Another Salvo in the Currency War

Macro Strategy Report for February 2015

by Jim Welsh with David Martin and Jim O’Donnell, Forward Markets

After a deep recession took hold in the early 1990s, Japan initiated fiscal and monetary policies to resuscitate its economy and lift the veil of deflation blocking the rising sun. The Bank of Japan (BoJ) lowered short-term interest rates below 0.5% in 1995 and has held those rates near 0% since 1999. In March 2001, the BoJ launched the first quantitative easing (QE) program in central bank history.

There were a number of false starts and relapses that only made deflation more entrenched and economic growth elusive. After more than 20 years, the residual impact of all the spending programs and monetary stimulus was that Japan’s government debt-to-GDP (gross domestic product) ratio had soared to more than 210% in 2012. To put this into perspective, most economists consider a debt-to-GDP ratio of 60% or less to be healthy. With no other stimulus options available, the BoJ moved in November 2012 to significantly cheapen the value of the yen in hopes of spurring exports, economic growth and inflation. After a brief growth spurt in the first three quarters of 2013, the Japanese economy fell back into recession in the third quarter of 2014. This relapse forced the BoJ to initiate another round of yen devaluation on October 31, 2014—think of a doctor using a defibrillator to start a patient’s heart.

Last year the European Union (EU) began to deal with the dreaded combination of weak economic growth and low inflation. In response, the European Central Bank (ECB) lowered its interest rate to less than 0.5% in November 2011 and finally to 0% in July 2012, so interest rates were already as low as they could go in 2014. Logistics precluded the launch of a QE program in the eurozone last year since the ECB would be required to buy the sovereign bonds of 18 different countries, a far more complicated task than the BoJ or U.S. Federal Reserve (Fed) faced.

From a fiscal point of view, there were no realistic stimulus options either. While the EU considers a debt-to-GDP ratio of 60% to be healthy, at the end of 2013 it was at 91%. Increasing government spending is problematic since spending already represents 50.5% of total EU GDP. Much like Japan had done in 2012, the EU exhausted its monetary and fiscal options by the spring of 2014.

After witnessing Japan’s battle against deflation and weak economic growth for more than two decades, the eurozone decided it did not want to follow suit. We discussed the conundrum facing the ECB in the April and May 2014 Macro Strategy Reviews (MSRs) and concluded that the ECB would convey its desire for a decline in the euro. The euro has fallen by 18% against the U.S. dollar since early May of 2014—a huge move in less than a year in the world of foreign currencies. The move created a significant increase in volatility in the largest global financial market.

Japan and the eurozone are exporting deflation to the rest of the world through the massive depreciation of their currencies. On January 16, the tentacles of deflation spread seemingly out of the blue. In the December 2014 MSR we said, “The volatility in the currency market that the BoJ and ECB have initiated is likely to intensify in coming months.” In the November MSR we noted that most change occurs incrementally over time at first, and then suddenly. These statements appear prescient especially in light of the decision on January 16 by the Swiss National Bank (SNB) to remove the cap on the Swiss franc versus the euro.

The SNB had pegged its currency at 1.20 francs per euro since September 2011. In order to maintain that level, the SNB bought euros. After ECB President Mario Draghi said the ECB would do “whatever it takes” in July 2012, the euro modestly increased in value versus the franc, so the SNB initially profited from its intervention.

The president of the SNB had reaffirmed its commitment to maintain the cap in the first half of January. That commitment evaporated after the European Court of Justice issued its nonbinding ruling that allowed the ECB to proceed with its QE program. The SNB determined that the ECB’s QE program would lead to a further decline in the euro, increasing its already significant losses.

Within minutes of the SNB’s announcement of its cap removal, the euro plunged 27% versus the Swiss franc before closing with a loss of 15% on January 16. Investors who were long the euro—expecting it to rise—or short the franc—expecting it to fall—incurred large losses. UBS, a Swiss global financial services company, estimates that the SNB incurred a paper loss of $40 billion on its euro holdings. Citibank, Deutsche Bank and Barclays were reported to have experienced combined losses that might reach $500 million and foreign exchange broker Forex Capital Markets (FXCM) required a $300 million loan just to keep its doors open.

The biggest loser could be Switzerland’s economy since more than half of its GDP comes from exports to the EU. With the 15% rise in the value of the franc versus the euro, the cost of imports from Switzerland into the EU jumped by 15% literally overnight. This is likely to cause Swiss exports to the EU to decline or force Swiss firms to cut their prices to offset a portion of the surge in the franc. While a recession in Switzerland is unlikely in 2015, a marked slowdown in the first half of 2015 is sure to come.

