Blast From The (Recent) Past: Jim Grant Nails The SNB Decision

Tyler Durden's picture

Via Jim Grant,

The Balance Sheet That Ate Switzerland

(Grant's, September 19, 2014) Like a celebrity in flight from the paparazzi, the Swiss Confederation demands protection from its pesky admirers. To beat back the unwanted appreciation of the Swissie, the Swiss National Bank is--once again--vowing to move heaven and earth. Now under way is a speculation. Prompted by a friend (that's you, Harlan Batrus), 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.

Curiously, for all the damage that Swiss private banks have suffered at the hands of American regulators, and for all the Federal Reserve's throat clearing about the supposed imminent rise in dollar interest rates, the franc is still, for many, the monetary bolt-hole of choice. To the Swiss, whose exports generate 54% of Switzerland's GDP, it's a kind of popularity they can live without--indeed, they insist, must live without.

So the SNB prints francs. It drew a monetary line in the sand three years ago: The franc shall not rally through the 1.20-to-the-euro mark, the authorities commanded in September 2011. To enforce this dictum, they bought euros with newly created francs (the cost of production of the home currency being essentially zero). What to do with the rising euro mountain? Invest it, of course.

CFA fashion, the central bankers are diversifying across asset classes and currencies. Among these asset classes are equities, and among these currencies is the dollar. As of June 30, the Swiss managers held $27 billion in 2,533 different U.S. stocks, according to the bank's latest 13-F report (the gnomes file with the SEC just like ordinary big hitters, say George Soros or Goldman Sachs Asset Management).

Here's a metaphysical head scratcher. The Europeans conjure euros, which the Swiss buy with their newly materialized francs. The managers exchange the euros for dollars (also produced by taps on a keyboard) and with that scrip buy ownership interests in real businesses. The equities are genuine. The money, legally and practically speaking, is itself real--you never mind having a little more of it. But what is its substance? We mean, how is it different from air?

In any case, observes colleague Evan Lorenz, the scale of the Swiss operations is titanic. He reports that, from December 2007 to July 2014, the SNB's balance sheet expanded to the equivalent of 83% of Swiss GDP from 23% of Swiss GDP. For perspective, over approximately the same span of years--and after three successive QE programs that boosted the Federal Reserve's assets by $3.5 trillion--the Fed's balance sheet as a percent of U.S. output expanded to 25% from 6%.

Swiss interest rates have shriveled as the SNB's balance sheet has grown. Thus, in January 2008, the average rate on 10-year, fixed-rate mortgages was an already low 4.17%; as of June 2014, 10-year loans were offered at an average of 2.25%. "In other words," Lorenz points out, "Swiss homeowners can borrow more cheaply than Uncle Sam." They can and they do. From December 2007 to June of this year, Swiss mortgage debt as a share of GDP surged to 146% from 127%. (Between the first quarter of 2009 and the first quarter of 2014, chastened Americans reduced America's mortgage debt as a share of American GDP to 55% from 74%.)

In these stupendous interventions, the SNB is hardly unique. Nor is it alone as it attempts to undo, through administrative means, the distortions it creates through monetary policy. New "macro-prudential" directives have tightened standards for home-loan amortization schedules, minimum down payments, affordability, bank capital ratios, etc.

Though the UBS Swiss Real Estate Bubble Index continues to flash "risk," the mortgage market cooled a bit in the first half of the year, Philippe Béguelin, an editor at Finanz und Wirtschaft in Zurisch, advises Lorenz. Then, too, the foreign exchange market cooled late in 2013, which allowed the SNB to cease and desist from franc printing. Thus, the central bank's assets declined to CHF 492.6 billion in February from a peak of CHF 511.7 billion in March 2013.

Russia's accession of Crimea at the end of February reheated the forex market. ISIS and the Scottish referendum have continued to turn up the temperature. Business activity in China continues to dwindle (electricity production fell 2.2%, measured year-over-year, in August), and European growth registers barely above the zero line. On Sept. 4, Mario Draghi unveiled a plan for a kind of euro-zone QE. So growth in the SNB's balance sheet has resumed. In July, the latest month for which figures are available, footings reached CHF 517.3 billion in July, a new high.

