Notes From Underground: SNB Fights the Battle of the Bulge and Thomas Jordan Says Nutz to a Sovereign Wealth Fund

The Chairman of the Swiss National Bank delivered a speech today in Bern, “SNB monetary and investment policy and the impact of the strong Swiss Franc.” The investing world knows that the Swiss have pegged the franc to the euro at 1.20 more than a year ago and have been successful in keeping the floor of the EUR/CHF in place. The result has been a massive growth in the Swiss foreign reserves as the SNB has had to diversify out of some of the euros and into other currencies. Mr. Jordan made it clear that the SNB was “prepared to buy foreign currency in unlimited quantities.” The Swiss will continue to keep the EUR/CHF floor in place as part of its mandate on monetary policy for an overly strong FRANC has a deflationary impact on the Swiss economy.

Many are questioning the SNB‘s continued policy of buying foreign currency to offset the bulging inventory of euros. Again, Chairman Jordan said, “Investment policy must be subordinated to the requirements of monetary policy …. At present, enforcement of THE MINIMUM EXCHANGE RATE HAS THE GREATEST INFLUENCE IN THE MANAGEMENT OF THE CURRENCY RESERVES,” (emphasis mine). Some critics of the SNB have suggested that the Swiss create a Sovereign Wealth Fund (SWF) to manage the foreign currency reserves in various types of global investments. Chairman Jordan quashed the SWF idea as crazy for several reasons:

  1. It would not be directed toward exchange rate action;
  2. SWFs have “unrealistically high expectations”; and
  3. The composition of the SNB balance sheet is a reflection of monetary policy and not derived from revenue sources like trade balances and energy exports

The SNB does acknowledge “the accumulation of currency reserves that have resulted from monetary policy measures, there are substantial risks weighing on the SNB balance sheet.” This speech by Thomas Jordan should scare the entire global financial community. THE WORLD’S PERCEIVED FINANCIAL GNOMES ARE CREATING ASSETS WITH A PRINTING PRESS AND PURCHASING A BASKET OF OTHER GLOBAL PAPER-BACKED ASSETS. As General Anthony McAuliffe said to the Germans asking for his surrender at Bastogne, December 22, 1944 … NUTS. But to the financial community, I am suggesting that we are all NUTS for standing idly by while the Swiss National Bank creates Swiss francs in a an effort to halt the appreciation of its currency. It takes that paper and proceeds to purchase the assets of other sound economies.

What if the crisis in Spain worsens and the EURO collapses? How many euros will the SNB have to buy to support the EUR/CHF currency rate at the floor of 1.20. Draghi may have access to Outright Monetary Transactions but the Swiss have a limitless supply of paper and ink. We indeed have surrendered the financial sanity of the developed world. Brazil’s Finance Minister Guido Mantega is correct that the western nations are in full war mode with the world’s currencies and the armory is in Zürich. The result of the SNB actions is for the full surrender of global financial and monetary sanity as the world observes the Swiss using freshly printed money to absorb a global basket of foreign reserves. NUTS.

***Today there was a Jon Hilsenrath piece on the FED or more to the point, a purported leak from the mandarins of monetary policy (h/t RF). The article, “Fed Officials Likely to Continue Bond-Buying” is not news per se but it gets attention as it comes two weeks prior to the next Fed meeting and the last one before the expiration of the Operation Twist, or, maturity extension program. The tone of the article is that the FED will not allow Twist to expire and seek to maintain all present programs so as not to upset the economy’s fragile recovery. The most interesting paragraph states: “The Fed has run down its stockpile of the short-term Treasuries to sell to fund long-term purchases. To keep buying the long-term bonds it would need to fund the purchases by creating new bank reserve, which in effect is printing money. That is how the Fed has funded previous Treasury purchase programs and it is how the Fed is finding its mortgage-bond buying. Though critics say this could be inflationary, many Fed officials believe they can manage the reserves without risking inflation.”

So we go from maturity extension to outright monetization. It will be tough to liquidate assets if the Fed goes full throttle on reserve creation and ends the Operation Twist with a new improved dose of liquidity. Oh well, just more assets for the SNB.

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7 Responses to “Notes From Underground: SNB Fights the Battle of the Bulge and Thomas Jordan Says Nutz to a Sovereign Wealth Fund”

  1. Charles Says:


    Thanks for these insights. My perception is that Swiss salaries are too high due to the CHF appreciation. This can a dust in a couple of ways. The normal way is for exports to become uncompetitive followed by businesses failing or being trimmed, and then salaries gradually falling.

    The trouble with this normal pattern is that it is socially disruptive and the country can lose market position which is difficult to regain. Another option is companies just realizing that salaries have to be cut. But this is generally too difficult for people to swallow. The easiest solution (though I am not promoting it), is to devalue the currency.

    People seldom seem to see it this way, but the major effect of currency devaluation is hidden salary reduction. This is needed in Switzerland at the moment, but as you say, if a major drop in the EUR occurs, the Swiss will likely be in trouble. In many conversations with Swiss people, I find them slightly concerned, but not prepared for a real shock of this type.

  2. yra harris Says:

    Charles–always good to get the insight from the Swiss people .It just seems to me to be crazy and the promoters of this strategy beleive the market will allow them to extricate themselves with little pain–very similar to the FED’s designs on exiting QE to the X

  3. Michael Greenberg Says:

    “The Fed has run down its stockpile of the short-term Treasuries to sell to fund long-term purchases.”

    And note that on Oct 1 there was an inversion of the yield curve with the 4 week t-bill and the 13 week t-bill and on Nov 23 the same thing happened with the 4 week and the 26 week. And just yesterday, Nov 27, you could get the same return on the 4 week as the 52 week treasury.

  4. yra Says:

    Michael–good catch on that for you in fact did point that out.Nice!

  5. Breakfast Links - Points and Figures | Points and Figures Says:

    […] impact of a strong Swiss Franc.  Well, chocolate is more […]

  6. FuturesAddict Says:

    why would anyone want to own EURO over CHF?

  7. yra Says:

    Futures–I think you need to ask SNB Chairman Thomas Jordan

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