Unfortunately, the economic fallout from the rapid appreciation in the franc will extend beyond Switzerland’s borders. According to Bloomberg News, 37% (566,000) of mortgages on the books of Polish banks are denominated in the Swiss franc. The Polish złoty lost 21% of its value to the franc in the wake of the SNB’s decision. A homeowner with a mortgage in francs valued initially at 100,000 now owes the equivalent of 121,000 after converting the złoty into francs. If the monthly mortgage payment was 300 złotys, it is now the equivalent of 363 złotys. According to the National Bank of Hungary, more than 60% of Hungarian household mortgages are denominated in a foreign currency, with the majority in Swiss francs. The Hungary forint has dropped by 18% versus the franc since January 16, so the same impact felt by Polish homeowners with a mortgage in francs will burden many Hungarians. As you can see, the overnight wallop of deflation that began with Japan’s decision to lower the value of the yen in November 2012 and the ECB’s devaluation of the euro will have a negative impact on more than just their economies.

U.S. Dollar and Foreign Currency

In the April 2014 MSR we wrote:

“The collateral damage that might flow from a weaker euro and stronger dollar could include renewed weakness in emerging market [EM] currencies with current account deficits and another decline in gold and a range of commodities, since a stronger dollar is likely to increase deflationary pressures in the global economy. There is a lot of debt denominated in dollars and most commodities are priced in dollars.”

The euro experienced a three week key reversal the week of May 9, 2014, which we discussed in the June 2014 MSR. The technical key reversal in the euro coincided with the beginning of the rally in the dollar. Based on the J.P. Morgan basket of emerging market currencies (EMCI), dollar strength has translated into a decline of 13.3% as this is written on January 26. Since May 2014, the S&P Goldman Sachs Commodity Index (GSCI) has declined by 41.5%. Certainly, a large portion of the loss was due to the drop in oil, but many other commodities have fallen, just less dramatically. Copper has declined -17.3% after falling from $3.05 a pound last May to $2.52.

As noted in previous MSRs, we expected gold to break below its support at $1,180 as the dollar strengthened. Gold bottomed on November 7, 2014, at $1,132 and has since rallied, in part due to the currency market instability ignited by the Swiss National Bank’s decision to allow the franc to float versus the euro on January 16. Interestingly, on January 15, gold jumped from under $1,230 to $1,262 after the European Court of Justice issued its nonbinding ruling that allowed the ECB to proceed with its QE program. Did the Swiss buy some gold prior to their announcement to offset a portion of its substantial euro losses? We’ll never know.

We expected the dollar index to rise to 95.00-96.00 in part based on euro weakness and its 57% weighting in the dollar index as well as for technical reasons. The dollar index fell from a high of 121.29 in July 2001 to a low of 70.69 in 2008. Taking a look at Fibonacci ratios, a 50% recovery of that decline would lift the dollar to 95.99. On January 23, the dollar index reached 95.48. We have also cited the potential for the dollar index to climb to 101.00-102.00, as that would represent a 61.8% retracement of the 2001-2008 decline. Conversely, the euro rose from a low of 82.30 in October 2000 to a high of 160.35 in July 2008. A 61.8% retracement of that 78.05 point rally would target a low in the euro at 112.12. On January 23, the euro fell to 111.11 before bouncing.

Although the longer-term fundamentals support a decline in the euro to 95.00-100.00, or parity with the dollar, these technical calculations suggest it’s time to be attentive to the potential of the largest rally in the euro since the high in May.

In the May 2014 MSR we said shorting the euro had the potential to result in a profitable trade over the next year. As luck would have it, that commentary went out during the first week of May when the euro was trading above 138.00 and in the process of making the top we expected. The foreign currency market has waited for months in anticipation for the ECB to walk the walk instead of just listening to Mario Draghi’s talk. With the January 22 announcement of the ECB’s QE plans, there is nothing left for the foreign currency market to anticipate. This isn’t much different than sport fans’ anticipation for the Super Bowl—after the game is over, expectations deflate and fans are left thinking “is that all?”

