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"Wise Man" sinks SNB?

Bruce Krasting's picture




 

 

The Federal Reserve made a whopping $98 Billion in 2014. That's a huge amount of money. How big is it?

- It's about equal to the state budgets of NY, California and Texas.

- It comes to $300 for every man woman and child in the country. It is equivalent to $600 for every worker.

- It is more than the top TBTF banks make in a year.

- The Fed's profits cover nearly 50% of the interest expense on the $18T of US debt!

- The profit is equal to 175% of the Fed's equity. Way-to-go!

 

I could on with this; $98B is a huge amount of money. But it's chump change compared to what is going on in Switzerland.

 

The Swiss National Bank earned an incredible $38B in 2014. Compare that to the Fed's results:

- On a GDP comparison the SNB earned 9Xs what the Fed did.

- It comes to $5,000 per person, and $9,000 per worker.

- The SNB's earnings cover half of the entire Swiss budget. The Fed's profits are only equal to a half of one percent!

 

So if you worry about the size of the Fed's balance sheet you should be horrified by what is happening in Switzerland. These incredible numbers from the Central Banks are not a sign of health - They are a sign of weakness and distress.

 

I bring this up because there has been a development. In today's Neu Zuricher Zeitung (NZZ) there was an article featuring one of the Swiss "Wise Men" -Ernst Baltensperger. The following quotes are close to a stake in the heart of the Swiss National Bank:

- the National Bank to abandon the rigid connection of the franc to the euro.

- The rate floor has been served excellently Switzerland. But it was always clear that it also involves costs and risks.

- it would be desirable if the SNB might loosen their minimum rate policy, at least in the foreseeable future.

- you could replace the current minimum rate by a lower limit for a basket of currencies, for example, each is half dollar and euro.

- (the change to a basket) would create the possibility that the Swiss franc appreciates against the euro in a certain degree.

And finally, the question about the SNB profits in 2014:

 

-It would be very dangerous to keep this asset to normal.

 

I said on 12/19, that the SNB's resolve to defend the Peg would be tested in January. Baltensperger's comments will stoke the fire. The fact that this discussion appeared in the most influential newspaper in Switzerland adds to its significance. I also said that the test of the SNB's resolve would have far reaching consequences to the concept of the All Powerful Central Banks.

 

Side Note:

Baltensperger was asked what will happen if the ECB initiates a QE program, his answer:

- Quite possible that the rate floor (EURCHF Peg) is then retested.

Mario Draghi will announce an ECB QE plan in eight trading days. The EURCHF FX rate is a small factor in the global markets. It might soon make center stage at the big circus.

 

Screen Shot 2015-01-11 at 12.16.38 PM

 

 

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Thu, 01/15/2015 - 09:06 | 5664259 Kina
Kina's picture

I think some people will want to delete or edit their comments to Bruce LoL.

 

Thu, 01/15/2015 - 09:59 | 5664459 tip e. canoe
tip e. canoe's picture

yup, nice call Bruce.

if a crow crows in the Alps, should it still be eaten?

Thu, 01/15/2015 - 06:36 | 5663922 mantrid
mantrid's picture

Damn! Bruce! YOU WERE SO F*KING RIGHT ABOUT IT!!!

Thu, 01/22/2015 - 11:11 | 5692240 Fractal Parasite
Fractal Parasite's picture

"Mario Draghi will announce an ECB QE plan in eight trading days."

Yep, ECB QE announced, exactly as predicted.

Thu, 01/15/2015 - 12:52 | 5665343 Fractal Parasite
Fractal Parasite's picture

Let's see if they're right about ECB QE too.

See you back here in a week.

Mon, 01/12/2015 - 08:57 | 5650809 Fix-ItSilly
Fix-ItSilly's picture

You are what you eat.  And the SNB is gorging on paper.

