Notes From Underground: SNB, Paradigm or Pariah?

Question: Why does the Swiss National Bank become an important topic for discussion?

Answer: Since Mario Draghi’s “whatever it takes” and “no taboos” comments in 2012 about saving the euro. The SNB has been in a defensive position of trying to prevent a dramatic appreciation of the FRANC as the SWISS acts as a haven for Europeans. The geographic location provides for what economists refer to as home basis.

When Europe was suffering under the weight of the debt problems of the PIIGS, the Swiss were worried that its haven status would drive its currency to exorbitant high valuations. In September 2011, the SNB decided to support the FRANC against the Euro at 1.20. The bank said at the time:

“The current massive overvaluation of the Swiss Franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development. The SNB is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect,it will no longer tolerate a Eur/Chf exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities. Even at a rate of CHF 1.20 per euro, the Swiss Franc is still high and should continue to weaken over time. If economic outlook and deflationary risks so require, the SNB will take further measures.”

As we eventually learned, the SNB policy failed as the 1.20 FLOOR was removed in January 2015 and caused massive havoc in foreign exchange markets. Today, the cross is 1.0526 as a testament to the ineptness of the European Union to keep its customers satisfied. While the EURO/SWISS rate is not at a level of the SNB’s desire the post-peg policy has proved phenomenally successful.

The SNB keeps INTERVENING to keep the currency relatively steady by selling Swiss francs in the market and buying baskets of foreign currency. Its balance sheet has grown by almost 300 billion francs in terms of foreign currency. The SNB sells francs, buys dollars and then purchases equity shares such as APPLE, MICROSOFT and many other companies. We at NOTES FROM UNDERGROUND have named the SNB the greatest ALCHEMISTS of all time as it PRINTS CURRENCY and purchases high quality assets in many jurisdictions.

Investors have not penalized the Swiss as its currency remains a very desirable store of value. That says so much about the nature of the global financial system. The SNB foreign reserves are 780 billion while its GDP is a mere 715 billion.

If my thesis about the world’s need for a weaker DOLLAR is correct (in an effort to forestall a global deflationary feedback loop), it is time for MNUCHIN and the U.S. Treasury to embark on a made-in-Switzerland policy and spend a few TRILLION DOLLARS on an array of global assets.

Right now the U.S. Treasury is growing its debt load by 2.99 trillion this quarter. If it at least purchased foreign assets they would be getting something for the money while preventing the DOLLAR from dragging the world into a deflationary spiral. The Swiss are the model and their mission statement about the PEG was preventing a deflationary environment.

Yes, the DOLLAR is strong as money pours into the U.S. as deflationary fears increase the threat of global insolvency. But the stronger the dollar the greater the deflation threat. Again, this is not a trade issue but a FINANCE issue. If not now, when? So Secretary Mnuchin, is the SNB a pariah or Paradigm? You do the math.

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24 Responses to “Notes From Underground: SNB, Paradigm or Pariah?”

  1. Michael Temple Says:

    Sadly, yours is a lonely voice crying out in an empty canyon.

    Mr Mnuchin (and Powell) are focused 24/7 on keeping Main Street, Wall Street And Corporate America afloat, not necessarily in that order.

    In fact, the next big step is a $1T+ bailout of the states before most of their July 1 FY starts.

    In the 1980s when the NY banks were threatened with insolvency over their LatAm loans going bad, we had the attention of DC and we crafted Brady Bonds to save the day.

    Today, as EM countries struggle to service their debts, Trump et al can hardly be bothered to lead the world in negotiating ways to assist the EMs. Heck, Trump won’t even join an European initiative to create a global agreement for countries to contribute to finding and distributing a Covid vaccine.

    The USD will NOT draw a policy response from Treasury unless or until the USD soars much higher. Keep your eyes on the German court case concerning the legality of ECB debt purchases.

    As you have said before, perhaps SNB should print some more CHF and buy some gold, or even silver.

    But, Mr Mnuchin is far too busy crafting new stimulus measures to spend time plotting the destruction of the USD.