Being short the euro may be the most embraced trade in the foreign currency world and the calls for the euro to fall to parity (100.00) have become a cacophony. The contrarian in us can’t help but think it is the ideal time for the market to throw traders a curve in the overcrowded short euro trade. Any rally in the euro will not begin because the prospects for the eurozone have suddenly brightened. Growth in 2015 will be better than in 2014, but an increase of 1.2% or so in GDP would hardly qualify as healthy. The short-covering rally will start when a piece of news causes some of those who are short to cover, which perpetuates more short covering. The outcome could result in a vicious and volatile bounce in the euro that might carry as high as 118.00 – 121.00. What could incite a short covering rally in the euro?

In 2013, EU GDP fell -0.5% while U.S. GDP rose 1.9%. In the first half of 2014, U.S. GDP advanced by 1.25% after the polar vortex induced a drop of -2.1% in the first quarter, while growth in the EU was just 0.5%. Between December 31, 2012, and May 8, 2014, the euro rose from 132.38 to 139.93 versus the dollar, despite economic growth in the U.S. being much stronger.

The rally in the dollar did not begin until May 2014 after foreign currency traders realized that Mario Draghi wanted the euro to fall—not because they awoke on May 9 and suddenly experienced an epiphany about the divergence between U.S. and eurozone GDP growth rates. Only after the dollar had been rallying for many months did most economists take notice of the rate divergence.

In rationalizing the dollar’s strength they noted that growth in the U.S. was stronger than in Europe, but that had been the case for several years! In recent months, economists have noted that the ECB was contemplating its own QE program while the Fed was winding down its QE program and deliberating when to increase interest rates.

One of the pillars in the short euro/long dollar trade is the expectation that the Fed will raise interest rates in June. The Fed has repeatedly said it is data dependent in deciding when it will raise rates. What if, in coming months, the U.S. economy shows signs of decelerating from the third quarter’s 5% growth rate? If the U.S. economy slows, as we expect, the perception that the first Fed rate hike will occur in June may shift to later in 2015 or even early 2016. Any reason for the Fed to postpone raising rates, whether it is due to a slowdown in U.S. growth or in the global economy, could provide a good enough reason for foreign currency traders to cover their euro shorts.

U.S. Economy

The Fed, Wall Street economists and investors have been waiting since the recovery began in June 2009 for the economy to achieve a self-sustaining growth path that is no longer dependent on extraordinary monetary accommodation. When the Department of Commerce revised third quarter 2014 GDP from 3.9% to 5.0% on December 23, 2014, the New York Times noted,

“The American economy grew last quarter at its fastest rate in over a decade, providing the strongest evidence to date that the recovery is finally gaining sustained power more than five years after it began.”1

We don’t usually go into much of a detailed analysis of GDP reports, but the acclaim afforded the third quarter report merits a closer inspection as to whether it overstated the actual strength of the economy. Let’s review the sectors that contributed to the Commerce Department’s second estimate increase from 3.9% to 5.0%.

There is often a lot of noise occurring in the GDP report, but there was more than usual in the third quarter of 2014. In the second quarter, trade subtracted 34 basis points (bps) from GDP, but in the third quarter it added 78 bps—a swing of 112 bps. This increase effectively accounts for the entire revision from 3.9% to 5.0%. The GDP report measures production (net exports of goods/services) in the United States: imports are subtracted since they are produced overseas and exports are added since they are produced within the country. In the second quarter, imports rose 11.3%, which was why trade lowered GDP by 34 bps. In the third quarter, imports fell 0.9%, mostly due to oil prices falling from $100.63 a barrel on June 30 to $89.39 a barrel on September 30. In his State of the Union address, President Obama said:

“We are as free from the grip of foreign oil as we’ve been in almost 30 years.”2

According to the U.S. Energy Information Administration, imports of crude oil are comparable to nineteen years ago in 1995 and are the result of domestic production rising from five million barrels a day in 2008 to over nine million barrels a day in 2014. The “we” in the president’s statement is somewhat ironic since the current administration has been arguably the most anti-fossil fuel administration in memory. As we discussed in the January MSR, the decline in energy prices is likely a net positive for the U.S. However, the benefit the drop in imports made to the third quarter GDP report is overstated compared to its real contribution to economic activity. The exaggeration of imports will be far more pronounced in the fourth quarter since oil prices fell 40.4% versus the 11.2% fall in the third quarter.

As for exports, they increased 11.1% in the second quarter but rose only 4.5% in the third quarter. Weak growth in Europe, recession in Japan and slowing in China all contributed to less demand for U.S. goods and services. As we discussed last summer, the increase in the value of the dollar, which makes U.S. exports more expensive, is a headwind. The dollar index gained 7.2% in the third quarter and rose another 5.1% in the fourth quarter. The drag on export sales is likely to increase in coming quarters as new contracts are signed and currency hedges are rolled over. Between October 2012 and October 2013, exports rose at an annual rate of 6.0%. By October 2014, annual growth in exports had slowed to just 1.2%. In our opinion, export growth reflects real economic activity both in the U.S. and globally better than the supply-induced plunge in oil prices that caused imports to fall.

