Swiss National Bank

Fed to lose patience.  Many expected Norway and Switzerland to cut rates.  Could they be disappointed? 

Following the dramatic December surge in Russian interest rates when the Bank of Russia scrambled to preserve confidence in the then-plummeting currency and sent the interest rate to a whopping 17%, now that the oil price crash has stabilized it has been walking down this dramatic move, and after reducing rates by 2% on January 30 to 15%, moments ago the Bank of Russia once again cut rates this time by the expected 100 bps to 14%. The bank also said that more rate cuts are in the pipeline.

The currency war salvos just keep on coming.  Moments ago the BOK unexpectedly (the move was predicted by just 2 of 17 economists polled by Bloomberg) cut its policy rate from 2.00% to a record low 1.75%, in what is clearly a full-blown retaliation against the collapse currency of its biggest export competitor, Japan, whose currency has cratered to a level that many in South Korea believe has become a direct subsidy for its competing exports. As such the only question is why the BOK didn't cut earlier. And following the surprise rate cut by Thailand earlier today, the "surprise" South Korean rate cut means there are now 24 easing policy actions by central banks in 2015 alone.

Whether the world's central banks are 'co-operating' or competing is up for question but the tsunami of policy easings so far this year is making the 'surprise' rate cut, unsurprising. As Bloomberg reports, Thailand today became the latest to execute an unexpected interest-rate cut, bringing the total to 23 in 2015. While only 6 of 22 economists expected it, the Southeast Asian country -- a onetime export powerhouse that’s seen its manufacturing mojo dim somewhat in recent years amid historic flooding and political infighting -- lowered its main rate to 1.75%. "The surprise move suggests the economy is much weaker than expected," noted one analyst, adding that "it is negative for the baht and there’s concern that lower rates may lead to more outflows as the U.S. is expected to raise rates."

Something curious has emerged as a result of the divergent "Fed-vs-Everyone-Else" central bank policy: as JPM observed over the weekend while looking at the dollar fx basis, the dollar funding shortage is back with a vengeance, and is accelerating at pace not seen since the Lehman collapse.

Why are negative interest rates now making an appearance? They are a natural consequence of the rampant money creation undertaken by central banks in response to the global financial crisis as there is a lot more newly-created money floating around the financial system than there are safe places to put it. With the increasingly globalized world of international finance a bank run or financial panic anywhere can easily become a bank run or financial panic everywhere, it might be a good time to give your mattress a bit of extra padding.

Has the DNA of the global economy been gradually altered by endless injections of quantitative easing, morphing it into a freakish mutant? Are things that are not supposed to happen for centuries on end going to become common occurrences? The collapse of oil prices and jump in the Swiss franc have forced us to puzzle over these weighty questions. In isolation, these events and the direction of their moves did not worry us, but their magnitude, velocity and proximity to each other sent me on an intellectual quest.

Just what are the Swiss up to...

*SWISS FINANCE MINISTER WANTS NEW MINIMUM EXCHANGE RATE: HZ

A confidential paper signed by Swiss Finance Minister Eveline Widmer-Schlumpf, discussed in government last week, said that new minimum exchange rate should be "considered," Handelszeitung reports in a prerelease of an article to be published Thursday.

Just hours after India's 'surprise' rate cut (which saw the SENSEX surge and then dump to close red), Poland has surprised the market with a bigger-than-expected rate cut. Despite two-thirds of econmomists expecting a mere 25bps cut, the Polish Central Bank slashed its benchmarket 7-day rate to just 1.5% - the lowest on record. Today's cut "makes up for inaction in previous months" after Poland held rate flat in January and February (but echoes Poland's Oct 'surprise' greater-than-expected ease of 50bps. Polish stocks dropped on the news (but recovered), banks are weaker, and the Zloty is selling off on this news (pushing back towards record lows)...

In a surprise move, the RBI just cut its main interest rates for the second time in two months, taking it from 6.75% to 6.50%, in what the central bank calls a “pre-emptive” policy move, but what is in reality merely a confirmation that so far in 2015 at least 20 central banks have lowered their interest rate.

Financial systems that seem robust are more often than not inherently fragile - China is no exception!

"The Fed is out of control," exclaims David Stockman - perhaps best known for architecting Reagan's economic turnaround known as 'Morning in America' - adding that "people don't want to hear the reality and the truth that we're facing." Policymakers are "taking our economy in a direction that is dangerous, that is not sustainable, and is likely to fully undermine everything that's been built up and created by the American people over decades and decades." The Fed, Stockman concludes, "is a rogue institution," and their actions have led us to "one of the scariest moments in our history... it's a festering time-bomb and we're not sure when it will explode."

And then there were 21. Hours ago on Saturday, the country whose currency is largely pegged to the dollar which itself is now anticipating a rate hike in the coming months, surprised the world by confirming its economic slowdown yet again following a recent rate cut just this past November when it lowered its benchmark rate by 40 bps, after it again cut benchmark lending and deposit rates by 25 bps starting on March 1. Specifically, the PBOC will lower the one-year lending rate to 5.35% from 5.6% and its one-year deposit rate to 2.5% from 2.75%. It also said it would raise the maximum interest rate on bank deposits to 130% of the benchmark rate from 120%.

Behavioral economics suggests that a little QE can change human behavior at the margins, but no amount of QE is enough to change human nature at its core. The High Priests of the IMF, the Fed, and the ECB are blind to this because all of modern economic theory – ALL of it – is based on a single bedrock assumption: humans are economic maximizers. Yes, we are maximizers of reward. But we are also minimizers of regret. We seem destined to learn the hard way... once again...  that you can’t change human nature by government fiat. But individual investors and allocators can listen and learn from these old good ideas, and that’s how you survive the Golden Age of the Central Banker.

With the Fed and other Central banks now leveraged well above 50-to-1, even those entities that were backstopping an insolvent financial system are themselves insolvent.