"If the drumbeat of bad news continues, why wouldn't investors move more cash into Switzerland?" Lorenz inquires. "Successive rounds of easy money have made the opportunity cost of parking assets in Switzerland much lower today than at the outset of the SNB's currency ceiling. True, the Swiss 10-year yield has declined to 0.49% from 0.93% since Nov. 1, 2011. But yields on the Irish, Spanish and Greek 10 years have also plummeted--to 1.88%, 2.33% and 5.69%, respectively, from 14.08%, 7.62% and 37.1%, respectively, at their euro-panic peaks. It no longer avails the income seeker much to gamble on second- and third-tier sovereign credits. Swiss yields are at rock bottom, but so are the rest of them. On the combined, undoubted authority of Deutsche Bank, Business Insider and Bloomberg, Dutch yields stand at a 500-year low."

It's a funny old world when frightened people turn to the Swissie, which the SNB is again mass-producing, rather than to gold, which nobody can mass produce. While the franc yields something to gold's nothing, the spread is narrowing. And if as Thomas Moser, an alternate member of the SNB's policy-setting Governing Board, suggested in a Sept. 10 interview with The Wall Street Journal, the SNB finally has recourse to negative rates, the barbarous relic will outyield the franc. Way back in the 1970s, relates Christopher Fildes, a delegation of foreign newspapermen were visiting the old Union Bank of Switzerland in Zurich. In response to a casual remark about the proverbial strength of the franc, a Swiss banker scoffed. "We do not say 'as good as gold,'" declared this eminence. "Gold is not as good as the Swiss franc." And now?

A bet on a higher Swiss/euro exchange rate implies that the SNB will stop intervening. What monetary or political forces might converge to persuade the bank that a strong franc is the lesser of two or more evils? "John Bull can stand anything but he can't stand 2%," the saying goes. It's clear to listen to their anguished cries that broad segments of the life insurance industry can't stand one-half of 1%. The Tokyo Stock Exchange TOPIX Insurance Index is essentially unchanged since 1994, the year that Japan government bond yields began their inexorable slide. "We are the collateral victims of the monetary policy which has been designed to help governments and banks after the financial crisis," Denis Kessler, the CEO of Scor SE, the world's fifth-largest reinsurer, complained at a London conference on June 24. "We were not at the heart of the crisis nor did we create the crisis."

More money printing or sub-zero rates may once again set a fire under Swiss house prices, macro-prudential policies notwithstanding. It may ruin the life insurers. At some point, the Swiss National Bank would have to decide whether propping up the export sector is worth the cost. If these circumstances, a bet (and, to be clear, it is very much a bet) on the franc appreciating against the euro might pay. A three-year, at-the-money option on the franc appreciating against the euro is priced at 3.7% of notional today according to Bloomberg. To return to its high of 1.03 francs per euro on Aug. 10, 2011, the franc would appreciate by 17%.

While there is nothing especially exotic about this option, it is available only to institutional investors with an International Swaps and Derivatives Association agreement in place with a too-big-to-fail bank. For readers not so situated, there is always gold, which--in our opinion--the franc is no longer as good as.

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nope-1004's picture

One of the few valued opinions, for sure.  +1 Jim.


Soul Glow's picture

King dollar is down 15% versus the Swiss franc.  The implication to the champion of the world king dollar is tremendous - the challengers are formadible - and the king just got punched in the face and is stumbling backwards.

"Everyone has a plan until they get punched in the face." - Mike Tyson

Bay of Pigs's picture

There is a Swiss National Bank

Whose chain was used to yank

They pulled the pin

And went for the win

Pouring jet fuel on the Franc


kaiserhoff's picture

Grant is a bright guy, but he doesn't think SNB's losses here are real.

The accountants, regulators, and shareholders will have the opposite opinion.

wintermute's picture

The losses are real, for the reason that a franc, printed by the SNB, is valued by Swiss citizens for products and services.

SMG's picture

Good call, Jim. Thanks.

MontgomeryScott's picture

If I'm not mistaken, Jim Grant is one of the more favored members over at the Von Mises Institute (where Lew Rockwell and Ron Paul reside). He looked kind of goofy with a bowtie, though, in past speeches. I'm glad he has decided to dress in a more modern fashion for the ZH picture shot; but I think that a different colored tie is in order (perhaps deep blue, or even brown, or black).

MontgomeryScott's picture

Several uparrows regarding the bowtie that Jim Grant wears regularly, further down on various comments.

