market views

Review & Focus®

Chuck Butler | September 1, 2016 9 MIN READ

August was as Augusts go, about the same-o, same-o, as past years. In baseball, they call August the “dog days of summer.” Over the years, I’ve adopted that phrase for the trading days in August. Central banks in Europe and the U.S. take a holiday in August, and nothing happens. I even said one day, while writing the Daily Pfennig® blog that trading was B-O-R-I-N-G! And so it went on throughout August. Nevertheless, let’s take a look at Fed policies, central banks around the world, and the performance of precious metals and foreign currencies.

A Previous Month’s Faux Pas

What was I thinking? I knew better than to think the FOMC (Federal Open Market Committee) would meet in August. But there it was; last month’s lead headline asking, “Will The Fed Hike Rates In August?” What a dolt! So, there are my errors and omissions for this month.

So, Will the Fed Hike Rates in September?

The easy answer to this is that I don’t believe they will. First of all, the economic data just hasn’t been there to support a rate hike, and second of all, it’s too darn close to the election.

But what about after the election? Well, again, the data, unless we see a miraculous recovery in the economy, still won’t be there to support a rate hike. But there is a scenario that, while I don’t believe it will come to fruition, just might happen. And that is, that the Fed uses their December meeting to hike rates, as a “one-year anniversary” event to their rate hike last December. The Fed members have stated that they need to add to their internal interest rate just in case the U.S. economic expansion falters and we head to a recession.

But here’s where the rubber meets the road on this folks. Basically, longtime economists and observers believe that to properly address a recession, a central bank would need about 300 Basis points (3%) in rate cuts. Even if the Fed does hike rates in December, we would only be at 1% or less—a far cry from what’s needed to combat a recession.

And the current expansion is sure getting long in the tooth, folks. I’ve said that the train has left the station and is heading to Recessionville. What will the Fed do when the economy drops into recession again, that is if it hasn’t already? Well, they’ll cut whatever interest they have, and then most likely return to the quantitative easing (QE) table once again. What else could they do? For it sure seems like going to a negative interest rate policy (NIRP) hasn’t worked in Europe, so why follow them down a road that doesn’t lead to better times? Ahhh, grasshopper, you need to answer the question as to why we’ve followed Japan down that same road that doesn’t lead to better times for years now. Could the Fed resort to “helicopter money?” I guess they could, but for heaven’s sake let’s hope not, for all it would do is give consumers an opportunity to pay off debts (good for them!) and not put money back into the economy, while the U.S. adds more debt (not good for us).

The Fed Re-Thinks Their Policies

The research team at Barclays recently issued a report, saying that, “A broad re-think of monetary policy is on the horizon.” Well upon seeing that, I had to read what they were talking about, and sure enough, they are talking about Fed Monetary Policy, which has been really criticized by me and other observers over the years for being so antiquated and not up to date. Phillips curves and dot plotting just seems so out of place in today’s world that is so integrated with global problems and changing productivity here in the U.S.

So here’s the breakdown of what Barclays is talking about: “Recent communications by San Francisco Federal Reserve President John Williams and former Fed Chair Bernanke suggest the committee is coming around to the point of view that we and many market participants have held for some time, namely that potential growth (y*) is low and unlikely to recover swiftly, the Phillips curve is flat (eg, NAIRU, or u*, is either very low or the pass-through of labor market scarcity to inflation outcomes is modest), and the natural rate of interest (r*) has fallen to very low levels. The Fed had hoped that its unconventional policies would have generated better outcomes, but seven years of incoming data after the end of the recession have done little to alter the view of slow potential growth, zero policy rates, low global government bond yields, and persistent disinflationary pressures. These are issues we have written about for some time, including in The Great Destruction, Equity Gilt Study 2015 and, when absolute zero isn’t low enough, Equity Gilt Study 2016, among other reports.

That this view has become more widely shared within the Federal Reserve and, over time, filtered into the FOMC’s forecasts about the long-run rate of potential growth, neutral policy rate, NAIRU, and the dot plot has seemingly prompted a broader re-think in Fed policy. This has taken on two dimensions. First, what it means for the near-term path of monetary policy in the current cycle and, second, what it means for the conduct of monetary policy in future downturns.”

For those of you unfamiliar with NAIRU, it stands for: Non-Accelerating Inflation Rate of Unemployment. So, basically what Bernanke and Williams are saying, and what is being more adopted by the Fed, is that these levels are too low, and therefore we need to re-think our monetary policy.

Have the Central Banks Run Out of Ammunition?

Central banks around the world are now spending $200 billion a month on emergency economic stimulus measures, pumping this money into their economies by buying bonds. The current pace of purchases is higher than ever before, even during the depths of the financial crisis in 2009.

And yet, despite the extraordinary support of so-called quantitative easing, the global economy is not in great shape. What was supposed to bolster economies temporarily during times of crisis has become a routine tool for policymakers, who long ago cut interest rates to zero (or below) but haven’t seen the pick-up in activity they hoped for.