Mon, 01/12/2015 - 08:46 | 5650792 wagthetails
wagthetails's picture

The single goal of price stability  works99% of the time. But we are in that extreme 1% area. The stability goal now means "if they jump off a bridge so do we". Price stability should also cause people to see that "safe haven" isn't correct either. At this point, with so many EUR and economic connection to eurozone, people will see chf IS eur. 

I'm not saying anyone has the resolve to go against this policy as it would mean Swiss econ would experience same if not worse issues than eurozone: econ drain doubled as weak peripheral countries import less is worsened by strengthening chf. But I believe there would be a floor to this pain. Eventually when eur jumped off cliff, Swiss would still be on the cliff, bruised and blooded at the edge of the cliff, but wouldn't fall to its death.

...or I'm completely wrong. No one knows. 

Mon, 01/12/2015 - 05:49 | 5650655 Weisbrot
Weisbrot's picture

I believe you, but I dont understand.

Mon, 01/12/2015 - 04:39 | 5650612 TheRideNeverEnds
TheRideNeverEnds's picture

I can tell that things are distressed what with the e-minis exploding higher. 

Mon, 01/12/2015 - 04:00 | 5650577 Ghordius
Ghordius's picture

lol, like an itch that can't be scratched, eh? at least from the perspective of an FX trader across the pond

the "wise man from the NZZ"'s advice is... unworkable, this way. or would have to be the official SNB stance while the inofficial would still be the floor

there is simply too much real economy attached to this "minor" FX cross, and it's very, very price sensitive, to boot

witness the competion among the touristic venues, the pricelists for lots of valuable industry parts in EUR, and the hundreds of thousands willing to take a car and do their shopping across the border as soon as there is the small whiff of a further price/FX difference/rebate

both authors seem to have trouble understanding that the dollar is not relevant enough, in this specific case right in the very middle of the eurozone and the very middle of europe's most vibrant industrial zone

Thu, 01/15/2015 - 12:33 | 5665246 Alea Iactaest
Alea Iactaest's picture

Above comment locked in.

Mon, 01/12/2015 - 03:08 | 5650538 Soul Glow
Soul Glow's picture

Now I know which cb had the biggest oil short.

Sun, 01/11/2015 - 22:59 | 5650125 Elliptico
Elliptico's picture

The house always wins.

Sun, 01/11/2015 - 22:52 | 5650108 Sambo
Sambo's picture

Black profit with black money from all around the world.

Sun, 01/11/2015 - 22:37 | 5650052 Ewtman
Ewtman's picture

Rand Paul said he plans to take up his father's "Audit the Fed" legislation in 2015.

 

http://www.globaldeflationnews.com/jaguar-inflation-a-laymans-explanatio...

Mon, 01/12/2015 - 00:08 | 5650302 weburke
weburke's picture

his father is just a tool, if he gets his way, we get a devalued dollar and lose reserve currency status. 

Mon, 01/12/2015 - 03:50 | 5650572 FIAT CON
FIAT CON's picture

And the alternative is trillions in debt, a military budget larger than the next 29 countries combined! Being hated around the world.

Just think how prosperous the US. could be without all the waste!

 But your children and grand children will be happy paying off the debt and living without! 

 

Mon, 01/12/2015 - 07:47 | 5650724 JamaicaJim
JamaicaJim's picture

they won't be happy....but they'll pay it off/war it off anyway

Mon, 01/12/2015 - 02:45 | 5650523 OZZIDOWNUNDER
OZZIDOWNUNDER's picture

"his father is just a tool, if he gets his way, we get a devalued dollar and lose reserve currency "status. 

 

And  - - - quite rightly so -it will be a just reward !  About time USA stuck to its own business instead of poking nose where not wanted .

Mon, 01/12/2015 - 00:22 | 5650335 orez65
orez65's picture

"... if he gets his way, we get a devalued dollar ..."

WTF?????

No, if he gets his way the truth comes out: the dollar has been devalued.

