market views

Review & Focus®

Chuck Butler | May 1, 2016 8 MIN READ

April brought us showers and hopes of a beautiful spring. We’ve not had long beautiful springs in the St. Louis area in quite a few years, as we normally go from one or two beautiful spring days, to 95 degrees. Down in Florida, where I’ve been, I’ve watched the sun move from the south to north, and the spring has been beautiful. Gold has seemed to pick up the pace with the warmer weather, and that too is a beautiful sight! Gold, China, Japan, U.S. Debt, and many other things will be discussed this month, so let’s get going!

APRIL IN REVIEW

There have been quite a few things that have happened in April, so let’s go in the order of importance: On April 19, China finally began their Chinese renminbi denominated gold fixing. China is obviously tired of watching the gold price in the U.S and London get tied up with paper trades and have moved to do something about it. This is simply a move by China to take over the pricing of gold from the U.S. and London. This new gold fixing will start out slow, but it will grow in importance over time, and eventually I think that investors and traders will depend on China’s gold price, rather than that of the U.S. and London.

I can’t put into words just how important this new gold fixing is for the future of gold’s price. You see, no paper trades will be allowed in the Chinese gold fixing, only physical gold. So eventually this could also put the paper trades, and thus the price manipulators, out of business. In addition to the gold fixing, China also announced a couple of days later that they were creating a gold trading platform with Russia. BRICS countries are large economies with large reserves of gold and an impressive volume of production and consumption of this precious metal. In China, the gold trade is conducted in Shanghai; in Russia it is in Moscow. Their idea is to create a link between the two cities in order to increase trade between the two markets. In other words, taking over the gold trading of the world.

The G20 meeting in March was responsible for an alleged agreement that some people are calling the “Shanghai Accord,” which was just found out about in April. According to some reports, U.S., Japan, China, and the Eurozone agreed to coordinate a weakening of the U.S. dollar to relieve the pressure that was on the economies of these countries and others. Not everyone believes in this "Shanghai Accord" theory, but since the March G20 meeting the dollar has been weakening.

This was much to the chagrin of Japan, who was basically told to cease and desist its intervention and jawboning to weaken the yen. You may recall me telling you multiple times in the past how Japanese Prime Minister Abe’s “3 Arrows” monetary policy called for a weaker yen to invite inflation into Japan’s economy. I guess we know who pulls the strings now, eh?

And finally, we had several Central Bank meetings around the world, and one pending here in the U.S. for the last week of April. None of the Central Bank meetings brought about any major changes, and I doubt the U.S. Federal Reserve’s meeting will either. The Reserve Bank of Australia (RBA) and the Bank of Canada (BOC) both sounded optimistic about their economies going forward, and thought that enough had been done previously to accommodate the economy. I liked hearing that from both the RBA and BOC.

Speaking of the U.S. Federal Reserve, we heard from Fed Chair Janet Yellen during the month, and the markets all took from her speech that she sounded very dovish. Well, what else could she be? After the alleged Shanghai Accord, the Fed certainly can’t be going around talking about rate hikes any longer now can they? No, they can’t.

DING DONG, THE WITCH IS DEAD

Since the middle of March, after the supposed Shanghai Accord was agreed to, the strong dollar trend was ended quickly. I had thought we were already seeing signs of the strong dollar trend fading, but this brought all that fading to the forefront in a heartbeat. This doesn’t mean that we won’t ever see dollar-strength days going forward again. Remember what I’ve always taught you, and that is that currencies do not move in one direction every day—there’s volatility, and there’s no one-way street. But a trend should be your friend and over a long period of time, while the trend is in place, the assets in the strong trend should increase in value.

Check out the Currency Returns chart that our metals guru, Tim Smith, does for the Review & Focus every month. There you can see the one-month returns, and they are pretty good, with a lot of green arrows pointing upward. This is the proof in the pudding that the currencies are staging a comeback. It’s been five long years of this dollar strength, and quite frankly, I was beginning to think I needed to raise the white flag and surrender.

I don’t take pleasure in seeing our purchasing power reduced, but I’m someone who looks at things and figures out their worth. And when an asset like the dollar is overvalued, I call that out, and then like to see it move back to a level that’s more acceptable for the fundamentals that the country has. And the dollar’s fundamentals are awful folks.

A couple of months ago, we passed $19 trillion in national debt and unfunded liabilities are more than $200 trillion according to professor Lawrence Kotlikoff. Two years ago, when I spoke in Vancouver, I told the audience that the current U.S. overall debt—including Gov’t, corporate, state, and individuals—was $60 trillion. I’ve been unable to track that number since, but if it was $60 trillion two years ago, I’m sure it didn’t see any subtractions from the figure.

