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November 2013
Why I Sell the Dollar
Axel Merk President & CIO Merk Investments
Please read important risk disclosure informa:on towards the end of this presenta:on.
Dan Lucas Financial Analyst Merk Investments
Purchasing Power of the US Dollar 1913-‐2013
Fed’s 100 Year Track Record
Source: Merk Investments, Bureau of Labor Sta:s:cs © Merk Investments LLC Calcula:on based on consumer price index; August 1913 = 100%. Data as of August 2013.
0%!
10%!
20%!
30%!
40%!
50%!
60%!
70%!
80%!
90%!
100%!
1913! 1923! 1933! 1943! 1953! 1963! 1973! 1983! 1993! 2003! 2013!
Fed’s 100 Year Track Record
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A World in Debt
• Try to “outgrow” debt load
• Raise taxes • Lower expenditures • Restructure (default) • “Print money”
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To manage their debt load, governments may…
Checking out…
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Bernanke Fed
• Talking down interest rates • Lowering interest rates • Purchasing Treasuries & MBS • Engaging in Opera:ng Twist • Introducing an infla:on target • Introducing an employment target
“MBS” are Mortgage-‐Backed Secuiri:es
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Yellen Fed
• Mandate: Full Employment • Yellen: “normal” monetary policy when economy “normal”. Oxymoron?
“Unemployment...is still too high, reflecting a labor market and economy performing far short of their potential. At the same
time, inflation has been running below the Federal Reserve's goal of 2 percent and is expected to continue to do so for some time”!
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Spooky Times?
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Course of the Fed?
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Source:(Merk(Investments,(Federal(Reserve,(Thomson(Reuters(
*(Yellen(is(nominated(to(succeed(Bernanke(as(the(next(Fed(Chair(and(may(take(ofAice(in(February(2014(
**(Duke(announced(retirement(effective(August(31,(2013;(Raskin(is(nominated(for(Deputy(Secretary(of(the(Treasury;(Powell's(current(term(as(a(
Governor(ends(January(31,(2014(and(may(not(seek(reappointment.(Appointment(of(the(Board(of(Governors(requires(congressional(approval.(
***(Pianalto(announced(that(she(will(retire(in(early(2014.(Appointment(of(regional(Fed(presidents(does(not(require(congressional(approval.(
(
(
0"
1"
2"
3"
4"
5"
Yellen*(
(succeeding(
Bernanke)((((((((
(Chair)(
Yellen's(
successor*(((((((((((((
(Vice(Chair)(
Duke's(
successor**(
(Board(of(
Governors)(
Tarullo((((
(Board(of(
Governors)(
Raskin's(
successor**((((
(Board(of(
Governors)(
Stein((((((((
(Board(of(
Governors)(
Powell(or(his(
succesor**((((
(Board(of(
Governors)(
Dudley(((((
(New(York)(
Kocherlakota(
(Minneapolis)(
Pianalto's(
successor***(
(Cleveland)(
Plosser(
(Philadelphia)(
Fisher(((
(Dallas)(
Average(
FOMC%DOVE)HAWK%SCALE%Expected%Changes%in%2014%Voting%Members%
Hawk(
Hawkish(
Centrist(
Dovish(
Dove(
Up%to%four%vacancies%will%be%available%and%require%congressional%approval**%
©(2013(Merk(Investments,(LLC(
Possible(vacancies(in(2014(
Another%vacancy%does%not%require%congressional%approval***%
Members(that(are(expected(to(stay(
Infla:on Expecta:ons
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On course…?
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Course of the US?
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Central Bank Balance Sheets – 5 Years
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-40%!
0%!
40%!
80%!
120%!
160%!
200%!
240%!
280%!
320%!
360%!
Aug-08! Aug-09! Aug-10! Aug-11! Aug-12! Aug-13!
Cum
ulat
ive
Chan
ge (%
)!
Cumulative Change in Central Bank Balance Sheets!(August 2008 - September 2013)!
U.S. Federal Reserve!
Bank of Japan!
Bank of England!
Source: Merk Investments, U.S. Fed, ECB, BOE, BOJ, MAS, SNB, RBA, Riksbank! © Merk Investments, LLC!
Swedish Riksbank!
Reserve Bank of Australia!
European Central Bank!
Swiss National Bank!
Monetary Authority of Singapore!
Central Bank Balance Sheets – 1 Year
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Strong Dollar ???
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Why I Sell the Dollar…
1. Crash proof my pordolio 2. Deflect mania of
policymakers 3. Protect my purchasing
power 4. Provide interna:onal
exposure without int’l stock and bond market risks
5. Provide access to most liquid market in the world
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6. Add uncorrelated returns to my pordolio
7. Improve downside resilience of my pordolio
8. Benefit from profit opportuni:es
9. Benefit from ac:ve management
10. Improve pordolio’s risk-‐adjusted return
…and invest in a managed basket of currencies:
Crash Proofing?
