Wave Of Central Bank Rate Cuts This Month, ‘Black Swan’ Still Looms | Axel Merk

Wave Of Central Bank Rate Cuts This Month, ‘Black Swan’ Still Looms | Axel Merk

so just for completeness here the Bank of Canada is meeting on June 5 that’s on Wednesday currently as we talk an 81% chance of a rate cut priced in the European Central Bank is meeting a DAT later on Thursday a 96% chance of a rate cut pric in um if you ask a federal official they will always say no no no no we are focused on US econom policy we don’t care in practice of course they communicate they talk um they do FOC is of course more on a domestic economy they will care about what’s happening in the rest of the world if it affects Financial stability in the US has a prospect of a US recession become so unlikely it is now a Black Swan well what happens if the consensus is wrong we’re talking about this Market implications of a recession risk and Friday’s data release for inflation with our next guest Axel MK president of Merc Investments this episode is brought to you by itus capital and Ira that offers 35 crypto assets and the lowest trading fees in the crypto Ira space at 1% and gold Holdings as well if You’ like to learn more and get started click on it trust. capital davit in the link down below if you use my referral link you’ll get $100 in signing bonuses Axel good to see you again welcome back great to be with you again like to start by talking about this article we were mentioning offline this uh this came in from Bloomberg the title is the Black Swan risk is now a US recession first paragraph of soft Landing for the US economy has now become become such a consensus view it makes sense to consider the risk that something else occurs and what that means for risk assets the data suggests the possibility of a recession is greater than commonly understood and then in the article they’ve attached a a chart from the uh Federal Reserve showing the probability of a recession is predicted by the treasury spread currently at 50% it was at 70% some months ago so it’s come down but still significantly higher than any other period since the since the early 1980 so let’s talk let’s start with that framework before we talk about recent economic data releases like the like the inflation report that came out on Friday what is your view on this what’s your reaction to this article sure well let me take a step back maybe as to why we care in the first place um we care about recessions aside from our own job maybe being at risk is that risk assets tend to do better during economic expansions in a soft Landing scenario risk assets often do just fine in a hard land in Risk assets tend to perform very poorly and that’s why there’s a huge industry dedicated about forecasting recession and of course as anybody who’s been paying somewhat attention recent years knows this is the most forecast recession ever that hasn’t quite happened yet and I certainly don’t claim to have a crystal ball either but my job as an asset manager is to look in the world in the world in terms of risks and if risks are significant can I take him into account and I argued a year ago already that hey the weak point in the economy might be just before the election in the US and that might have an impact there now clearly the economy has held up better um than than many people anticipated including myself I have always argued I bet on the consumer and the consumer is somewhat weakening we see a bit of a bipoc in the consumer to be more precise the the highend weal consumer High income consumer is doing just fine um but inflation hits particularly hard the the weaker consumer inflation has been more pronounced and the sort of goods that that the lower end consumer is is supposed to credit card delinquencies is actually just had a thick downward so they’re hanging in there and of course the context is that these these higher rates don’t affect everybody the same way and not as much into the past and so forth but overall yes I do think I mean Jamie Diamond said that um as well that that we do have to take the risk of a of a worse economy into account now for full disclosure right we manage over a billion in Golden gold mining that tends to be doing better during recessions so maybe I have a bias which I look at things but um but I do think that this consumer um is going to get weaker but um at the same time this huge deficit we have on the fiscal side is is one of the reasons why this economy is holding up better because that’s an implicit stimulus you know what’s interesting is that the other G7 countries have all fallen into technical recession at some point in the last 12 months except the US what do you think that is well I think it’s the it’s the enormous deficit that we have that’s an implicit stimulus I think that’s that’s the key driver here um there other factors we have such a micromanaged economy these days by the Federal Reserve as a reminder a little over a year ago um the FED gave this Lifeline um to to the small Banks where they converted a an acute into a chronic Problem by allowing them to to to kind of Shield their interest rate mismanagement the commercial real estate exposure the refinancing has been sluggish in that area and uh this is kind of the beroni world banki wrote a book during the pandemic where where he envisions a world where the Federal Reserve can be ever more micromanaging he doesn’t use those terms but that’s what it amounts to and I my view as well if we convert to a command yeah maybe we can get rid of recession Al together but it’s it’s we’re taking away the