. But I do think that when, I mean the CEO of NVIDIA signing the breast of a woman, that's not the sign of a market bottom, let's just put it this way.

Mike Maharrey: Right.

Axel Merk: When CEOs become these hip cult icons, so to me, those are not just yellow flags, those are starting to flash red. Now, does that mean things will come tumbling down tomorrow? Not necessarily. However, and then the stories that NVIDIA, and I'm not giving investment recommendation, but the story that it might be that the similarities to 2000, of course when the critical voices, that might mean it has further to go, but I don't know. I don't buy it. The way I look at it is I invest based on my risk profile. So do many. I get concerned when I hear that at many dinner tables people are saying, why I'm not investing in NVIDIA directly. I mean the rest of them, S&P sucks. I got to have exposure to NVIDIA. That's the future. It's going to be around and so forth.

A lot of these big companies have invested heavily and governments are investing in these chips heavily. Yeah. To me, that is a concern. Let's just put it this way. And I had just put it for practical purposes. In 2007, I got rid of just about all my equities other than the precious metals sector. I haven't done that this time around, but for several months I haven't added anything to any equity positions. And so I have substantial cash holdings that I would normally not have. And then of course, many others have that as well. And that's historically a sign that you can put it back in markets. I look at it more as having dry powder, should there be a substantial correction. I obviously have a substantial precious metals conditions both on the physical and in the miners. But yet to me, I think last time I was on there, I was more comfortable in the market than I am this time around. I'm getting to be a little concerned.

Mike Maharrey: Yeah. If we do get a significant correction in equities, how do you think that will affect the gold and silver markets?

Axel Merk: Well, I think that question is somewhat backwards, at least the way I look at it. Normally, historically, when you have a soft landing, you have these slight corrections in the market, sometimes you don't even have a decent correction, and the precious metals markets are doing okay. When you have a hard landing, you have a more pronounced reactions by the Fed, and equities tend to do worse. And it's in that environment where precious metals tend to do particularly well. But if one was, from your point of view, the way you phrased the question, when equities perform really poorly, investors are scrambling to diversify. And gold and gold miners are beneficiary in that space. The question is how tough the times have to be because the animal spirits haven't been tamed at this stage. I mean, there's a lot of money still chasing a lot of very obscure things, not just things where they actually make money like NVIDIA, but also other things where no money is made.

And obviously we mentioned the credit spreads in the beginning, right? We haven't seen any clearing out in the commercial real estate market, for example. We may not see that for a while because it's not in the interest of politicians to have too much of an adjustment there. Not that they control prices, but the policies they have in place might postpone the day of reckoning. I say might because when interest rates go down, it could be we see more transactions clearing commercial real estates, and then at some point the volume is going to pick up and the prices might come down in earnest. I tend to be early when I have my views on the market, but I'm in a lucky position that I don't need to chase the best performance in the market.

Mike Maharrey: Right. I've been making the case for quite a while that we live in a microwave society where we're driven by this, it used to be a 24-hour news cycle, now it's about a 30-minute news cycle. It seems like the next thing on X or on social media is it grabs everybody's attention. And I've been making the argument that these macro trends, they take longer to play out than I think most people really grasp. They think that we had all this stimulus and then we're going to instantly have price inflation, and then the Fed raises rates. We're going to instantly have price inflation go away. And these things take a long time to play out. Do you agree with that, that maybe things move more slowly than a lot of people in our world are comfortable with?

Axel Merk: Let me try to reframe that. First of all, the market never reflects the present.

Mike Maharrey: Right.

Axel Merk: It will always reflect the future, but also when you go forward, it will then reflect the future of that future point in time. And so it's a very difficult test to say, hey, will the market play out exactly what I'm forecasting now?

Mike Maharrey: Right.

Axel Merk: The other portion is macro forecasts are almost always wrong. I mean, if you look at the end of the year, the forecast for the following year, at least what the majority thinks, tends to be wrong.

And obviously, obviously, I've got enough gray hair to confirm that I've been humbled by the markets many times over myself.

Mike Maharrey: Yeah.

Axel Merk: And the way I look at macro forecasts is I'm a risk manager ultimately. And so when I predict or see certain risks in the market or hear others talk about them, it's not whether they're right or wrong. Is do they get me thinking about scenarios I may not have considered? If so, are they significant enough? Do they matter for my portfolio?

