FAQ
1. How can I invest in the SCB?
3. What about foreign-currency Certificates of Deposit drawn on a US bank?
5. I am a fund manager. How can I use the SCB?
6. How might the SCB affect monetary policy?
7. How can I use the SCB to compare bonds?
8. What would make EWI change out one currency for another in the Stable Currency Benchmark?
9. Is the SCB meant to replace standard methods of hedging the risk of currency movements?
1. How can I invest in the SCB?
You may invest in the SCB mix of currencies using the following methods:
(1) Using Safe Wealth Consultants Ltd., establish a relationship with a Swiss institution through which you can buy currencies in a mix that tracks the SCB: clientservices@safeweathconsultants.com or (011 from the U.S.) + 41-21-966-7200. Minimum investment: $200,000 USD or counter equivalent.
Note: This information is offered for convenience only and is not intended to be be a solicitation for securities.
(2) In the States, open a managed account with Hillier Capital and arrange to have your account track the benchmark: 616-796-6659 or www.hilliercapital.com. Minimums do apply.
(3) Open an account at a safe bank that will obtain short-term government debt instruments in the SCB currencies for your account.
(4) Buy bonds, bills or certificates of deposit in equal portions in each SCB country.
(5) Set up a bank account in each SCB country and fund it.
2. Can I buy SCB futures?
Not currently. One day soon an exchange may offer a futures contract on the dollar/SCB, an exchange-traded SCB fund and other similar vehicles. But if they do become available, we are unlikely to recommend that non-speculators invest in them. When you deal with futures/forwards, options, etc., you inevitably take on third party/custodial risks, which today are unprecedented. For 90% of our subscribers, the goal with the SCB should be direct ownership of the currencies within a safe custodial institution.
3. What about foreign-currency Certificates of Deposit drawn on a US bank?
As with any deposit account, the main issue is bank safety. As far as we know, no bank that offers foreign-currency CDs has a strong safety rating from TheStreet.com Ratings, Inc. (For more information on TheStreet.com Ratings services, visit www.thestreetratings.com.)
4. Would you recommend buying Traveler's Checks in mix that matches your SCB basket?
Interesting idea. However, with any demand note, there is always a risk of default on the part of the issuer. This includes Traveler's Checks. We expect that during economic crisis, anyone who did what you propose would face significant liquidity issues.
5. I am a fund manager. How can I use the SCB?
Any internationally oriented person or firm benefits from having a global, stable benchmark for storing and valuing assets. For example, if you're a hedge fund manager, the SCB gives you a well-researched basket of currencies in which to "park," creating the equivalent of a money market "sweep" account. Of course, there is not enough currency or debt in the SCB countries to allow everyone to keep liquid funds in the SCB currencies, so we suspect that if the SCB catches on, a futures exchange will develop to allow people to normalize portfolio cash denoted in the home currency to the SCB. If their home currency were to fall, the contract would let them own more and more of it to maintain value in SCB terms. And vice versa if the home currency were to rise.
Beyond holding money in an SCB allocation, any international investor or fund manager can follow every market worldwide in SCB terms and make investment/trading decisions based on it. This will reduce the complexity of the investment problem because no longer will you have to analyze a double bet on both the market and its currency. Say you're comparing real estate in Tokyo and London. By measuring them in SCB terms, you level the playing field. The SCB normalizes the fluctuations of the yen and pound for you; you look at true values in common terms. You will own or short a given market in its local currency, but you will measure it in SCB terms. This means that as far as assessing the underlying value and deciding whether to get in and stay in the position, the local currency's fluctuation will no longer be a separate variable.
6. How might the SCB affect monetary policy?
If the SCB catches on, central banks will have less temptation to steal value through inflation.The SCB exposes each government as the steward of its currency. So the SCB ultimately serves to make central banks more responsible. In 2004 San Franciscans thought they were making a killing in real estate, but once they factored out the dollar, it wasn't so impressive. Mexicans currently think they are making money in the rising Bolsa, but they're not; they're just breaking even due to the fall in the peso. When people use the home currency as a benchmark, they don't see their loss of value when it's inflated; they still have X currency units in the bank. That mistaken impression is corrected when they use the SCB instead.
Granted, the central bank of an SCB country has a slight advantage: Its presence in the SCB softens the footprint of any value changes, though not by much. The four SCB currencies each make up a quarter of the benchmark. This means that 75% of any value erosion shows up in a head-to-head comparison of the currency and the SCB. Plus, obviously if a central bank wants to maintain its currency's slot in the SCB, it has to manage its currency well or it will lose it's position – just as a stock can be deleted from the DJIA.
7. How do I use the SCB to compare bonds?
The formula would be price x yield x SCB. That will let you see the real story between, for example, Mexican bonds that are yielding, say, 20% and Swiss bonds that are yielding zero. Swiss bonds were the better buy in 2004, because the peso contracted 19% in SCB terms in '04 while the Swiss Franc expanded 4%. This gives you yields in SCB terms of 1% and 4% respectively. These numbers are hypothetical, but you get the idea.
If you want to get real specific, you expand the formula as follows: price x (1+yield) x (holding period/1 year) x SCB.
That leads you to the proper formula for comparing anything in SCB terms. For individual stocks, for example, you'd calculate: price x (1+dividend) x SCB.
To see exactly how the SCB is calculated, click here.
8. What would make EWI change out one currency for another in the Stable Currency Benchmark?
Switching currencies in and out of the SCB every time their “fundamentals” appeared to change would render the SCB useless as a benchmark. Worse, because good fundamentals attend tops and bad ones attend bottoms, the index would repeatedly take on new components at tops and unload them at bottoms, which is how most people lose money in their portfolios. The point of SCB is to take decision-making out of the equation and let the fluctuations cancel out so that you have a neutral parking place for your money. The SCB is useful for times when you do not know which currency will next rise or fall. For most investors, this means always. To create the SCB we chose currencies that had the best long-term situations—from many points of view—in their respective global quadrants. Nevertheless, we can imagine a shift in the conditions that caused us to include a currency in the SCB in the first place, such as a military coup, a communist takeover or a monetary authority beginning a policy of replacing debt paper with currency (as Germany did in the early 1920s). Any such events would render a currency hopeless for the purposes of stability and disqualify it for the SCB.
9. Is the SCB meant to replace standard methods of hedging the risk of currency movements?
The SCB is not a currency play. It's an anti-currency play. It's analogous to a money market account when you're out of the stock market.
