Swiss National Bank
Overview of these week's key developments
"QE detractors... see something quite different. They see QE as not responding to the collapse in the money multiplier but to some extent causing it. In this account QE – and the flatter yield curves that have resulted from it – has itself broken the monetary transmission mechanism, resulting in central banks pushing ever more liquidity on a limper and limper string. In this view, it is not inflation that’s at risk from QE, but rather, the health of the financial system. In this view, instead of central banks waiting for the money multiplier to rebound to old normal levels before QE is tapered or ended, central banks must taper or end QE first to induce the money multiplier and bank lending to increase."
Last month we laid out the reasons why France was On The Brink Of A Secondary Depression - in short, due to a deadly collision of French politics with Frankensteinian monetary union. Unfortunately, subsequent data confirms the bleak trajectory. Even Francois Hollande is beginning to wake up to just how destructive and anti-business the French agenda is. France will enter a recession at a time when spending and debt levels are quite high and Hollande’s recent attempts to assist entrepreneurs are too little, too late. France has been slower to cut taxes than other EU members and a secondary depression will push the French budget deficit to new dangerous heights as the government's 'forecast' of the primary balance is farcical. Even if borrowing costs remain low, debt ratios will still explode. Knowing this, why then are French rates so low? The usual explanations (purchases by the Swiss National Bank and Mrs. Watanabe buying) have some merit, but other factors may also be at play. In any case, in a bond market, one should look at two things: the return ON capital and the return OF capital. The return ON capital is pitiful and the return OF capital is far from certain. Sell the financials in Europe - and in France especially. Really, the euro is on its last legs. France is in play.
Stanley Fischer, who cost his central bank a lot of money with his ill-timed bet to invest billions of the Bank of Israel's foreign currency reserves on names such as Apple last year, has demonstrated that Einstein's definition of insanity is alive and well when it comes to central-planners, has just decided to double down on stocks. Alas, this is not a joke. Bloomberg reports that "The Bank of Israel plans to almost double equity holdings by the end of the year after falling bond yields prompted the central bank to invest in European shares for the first time. The bank will increase its stock holdings to as much as 6 percent of foreign-exchange reserves, or about $4.5 billion, from 3 percent at the end of 2012, according to Yossi Saadon, a Bank of Israel spokesman. Investments in shares rose to about 4.5 percent of assets in the first four months of 2013 as the institution made a “small allocation” to European equities in addition to its U.S. funds, he said." Well, if the BOI's investment in AAPL was the beginning of the end for that company, one can start shorting Europe - an academic Keynesian just called the top.
When tin-foil-hat wearing digital dickweed blogs first suggested that Central Banks were actively buying stocks, the mainstream media scoffed at the idiocy and un-independence of such an idea. However, it is clear the central banks themselves are now not only actively buying stocks but are activley encouraging it and propagandizing their efforts to lever this last policy tool left in the toolbox. As Bloomberg reports, 23% of central bankers surveyed said the bank owns shares and plans to buy more. From the Bank of Japan to the Bank of Israel and with the SNB and the Czech National Bank now at over 10% allocation of reserves to stocks, is it any wonder there is an inexorable bid under the 'free' markets. Rick Santelli is rightly concerned that, "there is a danger that everyone is loaded in the same direction," asking what happens if all the Central Bank pump-priming does not work, given these equity valuations, "who gets caught holding the bag? What chairs are left when the music stops?"
Pity the wise money manager these days. Our juiced-up financial markets, force-fed liquidity by the Fed the other major world central banks, are pushing asset prices far beyond what the fundamentals merit. If you see this reckless central planning behavior for what it is - a deluded attempt to avoid reality for as long as possible - your options are limited if you take your fiduciary duty to your clients seriously. Bill Fleckenstein of Fleckenstein Capital has a difficult time seeing other assets to own besides the precious metals. There are confidence bubbles in stocks, bonds and the fiat currencies that will break - not may, but will - and when they do, he sees no safe harbor for investment capital save gold.