    Strangely, the best way to sow doubt in the USD would be for Treasury to do the unthinkable. Using the ESM and doing so under the dark of night, Treasury should devalue the dollar against gold and get people thinking that somebody is losing faith in the old greenback.

    Again, never going to happen, even if it is elegantly simple.

  2. Mike Says:

    Is it possible that a contributor to the success of the SNB’s program is that there are more high quality assets to buy with the dollars they receive? Conversely, might the UST may have difficulty spending a few trillion on global assets that offer attractive risk/return prospects as the larger US companies or other domestic equity assets?

    I understand the need to add dollars to the global economic system, but it seems like it could become incrementally costly to put those dollars to work in the global system especially if there are not enough stable international assets to be purchased toabsorb the cash.

    Does that make sense or am I missong something?
    Thanks for your insightful posts

  3. Michael Temple Says:

    Good Morning
    Seems German Court has “kicked the can” forward for another 3 months. Typical of EU deliberations. Never a firm decision. Just band aid solutions while Rome, almost quite literally, burns (from Covid)

  4. Bosko Kacarevic Says:


    What if the US created this money and used some of it to buy assets in good quality gold refiners and producers, in order to help them expand? Better yet, create a USA royalty streaming facility to finance the miners and buy gold really cheap, before it even comes out of the ground. Would this be a kind of feed back loop, because they would be able to flood the market with gold to keep the price under control while the economy gets back on its feet? A quasi-gold-backed currency, AND it would also put to rest all the FEAR people have about owning gold to hedge a collapse in the USD? If private investors buy gold and hoard it, I don’t see how this helps the economy get back on it’s feet? Shouldn’t gold investors be financing small businesses NOW, when they need it most? Many businesses will be forced to go deeper into debt and they will fail anyway from the debt burden. It’s up to investors to step up to the plate and practice CAPITALISM as it was meant to be. Just thinking outside the box?


  5. Recoba Bacci Says:

    Mike Temple: Well stated, and I agree. Until USD strength brings the world to the brink nothing will be done about it. Positioned accordingly.

  6. Michael Temple Says:

    Here is the real nub of the German Court decision basically objecting to ECB purchase of zombie debt from Italy and Spain.

    Everybody in the EU was and still is mightily peeved at Britain for having the audacity to leave the EU back in 2016. All manner of pique and name calling has taken place and virtually all EU leaders have assailed Britain and have vowed revenge and harsh terms for the actual separation.

    Ok, fine, the EU is steamed that Britain wants to leave their party.

    Yet, now we discover this morning that Germany, once again, wants even less to do with the EU than Britain by virtue of her court decision declaring “Nein” to a United Euro Zone in which the strong will assist/bail out her southern flank, even after the truly once-in-a-century pandemic.

    From my perspective, Germany’s actions are more of an affront to the spirit of the EU than Britain’s, as they are playing hardball while the EU is walking a tightrope juggling several balls while Covid has laid waste to the Eurozone economies for the next 2-3 years.

    Italy and Spain only wish they had never given up their printing presses. They are literally toadies beholden to the German burghers and bankers who still cannot embrace the wisdom of Alexander Hamilton some 230 years ago who truly federalized the finances of virtually all the bankrupt colonies/states and assumed all their worthless “Continentals” and guaranteed their debts at par under the “full faith and credit” of the United States.

    The simple fact staring the EU right now is that the wealthy northern countries view their southern brethern as deadbeats who just want to spend their money, and they will be damned to think of a greater good if it is going to cost them now. Yet, the Target 2 imbalances scream to the fact that Germany has already wracked up a 1 trillion euro loss.

    Again, Germany is actually enacting its own Germanexit, far more troubling and with far greater consequences than anything Britain did when it voted “Leave” in 2016.

    Money is power….Duh. Britain smartly (or, perhaps luckily) never did forsake its Sterling for Euros. That is the difference.

    Germany et al do not hold the UK purse strings, as they did and do with Greece and now Italy/Spain.

    A truism of physics is that a system is only as strong as its weakest link. The Euro Zone and the Euro Have some very weak links.

