QE3 appears to have been effective in raising inflationary concerns. Indeed, market implied measures of inflation increased significantly in reaction to the announcement. Our concern is Bernanke and the Fed will now err on the side of inflation in attempting to drive the unemployment rate lower. The September Federal Open Market Committee (FOMC) minutes make it clear that the Fed would like to introduce a numerical target for the unemployment rate, looking to move away from a focus on moderating inflation and placing a greater emphasis on trying to improve the employment situation. This change in focus is worrying, as it further severs the link between monetary policy and inflation. Merk Insights
Moreover, through manipulation of the yield curve, the Fed is inherently increasing the risk that it gets monetary policy wrong. Every time the Fed purchases Treasuries or MBS, it drives the yields on those same securities lower. In so doing, the Fed can no longer rely on those yields to provide valuable information on the state of the economy, as the yields no longer reflect free market forces. As such, through its accommodative monetary policies, the Fed has taken away a key gauge in estimating and setting appropriate monetary policy. Put simply, the more the Fed manipulates markets, the greater the chance of unintended consequences, such as inflation and further deterioration in the U.S. dollar.
With such dynamics playing out, we believe investors may wish to consider adding a currency component to their portfolios, to potentially benefit from an ongoing decline in the U.S. dollar. A professionally managed basket of currencies may help to protect against inflationary pressures, while providing valuable portfolio diversification benefits and upside potential.
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This report was prepared by Merk Investments LLC,and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Merk Investments LLC makes no representation regarding the advisability of investing in the products herein. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute investment advice and is not intended as an endorsement of any specific investment. The information contained herein is general in nature and is provided solely for educational and informational purposes. The information provided does not constitute legal, financial or tax advice. You should obtain advice specific to your circumstances from your own legal, financial and tax advisors. As with any investment, past performance is no guarantee of future performance.
Axel Merk is president of Merk Investments, manager of Merk Funds, is an authority on currencies and a pioneer in using strategic currency investing for diversification and down-side protection. Merk is an expert on the global economy, macro trends, monetary policy, and the implications to the U.S. dollar and investing.