The coward who 'downarrowed' me didn't bother to respond with a comment (too busy working the room of fiat currency on the 'net to bother, I suppose).

oudinot's picture

I down voted you.

Jim Grant is a giant in the Lilliputian world of economists whatever garb he wears.

tc06rtw's picture

… I could  SWEAR  I hear  dominoes  falling !

Mountainview's picture

Agree with the end game...but Grexit could mean that the Swissy peak is not yet behind us...

Tao 4 the Show's picture

"the Swiss, whose exports generate 54% of Switzerland's GDP"

Not sure how much of that 54% goes to the Eurozone, but for whatever portion, Swiss industries have exactly two choices:

1. Denominate their products in CHF and very likely lose competitiveness as the price of their goods just jumped some 15% for buyers with Euros.

2. Denominate in Euros and take in some 15% less on the sale of their goods. They will have to cut something - profits, staff, expenditures, etc.

There will be (and probably is now) crying and gnashing of teeth. This no joke for the Swiss. Short term, they will all head out for cheap Europe vacations, but longer term, it will take a toll in jobs, salaries, etc.

Mountainview's picture

Or you buy a fake Rolex from China...or fake Avastin from an obscure labo...

Whoa Dammit's picture

Switzerland's top 3 exports are gold, pharmaceuticals, and medical blood products. The top 3 countries it exports to are Germany, India, and the US.

I doubt if demand for gold & medicines will drop due to price.Interestingly, their top import is also gold.

Good charts here:

Urban Redneck's picture

even looking at 4-digit hs aggregates, their data is makes no sense.

go to the source -

McRocket's picture

I agree completely.

Way to go Jim.

Soul Glow's picture

I don't agree with his statement, "The equities are geniune."  The equities are cunjured up as his fiat - fiat backed with a promise to pay and such with equity, equity in the form of accounting which is often moar than fabricated.

Greenskeeper_Carl's picture

The equities themselves aren't fake. You are buying shares of a (hopefully) productive company that you expect to gain in value over the years. The problem is that central banks have conjured up billions in fiat out of thin air that has found its way into the stock markets. I agree, they have destroyed any kind of honest pricing in the market, and these values are definitely not real.

OpenThePodBayDoorHAL's picture

You wouldn't want to hold Deutschemarks in Germany from 1935 onwards. But those who held shares in BMW, IG Farben etc came through the war allright

MontgomeryScott's picture

Krups still makes those high-end coffee-makers... don't they?

Hopefully, the Swiss still make army knives and watches (unless they have been 'out-sourced' to fucking China. SHIT. They HAVE.).

Jim Grant is pretty good, but he doesn't factor in the MACROECONOMICS. Producing money and having places to put money isn't 'economy' in ANY SENSE of the word. After the war, the Swiss seemed to have been brainwashed by all the gold they were given to hold, and thought they too could print a fiat currency based upon their 'holdings' (which weren't THEIRS).

Until the 1980's, having a 'Swiss Bank Account' was as safe as could be considered. WHY?

Because they had a booming economy producing cookoo clocks and watches and army knives?

Because they were 'neutral' during the war and the banksters who had taken control of Switzerland promised to hold any expatriated GOLD within the mountains that were IMPREGNABLE, perhaps; with the utmost guarantee of SECRECY?

The Grand Cayman Island protectorates (G.B.) took the wind out of the Swiss 'magical mystical stuff', a long time ago now. Mitt Romney put $230,000,000 in... banks in the Grand Caymans (NOT the secret Swiss banks with their secret accounts); for example.

If I was in Germany in, say, 1938, I would HAVE to hold 'Deutchmarks' in order to trade for bread and butter within the nation I inhabited.

'You wouldn't want to hold USD FEDS in the United States from 2000 onwards. But those who held shares in General motors, Morrison Knudsen, Lehman Brothers etc. ... came out allright.' REALLY? Tell me ONE story where someone who held shares in BMW in 1935 was recompensed after 1945. ONE.


l1b3rty's picture

I agree also. Interesting that gold is up in most currency's in 2014 but all we hear about is its performance relative to the USD. 

ReactionToClosedMinds's picture

to reiterate the clarity of Grant (from end of above):  "To return to its high of 1.03 francs per euro on Aug. 10, 2011, the franc would appreciate by 17%."


