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On the Swiss move
I have repeatedly said in these pages that for currency intervention to be successful it has to be done in conjunction with other big central banks. The Go it Alone policy has not worked over the past 20 years. I have no reason to expect that it will work this time either.
I think the most important press announcement this AM is not from the SNB; it is from the ECB. There is little doubt from this that the SNB is in this all alone:
The Governing Council of the European Central Bank has been informed by the Swiss National Bank about its decision to “no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20.”
The Governing Council takes note of this decision, which has been taken by the Swiss National Bank under its own responsibility.
I think that the SNB has just committed suicide. They did the one thing they should never have done. Draw a line in the sand.
Events far outside of the control of the SNB will determine the consequences of the policy to put a floor under the CHF. While I don’t doubt their short-term resolve to defend the 1.20 level for the EURCHF I am already questioning how long this can continue. Some thoughts on where this may go.
-Stay away from the CHF. There is only one trade to make as of this morning. That would be long the EURCHF. To me that is like shorting gold. Don’t do it, is my advice.
-This has been tried before by the SNB way back in the late 70’s. As a currency matter the policy was a success. The Franc stabilized against the weak German Mark. But three years later the Swiss were suffering a massive hangover. Inflation went from a negligible number to over 7%. There can be no doubt but that the same results will happen again. It’s just a matter of time.
-Stay away from Swiss stocks for the time being. Yes, a cheaper Franc is good for translated earnings. So if you believe that multiples are the only driver of stock prices you might conclude that the move by the SNB makes the SMI (stock index) a buy. Think again. A government that falls back on currency controls as the only measure of policy options left, is a place that you don’t want to put your money. The big jump in Swiss stocks this AM is a logical knee jerk response. But the SNB move is also the kiss of death for the equity markets in Switzerland.
-Europe is falling apart. That reality has not changed as a result of the SNB action. Over the next few weeks we will get more bad news from the EU. In the past the ‘go to’ response has been to buy the Yen and CHF as a safe haven knee jerk reaction. Now that trade is dead (both of them in my opinion). So where will the hot money go the next time the headlines scare capital? There is only one choice left now. That would be gold.
-I believe that the amount of intervention required to drive the EURCHF from 1.14 to 1.20 this AM was quite small. The market immediately re-priced the currency to the level the SNB said it was prepared to defend. But that is not going to be the result at some time in the near future. At some point the SNB will be tested. I have no doubt but that they will step up and intervene like mad the next time the CHF is in demand. But at what cost? How many Euros will they be forced to absorb? E100b? E300b? Could it go as high as E1 trillion? There is no number that can’t be achieved. The question of, “How much can they do?” has not been asked or answered as yet. The market is going to both ask and answer that question. I think the time frame for this is before the end of this year.
-Do the Swiss have the will to take this fight to the bitter end? There is nothing in history that says that they can or will. What if this begins to backfire sometime this fall? Does the SNB just stand there and print Francs? That is what they have said they will do. I wonder what they will be thinking when the money supply first doubles, then triples then just goes vertical. Are they really so stupid to think that the floor on the Franc has no risk attached to it?
-In 2010 the SNB reported a loss of CHF 21b as a result of their failed interventions against the Euro that left them holding the bag. There was political hell to pay for these losses. The annual gains of the SNB are paid back to the Cantons. There will be no gains (only losses) as a result of the new policy. The Swiss exporters, farmers, tourist industry may hail the move today, but just wait till the policy fails. Before this is over the SNB will hold an extra 500b Euros. The losses could easily exceed E50b. This will sink the SNB forever.
-What will the SNB do with all the Euros they have promised to buy? That’s easy to answer. Only German and French debt will be allowed. This will just result in a widening of credit spreads between the North and the South. As this happens more capital will seek a safe haven. What the Swiss have done will add to the instability within the EU. As a result, the ECB will hate the SNB.
-To some extent the strong CHF was a dollar phenomenon. The CHF got stronger and stronger against the Euro. Through the markets this acted as a support for the Euro versus the dollar. What might it mean now that this relief valve has been broken? One possible response is that the dollar gets stronger in a significant way. That has not been the reaction so far this morning, but I consider this to be a reasonable outcome. Just a question for those who are looking at this from a global perspective:
What is the number one worst thing that could happen to the US economy over the next six months?
