market views

Review & Focus®

Chuck Butler | February 1, 2016 9 MIN READ

For more than 15 years Chuck Butler, Managing Director of EverBank Global Markets Group, has written the Review & Focus® newsletter for the EverBank® World Markets® audience—providing his expert insights and analysis on financial news and markets around the world. Now, we’re proud to offer this wealth of information to all of our valued clients. We hope you enjoy the Review & Focus and find it to be of value as you traverse the ever-changing financial landscape. And now ladies and gentlemen, without further ado, Chuck Butler:

January brought us a New Year, but the same old problems. I don’t really get into the New Year’s resolutions because they rarely materialize, and in the end we’re stuck with the same problems we had the year before. And no, I wasn’t ordered to put away all the sharp objects at my house. It’s just me being me.

Fear Holds a Grip on the Markets

We ended 2015 with fear in the markets as China’s stock market was getting sold like funnel cakes at a state fair. China was using its currency, the renminbi (yuan), as a tool to show the U.S. that they shouldn’t have hiked rates, and the renminbi was trading at multi-year lows vs. the dollar. But it wasn’t all about China, and in my humble opinion we as U.S. investors and consumers should be more worried about the weak data that continues to print here in the U.S., which is taking us down a road that leads to Recessionville.

The price of oil, as I go to press, has fallen below $30 per barrel, and there are quite a few forecasters out there who believe it will fall to $20 this year. Well, it has a good start toward that figure, although there is something that could upset that applecart, and it is the fear that’s coming out of the Middle East—that the house of Saud could be in trouble.

So, fear is everywhere folks, and that means investors flock to safety. Now, there are some questions about what investors believe are “safe havens,” but for now they are what they are perceived to be. And that means dollars, yen, euros, francs, gold and treasuries are basically the only investments that investors are looking to as I go to press.

The looks of all this appears to me, more and more now, that the Chicken Littles who said the financial system in place today would collapse, and a new financial system would be developed that was based on gold, could end up being right. But, we’ve been here before folks, when everything looked to be teetering, and somehow things calmed down in time to avert a collapse.

But for now, stock markets around the world are getting whacked, and the currencies around the world, except the so-called “safe havens,” are getting sent to the woodshed on a daily basis. I would think gold would be soaring in price in an environment like this, but it’s not. What, or who, is holding it back? Ahhh, grasshopper, we’ve been through it all before—you’ll have to go back to previous lessons.

The Fed Opens a Can of Worms

I went to press with last month's Review & Focus before the Fed’s FOMC meeting in December, so you didn’t get to see me with egg all over my face. So here’s your chance. Recall that I held steady-Eddie with my call that the Fed wouldn’t hike rates, even in the face of all the people in the markets calling for a rate hike. I was wrong, dead wrong. I used to tell people all the time when I would be wrong about something, that “I was so wrong, I was almost right!” So, go ahead and kick me. I was wrong.

I wasn’t wrong for all the Fed meetings prior to the December meeting. Yes, recall that the Fed had stated a year earlier that they would begin hiking rates in 2015 and that rates would be 1.675% by year-end (they were 0.50%). First came December 2014, and no rate hike, then March 2015, and no rate hike, same for June and September. So, what made the Fed members believe that now was the time to hike rates when the previous meetings weren’t the right time? Their preferred inflation measure, PCE, was only 1.3%, nowhere close to the 2% target the Fed stated they needed to see before hiking rates. U.S. economic data like the ISM/ Manufacturing Index, Durable Goods, Factory Orders, Industrial Production and Capacity Utilization were all printing weak, negative numbers, and the ISM had fallen below 50, the line in the sand that marks the difference between expansion and contraction.

I truly believe that the Fed opted for December to save face with the markets, that’s all. They had told the markets that rates would be hiked in 2015, and December was their last chance saloon. Now was that any real reason to hike rates? So, what did gold do after the rate hike announcement? It rallied. When everyone except us at EverBank Global Markets thought that a rate hike would whack gold, it rallied instead.

