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The events of the
past seven days have altered the shape of the market and will impact the
economy going forward. The current financial crisis reflects the failure of
firms to deleverage in an acceptable period of time. The inability or unwillingness
to accept the terms of re-capitalization offered troubled institutions has
set in motion the financial train wreck of which we all bear witness. While
growth over the past year has exceeded the very low expectations set by the
market, the risk to economic output over the remainder of the year is to the
downside.
First, the reduction
of available credit to consumers and firms will impact overall economic
activity. This should be initially observed inside the housing sector. The
development community which, until recently took heart in the flattening in
the negative slope of housing starts and falling interest rates, will take it
on the chin once again as tight credit and lending standards impede the
building of homes and the purchase of an already elevated existing stock on
the market.
Second there are
still pervasive problems in the banking industry. For example, WaMu (not a
holding of the Merk Mutual funds) is currently trading just above $2.0 per
share down from it recent high of $38.32 in September of 2007 and remains
under duress. At the end of Q2'08 WaMu had just north of $150 billion in
interest bearing deposits, held $181.5 billion or 58% of its total assets in
home lending and wrote off $2.17 billion in non-performing loans, mostly
attributed to mortgage defaults, in the second quarter. Currently, the FDIC
has $52.413bln in its insurance fund balance and can tap a line of $30bln
line of credit at the U.S. Treasury should additional banks fail.
Second, the sharp
decline in the value of equities should provide a negative wealth effect on
consumers. Personal consumption which we already expect to post a negative
print in Q3'08 looks to now possibly contract at a rate of -1.0% during the
quarter with additional downside risk in the final quarter of the year.
The decline in the
cost of oil and gasoline will provide some savings to consumers and could
possibly offset the negative impact on consumer psychology. However, as the
recent data suggests even a decline of -4.2% in the cost of gasoline during
the month of August did not lead to increase in retail sales during a time
when back to school sales traditionally draw consumes into the malls. Given
the storm clouds gathering over the consumer we think that recent events
should cast a greater shadow over any increase in appetite for consumption.
External demand,
which has provided a major source of support for overall economic activity
during the now thirteen month financial crisis should see real declines on
the back of the global credit tightening that the market is in the process of
absorbing. While we are still only days into the recent evolution of the
financial crisis, we are observing some unwinding of positions in Emerging
Markets and risk aversion plays as capital flows into gold and Swiss Francs,
two traditional safe havens in times of crises.
Should credit
conditions not return to something approximating normal over the next few
days our economic outlook will be adjusted accordingly. At this time, the
damage wrought by the latest seizing up in the credit markets has not become
an economic event. However, we have inched closer to the outcome and we
continue to believe that risk is to the downside for the U.S. economic outlook.
Joseph Brusuelas
Chief Economist
VP Global Strategy
Merk Investments LLC
Merk Investments LLC is the manager
of Merk Mutual Funds, including the Merk Asian Currency Fund and the Merk
Hard Currency Fund. The Merk Asian Currency Fund invests in a basket of Asian
currencies. Asian currencies the Fund may invest in include, but are not
limited to, the currencies of China, Hong Kong, Japan, India, Indonesia,
Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand.
The Merk Hard Currency Fund invests
in a basket of hard currencies. Hard currencies are currencies backed by
sound monetary policy; sound monetary policy focuses on price stability.
The Funds may be appropriate for you
if you are pursuing a long-term goal with a hard or Asian currency component
to your portfolio; are willing to tolerate the risks associated with
investments in foreign currencies; or are looking for a way to potentially
mitigate downside risk in or profit from a secular bear market. For more
information on the Funds and to download a prospectus, please visit www.merkfund.com.
Investors should consider the
investment objectives, risks and charges and expenses of the Merk Funds
carefully before investing. This and other information is in the prospectus,
a copy of which may be obtained by visiting the Funds' website at www.merkfund.com or calling 866-MERK
FUND. Please read the prospectus carefully before you invest.
The Funds primarily invest in
foreign currencies and as such, changes in currency exchange rates will
affect the value of what the Funds own and the price of the Funds' shares.
Investing in foreign instruments bears a greater risk than investing in
domestic instruments for reasons such as volatility of currency exchange
rates and, in some cases, limited geographic focus, political and economic
instability, and relatively illiquid markets. The Funds are subject to interest
rate risk which is the risk that debt securities in the Funds' portfolio will
decline in value because of increases in market interest rates. The Funds may
also invest in derivative securities which can be volatile and involve
various types and degrees of risk. As a non-diversified fund, the Merk Hard
Currency Fund will be subject to more investment risk and potential for
volatility than a diversified fund because its portfolio may, at times, focus
on a limited number of issuers. For a more complete discussion of these and
other Fund risks please refer to the Funds' prospectuses.
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. Opinions and
forward-looking statements expressed are subject to change without notice.
This information does not constitute investment advise nor a solicitation or
an offer to buy or sell any products or services. Foreside Fund Services,
LLC, distributor.
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