I would put a “too strong” dollar at the top of my list. Should the result of the SNB action be a 10-15% up move in the dollar versus Euro it will be the kiss of death for US GDP. I think there is a very good case for this to occur. Bernanke must be very upset this AM. What the Swiss have done runs very counter to his plan to “export” US deflation. The Swiss are now going to be the exporters of deflation. The bulk of this will stay in the EU, but some of it surely will come to our shores. If your odds for a USA double dip were 50-50 on Friday, they just went to 70-30.
-How much intervention can the world absorb? Japan is doing it big time in both the currency and debt markets. China is manipulating its FX and interest rates. The USA is manipulating interest rates in an unprecedented way. Brazil, Russia, Korea are all doing the same. It won’t work folks. It will fail. The Central Banks are not omnipotent. The markets are.
-I suppose there is a soft landing scenario to the steps taken today by the SNB. The liquidity problems in the credit markets of Europe could somehow magically stabilize. It’s possible that the debt woes of the PIIGS could also disappear from the market’s radar. It’s conceivable that US growth could perk up and a crisis is avoided.
I don’t see any of those things happening any time soon. I say the SNB move will fail at some point. If/when that happens it will be an important point in history. If we see the headline, “Swiss cave to market – Franc soars” that will be the day that marks the end game of “extend and pretend” policies and market manipulation. That will be the day that the Great Depression of the new millennium begins. What we went through in 2008 will be a walk in the park compared to that turning point.
-I wrote about the prospects of a CHF Peg a few times in the past month or two. I think the steps taken today represent a huge gamble by the SNB. I said of the prospects for this to happen:
The Swiss like to “Double Down”
The SNB has, in fact, doubled down as of this morning. This is the biggest financial bet in the country's long history. They are “All In” on this bet. Not only are they betting Switzerland’s economic future, they have also placed a bet for the other 7 billion people living on the planet. I would give a “zero’ possibility for this to work. Get your seat belts on. Volatility is about to take another monstrous leap.
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Is this what the Chairsatan was waiting for? Imagine that the Swiss gave him a heads up a few weeks ago. Work things out from there.
Bruce,
Thank you for the analysis. Reading the piece reminded me of an article you wrote over a year ago. Gist of the article was a set of events that would enable BB to fire up a stogy. There's a saying, "What goes around comes around."
thanks Bruce. excellent work.
I would suggest that lowering a currency is a lot easier than propping it up. Different set of rules.
Step 1 -SNB should appoint Bernanke as chairman of their printing committee and Federal Reserve.
Step 2 -no need, problem already solved.
The Swiss see war coming somewhere soon and they want to be prepared to profit. That has always been their strategy - why change a winning hand? Don't bet against over 1000 years of successfully manipulating the world's events in their favor. And don't for a minute think that this wasn't thoroughly game-planned with the gov't and then with the real, behind the scenes, invisible power brokers in Geneva and London. I can't begin to untangle the knot andfigure out how they see the events of the next 6 months evolving but you can bet that at the end of whatever cataclysm they are predicting with this move they will be sitting happily on top of their mountains of gold while everything around them lies in smoking, maybe even glowing rubble. Except of course for Germany, their new (old) best friends, and a few small northern countries ( I'm talkin to you Finland) who have been smart enough to stay out of the way..
People tend to forget that the Swiss are the most heavilly armed nation in Europe. Compulsory armed service, then subject to recall at a moments notice. All personal keep their wepons and kit at home, while joining regular training sessions at the local, canon and national level. All the while maintaining sharp shooter status, with the country providing the amunition, of which each reserve soldier must keep 1,000 rounds stored at home.
Their mountainous territory is honeycombed with redougbts storing everything from food, meds, hospitals, ammo, artillery and even jet fighters! All protected under mountains of solid rock. The Swiss value their neutrality and will fight to maintain it.
I forget who said it, but it goes - there are two ways to conquer a nation, by the sword or by debt. Looks like the Swiss are going the massive debt route. May we live in interesting times indeed!
Those rifles are also very good and very accurate SIGs. Not the crappy spray and pray M4s.
OLI - you're right about those mountain redoubts. Every inch of the country is zeroed in from the mouths of those caves.
But what's your bet that in addition to hiding artillery and jet fighters they also hide at least a few cruise missles with nukes acquired from, oh, say, the Russian mob? (Some of their finest customers no doubt.)