It is not true that what you don't see or don't understand won't hurt you. 

Sun, 01/11/2015 - 21:51 | 5649949 hooligan2009
hooligan2009's picture

Central Bank "profits" are book keeping entries.

After all, whenever a central bank creates money out of thin air and people use this as "value", that is a profit. Otherwise why would counterfeiters (who threaten this monpoly) go to prison?

Sun, 01/11/2015 - 21:28 | 5649914 malek
malek's picture

First question should be:

How much of those $38B are realized profits, in the original meaning of the word (zero outstanding liabilities, such as "netting" derivatives etc.)

Sun, 01/11/2015 - 19:35 | 5649552 ISEEIT
ISEEIT's picture

Gotta love the smell of corruption.

'Specially in the morning.

Sun, 01/11/2015 - 19:04 | 5649454 NoWayJose
NoWayJose's picture

The Swiss had a chance to end this madness and follow the golden path - but didn't. Let them enjoy the consequences.

Sun, 01/11/2015 - 18:48 | 5649422 TeethVillage88s
TeethVillage88s's picture

In response to Article Posted in ZH, http://www.zerohedge.com/news/2015-01-11/wise-man-sinks-snb

I have some Corrections:

219.6 Million people over 25 years old, So $98 Billion USD is:
- $446.3 Dollars per US person over 25 Years (one year of FED Earnings)

147 Million = Total Employed (FRED & BLS)
- $98 B / 147 = $666.66 USD, FED Earnings per Person

$429.5 B Interest Paid on Treasury Debt, so $429.5 B / $98 B
- 22.8% of Interest on Federal Debt earned by Federal Reserve in one year

----

The Swiss National Bank earned an incredible $38B in 2014.

How Can the Swiss Central Bank make this kind of Profit. It must be interesting, must bear Investigation.

No Clue how SNB can do this. Perhaps there is Graft, Corruption, Systemic Racketeering,... some Legal Trick? Accounting Trick?? Who is investigating this.

Not long ago the Swiss Franc was traded to the Euro at 20:1 or some such thing, so the Swiss Devalued the Franc. Perhaps this SNB Profit is just a Feature of this Recent Devaluation??

There is a Question for ZH.

-----

backup data:

2014 Total--Interest on the Public Debt = $429.568 Billion
2013 Total--Interest on the Public Debt = $415.670 Billion
2003 Total--Interest on the Public Debt = $318.149 Billion
2002 Total--Interest on the Public Debt = $332.537 Billion
2001 Total--Interest on the Public Debt = $359.508 Billion
2000 Total--Interest on the Public Debt = $362.118 Billion
1999 Total--Interest on the Public Debt = $353.511 Billion
1998 Total--Interest on the Public Debt = $363.824 Billion

115.6 million = Total Households
2.63 people per Household

74.3 Million people under 18 years old
244.7 Million people over 18 years old

99.4 Million people under 25 years old
219.6 Million people over 25 years old

319 Million = Total Population (FRED)
245 Million = Total Population over 16 years old (BLS)
147 Million = Total Employed (FRED & BLS)
92 Million = Total Not in Labor Force (FRED)
98 Million = Total Not in Labor Force (BLS over 16)

Sun, 01/11/2015 - 17:41 | 5649213 max2205
max2205's picture

Median net worth is about 1 million bucks too  let's move!

Sun, 01/11/2015 - 17:15 | 5649138 q99x2
q99x2's picture

Haven't seen these articles for a while. Things must be getting serious.Good article. 

Sun, 01/11/2015 - 17:07 | 5649119 lordbyroniv
lordbyroniv's picture

I skip all Bruce Krasting articles as he is a banker foot soldier statist.

Sun, 01/11/2015 - 22:59 | 5650129 BigJim
BigJim's picture

Right. Which is why you're here, commenting.