Is Grant a 'sell-side' analyst .... you know like Goldie BestBuy/shortCHF?   just askin'

glenlloyd's picture

If I could afford it that's the one newsletter I'd buy...but I can't, but Grant is smart, too smart for those talking heads he has to put up with on TV.

Soul Glow's picture

Russia and the SNB made moves last night.  Big moves.

disabledvet's picture

Like Dance Moves?

Stay in Alive!
Stay in Alive!

Ha! Ha! Ha! Ha!

Stay in aliiiiiiiiiiiiive

Ooooo, oooooo

MontgomeryScott's picture

Julie Hagarty and Robert Hays. "Airplane, the Movie".

I didn't go there that night to fall in love. I just dropped in for a couple of drinks. The 'Bee Gees' were playing that night...


Sanity Bear's picture

how much is my share of the bailout for the guys on the other end of that trade?

Q-Q-Q's picture

The CHF was a worthy competitor to gold prior to the Swiss CB signing up to FATCA.

Mountainview's picture

Swissy bills are still easier to move than Gold... Wait for Greek elections and Grexit... afterwards Golds time mighjt come.

tbd108's picture

And while you're waiting, wait for the 6 European countries that got their natural gas cut off to go under and stop paying their bills (bank bust anyone?) This business might explain why the Swiss made their move.

Made in Occupied America's picture

OK, Tyler.  Time for a rally in stocks.  Gartman is short stocks.

Richard Chesler's picture

Wait for confirmation, i.e. when Cramer starts selling. Lol.


NoDebt's picture

"While there is nothing especially exotic about this option, it is available only to institutional investors with an International Swaps and Derivatives Association agreement in place with a too-big-to-fail bank."

Damn.  I was fresh out of them there 'International Swaps and Deriviatives Association Agreement' thingies.  Always a day late and a Franc short.  Story of my life.

kaiserhoff's picture

Looks like you can go out 6 months on something called the Swiss Frank Currency Trust on Nasdaq.  I wouldn't.

Used to be a full option chain available on the Swissy.  Probably will be again if it keeps rockin and rollin.

Those things need volume to survive.

Panic Mode's picture

I buy more gazprom as oil price keeps dropping

Jorgen's picture

Regarding Gazprom and Russia: 5th columnists are making gains at Russia's CB. Is VP giving up?

The ruble extended gains a day after Dmitry Tulin, a former central banker who also worked at the International Monetary Fund, was named to replace Ksenia Yudaeva as the first deputy governor in charge of monetary policy.
While Goldman Sachs Group Inc. said the nomination may spell relief for the ruble, it’s also a sign of “some political pressure on the current central bank team,” according to Natalia Orlova, chief economist at Alfa Bank in Moscow.

stant's picture

He's Gona be on cnbc in few min3:32 now . I will tune in

ebworthen's picture

GOLD not air for me.

KnuckleDragger-X's picture

Be careful for what you wish for because you might just get it. I need to dust off my bottle of end-of-the-world Tequila since i might have a chance to open it soon.

MontgomeryScott's picture

I wish I may, I wish I might, have this wish I wish tonight.

I want that 'style', I want it NOW; I want it ALL and I don't care HOW!

(BE) Careful what you wish; (BE) Careful what you say.

Careful what you wish, you may regret it; Careful what you wish, you JUST MIGHT GET IT:

The word 'just' is used as a descriprtor for the word 'might'; which is the primary descriptor of 'get it' (present tense participle). Is 'MIGHT' justice, or is JUSTICE 'mighty'? I suppose it depends on the relevant 'government' who metes out BOTH.

The 'grammar nazi' is tucked into bed, with visions of sugarplums dancing in her little head.

Kaiser Sousa's picture

presented with no comment...



clade7's picture

Who is buried in Grants tomb?  Oh yeah...Jim!...stay frosty and ready to BO there pal, theres some bad men afoot on the river tonight, and I doubt you can deal with them.. signed, your friend,


Gus McCrae

NoWayJose's picture

Fix the picture -- Jim Grant wears BOW-TIES!

NoWayJose's picture

Better grab your Toblerone bars and Swiss chocolate tonight!!!!

WTFUD's picture

I'm waiting for Cramer's letter. Big s/c

Just Take It All's picture

one less bidder for stawks.

new game's picture

for fed chair, like paul for prez-hopeless, but optimistic upon survival.

get a chasity belt for your ars, gonna need it...