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Deflect Mania of Policy Makers?
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Protect Purchasing Power?
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Purchasing Power of the US Dollar 1913-‐2013
Source: Merk Investments, Bureau of Labor Sta:s:cs © Merk Investments LLC Calcula:on based on consumer price index; August 1913 = 100%. Data as of August 2013.
0%!
10%!
20%!
30%!
40%!
50%!
60%!
70%!
80%!
90%!
100%!
1913! 1923! 1933! 1943! 1953! 1963! 1973! 1983! 1993! 2003! 2013!
Int’l Exposure with Low Vola:lity?
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Source: Merk Investments, Bloomberg.!!The following are used as proxy for the asset classes:!- Equities: Chicago Board Options Exchange Market Volatility (VIX) Index measures the market expectations of near-term volatility of S&P 500 index options.!- Currencies: Deutsche Bank Currency Volatility (CVIX) Index measures the currency volatility; weighted average of the implied volatility across 9 major pairs of currencies.!- Fixed Income: USD Swaption 5 Year Fixed/Floating Volatility Index (USSV055).!
0%!
10%!
20%!
30%!
40%!
50%!
60%!
70%!
80%!
90%!
Jan-03! Jan-04! Jan-05! Jan-06! Jan-07! Jan-08! Jan-09! Jan-10! Jan-11! Jan-12! Jan-13!
Annu
alize
d St
anda
rd D
evia
tion! Equities!
Fixed Income!
Currencies!
Currencies’ low historic vola1lity may mi1gate downside risks and improve risk-‐return ra1o.
Access to Liquidity
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When other alternatives dry up…!
With $5 trillion daily turnover, currencies may provide liquidity!
Low Correla:on
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Large Cap
Small Cap
Int’l Equity
EM Equity
US Bonds
TIPS EM Bonds
Commodities
Real Estate
Hedge Funds
I.DXY DBCR
Large Cap 1.00 0.94 0.51 0.50 -0.34 -0.04 0.36 0.37 0.82 0.55 0.28 0.18
Small Cap 1.00 0.45 0.45 -0.32 -0.06 0.29 0.33 0.86 0.50 0.25 0.18
Int’l Equity 1.00 0.84 -0.15 0.04 0.60 0.49 0.30 0.61 0.56 0.29
EM Equity 1.00 -0.16 0.00 0.62 0.47 0.32 0.64 0.38 0.35
US Bonds 1.00 0.13 0.04 -0.21 -0.26 -0.19 0.01 -0.20
TIPS 1.00 -0.01 0.05 -0.01 0.04 0.08 -0.20
EM Bonds 1.00 0.37 0.22 0.46 0.35 0.10
Commodities 1.00 0.23 0.45 0.47 0.16
Real Estate 1.00 0.30 0.18 0.12
Hedge Funds 1.00 0.30 0.34
Inverse DXY 1.00 0.00
DBCR 1.00 ! !All data as of 12/31/2011. Calculations based on daily data 12/31/2006 – 12/31/2011!
The following indices are used as proxies for the respective asset classes: ! Large Cap Domestic Equity: S&P500 ! !US Bonds: JPM US Bonds ! !Real Estate: FTSE/NAREIT US All REIT! Small Cap Domestic Equity: Russell 2000 ! !TIPS: Barclays US Treasury TIPS! !Hedge Funds: HFRX Global Hedge Fund! International Developed Equity (Int Equity): MSCI EAFE !EM Bonds: JPM EM Bond Index EMBi Global !G10 Currencies: Inverse DXY US Dollar! EM Equity: MSCI Emerging Markets ! !Commodities: DJ Liquid Commodity !DBCR: Deutsche Bank Currency Returns Index!SOURCE: Merk Investments, Bloomberg, Hedge Fund Research (HFR)!
Core Indices! Currencies!Alternatives!
Currencies’ low correla:on to tradi:onal asset classes may provide pordolio diversifica:on benefits.
Currencies (DBCR) correla:on with other asset classes -‐0.20 to +0.35
Downside Resilience?
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Performance in Recent Market Downturns!
Past performance is not indicative of future results. ! ! !Source: Bloomberg, Merk Investments!!Currency Non-Directional: DBCRUSI Index. Currency Directional: Inverse of DXY Index. US Equities: S&P 500 Total Return Index. International Equities: MSCI EAFE Index. It is used as a proxy for the international equity market performance in developed markets outside the U.S. & Canada. !!!
© 2012 Merk Investments, LLC!