Sun, 01/11/2015 - 16:54 | 5649069 Lokking4AnEdge
Lokking4AnEdge's picture

Hey Bruce-now that you have a full time job you still need to post here....more often than once every two months.....

Keep up the good work....

Sun, 01/11/2015 - 16:47 | 5649047 disabledvet
disabledvet's picture

"Death of money.". Move along....

Sun, 01/11/2015 - 19:15 | 5649485 logicalman
logicalman's picture

The death of currencies.

Money is much tougher to kill.

Sun, 01/11/2015 - 16:38 | 5649024 woolly mammoth
woolly mammoth's picture

It's good to see you posting Bruce. I had looked forward to seeing some of your entertaining personal storys around the holidays as they were always a fun read. As you probably know ZH is losing its flavor, hope you don't become a casualty.

Sun, 01/11/2015 - 16:34 | 5649001 That_shits_broken
That_shits_broken's picture

Get to work Mr. Bullard! I meant Mr. Evans!

Sun, 01/11/2015 - 17:42 | 5649196 Tao 4 the Show
Tao 4 the Show's picture

Nice article, Bruce.

You left out the juiciest parts, though:

- How was the money made? Presumably, it was through clever derivatives, capitalizing off of their own currency manipulations, mostly against the Euro. If so, nice tax collection from the Eurozone! I bet all those hard working Germans, etc, appreciate the extra (covert) taxation.

-Who benefits? The Swiss Cantons?

- How is making money a sign of weakness? Are the other NB's pissed?

And by the way, trading against their own moves is insider trading on steroids. Makes the usual stuff (that lands people in jail) look like penny bets on a ball game.

Sun, 01/11/2015 - 19:00 | 5649442 TeethVillage88s
TeethVillage88s's picture

If you bet on the Euro, I don't know what year, was it 2-3 years ago now?... then you devalue your currency the Swiss Franc... How do you get the Suckers to pay off?

- Maybe in Yearly Installments? Those that Short the Euro by $100 Billion, want to pay off on 3 year installments?

Mon, 01/12/2015 - 04:09 | 5649716 philipat
philipat's picture

The SNB Balance Sheet comprises mostly EUR and some Au. WIth Au flat and EUR down more than 10% over the last year, for SNB to have made such a profit must mean they had HIGHLY leveraged derivativate positions against EUR. Just like manipulation of the PM markets, what we see as fraud and insider trading which would send a private citizen to jail, is also known to the CB's as "Monetary Policy".

Mon, 01/12/2015 - 04:47 | 5650606 Ghordius
Ghordius's picture

philipat, have a look at the breakdown of the FX reserves of the SNB, here http://www.snb.ch/ext/stats/balsnb/pdf/defr/A3_2_Devisenanlagen_der_SNB....

yes, the SNB issues boatloads of CHF and buys boatloads of EUR with them. but then, it rebalances, and a lot of it was in currencies that became stronger, hence the "profits"

I read 28% in USD, 44% in EUR, 8% in JPY, 7% in GPB, 4% in CAD and over 6% in "others"

the USD "stash" is currently (end 2014) USD 142'366'000'000, valued at CHF 136'102'000'000. the SNB "made money" in the tune of a couple of billions in the first days of this year just on this part of their balance sheet, with the USD becoming stronger vs the EUR, and so vs the CHF, too

as for gold, that stash was valued at CHF 35 bn, at the end of 2013, versus 435 bn FX reserves. note the ratio

I don't really see the SNB doing anything that would send a private citizen to jail, at least not in Switzerland or the eurozone

Mon, 01/12/2015 - 05:12 | 5650636 Tao 4 the Show
Tao 4 the Show's picture

Medical prescription for Ghordius:

Go open a company. Set up derivatives to make 38 billion on news or a move by your company. Orchestrate said move with a news release or large purchases/sales in the market (who makes bigger sales than NBs?). Pocket the 38 billion.

Wait patiently.

When the financial police come and grab you for jail, the force they apply will pull your head out of the sand and you will be cured.