Government spending added 80 bps and was the second largest contributor to the upward revision to third quarter GDP, up from 31 bps in the second quarter and an increase of 49 bps. The third quarter increase was driven by a 16% increase in military spending, something that is not likely to be duplicated in the fourth quarter or the first half of 2015. The third largest contributor was a 46 bp increase in personal consumption expenditures (PCE), which rose from 175 bps in the second quarter to 221 bps in the third quarter.

Consumers spent more on healthcare (52 bps) and health insurance (35 bps), which means they may have fewer dollars to spend on everything else. Although some consumers have been able to lower their monthly premiums due to the Affordable Care Act (ACA), their out-of-pocket deductibles are higher. As more consumers fall under the umbrella of the ACA in coming years, many will realize their total cost of healthcare is actually higher. Another revealing aspect of the third quarter GDP report was that the amount of money from 133 bps to 106 bps.

So, while PCE as a whole may have risen as a benefit to the report, was it truly an economic benefit? Investment in nonresidential and residential structures dropped from 287 bps to just 118 bps, lowering third quarter GDP by 169 bps. This is the one component we believe could rebound in fourth quarter or 2015 reports.

In 2014, 2.95 million jobs were created—the best showing since 1999, as some headlines proclaimed. President Obama repeated this claim in his State of the Union address: “Our economy is growing and creating jobs at the fastest pace since 1999.”3 We aren’t trying to minimize the improvement in the labor market, but there seems to be a tendency to weigh headlines more than details.

Although the total increase in jobs was the most since 1999, when adjusted for population growth the improvement was far less. Since 1999, total U.S. population has increased from 279 million to 320 million as of the end of 2014. After adjusting for the increase in population, the increase in employment in 2014 amounted to 2.1% of the existing labor force, or 16% less than the increase of 2.5% in 1999.

While job growth continued to grow at a healthy pace in December, the paltry rise in wages was sustained, up just 1.7% from a year ago. This continues a pattern that has persisted for more than four years. The dramatic decline in gasoline prices will increase the purchasing power of disposable personal income since the average household will have an extra $750 to spend—that’s the kind of middle class economics most families understand. Consumers are likely to save some of the extra discretionary income from lower gasoline prices, pay off debt and spend the rest. This extra spending will be supportive of continued growth.

Business capital expenditures (capex) comprise about 13% of U.S. GDP and energy companies represent almost one-third of that total. In 2014, energy companies spent $700 billion in capex. With the price of oil now at half of its 2013 and early 2014 price, energy firms are likely to pare their capex by at least 15% in 2015. Their reduction in capex has the potential to lower GDP by 0.50% in 2015.

Oil and gas exploration companies have been shedding employees as the number of drilling rigs in operation has declined by 15% in recent months. As we discussed in the January MSR, energy-related job creation added significantly to total job creation in recent years. The absence of new jobs from the oil patch is likely to take some of the steam out of the labor market in upcoming employment reports.

In the second quarter of 2014, exports increased 11.1%, but as we noted previously, tapered off in the third quarter, rising only 4.5%. Just as we expected, a stronger dollar has become a headwind for exports. In December 2014, computer technology giant Oracle told investors that its revenue would have risen 7% in the quarter that ended on November 30, but instead reported half that growth. The chief financial officer for IBM, Martin Schroeter, noted, “We have some real macro headwinds in the form of a strong dollar.”4

On January 20, Johnson & Johnson said if current exchange rates hold, the damage to its earnings would be two to three times what the company projected in October. The negative impact from the strong dollar is not likely to be limited to Oracle, IBM and Johnson & Johnson. The 500 companies in the S&P 500 Index derive about 40% of their sales from overseas. Sales growth is going to be hard to achieve as international customers choose other suppliers whose products cost less due to the dollar’s appreciation. This may force U.S. firms to discount prices to retain customers, which will translate into smaller profit margins.

Investors became mesmerized by the GDP growth of 5.0% in the third quarter and may not be prepared for the wake-up call coming from the impact of the stronger dollar. The 40% drop in oil prices in the fourth quarter may provide a temporary smoke screen since the drop in imports will lift fourth quarter GDP, but guidance on sales and profits from firms with an international footprint will provide more clarity and a measure of sobriety about the health of the global economy. We expect GDP growth to sag below 3.0% by the middle of 2015.