!0.71%'
!11.61%'
!55.25%'
!60.99%'
!2.48%' !3.85%'
!15.27%' !16.04%'
!4.36%'!7.04%'
!17.63%'
!23.67%'
!70.00%'
!60.00%'
!50.00%'
!40.00%'
!30.00%'
!20.00%'
!10.00%'
0.00%'Currency Non-Directional! Currency Directional! US Equities! International Equities!
Crisis' Flash' 2011'Drawdown'
Crisis:! October 9, 2007 – March, 9, 2009!Flash:! April 26, 2010 – July 5, 2010!
2011 Drawdown:! April 26, 2011 – October 3, 2011!
Currencies Non-directional
Currencies Directional
Profit Opportuni:es
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• Corporate Hedgers • Central Banks • Tourists • Interna:onal Equity Investors
Currencies May Provide Unique Profit Opportunities!
Market Participants Don’t Necessarily Optimize Profits!
Ac:ve Management
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THOUGHT LEADER!
Global Economic Expertise!
Primary source of info for media & investment
pros!
Regular speaker at
conferences!
Original Research!
Insight into major central banks!
Prudent quantitative
modeling!
!
Merk: Managing Dollar & Currency Risk!
Enhance Risk-‐Adjusted Returns?
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Source: Bloomberg, Merk Investments Equi:es/Fixed Income: Dow Jones U.S. Moderate Index. Currencies: Deutsche Bank Currency Returns (DBCR) Index. All calcula:ons based on daily data since (12/31/2002 -‐ 12/31/2012).
• Are treasuries safe?
• Is the dollar safe?
• Safety in currencies?
Concerned about the bond market? Currencies may help…!
Currencies – Return Diversifiers!
www.merkfunds.com ! ! 26! !© 2013 MERK Investments®!
Alterna:ve to Bonds?
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And Reason #11…!
• Low correlation to traditional asset classes
• Low volatility: downside resilience
• Well suited for active management
Concerned about the markets? Currencies may help…!
Currencies – Return Diversifiers!
Currencies: Return Diversifiers – Downside Resilience!
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Currency Asset Class
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Merk Research
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Merk Insights
Investors may enhance investment returns while poten1ally reducing risk by adding a currency component to their por<olios.
Disclosure
This presentation was prepared by Merk Investments, LLC. Information presented is for general information purposes only and does not constitute an offer to sell, or a solicitation of an offer to buy, any investment security. The information presented is the current view of the presenter and subject to change without notice. An investment in a strategy described herein has risks, including the risk of losing some or all of the invested capital. Before embarking on a described investment program, an investor should carefully consider the risks and suitability of the described strategy based on their own investment objectives and financial position. Past performance is no guarantee of future results. The information presented may include opinions, projections and other “forward-looking statements.” Due to numerous factors, actual events may differ substantially from those presented. Merk Investments assumes no duty to update any such forward-looking statements or any other information or opinions in this document. Any information and statistical data contained herein derived from third party sources are believed to be reliable, but Merk Investments does not represent that they are accurate, and they should not be relied on as such or be the basis for an investment decision.!
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Notes!
Indices referred to in this presentation may include the following: !Inverse U.S. Dollar (Inv. DXY) Index: a measure of the inverse value of the United States dollar relative to a static basket of currencies with Euro (EUR) 57.6% weight, Japanese yen (JPY) 13.6%, Pound Sterling (GBP) 11.9%, Canadian dollar (CAD) 9.1%, Swiss franc (CHF) 3.6% and Swedish krona (SEK) 4.2% weight. Deutsche Bank Currency Returns (DBCR) Index: an equal-weighted blend of the most widely used investment strategies among active currency managers. It captures long term systematic returns available in the world currency markets. Bloomberg-JP Morgan Asian Currency (ADXY) Index: a trade and liquidity weighted index of a basket of Asian currencies, excluding the yen, compared to the U.S. dollar. S&P 500 Index (SPXT): a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. Performance figures assume that all dividends are reinvested. MSCI EAFE (Europe Australasia Far East) Index: a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. MSCI Emerging Markets (EM) Index: a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. Barclays Capital Aggregate US Bond Index: is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS, and CMBS. FTSE NAREIT US All REITs Index: spans the commercial real estate space across the US economy. It provides exposure to all investment and property sectors. DJ Liquid Commodity Index: serves as a liquid and diversified benchmark for the commodities' asset class. Barclays US TIPS Index: measures the performance of the US Treasury Inflation Protected Securities ("TIPS") market.
www.merkfunds.com ! ! 30! !© 2013 MERK FUNDS℠!
November 2013
Why I Sell the Dollar
Axel Merk President & CIO Merk Investments
Please read important risk disclosure informa:on towards the end of this presenta:on.
Dan Lucas Financial Analyst Merk Investments
