Axel Merk
Merk Hard Currency Fund
Incoming data suggests that recession risk for 2023 continues to increase and is generally at highly elevated levels. Notably, the 10y3m yield curve finally inverted, ending October at -1bp. Historically, recessions don’t start until 6-18 months after initial inversion of 10y3m. But that signal is arriving late relative to other leading indicators and so it might push the shorter end of that range (if indeed a recession materializes).
Last week’s jobs report was mixed. There is a growing divergence between the establishment survey and the household survey in terms of the trend in total employment, with the household survey moving mostly sideways over the past seven months. The household survey shows just 150k in cumulative job gains since March, whereas the establishment survey shows 2.5 million. Also, the unemployment rate increased and that was with a decline in the labor force participation rate, a bad combination for the outlook. The lack of meaningful improvement in labor force participation continues to be a concern.
Conversely, temporary jobs are still making new all-time highs, typically a long leading indicator. In other words, recession typically only arrives several months after a peak in temporary employment. Also, cyclical job categories continue to show gains.
Bank lending standards, according to the Fed’s Senior Loan Officer Opinion Survey (SLOOS), have continued to meaningfully tighten. The New York Fed’s Household Debt and Credit Report comes out later this month and will provide further clues on the household credit cycle, which is looking like it has turned as judged by new transitions into delinquency.
One of the variables that’s different in this cycle (and difficult to gauge), is that excess household savings built up in 2020 and 2021 through fiscal stimulus look like they have only been partially drawn down (roughly 25%). The remaining buffer of excess savings could prolong the cycle.
Internationally, there are some signs that China’s economic growth is reaccelerating, with mixed implications: likely a positive for global growth but could add to inflation pressures and central bank tightening plans.
In summary, the weight of the evidence currently suggests that recession risk is very high. As always, the outlook remains data dependent and requires constant reassessment.
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The Merk Hard Currency Fund is a no-load mutual fund that invests in a basket of hard currencies from countries with strong monetary policies assembled to protect against the depreciation of the U.S. dollar relative to other currencies. The Fund may serve as a valuable diversification component as it seeks to protect against a decline in the dollar while potentially mitigating stock market, credit and interest riskswith the ease of investing in a mutual fund. The Fund may be appropriate for you if you are pursuing a long-term goal with a hard 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 Fund and to download a prospectus, please visit www.merkfund.com. Investors should consider the investment objectives, risks and charges and expenses of the Merk Hard Currency Fund carefully before investing. This and other information is in the prospectus, a copy of which may be obtained by visiting the Fund's website at www.merkfund.com or calling 866-MERK FUND. Please read the prospectus carefully before you invest. The Fund primarily invests in foreign currencies and as such, changes in currency exchange rates will affect the value of what the Fund owns 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 Fund is 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. As a non-diversified fund, the 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. The Fund may also invest in derivative securities which can be volatile and involve various types and degrees of risk. For a more complete discussion of these and other Fund risks please refer to the Funds prospectus. The views in this article were those of Axel Merk as of the newsletter's publication date and may not reflect his views at any time thereafter. These views and opinions should not be construed as investment advice nor considered as an offer to sell or a solicitation of an offer to buy shares of any securities mentioned herein. Mr. Merk is the founder and president of Merk Investments LLC and is the portfolio manager for the Merk Hard Currency Fund. Foreside Fund Services, LLC, distributor.
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