Federal Reserve

Federal Reserve members have said they are data dependent, which is another way of saying they really don’t know when they will execute the first interest rate increase. These Fed members must nudge market perceptions forward so the market is not surprised when they do pull the trigger. Consensus has settled on the first rate hike coming in June. We’re skeptical. Global growth is more likely to slow in the first half of 2015 and some of that weakness is going to bleed into the U.S. The decline in energy prices will push the consumer price index lower, well below the Fed’s 2% target, especially if oil falls under $40 a barrel, as we expect. In a normal post-World War II recovery, wages would be growing closer to 3.5% annually, 70% higher than the 2.0% average gain since early 2010. Until contrary evidence shows up, wages do not seem poised to rise significantly. We have no idea when the Fed will decide higher rates are appropriate, but the data on which it will be basing its decision is not likely to be as clear as the Fed would prefer.

U.S. Dollar Technical Analysis

The dollar has reached our initial upside target of 95.00 – 96.00. It is extraordinarily overbought and bullish sentiment toward the dollar is overwhelming. Although we think the dollar is near an interim high, we are not expecting a huge correction in price. It is more likely to be a consolidation that chews up time with a modest price decline. At a minimum, a pullback to 92.60 is likely, which was the high in November 2005. The most we would expect is a retest of the highs recorded in 2008, 2009 and 2010, which were between 88.00 and 89.50. After this correction, we expect the dollar to reach 101.00 – 102.00 before the end of 2015.

Stocks

since the valuation metric most often referenced is the S&P 500 price-earnings (P/E) ratio, which only looks modestly elevated. We have pointed out in the past that the earnings component of the S&P 500’s P/E ratio has become distorted by the more than $2 trillion in stock buybacks since the end of 2010. Earnings are lifted when companies reduce their share count and a meaningful portion of the stock buybacks have been funded with borrowed money.

Other measures indicate that the stock market is at its second or third most expensive level in history, e.g, Tobin’s Q ratio, Shiller’s cyclically adjusted P/E (CAPE) ratio and Buffet’s favorite, market capitalization as a percentage of GDP. Nobel Prize winner Kenneth French analyzed all listed stocks going back to 1926 and found that in mid-2014 the median U.S. stock price had a price of more than 20 times earnings. That’s the most expensive level since World War II. Comparable valuations in 1962 and 1969 were followed by declines of 27% and 35% in the S&P 500.

As we have always noted when discussing valuations, the stock market does not decline just because valuations are expensive as they can always become more extended. That’s truer today than ever before as central banks in developed countries hold short-term rates at or below 0% and use quantitative easing to suppress long-term sovereign bond yields to extraordinarily low levels. Equities do appear to be the beneficiary of the TINA (there is no alternative) investment strategy, which will work until a reason to sell materializes. No matter how true TINA is today, it does not mean investment risk is less, which is why we like to periodically review the market’s valuation.

Investors have been fixated on central bank intervention and have viewed any implementation of quantitative easing as being unquestionably bullish for stocks. In the short term, this outlook may enable the S&P 500 to make another new high. We would use any new high as an opportunity to sell and reduce exposure. We think the volatility in the foreign currency market and energy market is destined to spill over into the equity market at some point in the first half of 2015, allowing the S&P 500 to trade below the mid-October low. Corporate earnings may also disappoint if the economy slows as we expect and the negative impact from the strong dollar on revenues and profits surprises investors.

As of January 25, our proprietary Major Trend Indicator (MTI) is also flashing caution. In recent weeks, the MTI has fallen below 2.0—the level it hit in the lows made in September 2013, February 2014 and August 2014. The only other instance the MTI fell below 2.0 prior to the current low occurred in September 2014, just before the sharp nasty sell-off last October. As we noted last month, as long as the S&P 500 holds above 1,972, the uptrend is still intact. However, a close below 1,972 would likely confirm that an intermediate top was in place.

Treasury Bonds

As we discussed last month, the 10-year U.S. Treasury yield has held within a downward sloping channel since September of 2013. The only excursions outside of this channel occurred in December 2013 and September 2014, which proved to be highs, and in October and December 2014, which were lows. Each break above and below the channel proved temporary, which indicates that this channel is important and any breakout that is not quickly followed by a move back into the channel is probably significant. The 10-year yield has dropped below the lower channel line and has remained below it since the beginning of this year. Undoubtedly, lower yields in Europe make the 10-year Treasury yield look like a bargain. The strength of the dollar only adds to the total return international investors have received by moving out of the euro or any currency that has weakened against the dollar and into Treasury bonds.