Central bankers would never say, “We’re out of ammunition.” But once we get to where we are, it sure does appear that way to me. Remember the story of the emperor’s new clothes? In case you’ve forgotten this one: “The Emperor’s New Clothes” is a short tale by Hans Christian Andersen about two weavers who promise an emperor a new suit of clothes that is invisible to those who are unfit for their positions, stupid, or incompetent. When the Emperor parades before his subjects in his new clothes, no one dares to say that they don't see any suit of clothes until a child cries out, “But he isn't wearing anything at all!”

Will the central bankers end up being the emperor with his new clothes? It sure does appear that way to me.

The Strong Dollar Trend Begins to Bend

A few months ago, I wrote about how I believed that we were seeing the beginning of the end of the strong dollar trend, which began without fanfare in 2011 when the Greek debt came to everyone’s attention, and PIIGS became a new word.

Over the past 8 months, currencies have put in good returns vs. the dollar, and gold and silver have turned the corner to higher values. Our currency and metals chart below gives you the month-to-month returns, but since I’m talking about a longer period that may eventually be looked back on as the start of a new trend, I’ll go further back.

Year-to-date (to 8/16/16), the Brazilian real leads the currency pack with a 24.65% return, followed by Japanese yen at 19.78%, the South African rand at 16.16% and the Norwegian krone at 7.85%. Metals too have been rising with silver at a 43.5% return this year, gold has a 27.08% return, and so on. It’s very reminiscent of the beginning of the last weak dollar trend in which the euro, being the big dog, had to get off the porch, which it has again this year with only a 3.8% return to date. But once the big dog leaves the porch to chase the dollar down the street, the little dogs (the remainder of the currencies) will outrun the big dog. And that’s exactly what we’re seeing right now.

Longtime readers know that I like to be right. Who doesn’t? So, I really went out on a limb earlier this year when I said that it appeared to me that the strong dollar trend was beginning to end. It was much like in 2001, when I wrote the white paper titled, “The Decline of the Dollar,” and the beginning signs were very much the same as now. Oh, by the way, in case you’re new to class, the weak dollar trend began at the beginning of 2002, and ran through 2010.

Speaking of Gold and Silver

A couple of years ago, I wrote about how I saw a shortage in silver coming down the road. And when it didn’t materialize I thought, “How could I have been so wrong?” But I just needed to be patient, as the shortage became a realization in 2016. First Majestic’s Keith Neumeyer, whom I’ve quoted before, recently said, “Silver mines and silver are way rarer than people actually think.” He should know, as he is the CEO of First Majestic Silver Corp, one of the top silver mining companies in the world!

Recently, the well-respected author and analyst, James Rickards, also wrote:

“How much longer will investors sit with dollars, waiting for the wipeout to come? It’s important to diversify into 10% physical gold to preserve your wealth before it’s too late.”

Take your pick, gold or silver, platinum or palladium, at least one of these precious metals should be a part of a well-diversified investment portfolio—one that takes on the Markowitz portfolio diversification theory. We’ve used the Markowitz theory for as long as I can recall, which basically calls for adding different assets classes to an investment portfolio that have different pricing mechanisms and different features than the other investments you hold, as the proper way to diversify an investment portfolio.

In Conclusion: What If This Is the Beginning of a Weak Dollar Trend?

Well, you can see from the currency returns so far this year that you may have already missed out on the real beginning of the potential weak dollar trend, but not to worry! Currency trends are typically long-sweeping moves that often take a few years to run out. So, if this is the beginning of the new weak dollar trend, then there’s still time. Individual investors have a history of chasing market trends, getting in too late, and staying too late. Don’t be a part of that history!

ASSET TRENDS 7/19/2016 – 8/15/2016

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 2.11%
Brazilian real 2.63%
British pound -1.82%
Canadian dollar 0.69%
Chinese renminbi 0.85%
Columbian peso -0.08%
Czech koruna 1.44%
Danish krone 1.42%
EMU euro 1.43%
Hong Kong dollar -0.01%
Hungarian forint 3.28%
Indian rupee 0.33%
Israeli shekel 1.35%
Japanese yen 4.90%
Mexican peso 2.24%
New Zealand dollar 2.11%
Norwegian krone 3.30%
Polish zloty 3.99%
Russian ruble1 -0.94%
Singapore dollar 0.71%
South African rand 7.42%
South Korean won 2.93%
Swedish krona 1.60%
Swiss francs 1.20%
Turkish lira 3.12%
Metals3 Trend Change (%)
Gold 0.45%
Silver -0.69%
Platinum 2.06%
Palladium 4.21%
EverBank CD Baskets1, 2 Trend Change (%)
Balanced Debt® 1.99%
BRICS 2.06%
Commodity BasketSM 3.08%
Euro Trax® 1.79%
European OpportunitySM 3.09%
Geographic BasketSM 1.44%
Global Power Shift® 2.18%
Investor's Opportunity® 2.03%
Mining Opportunity® 1.07%
New World EnergySM 2.03%
Pacific Advantage® 1.96%
Pan-AsianSM 1.96%
PetrolSM 1.24%
Ultra Resource® 1.48%
Viking® 2.23%
World Energy® 1.07%

EverBank CD Basket trends are also based on WCRS indicative spot rates for the underlying currency mix, which is described at, 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

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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