Outstanding auto loans have hit more than a trillion dollars, with an average balance of $12,000 per person, which consumes nearly 8% of the average borrower's disposable income. I’ve talked about this need of Americans to have a new car, and I just don’t see how that’s viable, given that 62% of Americans are living paycheck to paycheck, without any savings.

And it’s not just debt that is weighing on the dollar; the economic data has been just awful for a few months now, and when all is said and done, Q1 GDP here in the U.S. is going to be south of 1%. It will probably be around 0.4%, according to my GDP tracker. If the GDP is weak, and Consumer Spending is down, tax receipts will be weak, and there’s a real problem for the government.

BUT THINGS HERE AREN’T AS BAD AS IN JAPAN

Unsustainable debt, an economy that has been in a funk for a couple of decades now, no inflation to help melt away the debt, and an aging demographic is going to keep interest rates at 0% and even negative for some bonds and deposits. It’s going to keep the government attempting to figure out how to unlock the Japanese economy, and it’s going to keep the Japanese yen from fulfilling the promise of a strong, long, drawn-out rally.

And now the IMF is telling Japan to “back off” their attempts to weaken the yen. Japanese Prime Minister Abe and Bank of Japan (BOJ) Governor Kuroda have their hands tied, and maybe, just maybe that’s a good thing. You see, I contend that Japan got into this mess more than 20 years ago when it tried to circumvent its first recession in years. Remember the 80’s? Everyone was jealous of Japan. But the BOJ thought they knew a better way to make the recession go away quicker. They opened Pandora’s Box of Central Bank gaffs, and have been reaching into Pandora’s Box ever since. If they had just allowed the excesses from the 80’s to be cleaned out, and then started over once again, Japan wouldn’t have debt up to their eyeballs and an aging population that is no longer interested in self-financing the government.

The Japanese yen continues to survive though, just proving once again that these things can last longer than it seems they should. And somehow the markets still believe the yen is a “safe haven currency.” Wait, what? Are you kidding me? No, it’s true, and so there are periods of time when yen is bought, and you just have to scratch your head and wonder what traders are thinking.

WHAT’S NEW WITH CHUCK?

Well, April brought me some good news on my health problems. I can’t tell you how great it was to receive some good news, for it had been a long time since that has happened to me. The cancer drug I’ve been taking for 6 months, is working! The tumor in my jaw has shrunk from 7.5 cm to 3.9 cm, and the tumor in my chest, which was a real problem as it was lodged between my esophagus and aorta, has shrunk to a tiny mass. In essence, it’s gone! Yahoo! I still have this mass in my mouth that needs to shrink more, so more treatments to come.

In conclusion, all indicators point to an end to the strong dollar trend. It’s been five long years of the strong trend, and to see it end, would tie the dollar more securely to its awful fundamentals. China is working toward taking over gold trading, and its first step was to gather as much physical gold as it could. The next step was to begin a renminbi denominated gold fixing, and that is now done. Stay tuned for further moves from the Chinese with gold.


ASSET TRENDS 3/18/2016 – 4/15/2016

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 1.22%
Brazilian real 3.05%
British pound -2.09%
Canadian dollar 1.04%
Chinese renminbi -0.07%
Columbian peso 2.11%
Czech koruna 0.16%
Danish krone 0.30%
EMU euro 0.12%
Hong Kong dollar -0.02%
Hungarian forint -0.03%
Indian rupee -0.21%
Israeli shekel 1.94%
Japanese yen 2.42%
Mexican peso -0.79%
New Zealand dollar 1.56%
Norwegian krone 1.52%
Polish zloty -0.50%
Russian ruble1 3.03%
Singapore dollar 0.01%
South African rand 4.61%
South Korean won 1.42%
Swedish krona 1.05%
Swiss francs 0.24%
Turkish lira 0.40%
Metals3 Trend Change (%)
Gold -2.07%
Silver 2.50%
Platinum 1.65%
Palladium -3.93%
EverBank CD Baskets1, 2 Trend Change (%)
Balanced Debt® 1.21%
BRICS 2.08%
Commodity BasketSM 2.11%
Euro Trax® 0.61%
European OpportunitySM -0.16%
Geographic BasketSM 0.13%
Global Power Shift® 1.71%
Investor's Opportunity® 0.26%
Mining OpportunitySM 1.65%
New World EnergySM 1.26%
Pacific Advantage® 1.11%
Pan-AsianSM 0.97%
PetrolSM -0.45%
Ultra Resource® 0.88%
Viking® 1.01%
World Energy® 0.42%

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.

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