And I answered your question in some ways earlier, gold is the thing you glad you had looking backwards, but why the heck do you have it going forward if it doesn't even pay a dividend? And so it's one of these things that in the long run help balance out a portfolio or depending on how you are, some people have a substantial position in it, and I would be one of them I suppose, but it doesn't matter so much as we are right or wrong.

Now, will things play out faster or slower? I mean a crisis, there's always the unknown unknown. You have just no idea when it's going to hit you. By the way, it used to be that August is a fabulous month to invade another country, but will it happen and will the markets react? We don't know, right? One of the things about things playing out longer is things might be playing out, we might just not recognize it. The one thing in our space, there are a lot of conspiracy theories. The one thing I don't like about them is because they assume that if you just get rid of the bad apple, things will be fine.

Whereas society adjusts, right? If you go to your supermarket and see a seventy-year-old behind the counter, I mean some decades ago you would've had pity with them. Now they say, hey, I'm a contributing member to the society, and this is all great, right?

Mike Maharrey: Right.

Axel Merk: There's always a tomorrow. Look at Latin America, right? Society doesn't collapse, there's tomorrow. Look at the US, right? Our fiscal discipline goes down the drain, and there's lots unhappiness for many of the right reasons. But it's not like we are electing people to fix the issues both on the left and the right. We go towards the more popular sides, which creates unstable dynamics and we just deal with it.

And so these scenarios actually playing out. Now in 2008, it showed that even if you have a very good prediction of what will happen and should happen, the policymakers change the rules along the way.

Mike Maharrey: Right.

Axel Merk: There's no assurance you actually make money with this, with implementing the views. And it's one of the reasons why, for example, shorting the market is very dangerous because you've got the policy risk in there.

Some things move faster, some things move slower, right? I mean, the commercial real estate, their reserve is swaddling it down. Should have had a recession, but other things might move faster, right? I mean, a few people would've predicted that the moment the natural language interface was put on top of AI, which by the way has been around forever. I studied AI in the late eighties. I have a master's in computer science with a focus in AI. But once the public recognized the power of this, suddenly everybody went crazy, right?

Mike Maharrey: Yeah.

Axel Merk: Now of course, it means that millions of people use the stuff that have no clue how to use these things, right? But that's how you create this mania around something and how long that's going to last is anybody's guess.

Mike Maharrey: The fantastic way of looking at the world. I really appreciate that outlook. I've got one more question for you, actually two. The first is, what is something that maybe that you see bubbling under the surface that maybe is being missed by the mainstream? Is there anything that's got your attention right now that other folks haven't really grasped yet?

Axel Merk: Well, I alluded to it. What really concerns me is the gradual erosion of numerous things on the fiscal side, on the monetary side, it's the road to hell that's paved with good intentions. And then policymakers always reacting the wrong way, really amplifying things, making things worse rather than better. And of course there's a pendulum in politics that swings left and right, but it's the stuff under the surface that erodes the fabric of society. Now, we are lucky that we have reasonably strong institution in the US. Many other countries aren't as lucky. I happen to think that the good peaceful periods since World War II are over and what's happening in Ukraine and Gaza are just symptoms of a new era. And in that context, fiscal deficits are the greatest threat to national security. And we see that because the US is less able to secure the world. Now, obviously, again, it turns into a feature rather than a bug. We have an increasing number of isolationists that's saying, hey, that's fantastic. Let's not get involved. The society embraces the new world. All of that concerns me. Now, again, there will be a tomorrow. We'll just have to embrace it and deal with it and make the best of it and not just complain about it.

Mike Maharrey: Yeah. Again, thank you so much for taking the time to be on the show. Before you go, I would love for you to let people know where they can follow you and where they can find out more about your company and your work.

Axel Merk: You can follow me on Twitter, @axelmerk. Then on our website, merkinvestments.com. We have a newsletter. We have a link to products we manage in the precious metal space. Can't talk about them here, but sign up to the newsletter to be in the loop of what we do. And yes, on Twitter, I can't tweet about products, but I can let you know my latest macromusings, so to speak.

Mike Maharrey: Well, and it's definitely worth following for sure. And again, I really appreciate your insights and the work that you're doing and taking time out of your day. I know you're a busy man, so thank you so much for that. And hopefully we'll be able to get you on again soon as things continue to play out.

Axel Merk: Yeah, great chatting with you.

Mike Maharrey: All right, thank you.