the free market mechanism from more areas in the economy and Ure that works for a while there are side effects um we can talk about those but that is part of the reason why the US economy is held up better and the other one is of course that people have refinanced their homes and on the commercial real estate side um the Day of Reckoning hasn’t been there in Europe Europe by the way that’s starting to to get into a higher gear where there are more defaults and a little bit more of a flushing out in the commercial real estate side what sectors do you think are most at risk right now if there’s any risk at all right now well in the on the valuation side um the question is what is at risk is it layoffs or valuations in in the markets right on the valuation side obviously there have been a few Darlings that have been the main beneficiaries um of of uh of the flows and uh recent days the softer side of things in particular there have been some setbacks um and I’m not going giving any investment recommendation here but when a company like Salesforce says that um they they are struggling a tad to me that might signal a broader weakness we’ve had companies like uh like Amazon and Walmart say they’re giving more discounts those are signs that there is a weakness somewhere now it’s a diverse economy it’s a broad economy um these things never matter until they do right and so um some people are saying yeah you got to look at the yield curve well the yield curve being inverted right hasn’t hasn’t quite worked the recession hasn’t come yet and and so ultimately it’s a question of risk management and and then at the other end of the spectrum for the investors of the question what can you afford right can you afford the risk um of of having a 20% plus downturn in your portfolio or can you not afford it if you cannot you may not want to be as exposed to the market the biggest mistakes that people make is that they they rebalance too late um people haven’t gotten bankrupt if they reduce their spending and are more risk averse in their Investments you brought up a very good point which is fiscal stimulus so as you know the treasury general account swalled $930 billion right this was farther uh than their $700 billion do initial Target do you think Jenna Yellen uh is going to start pulling this back at some point well you live happily ever after right I mean you you do what the market can bear you’re dealt with the numbers right you you as a treasury Secretary of course you have some flexibility your flexibility way on the curve you refinance um but ultimately it’s the deficits that dictate when you have to go to the market and the one thing we know from Greece and and the European experience is that politicians don’t come to their census until the market forces them to and we are far off from that and so I think both political parties we have in the US have have shown that deficit spending is popular with the electorate and so we always talk about spending money better if you only elect me but I haven’t seen really that fiscal discipline is on the is is the top thing on people’s mind it may be as as part of a protest right I vote this guy out of office because I want more fiscal discipline whether we get that at the end of the day is another question but to the extent that we did let’s just assume for a moment we we had a change in the White House in the US and we had more fiscal discipline well that would be bad for economic growth in the short run anyway right in the long run it may be good if if one if one doesn’t waste as much money but in the short run that that may well mean a deeper recession today’s data uh core PC which is the fed’s preferred measure of inflation came in annualized 2.8% which is exactly the same as the previous month 2.8% on a on a month-to Monon basis it Rose about 0.2% which is more or less in line with expectations so uh the question is why did markets react the way that it did or perhaps it was reacting to something else because I’m looking at my screen right now the NASDAQ is down 1.4% which is significant uh the the gold price is down 6% um and the dollar is well more or less flat but stocks and gold both down today um are reacting to something else or this you think yes I mean the breaking news is it’s the last day of the month in May um I think that is back to work everybody yeah um and there is some profit taking there is a repositioning there’s window dressing you give you call it what you want um but I these numbers are pretty much as expected um relevant here from the the monetary side is believe still that I I positioned it last October some put in last December but um fed share power last October gave what I call a mission accomplish speech he was then more explicit about it in December it’s the change in buyers at the FED um that that really matters and that has given a positive spin to the market it has given the direction where we’ll be um it has allowed other central banks around the world to kind of follow suit the European Central Bank is likely to Cut Rate next week although their inflation numbers released today were that bit worse than expected um and and and and so now why do we have a selloff in in equities and by the way we’re talking before the market closes so who knows how the market will close at the end of the day but I wouldn’t to take a step back here right I I mentioned earlier the market and the Federal Reserve is ever more micromanaging these markets one of the side effects of that is that the market is giving ever less information um pre 2008 you could look at the yield