I 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 francs. The Swiss authorities have created a perpetual money machine that “coined” unlimited amounts of francs and exchanged them for other paper assets. The question remains: Who was willing to buy all those francs that the SNB kept selling into the market (and yet the EUR/CHF remained at the 1.20 floor/ceiling)?
Somebody robbed the global financial train and made off with huge profits. Had the SNB wonks not battled against the Swiss referendum, the SNB could have been buying gold with unlimited Swiss francs, which, of course, is a real example of Gresham’s Law. The “COMMON MAN” in the Swiss cantons was far wiser than the gnomes of the Swiss ruling classes. It is in respect for citizens against their enlightened technocrats that I offer up this week’s battle cry, “PEPPER SPRAY DAVOS.” This effort to pepper spray Davos is to break the meeting of the power elite that in its collective wisdom has continued to cause so much destruction to the global economy. The image in my mind is the video of University of California-Davis police spraying campus protesters in 2011.
From December 21:
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.
Tags: Davos, EUR/CHF, SNB, Swiss Franc
January 18, 2015 at 3:55 pm |
Notes From Underground:I 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 francs. The Swiss authorities have created a perpetual money machine that “coined” unlimited amounts of francs and exchanged them for other paper assets. The question remains: Who was willing to buy all those francs that the SNB kept selling into the market (and yet the EUR/CHFremained at the 1.20 floor/ceiling)?Somebody robbed the global financial train and made off with huge profits. Had the SNB wonks not battled against the Swiss referendum, the SNB could have been buying gold with unlimited Swiss francs, which, of course, is a real example of Gresham’s Law. The “COMMON MAN” in the Swiss cantons was far wiser than the gnomes of the Swiss ruling classes. It is in respect for citizens against their enlightened technocrats that I offer up this week’s battle cry, “PEPPER SPRAY DAVOS.” This effort to pepper spray Davos is to break the meeting of the power elite that in its collective wisdom has continued to cause so much destruction to the global economy. The image in my mind is the video of University of California-Davis police spraying campus protesters in 2011.From December 21: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, DAXand NIKKEI. Yes, more was at work, especially on Thursday when the Swiss National Bank (SNB) held anEMERGENCY 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 ECBmeeting. 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 purchasingSWISS 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 SNBholds 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 SNBmeeting 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 sellingGOLD 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. Date: Sun, 18 Jan 2015 21:50:03 +0000 To: iannuccillo@hotmail.com
January 18, 2015 at 4:02 pm |
Ira, I remember this piece well…
For anyone with money in euros to invest, the SNB foolishly offered the perfect trade: buy Swiss Francs / Swiss government bonds with both hands; SNB guarantees you won’t lose anything while the peg is in place, and have the option of winning big if ever it fails (just like about any other peg that comes to mind has failed eventually).
Thanks for your insightful writings & best wishes from the shores of the Lake of Zurich
Marc
January 18, 2015 at 4:12 pm |
Yra,
“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.”
Maybe it is the EQUITIES the SNB no longer wishes to accumulate… for obvious reasons, I’m sure.
BTW, You forgot two very important words of course… “Go Pats!”…
January 18, 2015 at 5:16 pm |
rockeye–rock on except that Brady and hid wife bullish Euro
January 18, 2015 at 6:49 pm |
Marc–thanks for the kind words–I would come and visit but can’t afford it now.Keep us posted from Switzerland.
January 19, 2015 at 2:14 am |
Yra – I priced up 1y EuroSwissie knock-in puts with this event in mind in August and never put it on.
Unbelievable turn of events. If the SNB didn’t foresee the move being of that magnitude, their behaviour is questionable, if not irresponsible. On the other hand if they did envisage the move being that order of magnitude, then their behaviour was malicious. Alas, the likelihood is the former and that’s even more concerning, that a CB could be so detached from reality. Unambiguous example of the distinction between theory and practice!
Happy new year from the land of Oz.
CHT
January 19, 2015 at 2:59 am |
As The Economist points out, “the SNB should not be lambasted for removing the cap. Rather, it should be criticised for adopting it in the first place. When central banks try to manipulate exchange rates, it almost always ends in tears.”
January 19, 2015 at 3:31 am |
I wonder if Mrs Jordan was long Swiss/short Euro at the beginning of last week?
Mrs Hildebrand was short Swiss/long Euro the week before the peg was announced.
The wives as usual show the men how to really play the game…
January 19, 2015 at 8:15 am |
Alex–why do you think IMF Lagarde is so upset–the perks of the office were undermined