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Review & Focus®

Chuck Butler | November 1, 2016 11 MIN READ

Rocktober was a difficult month for the currencies, metals, commodities, bonds, stocks, what else? Oh, my psyche! I was so far down the line with the idea that we could be seeing the beginning of the end of the strong dollar trend. Unfortunately, the plans of mice and men don't always play out, as there was a spanner thrown into the works, by the name of Deutsche Bank. So, we have that to talk about this month, and we'll also touch on debt monetization, the latest Janet Yellen talk, and prospects for a rate hike coming here in the U.S. soon. So, let's get to Reviewing and Focusing this month!

But First, China Makes A Statement

Late in September, the IMF announced that Chinese renminbi (yuan for those that can't spell, pronounce or say renminbi) would be added to their Special Drawing Rights (SDRs) as a Reserve Currency with a weighting of 10.92%. So, let's first review, which we have done previously, but it never hurts to do again, what SDR's are.

“The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries' official reserves. As of March 2016, 204.1 billion SDRs (equivalent to about $285 billion) had been created and allocated to members. SDRs can be exchanged for freely usable currencies. The value of the SDR is based on a basket of five major currencies—the U.S. dollar, euro, the Chinese renminbi (RMB), the Japanese yen, and pound sterling—as of October 1, 2016.

“The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions. In addition to its role as a supplementary reserve asset, the SDR serves as the unit of account of the IMF and some other international organizations.”1

OK, now that we've established what an SDR is, and what it is used for, let's go back and do some math: $285 billion is an issuance, of which 10.92% is weighted to renminbi, but there had been no renminbi in the SDR mix previously, so 10.92% of $285 billion would have to be held by owners of SDRs to bring their SDR mix into line with the IMF's guidance. That would be over $31 billion worth of renminbi that would have to be held by Central Banks that own SDRs.

Now, I'm not saying that this allocation would be made all at once, or that it hasn't already occurred, as it would be suicide for the buyers to all line up and make their purchases at the same time, which would drive the price of renminbi higher with each purchase. But what I am suggesting is something that I've been talking about for more than six years now. And that is simply, that this is just another step for the Chinese to gain a wider distribution of their currency. And a wider distribution is the goal of the Chinese in order to facilitate their ability to overtake the U.S. with regards to economic growth, (they may have already done so), trade prowess, financier of the world, and so on.

A few years ago, my good, longtime friend, Ellie, sent me the following from the Epsilon Theory blog, and I loved it, but while you're reading it imagine that the tiger is the renminbi, and donkey is the dollar. Enjoy!

There were no donkeys in Guizhou until an eccentric took one there by boat; but finding no use for it he set it loose in the hills. A tiger who saw this monstrous-looking beast thought it must be divine. It first surveyed the donkey from under cover, then ventured a little nearer, still keeping a respectful distance.

One day the donkey brayed, and the tiger took flight and fled, for fear of being bitten. It was utterly terrified. But it came back for another look, and decided this creature was not so formidable after all. Then, growing used to the braying, it drew nearer, though it still dared not attack. Coming nearer still, it began to take liberties, shoving, jostling, and charging roughly, till the donkey lost its temper and kicked out.

“So that is all it can do!” thought the tiger, greatly pleased.

Then it leaped on the donkey and sank its teeth into it, severing its throat and devouring it before going on its way.

Poor donkey! Its size made it look powerful, and its bray made it sound redoubtable. Had it not shown all it could do, even the fierce tiger might not have dared to attack. — Liu Zongyuan (773-819 AD)

Deutsche Bank Throws A Spanner In The Works

Right about the time that I was ready to announce to the world that the strong dollar trend was over, along came a spider and sat down beside the currencies, metals and commodities. That spider’s name? Deutsche Bank (DB), the largest bank in the largest economy state of the Eurozone. They have problems, and their problems, become those of the euro, and without a euro on the rally tracks, there can be no end to the strong dollar trend.