The global decline in yields must also be considered a reflection of the increase in deflation as global growth slows and commodity prices slump despite central bank maneuvers. These dynamics are likely to continue to support low Treasury yields and could be buttressed if the U.S. economy slows as we expect, creating doubts that the Fed will raise rates in June as widely expected. The 10-year Treasury yield is likely to encounter resistance at 1.60%, which was the low just before the taper tantrum in May 2013. This suggests that the yield could be range-bound between 1.60% and 2.10% until more clarity develops about the timing of the Fed’s first rate hike.

Footnotes:

1. Nelson D. Schwartz, “Economic Vital Signs in 3rd Quarter Were Strongest in a Decade,” New York Times, December 23, 2014.
2. President Barack Obama, State of the Union address, January 20, 2015.
3. Ibid.
4. Vipal Monga, “Dollar’s Updraft Taxes CFOs,” Wall Street Journal, January 13, 2015.

Definition of Terms

10-year Treasury is a debt obligation issued by the U.S. Treasury that has a term of more than one year, but not more than 10 years.

Basis point (bps) is a unit of measure that is equal to 1/100th of 1% and used to denote a change in the value or rate of a financial instrument.

Capital expenditure (capex) refers to the funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment in order to maintain or increase the scope of its operations.

Consumer price index (CPI) is an index number measuring the average price of consumer goods and services purchased by households. The percent change in the CPI is a measure of inflation.

Cyclically adjust price-earnings (CAPE) ratio measures the value of the S&P 500 equity market.

Debt-to-GDP ratio is a measure of a country’s federal debt in relation to its gross domestic product (GDP). By comparing what a country owes to what it produces, the debt-to-GDP ratio indicates the country’s ability to pay back its debt.

Devaluation is a monetary policy tool whereby a country reduces the value of its currency with respect to other foreign currencies.

A Fibonacci number refers to a number sequence in which each number is the sum of the previous two numbers. The concept was introduced to the West by Italian mathematician Leonardo Fibonacci.

Gross domestic product (GDP) is the total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports. The GDP of a country is one of the ways of measuring the size of its economy.

JPMorgan Emerging Market Currency Index (EMCI) is a tradable benchmark for EM currency markets. The index is comprised of 10 liquid currencies across three equally weighted regions: Latin America, Asia and CEEMEA (Central & Eastern Europe, Middle East and Africa) vs. USD.

The Major Trend Indicator is a proprietary technical tool that measures the strength or weakness of the market and helps identify bull and bear phases. During bull markets it helps indicate when the market may be vulnerable to a correction, and during bear markets it helps identify a potential rally.

Price-earnings (P/E) ratio of a stock is a measure of the price paid for a share relative to the annual income or profit earned by the firm per share. A higher P/E ratio means that investors are paying more for each unit of income.

Q ratio is a ratio devised by Nobel Laureate James Tobin that suggests that the combined market value of all the companies in the stock market should be about equal to their replacement costs.

Quantitative easing refers to a form of monetary policy used to stimulate an economy where interest rates are either at, or close to, zero.

Range-bound is when a market, or the value of a particular stock, bond, commodity or currency, moves within a relatively tight range for a certain period of time.

S&P 500 Index is an unmanaged index of 500 common stocks chosen to reflect the industries in the U.S. economy.

S&P GSCI is a widely recognized, investable broad-based and productionweighted index that represents the global commodity market and measures commodity performance over time.

U.S. Dollar Index is a measure of the value of the U.S. dollar relative to six major world currencies: the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc.

Valuation is the process of determining the value of an asset or company based on earnings and the market value of assets.

Volatility is a statistical measure of the dispersion of returns for a given security or market index.

One cannot invest directly in an index.

RISKS

Investing involves risk, including possible loss of principal. The value of any financial instruments or markets mentioned herein can fall as well as rise. Past performance does not guarantee future results. This material is distributed for informational purposes only and should not be considered as investment advice, a ecommendation of any particular security, strategy or investment product, or as an offer or solicitation with respect to the purchase or sale of any investment. Statistics, prices, estimates, forward-looking statements, and other information contained herein have been obtained from sources believed to be reliable, but no guarantee is given as to their accuracy or completeness. All expressions of opinion are subject to change without notice.