    Ergo, King Dollar unless LaGarde has some compromising photos/videos of key German hard liners to blackmail them into going “All In” on true Eurobonds.

    Frankly, this is sadly Uber bullish for gold. The entire PIIG fiasco in 2011 sent gold up $400 in just a few months. This time around, the existential threat could be far more real.

    USD may have a very bad future in the 2020s. But, for now, the US remains the fairest of the ugly sisters.

    Will be issuing $3T in this coming quarter. I highly doubt UST 10 yr jumps too much. Yes, sure, the Fed will be a big buyer where necessary. And, yes, that is bearish for the USD. But compared to the existential Euro crisis, global capital ain’t rushing into the Euro until LaGarde can outmaneuver Merkel and get a Eurobond created

  7. ShockedToFindGambling Says:

    Yra- interesting idea, but I don’t see how the U.S. Treasury can take the risk of borrowing more now, and buying assets……suppose the assets go down.

    The Treasury/FED need to maintain the integrity of the USD. As you pointed out the other day, the fact that the USD is losing to the Yen (which has all sorts of problems) is concerning.

  8. Alex Says:

    Thank you for this post. I am Swiss and I live in Switzerland. I think that Switzerland is the only country that keeps increasing its balance sheet by “printing money”, not because it cannot pay its bills, but because it does not want too strong of a currency. In this respect, the logic that applies to all the other countries does not apply to Switzerland I imagine?

    Hence, I cannot figure out wether the massive balance sheet that the SNB has created is a net positive or a net negative? a) for Switzerland, and b) for the citizens of citizens? (such as myself)!

    I can’t see how owning European Bonds will end up being a good thing for Switzerland. On the other hand, I can see why owning a portfolio of shares of high quality US companies is likely a net positive for the country. Does the SNB also buy shares of European companies?
    (Such a shame it does not simply purchase Physical Gold though.)

    And finally, I don’t understand the endgame of this policy. Will the SNB not have to sell back all these foreign assets eventually? And what if it has to sell them at a loss? How would this affect the nation?

    If you have a short answer to these somewhat obsessive questions of mine, I would be so very grateful!

    Alex from Geneva

    • yraharris Says:

      Alex–thanks so much for your input.I also try to figure whether the balance sheet is a positive or negative–but the ability of the CHF to hold its value deems its policy to be a positive and the first quarter drop in its assets by 39 billion is expected as global equities were crushed—but the last quarter of 2019 gains more then offset.It is amazing that the SNB gold holdings are no larger then in 2013 when GOLD made its all time highs–the SNB’s equity holdings dwarf their bond holdings –their holdings are public record and you being Swiss would help us all by digging deep into the balance sheet and enlightening all of us—thanks very much,Yra.Also,the endgame would result in selling equities rather then bonds which is far better then the others—BOJ,ECB,FED

  9. Michael Temple Says:

    A Declaration Of War by the German Courts

    How high does USD soar if the Germans decide to punish Italy like Paulson decided to punish Lehman?

    Of course, if this actually happens, gold could soar $500 overnight, if you ask me. Crazy?

    Gold rose $400 from July 2011 until its August peak when the last Euro crisis was averted by Super Mario.

    Break the Euro, and I think gold soars as not all capital flows into USD

  10. Pierre C Says:

    Germany and Italy, like a dysfuntional marriage, are both to blame.
    In most marriages that go bad it’s usually the person abused that finally decides they’ve had enough and leaves. (Maybe demographics will play into this, the young are always more willing to take risks)
    Italy leaving (or being pushed out) would be Euro positive, it seems to me. The Euro would rise and more correctly reflect the German economy and it’s surpluses.
    Which in turn would be positive globally. To the point we’ve been making on notes, the euro rising would help bring the dollar down. And voila!
    So, Italy has to set aside it’s fears and stand up for itself. Maybe a Rocky 5 inspired movie?
    I don’t think the world can count on Germany from what I’m seeing.

    • Michael Temple Says:

      You are far too blasé about what the market reaction would be if there is an Itexit.

      Chaos would be unleashed as the “Wolfpack” would next attack Spain and Portugal and create a Super Nova explosion.

