Axel Merk: Yellen's Complacency Risks Stock Market Crash

Thursday, 17 Jul 2014 12:17 PM

By Dan Weil

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Federal Reserve Chair Janet Yellen's complacency over investors' own complacency about financial markets puts the stock market at risk of a plunge, says Axel Merk, manager of the Merk Funds and a Moneynews Insider.

"Janet Yellen argues complacency in the market is not a problem," he writes in the Financial Times. "[She] might well live to regret those words."

The stock market's march to recent highs has been accompanied by very low volatility. The CBOE Volatility Index (VIX), which measures expected volatility in the S&P 500 index, recently hit a seven-year low.

Editor’s Note:
Dow Predicted Will Hit 60,000 — Buy These 4 Stocks Now


"When asset prices rise on the backdrop of unusually low volatility, investors unaware of dormant risks are lured into the markets. And because there is such low perceived risk, investors are tempted to gear themselves up, i.e., borrow money to invest," Merk notes.

"However, at the first sign of volatility flaring back up, which could come from any number of reasons, those investors might sell out of their positions in a heartbeat screaming, 'I didn't know this was risky!'

"Ms. Yellen does not think this is reason for concern, suggesting there are few signs of excesses in the markets," he argues. "The Fed's policies have artificially created a low volatility environment, and with it equity price appreciation."

But this state of bliss won't last forever. "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."

And what will be the outcome? "The longer the low volatility trend continues, the higher the chances a stock market correction turns into a stock market crash," he says.

Others think Fed policy is too loose as well.

"I hope we can all agree that once-in-a-century emergency measures are no longer necessary five years into an economic recovery," renowned hedge fund manager Stanley Druckenmiller, now CEO of Duquesne Family Office, said at an investment conference Wednesday, CNBC reports.

The central bank should be raising interest rates, he said.

Editor’s Note: Dow Predicted Will Hit 60,000 — Buy These 4 Stocks Now

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