The Fed also said that they would be hiking rates four more times in 2016. Now to me, that was akin to opening a can of worms, or a Pandora’s Box of rate expectations. Because I just don’t see the economy backing them up for four more rate hikes this year. In fact, I’ve gone out on a large, fat limb here and said that by summer 2016 the Fed will stop their rate hikes and begin to look to reverse them as the economy enters a recession. Of course that’s me and my opinion, which could be wrong.

The Strong Dollar Trend

For the January 2016 Insights letter, I talked about how the dollar had entered a strong trend in 2011, when the euro began to deal with the PIIGS. It took a few years for currencies like the Aussie dollar, New Zealand dollar, Canadian dollar, Chinese renminbi, and a few others, before they succumbed to the strong dollar trend, but in July 2014, things really turned in favor of the dollar.

But what’s up with this strong dollar trend, given the weak economy here, the very large debt picture, and low interest rates? I don’t really like this term, but it applies here: “The dollar was the cleanest shirt in the dirty laundry.”

I guess now you’re asking what do I do with my currencies in a strong dollar trend? Well, you can go down two different paths. The first path leads you to sell into weakness, and take potential losses. The second path leads you to a place where you batten down the hatches, look for basement, bargain prices and wait out the storm.

How much longer do we wait? Well, that’s a good question, but as I said above, I truly believe that by summer the Fed will be reversing their rate hikes. And when that happens it will be time to be like the munchkins and, “come out, come out, wherever you are. It’s safe now.” You see, currency trends normally last between 5 – 7 years, the last weak dollar trend lasted 9 years, so it was long in the tooth. And 2016 will be 5 years for this strong dollar trend.

China, We Have a Problem

The economic slowdown in China digs deeper roots, and causes many problems. China’s Manufacturing Index has been below 50 for several months now, and just doesn’t show signs of recovering. And it probably won’t—not for a while given how the rest of the world that buys the stuff that China makes, has slowed down. Right now, the only country seeing some recovery is the Eurozone (which really isn’t a country, but a union of countries), and that recovery is nascent at best.

The flow of funds out of China is becoming a real problem for the country, and the currency, which at first got whacked because China didn’t want to have a strong currency, being the reason their exports suffered. But then along came the Fed rate hike, and China had to offset that rate hike with more renminbi weakness, They did this so that the renminbi didn’t get too strong against the euro and yen, two of China’s biggest trading partners.

With China suffering a recession, the rest of Asia, does too. China has become the “go-to country” for Asia and most of Europe and S. America, so when China sneezes, most of the world catches a cold. And that couldn’t be more evident than in the currencies of Australia and New Zealand.

There are still a lot of good things going on in China, folks. The renminbi-denominated gold trading is still on track to start in April. China is still going forward with the high-speed railway on their new “Silk Road” to Europe, and China is still continuing to buy and produce all the gold they can take on. And what China doesn’t buy, Russia, India and others are lining up to purchase.

Update on the U.S. Economy

Well, I’m going to talk about some data that we don’t normally see or hear about. Yes, the usual suspects of Retail Sales, and data of that ilk, are all still printing weak here in the U.S., but there are other things that I think we should look at too.

According to the Employee Benefit Research Institute (EBRI) over 30 million Americans tapped into their 401k accounts in 2015. Maybe I don’t need to tell you why this is one of the worst things people can do with their money, but I will anyway. Not only do early withdrawals cost you a 10% penalty, as well as additional income tax, they also put a giant dent in your retirement savings.

Moving on: A very large number of millennials are moving back in with their parents, and I don’t think they are doing so because they don’t want to be independent any longer. Of women age 18-34, a shocking 36.4% are living with their parents, the highest percentage since record keeping began more than seven decades ago. And the number of men in the same age bracket is even higher at 42.8%.

Again, moving on: After spiking in October, U.S. foreclosures settled back down in November and December, but still represented a very large number of foreclosures each month. And with interest rates going higher in the U.S., this data for 2016 might be even worse. I bring this up to mention that home ownership in the U.S. has dropped to the lowest level in 30 years, and this with mortgage rates still very low. What has happened to the American Dream?