If the flag really, and I mean really goes up, a few one-way jet fighters and a few hundred 155s and a few thousand yodeling Hansels with rifles aren't going to be much deterrence.
The Swiss were not really doing that well until they became the bankers of frightened money from all parts of Europe, and promised to hide all links to the depositors.
They had a very good century. Take away that money, Switzerland is a reduced prospect. But still an interesting one. How can Italians, French & Germans live together in a mountainous country and not have the worst of all worlds? Doesn't make much sense until you factor in the commission on all that imported wealth.
So who is going to be the custodian of all that money looking for a secret home; big opportunity for someone.
I think we may have the answer here from Debka ( granted, a propaganda shill). "
Gen. Benny Gantz recently lectured to the IDF's General Command on the danger of the Arab Spring fast degenerating into "an Arab autumn or winter."
"There is no need to sow panic," said the defense minister's political adviser Amos Gilead in an early morning interview Tuesday, Sept. 6 in which he sharply contradicted the Home Front commander point by point with "the real facts."
"Israel's security situation has never been better," said Gilead. "We have deterrence in the north and the south, the Arab regimes around us are stable" and "all we need do is take care that current situations don't develop into threats." Israel has broad leeway for action, he insisted, and plenty of time to prepare for the unexpected. "It is therefore not correct to say that we face total war."
There you have it. Israel's situation has never been better. There is no need to panic. Whew - glad to hear it Amos. For a minute there I thought that General Gantz might have a point. And by the way, where is Israel's gold stored? Who would get to keep it is Israel were to, um, disappear?
Even an unenlightened sheeply maroon such as meself can begin to understand these markets with guidance like this. Thanks.
"The Central Banks are not omnipotent. The markets are."
Can Central Banks/governments change that?
Bruce, thanks
I don't think I have ever read anything from you that is quite so gloomy, and that from a guy who above all offers a balanced and realistic perspective with a pretty good track record. And unike some contributors you aren't selling anything.
This post should be cause for concern to any who believe in happy endings.
Bruce is too close to this. He's a proud Swiss national. Times are changing. The Swiss corporates are cheering.
Ditto wang's thoughts. Thanks for your insight bk.
There's a difference between suicide and human sacrifice. The SNB is simply getting out of the way (fully neutralized via printing into oblivion) so that the BIS can do their job via the ECB in the bond roll-up from the PIIGS.
Where you gonna hide? Looks bullish for the petro-dollar-US-military as the last safe haven. Could this be bearish for gold in the near/mid-term when you consider the potential dollar strength that is implicit in the move?
Dave Harrison
www.tradewithdave.com
Gold rush is done for a bit imo.
Dave
If you haven't noticed, gold is no longer trading with the USD, but has broken out from that link and trading on its own. Gold has become the anti-fiat including the Swiss Franc.
JFC
i read that TRADE with DAVE website daily .......... it's fascinating stuff . i'm really intereseted in this "divorced currency" theory.
But a move that makes a stronger USD near term, dropping US market prospects, allows Bernanke to be aggressive with QE3 on Sept 21, no?
Absolutely correct. The missing piece of the puzzle must occur this week into early next week: SP under 1k. Then QE3 levitates markets until late December and then CRASH into 2012.
Thanks Bruce for yet another most excellent article.
hey Bruce, "TOLD YOU SO"
remeber my post couple weeks ago about 10% MOVE IN FRANK.. it happened .. right on money
couple points need to be clarified in your post , again
##1
t has to be done in conjunction with other big central banks.
##
##
-How much intervention can the world absorb? Japan is doing it big time in both the currency and debt markets. China is manipulating its FX and interest rates. The USA is manipulating interest rates in an unprecedented way. Brazil, Russia, Korea are all doing the same. It won’t work folks. It will fail. The Central Banks are not omnipotent. The markets are.
##
you are saying INTERVENTION WILL FAIL CAUSE ITS NOT DONE BY AL CENTRAL BANks at once.. but below you answered your own analysis : ALMOST ALL BIGGEST CENTRAL BANKS DO IT.. USA - check (1.5 trln$), ECB - check , buying spain.italy/greece/ debt.. Japanese central bank - dont get me started .. they were doing as long as i remember.. China- chekc, just peg yan..
SO WHAT IS THE PROBLEM W/ SWSS Central bank?