Mon, 01/12/2015 - 05:51 | 5650649 Ghordius
Ghordius's picture

thanks, but no, thanks. I open companies for trade and for production. nothing big, nothing fancy, no products likely to become famous, nothing that would ever excite a banker, which I studiously avoid

you are replying with quips to a comment where I brought facts, numbers and sources. I could add the breakdowns of the net gains/losses of the SNB for gold and for FX reserves, for example for 2012/2013

38 billions on a nearly 450 bn (of reserves) balance sheet? every megabankster could do it with 70 times less balance sheet, thanks to derivatives and leverage. check again your assumptions

Mon, 01/12/2015 - 05:56 | 5650658 Tao 4 the Show
Tao 4 the Show's picture

Ghordius,

I am sure you are an honest business person and am mainly teasing you. Bruce's article seems to say something and say nothing at the same time. What do the gained reserves actually mean? Although you are playing it cool with your words, we all know that the NBs hold many cards the rest of us don't. Well protected cards, BTW, as can be seen by the sovereignty of the BIS, and the government/non-government status of the FED.

Mon, 01/12/2015 - 06:25 | 5650663 Ghordius
Ghordius's picture

how much do you know about how a classic national bank like the SNB works? the SNB did what FX traders like Bruce hate, hate, hate. It took their toy away

on the other side, the Swiss National Bank has a "product", i.e. the CHF, and intervened on the markets as "price maker", setting a floor to the EUR

it bought EUR in the tune of hundreds of billions, and then rebalanced by selling EUR vs USD, GBP, etc. since we are experiencing a "strong dollar", it made "gains" on it's books

do you issue a currency? something that is legal, in the eurozone, btw? your "as the rest of us don't" is otherwise irrelevant, isn't it?

if I have a unique product, I can usually act as a pricemaker for that product. that's free market, btw

and you can't compare the BIS with the FED. the first is a bank owned by 60 central banks and has no "sovereignty" as such, while the second is so utterly special, unique and exceptional to warrant a category for itself

I repeat: a classic national bank issues a unique product, a national IOU and credit unit. in this case, the CHF, which is also a tax unit, of course. from a free market point of view, it's free to sell it or buy it back as it sees fit, it is it's own product, after all, it's own "bond". the SNB is set up as a private bank with special purpose delimited in a national law. it's stocks are listed/quoted, with that law delimiting how much dividends it can pay (very little)

most of the stocks of the SNB are owned by the Swiss State banks (in German: Kantonal-Banken), which usually are fully or nearly fully owned by their respective Swiss States (Gr: Kantons)

the FED copied this classic setup in 1913, with a few added twists which are... quite relevant. but if you don't understand how the SNB is set up, you won't understand where the "trick" about the FED is

and the "trick" is mostly in that the US-Treasury has a special relation with the NY-FED, which is  a kind of it's "bank for foreign settlements", more similar to the BIS then anything else, while the US-Treasury again has so called Primary Dealers for it's bonds' "Primary Market", i.e. the auctions of the USTs working together with the FED

Mon, 01/12/2015 - 09:37 | 5650890 Bruce Krasting
Bruce Krasting's picture

It's been a very long time since I was an active participant in the FX markets. I have no personal axe to grind on the EURCHF story.

You defend the SNB, fair enough. But answer these questions:

1) How long (in years) can the SNB continue to defend an artificial value of the currency?

2) How much reserves can the SNB acquire before a point is reached where they can't do more?

 

The answer to #1 is: Not forever (it's been 3 years now)

The answer to #2 is: The answer is not "unlimited". (What the SNB has promised).

 

If there are limits to amounts and time, then here will be an explosion when those limits have been reached. My guess is that this does not go on for more than another year, and that an increase in reserves of $250B would force the SNB to change policy.

