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Merk In the News: Financial Times

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Axel Merk cautions of market crash

In a recent OpEd published by Financial Times entitled "Missing fear factor will return to haunt Yellen", portfolio manager Axel Merk warns of a possible market crash.

Axel Merk writes, "Alan Greenspan suggested home prices could not fall; Ben Bernake suggested the subprime mortgage market problems were contained; and Janet Yellen argues complacency in the marekt is not a problem. The current Federal Reserve chair, just like her predecessors, might well live to regret those words.

...In the years leading up to the financial crisis, investors had geared themselves up given what appeared to be a 'goldilocks' economy. As complacency yielded to fear, it was only rational for investors to reduce their leverage. Disruptions arose when large investors were forced to sell anything liquid to meet margin calls.

...In the current enviornment, equity prices have been marching higher on the backdrop of ever lower volatility; similarly, bond yields are near record lows. Ms. Yellen does not think this is reason for concern, suggesting there are few signs of excesses in the markets.

...it appears pretty clear the 'quantitative easing' and its variants throughout the world have compressed volatility.

...The Fed's policies have artifically created a low volatility environment, and with it equity price appreciation, which Ms. Yellen insists is not the Fed's concern.

Volatility will not remain low indefinitely. For whatever reason, and it does not really matter what initially triggers it, volatility will come back and the equity market may well get repriced lower.

...The longer the low volatility uptrend continues, the higher the chances a stock market correction turns into a stock market crash."

You may read the full Financial Times article (registration required) by clicking here.