Swiss National Bank

Remember, years ago, when the markets were a mechanism for honest price discovery and a gathering place for buyers and sellers to participate in open, unvarnished capitalism?

"we venture that the SNB will sooner or later be forced to permit the franc to appreciate and thus to enrich the holders of low-priced, three-year call options on the Swiss/euro exchange rate. It's a long shot, to be sure--the options are cheap for a reason--but we judge that the prospective reward is worth the obvious risk." - Jim Grant, Sept 14th, 2014

At this point, the writing is on the wall: nothing can be taken for granted.  No assurances or promises or proclamations will hold.

It appears the Swiss National Bank decided to wait til they saw the whites of the eyes of the 'speculators'. The SNB's surprise decision to scrap the EURCHF ceiling has unleashed major pain across the hedge fund community as speculators, according to CFTC data, are the most short Swiss Francs (long the USD) since June 2013. Holding a huge 24,171 contracts short USDCHF futures (which surged 24 handles on the news) will not go unnoticed by the margin clerks...

The Swiss National Bank just threw gasoline on Swiss F.I.RE. Expect to see combustive contagion in the Swiss banking, insurance and real estate giants as knock-on effects spread from so-called hedges

This morning's decision by the Swiss National Bank has polarized the investing community. From the 'smartest men in the room' to the 'most renowned newsletter writers in the world', the reactions could not be more different...

And to think so many otherwise very bright people still don't get it.

Anyone who continues to believes in the all powerful CB after today is a fool.

To paraphrase a trader who walked into the biggest FX clusterfuck in years, "it's total, unprecedented market turmoil."  So while the world gets a grip on what today's historic move by the SNB means, which judging by the record 13% collapse in the Swiss Stock Market shows clearly that the SNB market put is dead and the SNB may be the first central-banking hedge fund which just folded (we can't wait to see what the SNB P&L losses on its EURCHF holdings will be), here is what has happened so far for anyone unlucky enough to be walking into the carnage some 2 hours late.

Over a decade ago, George Soros took on the Bank of England, and won. Less than two hours ago the Swiss National Bank took on virtually every single macro hedge fund, the vast majority of which were short the Swiss Franc and crushed them, when it announced, first, that it would go further into NIRP, pushing its interest rate on deposit balances even more negative from -0.25% to -0.75%, a move which in itself would have been unprecedented and, second, announcing that the 1.20 EURCHF floor it had instituted in September 2011, the day gold hit its all time nominal high, was no more. What happened next was truly shock and awe as algo after algo saw their EURCHF 1.1999 stops hit, and moments thereafter the EURCHF pair crashed to less then 0.75, margining out virtually every single long EURCHF position, before finally rebounding to a level just above 1.00, which is where it was trading just before the SNB instituted the currency floor over three years ago.

If you worry about the size of the Fed's balance sheet you should be horrified by what is happening in Switzerland.

There could be some (nasty) side effects...

This wasn't supposed to happen. The Swiss National Bank has a problem - having announced on Dec 18th that it will impose negative deposit rates starting Jan 22nd, sight deposits soared (as opposed to the textbook expectations). Sight deposits (cash-like deposits commercial banks hold with the central bank) rose CHF10.8 billion this week (or 3.4%) - the most in over 18 months.

For those wondering where US shale exploration and production companies will be in about 2-3 years, look no further than the gold miners, where the disconnect between undaunted physical demand and relentless paper supply (after rebounding above 0%, GOFO is once again negative through the 3 month mark), and where high production costs and low selling prices, after two years of balance sheet pain, is finally leading many over the cliff. Case in point, Canadian gold-miner San Gold, which had a capitalization of over $1 billion in 2010 just filed for bankruptcy protection. It isn't the first gold-miner to wave the white flag, and it certainly won't be the last.

Say what you want about the gold price languishing below $1200 (or not, as the case may be, after this week), and say what you want about the technical picture or the “6,000-year bubble,” as Citi’s Willem Buiter recently termed it; but know this: gold is an insurance policy — not a trading vehicle — and the time to assess gold is when people have a sudden need for insurance. When that day comes - and believe me, it’s coming - the price will be the very last thing that matters. It will be purely and simply a matter of securing possession - bubble or not - and at any price. That price will NOT be $1200. A “run” on the gold “bank”  would undoubtedly lead to one of those Warren Buffett moments when a bunch of people are left standing naked on the shore. It is also a phenomenon which will begin quietly before suddenly exploding into life. If you listen very carefully, you can hear something happening...