This story is closer to being a blowup than people think.

bk

 

 

 

Mon, 01/12/2015 - 12:07 | 5651410 Ghordius
Ghordius's picture

Hi Bruce. You have no personal axe to grind, fine. But how much are you still in touch with Switzerland?

the answer to 1: there is no limit. counterquestion: how long do you think the "strong dollar" will stay strong?

the answer to 2: there is no limit... except what the ECB and the FED can print. when do you think the last QE will happen (or happened)?

you are painting it as if there was any kind of limitation because you wish it to stop. in fact, you are painting the situation as if the SNB was in the opposite conundrum, that of the Russian CB

the SNB, for all purposes, could start to "calf" little sovereign funds like the Norvegian Oil one. there is no limit to this game, in this direction. and if the direction turns... well, then it has plenty of ammuniton, also called FX Reserves, the same stuff that the Russian would now wish to have been stocking up more

"force the SNB to change policy" sounds great, but does not solve the problems the real economy faces, in Switzerland, if this policy stops

the real question is how much foreigners are going to buy CHFs, and why, and from where

Thu, 01/15/2015 - 12:51 | 5665339 Fractal Parasite
Fractal Parasite's picture

Bravo, Alea!

Thu, 01/15/2015 - 12:32 | 5665233 Alea Iactaest
Alea Iactaest's picture

Above comment locked in.

Mon, 01/12/2015 - 07:50 | 5650727 JamaicaJim
JamaicaJim's picture

Spot On G ~ Irie

Mon, 01/12/2015 - 06:53 | 5650680 Tao 4 the Show
Tao 4 the Show's picture

Good points, Ghordius, and you filled in much of what Bruce left out of the article. Yet, I still disagree with you in essence, if not in overt facts. Yes, I can set up a currency and yes, the SNB has a unique product. These are all valid points in general. The essential point you are flying over, however, is that the national currency is not just another product. It affects everyone's life and it is what people work for and save as a means towards their physical needs and security. To treat it like any other product is, as you seem fond of doing, misdirecting the reader's attention. I have little real choice about whether to use dollars, Euros, CHF, etc., or not depending on which country I live in.

We are all deeply affected by what the NBs do in decisions that are not ours. The Swiss are happy enough in general for now, and I also supported the SNB in my ZH comments when they held up the peg. But there will be a price to pay. Nothing is for free and effects in CH are already showing up in employment problems (don't quote figures - they don't reveal the level of anger going on among the unemployed Swiss professionals), inflation pressures, etc.

Mon, 01/12/2015 - 07:37 | 5650715 Ghordius
Ghordius's picture

this still does not give me the impression that you have understood. Bruce and the other FX traders with some specialization in the CHF have no interest in the effects on the Swiss population

they want their ball back, and so their profits. period

meanwhile, the SNB was faced with plenty of non-Swiss looking for a safe haven and buying boatloads of CHF. so it looked around and... lo and behold!... it noticed that it's economy is tightly interwowen with the eurozone's, which has the ECB embarked in a policy of price stability for the EUR... which was copied from the SNB

and so it joined, for all purposes, the eurozone, in an informal way, and issued more CHF, bought more EUR with it, and rebalanced, increasing it's FX reserves

but Bruce here says: "oh, there is a price to pay, in the future", pointing at exact those FX reserves as a... liability, not an asset

but if the SNB wants to preserve CHF price stability in the future, FX reserves are... ammunition. all this gains/losses talk is... distraction

and there it is. what the Swiss economy does is it's business, the SNB has one damn thing to do, and that's preserving price stabilty in the franczone, not gains or losses

so what inflation pressures are you talking about? and what professionals, FX traders? the whole world is affected by what the issuer of the global reserve currency does, btw

meanwhile, who is fit to decide how the SNB should be set up... except the Swiss legislators? and they gave the SNB that price stability goal

Mon, 01/12/2015 - 07:52 | 5650728 JamaicaJim
JamaicaJim's picture

Great post

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