#ny Euros will they be forced to absorb? E100b? E300b? Could it go as high as E1 trillion? There is no number that can’t be achieved
BRUCE, what do you mean by absorbing? its not the problem, those euros will sit on balance of central bank, they wont be used for anything.. THE ONLY REAL PROBLEM IS inflation and INCOMING fresh printed Swiss franks if they directly get into Swiss economy/country..
##In 2010 the SNB reported a loss of CHF 21b as a result of their failed interventions against the Euro that left them holding the bag
Bruce, you seems have been there, know stuff.. PLEASE STOP THIS NONSENSE OF LOSSES.. as long as all contracts settled in Swiss franks and cost of printing is bascially zeo. there cant be any losses..
JUST IMAGINE YOU ARE SWISS CETRAL BANK,, you printed new franks, bought whatever.. HOW CAN YOU HAVE LOSSES FROM HOLDINGS if cost of buing is zero.. ???
alx
ps
hope you didnt get caught being long swiss frank.. that would be sad..
My last words re a CHF bet was on August 17:
I'm taking a wait and see for a bit. It’s better to find something else to do than trade the Swissie
So no, I was not long (or short) a spec CHF position.
If you read me over time you would have read me to say that FX markets are not for small investors. This is a pro's only market. I stand by that.
If you're a pro, I wish you well. But if you were a pro you would not write as you do.
how do you spell patronising?
W-O-O-D-S-H-E-D
And, make him cut his own switch on the way.
With a "z."
I'm hardly an expert in macro matters Swiss but I have asked in these type of posts before why they don't go into "fortress Switzerland" mode as the best of several painful choices and watch the rest of the developed world's monetary systems collapse around it. Print money and buy gold maybe but peg to the Euro -now? Good Grief.
For a country that is famous for discretionary banking, gold and impregnable defenses they seem to be rejecting these core competencies at the worst possible time these days. What's next - close down their chocolate industry?
In today's paper there is a small article about Swiss push-back regarding US pressure to unwind their famous bank secrecy laws (another crazy Swiss action I never understood the wisdom of) so maybe the entire country hasn't lost their wits just yet...
http://online.wsj.com/article/SB10001424053111904537404576552132246760552.html
I think the Swiss are going to learn the hard way that too much globalization (or Europeanization) of their economy inevitably leads to an equilibrium well below where they have been comfortable residing these past couple decades.
bruce, is is possible the snb talked and took no action, letting the market do its work for them? and if so is it possible the snb is doing the exact opposite of what it says it is doing given the statement that it is the role of bank officials to lie?
Hey now Bruce, a strong dollar allows me to buy more PMs amd solid equities. Don't knock it just yet. As to your piece, I agree the pendulum is swinging and rather than stop it with a jubilee, these banks are now simply pushing it back with even more force. This ends badly for all paper.
EU harmonised Swiss cpi was -0.6% mom and -0.3% yoy announced this morning. The SNB can certainly afford some "inflation" risk in the current circumstances. There is no reason for a value trader to buy CHF. It is overvalued on any measure. "Safe haven" buying has been the driving force and will now look elsewhere. Sell Eur/CHF at your peril.
Great piece Bruce, always eager to read you.
"The SNB has, in fact, doubled down as of this morning. This is the biggest financial bet in the country's long history. "
Yes clearly, but why? What does it take to scare the proudly independent central bank of a wealthy, successful country into a gamble like this? Pegging themselves to a sinking ship?
What do the SNB know that those of us outside the rarified world of Central Banking secret briefings are not yet aware of?
THAT is the 64,000 Franc question.
And what is it, that they know, Quintus? That there is great support for the Euro, and we'd better get long??? I'm thinkin'.
maybe just another step of the global cabal for our NWO?
Yep. The secret is that there is no secret. it is all right there on the U.N. web site.
oh yeah, GOLD BITCHEZ......!!!!!!!!
gold, gold, gold....thanks Bruce, very, very enlightening as usual. Damn, in MY lifetime too, who could've imagined.
If at first you don't succeed, try again!
"Insanity is repeating the same experiment and expecting different results..."
The Swiss have been trying this buying euro gig over and over without success. They are stuck, victims of their own thriftitude (not to be confused with prudence or thrift).
Swiss banks are under pressure due to billion$ in francs worth of crappy real estate loans extended in Eastern Europe. These cannot be repaid in the more expensive franc, so the Swiss are stuck. Doing nothing has Swiss banks holding defaulting loans with no means to recover collateral. The outcome of 'nothing' is large bailouts -- think Iceland or Ireland, loan to value.
