Notes From Underground: In a 70th Anniversary Redo, I SAY NUTS to Global Financial Markets

First, as the clouds of sadness begin to lift I want to thank all of those who took time to send a note to the blog and to me in emails for the condolences on the passing of my mentor and friend. In a tribute to one of the great traders, the markets provided volatility reminiscent of a 21 gun salute, or maybe just 21% vol levels and a VIX to go with it.

The cannons roared as the FOMC merely mentioned the word PATIENT. It is NUTS that a possible delay of a few months can prompt a 7 percent rally in the SPOOS, DAX and NIKKEI. Yes, more was at work, especially on Thursday when the Swiss National Bank (SNB) held an EMERGENCY meeting and dropped its interest rates on sight deposits to a -0.25% and expanded the “… target range for the three-month Swiss LIBOR from -0.75% to +0.25%. It is thus back to its usual width of 1 percentage point.”

This was done to maintain the minimum exchange rate of the EUR/CHF at 1.20. The EURO did rally against the Swiss franc, but it was a short-lived rally as the cross was back at 1.2035 on Friday’s close. Most interesting is that the NEW policy does not take effect until January 22, which just happens to be the date of the next ECB meeting. Thomas Jordan, head of the SNB board, concluded his comments with “… we are prepared to purchase foreign currency in unlimited quantities and to take further measures, if required.”

NUTS! Again, the question remains: Who is purchasing SWISS FRANCS in massive amounts in contravention of the SNB? Last week, the FT had a column by John Plender, “Follow the Swiss and Diversify for Reserve Management Success.” Mr. Plender notes that the SNB holds 16 percent of its official reserves in equities and the gross amount is growing as the SNB is forced to accumulate more reserves in its efforts to maintain the 1.20 Eur/Chf floor. In the SNB‘s portfolio of 5600 individual stocks, “… of roughly 1400 were mid-and large-cap stocks and some 4200 were small-caps. This makes the SNB one of the world’s biggest equity investors.”

In my mind the SNB is beginning a large sovereign wealth fund (SWF) not by exporting vasts amount of goods or petroleum but by merely printing more Swiss francs in which to sell and buy foreign assets. And the Swiss central bank is deemed to be a model of financial rectitude. In fact, the Swiss electorate voted against a greater role for GOLD but purchasing more GOLD with newly printed FRANCS would appear to be a very rational decision. The world craves the Swiss currency still … NUTS.
In response to Plender’s column: He is right. The SNB‘s effort to diversify should be applauded, it is the rest of the world that has lost its financial compass. This is the classic case of Gresham’s Law foisted upon the world by Swiss banking authorities: Spend the bad and hoard the good, in this case global equities with some chance of an upside. NUTS.
[As I opined back in November, the euro/Swiss 90-day interest rates were a good trade in case the SNB went negative. I was long the December 2014 contract, which expired last Monday, three days prior to the emergency SNB meeting for the SNB met the previous week in a regularly scheduled meeting. The final result for my P&L is that timing is everything: good analysis, poor execution.]
***Russia raised interest rates to 17 percent in an effort to support the ruble. An act of desperation never calms the markets and a sudden increase of 6.5 percent only causes more fear. This is similar to Britain prior to its September 1992 plan to abandon the EMU and not peg its currency to the Deutschmark. The Bank Of England raised its overnight rate to 15 percent hours to abandoning the PEG. Raising rates forced more selling of Sterling as the market sensed panic and that the 2.92 floor would give way. It is what happened and the BOE immediately cut interest rates in an effort to combat the recession that was beginning to unfold in the U.K. economy. The French central bank used to raise its interest rates to 100 percent overnight to fend off any attacks of the French franc versus the Deutschmark, but the Bank of France was willing to pay a steep price in terms of growth to ensure the viability of the European Union and France’s position within it.
The point is that markets should not view the move by the Russians to be extraordinary. Modern financial markets are full of similar attempts to support a nation’s currency. There were also rumors that the Russian Central Bank was selling GOLD in an effort to raise money to support the RUBLE. This is also NUTS because Putin will not sell GOLD for it will possibly be the savior of the RUBLE. If PUTIN wants to support the ruble he could make it GOLD-backed or he could take the advice of Notes From Underground and offer Russian gold-backed bonds. The Russians will not be selling GOLD. In fact, if Putin thinks clearly, he should purchase massive amounts of SILVER and create a bi-metal-backed RUBLE. That would be an act of sanity.


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12 Responses to “Notes From Underground: In a 70th Anniversary Redo, I SAY NUTS to Global Financial Markets”

  1. Joe Says:

    It’s certainly plausible the SNB is buying foreign “securities” with newly created Franc reserves. And why not? If that be the case, perhaps all central banks adopt the same model. Today’s best and brightest would likely agree we’d all could live happily ever after.

    Nuts? Yes-sir.

  2. JB Says:

    Moral of the story? Weakening one’s currency is a piece of cake. Trying to strengthen it is almost impossible

  3. Yra Says:

    Also for the under informed—NUTS is a reference to the famous reply of General Anthony Mc Auliffe to the Germans after they asked for the surrender of American forces at Bastogne

  4. Dustin L. Says:

    A quick side note, 2YR JGB yielding negative 4 basis points and yet the 10-2 spread is only 38 basis points! Uggghh, have fun holding those beauties BOJ.

  5. yra Says:

    DustinL–are the markets really reliable barometers of valuation —or as b.C. says—whenfundamnetals no longer matter it is a definition of a BUBBLE

  6. yra Says:

    Bernard Connolly will be on Bloomberg radio in 40 minutes with Kathleen Hayes and Vonnie Quinn

  7. kevinwaspi Says:

    Thank you for all of your contributions to the thought process. Your friend and mentor is smiling down on all of your accomplishments!
    Thank you also for the tip on the Bernard Connolly interview, for Notes Readers, it is available at
    The piece with Bernard begins at time 13:30.

  8. Yra Says:

    Thanks Kevin–and thanks to professors like you who challenge students to always thirst for knowing more and thinking outside the standard lines presented in conventional wisdom—pushing the boundaries to understand the limits to all convention—the Bernard interview was great and Vonnie Quinn should be applauded for a quality interview–her last question and Bernard’s answer should be discussed around the world–except in davos –but all davos attendeeds should be peppered sprayed so that they shed real tears for the damage done to world finances—mantra—Pepper Spray Davos

  9. Dustin L. Says:

    Thanks for the heads up on the BC interview as it is always good to hear his views. That was one heck of a way to end the interview with a bang!

  10. Chicken Says:

    Assuming I understand this correctly, SNB is buying equities in attempt to suppress their currency while Putin is buying gold in attempt to support his currency.

  11. Yra Says:

    chicken–very well said

  12. Notes From Underground: | Notes From Underground Says:

    […] am reissuing a piece from December 21, 2014 as a reminder of just where the SNB has invested the assets bought by the massive printing of Swiss […]

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