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Gasoline prices
have seen a steep decline over the past three months. Since hitting a peak on
July 20, the national average price for a gallon of gasoline has declined 52
cents, which should inject approximately $120 to $130 billion into the
pocketbooks of consumers, with more expected on the way. Although, the
decline in the cost of energy and other commodities will somewhat offset the
overall fall in the rate of personal consumption, the US consumer is well on
its way to pulling back the reins on spending in a manner that has not been
seen since the early 1980's.
Real personal
consumption looks to be on a pace to decline -3.0% in Q3'08 and will almost
certainly see a second consecutive negative quarter during the final three
months of the year. If consumption were to decline at a similar rate during
the final quarter of the year it will be the first time since 1951 that
changes of that magnitude have been observed in real personal consumption.
The combined impact
of falling housing prices, the reduced value of equity portfolios and bleak
job and income prospects are in the process of reshaping consumer
expectations despite the positive impact from reduced gasoline prices on the
bottom line of consumers. Recent data on retail sales provide tangible
evidence that the consumer is in the process of a once in a generation
retrenchment.
The primary
question outstanding is not if consumers will cut back spending, but where
and how. We anticipate that the majority of the reduction in consumption will
occur in the ex food and energy category, with particular emphasis on
imported goods. On a monthly basis, demand for imported goods declined from
$194.94bln in July to $188.54bln in August. Inside the goods category that declined
-3.3% in August, demand for computer accessories, household electronics and
appliances all experienced declines.
Going forward we
expect the consumer to begin increasing her rate of savings over the next
year as individuals adjust to a diminished employment and income picture.
Reduced demand for goods overall and imported goods in particular, will hit
the retailers quite hard and curtail overall growth. The approximately
$300bln output gap that the majority in Congress appear to be targeting with
their new proposal will not provide direct rebate checks to consumers, but
looks to be aimed at bailing out states and municipalities and focused on job
creation vis-à-vis infrastructure projects. Thus, the largest decline
in retail prices that have been recorded in the post war era looks to have
little impact over the remainder of the year and well into 2009 on the
behavior of the consumer.
Joseph
Brusuelas
Chief
Economist
VP Global Strategy
Merk
Investments LLC
Merk Investments LLC is the manager
of Merk Mutual Funds, including the Merk Asian Currency Fund and the Merk
Hard Currency Fund. The Merk Asian Currency Fund invests in a basket of Asian
currencies. Asian currencies the Fund may invest in include, but are not
limited to, the currencies of China, Hong Kong, Japan, India, Indonesia,
Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand.
The Merk Hard Currency Fund invests
in a basket of hard currencies. Hard currencies are currencies backed by
sound monetary policy; sound monetary policy focuses on price stability.
The Funds may be appropriate for you
if you are pursuing a long-term goal with a hard or Asian 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 Funds and to download a prospectus, please visit www.merkfund.com.
Investors should consider the
investment objectives, risks and charges and expenses of the Merk Funds carefully
before investing. This and other information is in the prospectus, a copy of
which may be obtained by visiting the Funds' website at www.merkfund.com or calling 866-MERK
FUND. Please read the prospectus carefully before you invest.
The Funds primarily invest in
foreign currencies and as such, changes in currency exchange rates will
affect the value of what the Funds own 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 Funds are 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. The Funds may also invest in derivative securities which can be
volatile and involve various types and degrees of risk. As a non-diversified
fund, the Merk Hard Currency 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. For a more complete
discussion of these and other Fund risks please refer to the Funds'
prospectuses.
This report was prepared by Merk
Investments LLC, and reflects the current opinion of the authors. It is based
upon sources and data believed to be accurate and reliable. Opinions and
forward-looking statements expressed are subject to change without notice.
This information does not constitute investment advise nor a solicitation or
an offer to buy or sell any products or services. Foreside Fund Services,
LLC, distributor.
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