... this leaves out the small matter of UBS/Credit Suisse insolvencies.
What to do? Swiss has no independent monetary policy; they are locked into the policies of their neighbors with currency values set on the petroleum exchanges. Any failure in the EU has panicked citizens buying francs and putting them in Swiss accounts.
Better to require refugees buy stock of Swiss banks and exporters who are hurt directly (put at risk) by rising franc. They would be required to hold for 3 years or as long as they keep their accounts in the country, whichever period is longer. This would prevent Switzerland from becoming a 'parking lot' for euros.
Right now the issue is for euro holders to obtain a currency that can be converted into the 'Whatever', the paper that replaces the euro in parts of Europe. People will buy the francs at any price assuming the honest Swiss will keep the franc value stable.
All these assumptions: the euro is like Hotel California, it will endure far longer than people suspect, you can check out but never leave.
"the euro is like Hotel California . . . you can check out but never leave." Classic!
I've been pushing this Euro/Hotel Cali line for a while too. Most people don't understand how tight the EU constitution is. It took them 31 years to build it and implement it, whilst knowing that they were letting in dodgy gits like the Greeks etal....They HAD to make it impossible to leave or the politicians would fuck it up in short shrift and bail at the first sign of a lost election.
More importantly, it is also the first currency to sever it's link to a nation state and also to gold.
I am now wondering if it is possible the SNB just started to BTFD....
Perhaps when the world realises that oil producers want EURO not USD (See WTI/BRENT differential)...... and if the ECB then implements it's "nuclear option" (which is revealing that paper gold is not actually the price of physical gold....which is orders of magnitude higher...) and suddenly the PIIGS are rich again and the Euro is doin' just swimmingly and the SNB has a pile of now very valuable EURO to blow at it's leisure....
Or not.
@spotgoldprice
Following your stuff very closely lately. You are on a roll.
Who cares if the SNB takes a loss on Euros? What's going to happen? Somebody going to ditch the CHF? Doubtful.
They can just sell those Euros and buy USDollars or other assets (gold, for example).
Swiss Movement
Compared To Whathttp://www.youtube.com/watch?v=MzvlivbptXk&feature=results_video&playnex...
Compared To What
I love the lie and lie the love
A-Hangin' on, with push and shove
Possession is the motivation
that is hangin' up the God-damn nation
Looks like we always end up in a rut (everybody now!)
Tryin' to make it real — compared to what? C'mon baby!
Slaughterhouse is killin' hogs
Twisted children killin' frogs
Poor dumb rednecks rollin' logs
Tired old lady kissin' dogs
I hate the human love of that stinking mutt (I can't use it!)
Try to make it real — compared to what? C'mon baby now!
The President, he's got his war
Folks don't know just what it's for
Nobody gives us rhyme or reason
Have one doubt, they call it treason
We're chicken-feathers, all without one nut. God damn it!
Tryin' to make it real — compared to what? (Sock it to me)
Church on Sunday, sleep and nod
Tryin' to duck the wrath of God
Preacher's fillin' us with fright
They all tryin' to teach us what they think is right
They really got to be some kind of nut (I can't use it!)
Tryin' to make it real — compared to what?
Where's that bee and where's that honey?
Where's my God and where's my money?
Unreal values, crass distortion
Unwed mothers need abortion
Kind of brings to mind ol' young King Tut (He did it now)
Tried to make it real — compared to what?!
Tryin' to make it real — compared to what?
Thanks for the vidio of one of the great protest songs out of the 60's. Never seen the vidio before. Got lots of music from the 50's on with Miles, Yardbird, Mulligan etc. Again thanks Milestones (1956 Miles, Cannonball and Coltrane. song.
Les McCann and Eddie Harris....Brilliant!
Very nice work Bruce. I totally agree this will end badly. I francly (mispelling intended) don't recall even huge concerted intervetions by the Bundesbank, the Fed, Bank of Japan, et. al. in the early 90's working for more than a short while.
Now we just have to figure out how they screw us out of the gold?
Just ban owning it. They've done it before.
http://fofoa.blogspot.com/2009/08/confiscation-anatomy-different-view.html
http://fofoa.blogspot.com/2010/08/confiscation-anatomy-part-2.html
They banned narcotics too; so, of course, any illegal drugs you 'think' you see are just the products of a deranged imagination...