In conclusion, I hope you enjoyed this edition of Review & Focus. Each month I’ll continue to dig into thoughts a little deeper than I can with the world famous Daily Pfennig® newsletter. Glad you’re aboard.


ASSET TRENDS 12/15/2015 – 1/15/2016

Source: Bloomberg World Currency Ranker Screen (WCRS). WCRS asset trends are based on BGN “Bloomberg Generic” indicative or “spot” currency exchange rates and metals prices as of 5 pm Eastern Time on the dates specified. Such rates and prices are generally only available for large volume transactions conducted by institutional investors at a specific point in time. These values are illustrative only and do not reflect interbank rates available to us or the rates or prices we make available to customers at any point in time, and the trend data provided do not include retail exchange spreads or other transaction costs.

Currency1, 2 Trend Change (%)
Australian dollar -4.13%
Brazilian real -4.23%
British pound -4.61%
Canadian dollar -4.85%
Chinese renminbi -1.86%
Columbian peso 0.76%
Czech koruna 0.10%
Danish krone 0.11%
EMU euro 0.12%
Hong Kong dollar -0.55%
Hungarian forint 0.82%
Indian rupee -0.99%
Israeli shekel -2.13%
Japanese yen 3.93%
Mexican peso -5.37%
New Zealand dollar -4.97%
Norwegian krone -0.98%
Polish zloty -2.02%
Russian ruble1 -9.56%
Singapore dollar -2.27%
South African rand -10.56%
South Korean won -2.46%
Swedish krona -0.64%
Swiss francs -0.82%
Turkish lira -2.27%
Metals3 Trend Change (%)
Gold 2.91%
Silver 2.00%
Platinum -1.81%
Palladium -13.06%
EverBank CD Baskets1, 2 Trend Change (%)
Balanced Debt® -2.49%
BRICS -5.44%
Commodity BasketSM -6.13%
Debt-FreeSM -1.50%
Euro Trax® -0.44%
European OpportunitySM -0.43%
Geographic BasketSM -2.48%
Global Power Shift® -3.55%
Investor's Opportunity® -3.94%
Mining OpportunitySM -4.93%
New World EnergySM -3.32%
Pacific Advantage® -1.77%
Pan-AsianSM -1.43%
PetrolSM -3.65%
Prudent Central BankSM -3.40%
Ultra Resource® -2.95%
Viking® -0.55%
World Energy® -3.64%

EverBank CD Basket trends are also based on WCRS indicative spot rates for the underlying currency mix, which is described at everbank.com/currencies, and thus are not reflective of interbank rates available to us or the rates we make available to customers at any point in time and do not include our spread. For more information, please see everbank.com/currencies.

Chuck Butler
Chuck Butler
Managing Director of EverBank Global Markets Group
Chuck Butler
Chuck Butler
Managing Director of EverBank Global Markets Group
You can count on Chuck to tell it like it is. He has over 35 years of experience in the currency field. And he's got a wit all his own. A frequent and respected analyst for various national media outlets, Chuck is also the original author of the popular Daily Pfennig® blog.

Asset trend data are illustrative only and do not reflect retail exchange spreads or other transaction costs.

Along with the potential for market gains, foreign currency accounts carry some additional risks from currency fluctuations, economic and political factors, and accounting differences.

All statements, comments and opinions expressed are solely those of the writer or speaker and are not the statements, comments or opinions of EverBank or of any of its affiliates, and are subject to change without notice. Due to the rapidly changing nature of currency and commodities markets, any statement, comment, or opinion may quickly become outdated. This is not a solicitation for the purchase or sale of any securities or options on securities or for the purchase or sale of a currency or any precious metal, and it does not constitute a recommendation to you or to any specific person of any particular action. EverBank, its officers and employees do not provide investment or other types of advice. All factual information has been obtained from sources that the writer or speaker believed to be reliable, but the accuracy, completeness, and interpretation of the factual information is not guaranteed and has not been independently verified. Not all products are right for everyone. You should conduct your own research and/or consult your advisor before making any purchases.