Now, I could say things like, “I didn't see this coming at DB”, or “DB really blindsided me,” otherwise I wouldn't have gone out on the limb and say that it appeared the strong dollar trend was coming to an end, like I did in the previous two months of the Review & Focus® newsletter. But those are just excuses, and the old football coach used to say, “Excuses never won a game for anyone.” So, we'll have to wait-n-see how this DB thing all plays out. Just recently on 09/29/16, Germany announced that they would not bail out DB, or any other struggling bank.2 Uh-oh!

Have you ever heard of CoCo bonds? Tier 1 contingent convertible or ‘CoCo’ bonds are designed to automatically convert from debt into equity in order to circumvent the messy and often protracted negotiations, which inevitably take place whenever such a conversion is called for.

Such a conversion would, theoretically, shore up a company's weakening capital base in times of crisis, and the bonds also allow for issuers to miss coupon payments (which, unlike regular debt instruments do not then accrue) or even cancel the bonds altogether should the firm's capital base break stipulated levels.

“So, why on earth would investors accept these seemingly one-sided terms? Why the one thing that central banks action have gradually and systematically stolen from them over the course of their extraordinary monetary policy measures; yield.” — Grant Williams from Things That Make You Go Hmmm.

The reason I mention these bonds, is that DB issued a ton of them, even though CoCo bonds could be the riskiest bonds/debt issued by a bank, due to the fact that they have such high yields, and the fact that the issuer controls when the bonds get converted to equity. These are just some facts about things going on in the background that you might not have heard about, but that play heavily into the goings on at DB, and what might happen to the euro should DB continue to have problems.

But then, my guitar-playing, guru-analyst friend, Steve Sjuggerud, always says that when “everybody else hates something, it’s time to buy it.” Well, I don’t think everyone hates the euro right now, but there are certainly a number of things not to like: DB problems, Italian bank problems, elections in Germany…I'm just saying.

Janet Yellen Talks About The Slow Recovery

On October 14, 2016, Fed Chair, Janet Yellen, spoke to an economic conference at the Federal Reserve Bank of Boston. In her speech she touched on how the slow recovery from the Great Recession has surprised economists, and stated that the past couple of years have shown “limits on economists' understanding of the economy,” including the topics of supply and demand.3 According to an AP report on the speech, “Yellen said the sluggish recovery suggests that ‘it is even more important for policymakers to act quickly and aggressively in response to a recession’ and that policymakers might need to provide more stimulus ‘during recoveries than would be called for under the traditional view.’”4

OK, that's a lot to take in. But there are two points here that I think the markets completely missed, for had they “caught them” like I did, the dollar wouldn't have been so strong three days after her speech. 1) I think Yellen's remarks amounted to an implicit defense of the Fed's aggressive efforts to boost the economy in the aftermath of the Great Recession. And 2) I think she greased the tracks for additional stimulus as she sees a recession might be coming.

Just my two-cents and I could be wrong about it, but re-read it. This was taken from the Associated Press report; I didn't make this stuff up.

Should We Get Ready For Permanent Monetization?

I really got up on my soapbox on Rocktober 17th in the Pfennig. I had read so much about debt monetization over the previous weekend, that it had me awake in the middle of the night thinking about it.

One of the things that scares the bejeebers out of me is an article I read about how Central Banks around the globe have added trillions of dollars to their respective balance sheets. Get this. The 10 largest Central Banks now own assets totaling $21.4 trillion! That's a 10% increase from the end of last year, folks. This is the fastest pace since 2011, when the PIIGS5 were scaring the bejeebers out of everyone with their combined debt. And then the Daily Reckoning (DR) was discussing “permanent monetization” the other day and offered a quote from Adair Turner, former captain of the U.K.'s Financial Services Authority, which made me cringe and decide to put the article aside for a day, so I could stew on it for a while. Turner said:

“There is no need for central banks' balance sheets to shrink. They could stay permanently larger. Advanced economies face debt burdens that cannot be reduced simply through a mix of austerity, forbearance and growth. But if a central bank owns the debt of its own government, no net public liability exists. The government owns the central bank, so the debt is to itself.”6

Really? I loved the way the DR responded to this thought that governments can take control of the printing press. They called it playing with “fire.” I may be one of those old befuddled men that think that the Constitution is great, so I'll say this with that in mind: The whole purpose of independent central banks was to prevent governments from using monetary policy to fund its expenses or its debt, so-called monetary financing.