curve um and and get information you could look at the at the New York desk of the treasury they would see when they manage the interest rates by interfering in the markets by buying and selling treasuries um are there any weaknesses in the banking site nowadays by paying interest on reserves that is gone and what that means is that these these very smart people at the FED are reading the exact same tea leaves that you or I are reading uh they’re looking at backward-looking data and they’re trying to make a forward-looking decision a key difference is it’s a comedy of many people so their reaction time is much slower they have their own biases and indeed unlike the market as a whole most of the folks at the fed and central banks around the world have the same sort of training and so they they have their own biases um which means they’re going to be late and which also means because they have the Bazooka we going to put every word that they say um under the microscope um but they don’t know anything more than we do and so they going to be driven by a backward-looking thought about what inflation might do plus their forward-looking bias which basically means nothing has happened because they have said that even if inflation is still above 2% they don’t really care because they think that um at the current rates there is a tightening bias and that’s good enough for them and so that’s why my conclusion is that it’s Friday in May is far more important than than what they what the number today was what do you think the FED is going to do going forward now let’s take a look at what other central banks around the world are planning to do so here in Canada I’m hearing rumors that Bank of Canada may cut rates this summer uh the governor of the uh Finnish Bank bank of Finland recently this week said that he expects the ECB to cut rates by June which is coming up you know other central banks around the world are acting doish will this affect fed policy so just for completeness here the Bank of Canada is meeting on June 5 that’s on Wednesday currently as we talk an 81% chance of a rate cut priced in yes the European Central Bank is meeting a day later on Thursday a 96% chance of a rate cut yes cred in um if you ask a federal official they will always say no no no no we’re focused on US econom policy we don’t care in practice of course they communicate they talk um they do focus of course more on the domestic economy they will care about what’s happening in the rest of the world if it affects Financial stability in the US and so I mentioned earlier right the the commercial real estate market in in Europe is starting to flush out well if that creates hiccups in the banking system and I’m not suggesting that it necessarily does but assume for a moment that credit spreads were to blow out there and so forth there will be more uncertainty in the market those Jitters might swap over to the US market and I’m talking hypothetical here I’m not saying it will happen but if that were to happen then it will get the fed’s attention right but other than that they probably could care less what’s happening in New Zealand or or even in Canada um and so they they will be very much focused on what’s happened domestically and and also when something does happen internationally remember most of the folks that the FED are academics U and so they they only realize there’s a problem when it whacks them in the face I think that’s a technical CFA level three term um that that um if something if something really derails then it will get their attention and then with a lag they will react to it but they will not do anything preemptively saying hey something might happen the rest of the world therefore we shouldn’t be cutting rates or raising rates or keeping them where they are going back to the first part of our conversation that 50% probability of recession is coming from the Federal Reserve researchers right their economists themselves they’re looking at the same data that we are and yet they’re probably not reacting right now what what we don’t know what’s on Tron pow’s mind but if I were looking at that data I would be thinking well higher rates for longer May raise the probability even more risking the economy he doesn’t want that now does he well he would like to have the economy be Tad weaker than it is I think because inflation is still higher now they say two 2% inflation um Target Larry Summers the other day spoke up and said um the FED should not get rid of its numeric Target and I’m fine with that except then he added well then he added in situations like this they could Target a slightly higher inflation and that’s of course something that a central Banker must never say because the moment you say that what stops you from changing the inflation Target every week every month every year or whatever it may be you you’re you’re you’re losing The credibility of of that anchor but um at the same time the FED is perfectly happy with the 2.8% inflation that we have right now um but they give it lip service that we’d rather be at 2% so they’re they’re happy with the slight um tightening bias they certainly don’t want to ease but you’re absolutely right of course a Fed policy acts through the lag and that historically means that when the FED wants to tighten we get a recession because they will be late um it’s one of the reasons why I believe that discretion should be all but eliminated from fed decisions because at commit will always be late in reacting and we saw of course the the horrendous implications of that when they were too late in in