      Germany seems intent on sticking to the law while the US/Fed have ignored all pretense of Fed laws/prohibitions to what it could do.

      It is mind boggling to behold, but Germany might actually channel their inner Paulson and choose to mete out Justice, Lehman-style to those “lazy” Italians who wish to live off the German credit card.

      For all his political blustering, Trump is going to grant $1Trillion plus to the Covid-ravaged states while the Fed continues its QE of muni bonds.

      An Italian Exit would simply crash the markets far worse than Lehman 2008


      • Pierre C Says:

        Thank you for your reply Mike.
        I didn’t mean to be nonchalant about a break up. But I did want to point out that there is another side of this coin.
        Of course, there would need to be precautionary steps taken to prevent a domino effect. This is way beyond my pay grade.
        What I’ve learned is: that for every surplus there has to be an equal deficit.
        Rebalancing these does not benefit the elite. Or as Yra points out the “Davos group”.
        Thank you for all the insight that you bring to us, it is much appreciated.

      • yraharris Says:

        Pierre—Mike is right on target.The financial reverberations from a German led break -up of the ECB balance sheet will make the recent fears from the Corona will look like ablip—the losses to the financial system around the word as trillions in debt were repriced –go look back at 2012,July prior to No Taboos ,Whatever It Takes

      • Pierre C Says:

        Yra, Mike,

        You know if you recommend something, I will dig into it:

        “go look back at 2012,July prior to No Taboos ,Whatever It Takes”

        is next on the list.

  11. JMH Says:

    ‘If something can’t go on forever, it won’t’.
    Economist Herbert Stein, WSJ, 1985.

    Nuff said.

  12. kevinwaspi Says:

    In reading the Express News article (thank you Michael) I delight in the following passage: “But Jorg Kramer, chief economist at Commerzbank, said the ECB’s bond-buying scheme will continue.
    He said: “The ECB will have to prove now that the programme is really proportionate so as to win approval by the German government and lawmakers – given the large group of experts at the ECB, that shouldn’t be much of a problem.”
    Given 90 days, and ‘experts’, anything is possible! What a joke.
    When asked “How much?” after the counting concluded on the ninetieth day, the experts replied, “How much would you like it to be?”

  13. Chicken Says:

    Employment bubble bursting? Palladium finally took one on the chin.

  14. Srjean Says:

    Yra, what to do you think about the potential for a massive demand shock after restrictions are lifted. One that could potentially lead to a big jump in inflation? Steven Roach in FT talked a bit about it, but it is generally not covered in the media and most are unprepared for such a scenario. Excepting gold bugs, of course.

    • yraharris Says:

      Srjean—I actually wrote a comment to the Roach piece.The inflation effect will be from supply being unable to meet the pent up demand and supply chains being terribly disrupted.I just don’t know .But my concern is that the demand shock will be from the lack of demand due to the elevated levels of unemployment—it will take time to work out the changes that the shut down have created.But Roach is certainly of the mindset that policymakers are HAPPY to endure inflation if it works off the huge debt load which will plague the global financial system for many years to come.Bernanke and Co.–central bankers—fear the deflation while believing inflation can always be put back in the bottle as Paul Volcker taught—it is an assymetric policy outcome.Professor Rogoff also makes that point in the book ,This Time It’s Different—noting five /six percent inflation wouldhave helped workout the 2008 crisis.Yes ,the Goldbugs relish this but as this BLOG has maintained for its entire 10 years,GOLD is a store of value against the lack of central bank credibility in a fiat currency world—the inflation will follow

  15. Arthur Says:

    Study from the Centre for European Policy in Freiburg has shown Germany to have gained “by far the most” from the introduction of the euro. Italy and France saw a drop in prosperity over the last 20 years.

    • yraharris Says:

      arthur–the germans would respond to this study and again do we know the veracity—We did everything right beginning with hartz 4 so why should we have to bear an undue burden of a perpetual transfer union

      • Arthur Says:

        Fully agree with you… anyway, perception is NOT reality. Or so they say.

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