For those of you that are just trying this letter, I may have done something here that I don't normally do. I talked about a monetary policy without explanation for new readers. So, monetization of debt according to is defined as: “A way of paying off or otherwise financing debt accrued by a government by that same government or its independent central bank, in order to print more money and increase the monetary base. This can be done by issuing new bonds and/or selling domestic debt to foreign countries.”

So, you can see that should this concept become reality here in the U.S., or for any other country for that matter, the country doing this would be basically handing the keys to the printing press over to the government, and then the government could print money anytime they felt like it—whether it was a “recessionary time” or not. There have been a couple of countries in history that have done this very thing; handed the keys to the printing press to the government. I don't think I have to mention them, I'm sure you know about them like you do the back of your hand. I sure don't think that this is the kind of company any country would like to keep!

I would like to point out something here that my dad taught me years ago: There are two ways to be fooled. One is to believe what isn't true; the other is to refuse to believe what is true.

And Finally…

After more than 20 years of nearly unprecedented growth, the billionaire population had a largely stagnant 2015.

According to data collected in UBS and PWC’s Billionaire's Report for 2016, released 10/13/2016, what the study calls “The Second Gilded Age” may be faltering. The report analyzed data on 1,397 individuals in 14 worldwide markets over the past two decades. The total wealth of billionaires worldwide fell some $300 billion in 2015 from $5.4 trillion to $5.1 trillion. The group's average wealth fell by the same amount as well.

The U.S., home to the world’s largest billionaire population (47 percent), was an exemplar of the overall tepid year. The number of billionaires increased, but only by five (that's people, not percent), and total wealth actually fell 6%.

Not that this means a hill of beans to you, me and the guy down the street that’s fixing his car right now, but in the long run, this is something that could turn badly for the U.S. economy

In Conclusion

I know, not a lot of talk about the currencies etc. this month, and that’s because the dollar has the conn, and there’s not much else to talk about other than what I did talk about. It was a good month to get some things off my chest, and on to yours, dear reader. Next month, we’ll be talking about the upcoming rate hike from the Fed (there, I said it out loud!), and who knows what else, given “the times they are a-changing!”

ASSET TRENDS 9/16/2016 – 10/17/2016

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.

Currency7,8 Trend Change (%)
Australian dollar 1.79%
Brazilian real7 2.02%
British pound -6.28%
Canadian dollar 0.49%
Chinese renminbi7 -0.93%
Columbian peso 1.21%
Czech koruna -1.47%
Danish krone -1.34%
EMU euro -1.43%
Hong Kong dollar -0.01%
Hungarian forint -1.19%
Indian rupee7 0.14%
Israeli shekel -1.11%
Japanese yen -1.62%
Mexican peso 3.79%
New Zealand dollar -1.80%
Norwegian krone 1.46%
Polish zloty -1.76%
Russian ruble7 3.20%
Singapore dollar -1.54%
South African rand 0.19%
South Korean won -1.66%
Swedish krona -2.90%
Swiss francs -0.88%
Turkish lira -3.99%
Metals9 Trend Change (%)
Gold -4.19%
Silver -7.23%
Platinum -8.39%
Palladium -5.23%
EverBank CD Baskets7,8 Trend Change (%)
Balanced Debt® 0.57%
BRICS 0.92%
Commodity 0.17%
Euro Trax® -1.04%
European OpportunitySM -1.47%
Geographic 1.04%
Global Power Shift® 1.44
Investor's Opportunity® 1.23%
Mining OpportunitySM 1.31%
New World EnergySM 1.25%
Pacific Advantage® -1.35%
Pan-AsianSM 0.08%
PetrolSM -0.34%
Ultra Resource® 0.06%
Viking® -0.69%
World Energy® -0.64%

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.

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  5. The five eurozone nations that were considered weaker economically following the financial crisis: Portugal, Italy, Ireland, Greece and Spain, are referred to as PIIGS.
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