hiking rates um and uh on the way down it’s quote unquote just a recession I’m curious to get your sentiment on stocks Axel some Wall Street firms UBS for example has recently lifted its outlook on the S&P 500 for the year where do you stand on this are you lifting your outlook are you staying neutral are you more bearish well anecdotally just on on on International location I talked to somebody the other day um who had been investing internationally and saying oh look at that um it’s been losing money and yes it has lost some money but the data first of all didn’t include the dividends International stocks tend to pay higher dividends so it looked worse than it did but say see the US is doing much better I don’t expect that to change in the coming years now of course um if you and again I’m not giving an investment recommendation but company like Nidia has of course had a great run um and in contrast some of the stuff in the rest of the world has had a rather poor run and so that means really nothing about how things will go forward but one is a low valuation and one is a very high valuation I’m a value guy so I tend to like things that are of quote unquote good value um institutionally we manage uh currently just under 1.4 billion in gold and gold mining so of course we we we kind of institutionally like that space there and what we like there on the mining side is that change in bias that came after last October um keep in mind that when the FED is in a tightening phase that that provides tighter Financial conditions many of the small mining companies um need access to credit because they need to periodically Finance the next phase of the expansion so that’s a more favorable environment and then recession especially severe one could be very favorable to them on the general Equity side right I mean there’s the saying as I indicated earlier um that equities tend to do just fine when uh when you have an economic uration they should do okay when you have a soft Landing it’s the hard Landing you want to be concerned about and so I mentioned already a year ago when I expected a harder learning that unlike in 2007 when I sold all my regular stocks talking about my personal portfolio here I didn’t do this this time around but I haven’t added to that allocation um I’ve kept it at a fairly modest level compared to most investors I have a much bigger allocation on the mining side um and I’m very happy with that but I’ve also Diversified to to various other areas outside of the um the traditional Capital markets um ranging from forest to to to other area some some some real estate Investments as well and and so forth right to to be more broadly Diversified because I don’t like everything that I see in the markets but I don’t I don’t see a um I don’t see a 2008 crisis which would get me completely out of the markets you don’t see a 2008 crisis why would you need a crisis to get out of the markets perhaps you just see other opportunities and other asset classes well sure to me it’s it’s about risk management and asset allocation right um I am not a type of person who says oh I think the market is going to go down tomorrow I sell all my stocks no it’s to me is um I have a certain Equity allocation um to me that’s lower than most people have and I haven’t added to that as Equity a good run obviously that that position has grown a little bit and I’m just fine with that right it’s about to me it’s about the risk of what you can afford and of course every every one of your listeners or viewers has to decide I think on the risk that they can afford to lose and to just go back to 2008 um the mistake many people made is in the runup to 2007 or so that people didn’t take chips off the table uh and then in the spring of 2009 when we hit the low in the equity Market some people said oh you got to Double Down um and even though that technically that would have been the right thing to do I think it was completely irresponsible and the reason why I say it was irresponsible is uh think about you’re losing a substantial portion of your worth net worth when the markets go down and you were Overexposed to equities and then doubling down on that means you’re dramatically Overexposed to things that are riskier than than your comfortable with and so if you look at things from the list um through the lens of risk management yes sometimes you lose out on on a gain um but at the same time I think that you you have a better chance of reaching your low long-term goals because you don’t have to sell out in the P Panic or or whatnot and so when when I make ass allocation changes I tend to be more a long-term investor um for most folks it doesn’t really matter what strategy they have my view is they should have a strategy if you’re if you’re good day trading go for it right but if you’re not good and stay away from it did you or are you planning to take profits on gold or gold stocks this year given how high gold has run um since I’m an Insider in a in a in a company that’s publicly traded I I am not authorized so to say to say what I will do in the future but if you just if you just um look at my historic pattern and their public disclosures on that I’m a very long-term investor so I don’t tend to trade in and out of these things and the other thing I have said is that with the Federal Reserve having changed its bias towards some easing bias it’s a more favorable environment medium-term and uh and so um that obviously is something I’ll I’ll take into consideration as I as I look in that space can you just explain the logic here for the for the audience