A few weeks ago, we wrote of the Swiss People's Party's efforts to gain enough signatures to force the Swiss National Bank (SNB), who 'supposedly' guarantees the price stability in Switzerland, to stop selling its gold reserves. This last week, as the FT reports, they reached the required 100,000 signature mark and on Thursday the federal chancellery confirmed Switzerland is to hold a referendum that would ban the central bank from selling its gold reserves, force it to keep at least 20% of its assets in the metal, and repatriate gold reserves held abroad and keep them at home. Following Cyprus' forced sales and discussions of the net wealth in other European peripheral nations, proponents of the Swiss measure flatly reject the idea of sales, arguing that disposals of gold reserves at low prices between 2001 and 2006, as well as more recently, have cost Switzerland billions of Swiss francs. The "Save Our Swiss Franc" initiative proclaims, "today gold is almost the only really valuable asset left on the SNB’s balance sheet." The SNB, however, is concerned at, "the monetary policy implications of the demands in the initiative." A date for the referendum has not yet been set - but the FT notes that previous 'referenda' have taken up to several years from acceptance to actual vote.
The Treasury Department planted a "dirty bomb" at the Bank of Japan, and tossed a grenade at the Swiss National Bank.
Since the Financial Crisis erupted in 2007, the US Federal Reserve has engaged in dozens of interventions/ bailouts to try and prop up the financial system. Now, I realize that everyone knows the Fed is “printing money.” However, when you look at the list of bailouts/ money pumps it’s absolutely staggering how much money the Fed has thrown around.
It's that time of the month again when, with little fanfare, the NY Fed discreetly discloses on which days of the upcoming month shorting is unadvisable, because on the other end of every sale or short will be none other than Kevin Henry & Co., and some $45 billion in buying power-cum-short stop loss triggers (not to mention every possible Citadel HFT algo operating at a less than arm's length from the Liberty 33 trading desk). In short: we get the advance monthly schedule of POMO days. And as everyone knows, one should never fight the Fed (unless, of course, one is the European Central Bank, the People's Bank of China, the Bank of Japan, the Bank of England, the Swiss National Bank, and pretty much every other central bank now that the entire world has devolved to outright currency warfare, but let's ignore that particular weak link in the media's propaganda narrative for the time being). So how does April look? In short: for anyone seeking to short the market in order to take advantage of the inevitable end of the Fed's despotic central-Ponzi planning regime (for reference, please see Bernie Madoff): not good.
The Swiss National Bank (SNB), which supposedly guarantees price stability in Switzerland, currently holds about 1,040 tons of gold reserves after gradually selling off at least 1,550 tons and now members of the Swiss People's Party, the far-right Swiss Democrats and the Lega dei Ticinesi movement, is confident a nationwide vote will be called (after they gathered 106,000 signatures) on stopping the sale of gold reserves held by the SNB. It also wants gold bars stored in the US to be returned. As Swiss Info reports, the People's Party leader Luzi Stamm comments, "Gold reserves guarantee the stability of the Swiss franc. They ensure that that private savings, salaries, pension keep their value," warning that gold must not be the object of speculation for the SNB or for politicians and demanding the SNB keep a minimum of 20 per cent of its assets in gold, twice the current level. In addition, they want to force the government to disclose where the gold reserves are stored, since "it is only in safe hands if it is kept in Switzerland."
What to make of this development?
A few observations about growth and policy backdrop that is shaping the investment climate. It is a large overview that may be helpful to start the week.
The US dollar rose to new multi-month highs against several of the major currencies, including the euro, Swiss franc, British pound and the Japanese yen. The BOJ, BOE and ECB meet last week and none changed policy. The Swiss National Bank meets on March 14 and is also unlikely to change policy. The Federal Reserve meets the following week and is widely expected to stay its course. It is not monetary policy then providing the new trading incentives.
Nor can the dollar's gains be attributed to political uncertainty in Europe stemming from the inconclusive Italian elections, as was the case previously. The immediate shock has worn off and Italian stocks and bonds have recovered the lion's share of those initial losses.
In many Western industrialized nations, debt has overwhelmed or is about to overwhelm the economy's debt-servicing capacity. In the run-up to a debt crisis, bad debt tends to move to the next higher level and may ultimately accumulate in the central bank's balance sheet, provided the economy has its own currency. Many observers assume that, once bad debt is purchased by the central bank, the debt crisis is solved for good; that central banks have unlimited wealth at their disposal, or can print unlimited wealth into existence.
However, central banks can only create liquidity, not wealth. If printing money were equivalent to creating wealth, then mankind would not have to get up early on Monday morning. Only a solvent central bank can halt hyperinflation. The longer governments run large deficits, the longer central banks continue to monetize them, and the longer their balance sheets grow, the higher the potential for enormous losses and thus hyperinflation.
Necessary preconditions for hyperinflation are a quasi-bankrupt government whose debt is monetized by a central bank with insufficient assets. One way or another, owning physical gold is the safest and most effective way of insuring against hyperinflation.