Merk Insights

11

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Wanted: Money for Uncle Sam
Thu, Jun 11 2009, 08:43 GMT
by Axel Merk
Merk Hard Currency Fund
In our estimate, the U.S. Treasury will have to raise over $2 trillion dollars this year to finance new obligations. In addition, over $2 trillion in government debt held by the public is coming due and has to be re-financed this year.
My pocket calculator tells me that this requires over $15 billion of government debt to be issued every business day. Note that summer months tend to be bad months to issue debt, as many buyers, including foreign buyers, tend to take vacation. Conversely, it looks like vacation has been cancelled for the U.S. Treasury’s debt issuance department.
On Wednesday, the Treasury issued $19 billion in 10 year notes; on Thursday, another $11 billion in 30 year bonds will be sold. Those happen to average $15 billion a day, but these are the highlights of the week and the government will need to ramp up future issuances substantially to meet its funding needs.
However, the government is not the only party issuing debt. A lot of corporate debt needs to be rolled; and a lot of foreign governments and corporations need to raise unprecedented amounts of debt. So far, there seems to be appetite for Uncle Sam’s debt, but the cost is rising; at the auction today, creditors demanded a yield of 3.99%, up from 3.6% only a week earlier.
In our view, the cost of borrowing may rise dramatically this year; a big unknown is whether the Federal Reserve will allow this to happen, as a spike in borrowing costs could put any nascent recovery into a tailspin. The Fed may step in and finance the deficit - to an extent, this is happening already, as the Fed has been buying government bonds, but the activity would need to be ramped up dramatically to keep borrowing costs low. At this stage, the Fed denies it will print money to finance deficit spending, although this may be more about semantics than substance.
If creditors are not properly compensated for the risk they take (which is the case when the Fed artificially keeps long-term borrowing costs low), the U.S. dollar may fall sharply. It is also possible that the Fed will be overwhelmed by market forces: the Fed may be able to print money, but it is not almighty; we may end up with a weaker dollar and higher borrowing costs.
Published on
Thu, Jun 11 2009, 08:50 GMT
Archive
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Merk
| Palo Alto, California
http://www.merkfund.com | insights@merkinvestments.com
Legal disclaimer and risk disclosure
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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