why an easy monetary policy may be conducive for higher uh gold and perhaps gold mining stocks prices yeah well let’s take the site which is maybe a little easier um the gold is the the purest indicator of monetary policy gold is a brick doesn’t pay interest and it competes with cash amongst others yes so if you think that you get a real return on your cash why would you hold gold whereas if you think that the purchasing power of cash is eroding well then suddenly maybe gold has has some value to you and since markets are for looking you may want to look at the real rates going forward now a lot of people say nobody knows what inflation is going to be in five six seven years from now and that’s of course correct but what the market gives you is an assessment of what the market thinks and relative changes and that are relevant and so there the bias of the Federal Reserve matters um if the bias of the FED is hey I’m a cool with a little higher inflation for a while and I’m more worried about it a downturn um than that is something that’s more favorable to Gold also when when you have a more severe recession the Federal Reserve tends to ease rather rapidly and gold has the most direct impact on that right because of the discounting mechanism and how people price these things on the gold mining side theoretically that’s a lever play on the price of gold I say theoretically um imagine let me take some abstract simple numbers the cost of production is a th000 um ,000 dollar an ounce and the gold price would be, 1500 the price of gold goes from, 1500 to 2,000 well that $500 increase is a 100% gain in the in in the profit in the bottom line now that’s a theoretical thing because when the price of gold goes higher many other costs tend to go higher as well including the cost of energy and the cost of labor taxes may go up and so forth for the junior mining space which is often a levered play on the gold miners uh because you’re literally betting on them striking gold and develop being able to develop a mine often these Junior miners only have funding for two years or so they need to go back to the markets and so there a tight environment um has helped to depress those prices and even though the the rates have been cut and of course access to money isn’t that easy even get but the buyas has had an impact and so you have a disproportionate gain there and if you were to have a more severe recession um you just have that trickle down even faster with the potential for for a higher upside a lower rate environment uh has had the history of lifting most assets it’s conducive to higher stock price growth it’s lifted gold as you said it may even help bond prices as lower rates increases Bond valuation so how do we as investors decide where to allocate our Capital when rates go down and seemingly everything goes up well we times where everything has gone up right I mean the last decade was an example buy the S&P 500 and nothing else um I’d like to remind people that that’s not how the world usually works and that’s why people diversify and the one thing about gold is that it has a the zero correlation to equities in the long run um and that can be very helpful if you’re worried about something else and the gold equities because it’s more volatile than price of gold you need a small allocation to get kind of bang for the buck to get a greater degree of diversification but the the the question is of course why are rates coming down and usually it’s because of a recession and so and because markets are forward looking just before rates are coming down it might be a good place to to be in those interest rate sensitive things once you’re at the bottom right then you want to be concerned about the next cycle because then the next thing is well when is the Federal Reserve going to tighten and and so depending on on how the economy grows there might be reasons to kind of be be in different areas um of course I’m I’m overly simplifying here but um Market timing is not easy and most folks might want to stay away from it um again that’s part of the reason why I encourage people to look at it in terms of risk can you afford for this or that to happen um with that caveat if the markets look perfect be that for the S&P or for gold perfect is not a good thing because when Perfection is priced in then it usually means are going to get worse okay perfect Axel I appreciate your updates as always tell us where we can learn more from you come to amk investments.com we have a newsletter follow me on Twitter at Axel Merk where I cannot tweet about products um but I I will keep people up to date of what’s happening in markets from from my lens and uh as a as a caution when central banks meet I sometimes can get a little nerdy and dive into details this is the kind of caution we like now axel let us all nerd out together so please check out ax Mark in the links down below thank you very much we’ll speak again next time my pleasure thank you for watching don’t forget to like And subscribe

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Axel Merk, CIO and President of Merk Investments, discusses the “signs of weakness” the economy is showing, as well as the impact of lower central bank policy rates on markets.

*This video was recorded on May 31, 2024

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0:00 – Intro
1:22 – Recession is ‘black swan’?
7:55 – Fiscal policy and deficit
9:46 – Inflation and market reaction
13:19 – Central bank cuts
15:30 – Economic risks
17:30 – Outlook on stocks
22:00 – Gold and gold stocks

#investing #economy #stocks