This page has been archived and commenting is disabled.

End of CB Power - SNB Folds

Bruce Krasting's picture




 

 

I wrote about the Swiss National Bank being forced to abandon its currency peg to the Euro on 12/3/14, 12/8/14 and 1/11/15. That said, I'm blown away that this has happened today.

 

Thomas Jordan, the head of the SNB has repeated said that the Franc peg would last forever, and that he would be willing to intervene in "Unlimited Amounts" in support of the peg. Jordan has folded on his promise like a cheap suit in the rain. When push came to shove, Jordan failed to deliver.

The Swiss economy will rapidly fall into recession as a result of the SNB move. The Swiss stock market has been blasted, the currency is now nearly 20% higher than it was a day before. Someone will have to fall on the sword, the arrows are pointing at Jordan.

The dust has not settled on this development as of this morning. I will stick my neck out and say that the failure to hold the minimum rate will result in a one time loss for the SNB of close to $100B. That's a huge amount of money. It comes to 20% of the Swiss GDP! If this type of loss were incurred by the US Fed it would result in a loss in excess of $2 Trillion!

In the coming days and weeks there will be more fallout from the SNB disaster. There will be reports of big losses and gains from today's events. But that is a side show to the real story. We have just witnesses the collapse of a promise by a major central bank.

The Fed, Bank of Japan, ECB, SNB and other Central Banks have repeatedly made the same promises over the past half decade:

 

Don't worry! We are here. We will do anything it takes to achieve the stability we desire. We are stronger than the markets. We can overwhelm all forces. We will never let go - just trust us!

 

I never believed in these promises, but the vast majority of those who are active in financial markets did. The entire world has signed onto the notion that Central Banks are all powerful. We now have evidence that they are not.

Anyone who continues to believes in the All Powerful CB after today is a fool. Those who believed in Jordan's promises now have red ink on their hands - lots of it!

The next central bank that will come into the market's cross hairs is the ECB. Mario Draghi has made promises that he would "Do anything - in any amount". Like I said, you would be a fool to continue to believe in that promise as of this morning.

We've just taken a huge leap into chaos. The linchpin of the capital markets has been the trust in the CBs. The market's anchors have now been tossed overboard.

 

broken_promises_by_herrfous1

 

 

 

 

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Thu, 01/15/2015 - 14:24 | 5665796 LawsofPhysics
LawsofPhysics's picture

"Looks like they will need to be approximately 20% more productive!" -

Sorry, they already have a trade surplus.  You are thinking of what would happen in a debtor nation.

I can certainly name a few, can you?

Fri, 01/16/2015 - 10:28 | 5669804 Stares straight...
Stares straight ahead's picture

From Wikipedia: " Devaluation can lead to a reduction in citizens' standard of living as their purchasing power is reduced both when they buy imports and when they travel abroad. It also can add to inflationary pressure. Devaluation can make interest payments on international debt more expensive if those debts are denominated in a foreign currency, and it can discourage foreign investors. At least until the 21st century, a strong currency was commonly seen as a mark of prestige, while devaluation was associated with weak governments.[2]"
http://en.m.wikipedia.org/wiki/Currency_war

Though I respect your friends as you describe them (productive, savvy, skilled), I do not think they can survive solely on Honey and Veterinary Services, Swatches, Swiss Army knives, crystal and delicious cheeses. Though they are better off than most by virtue of their forward thinking and positioning and the geography, culture, and productivity of their country, they will be hurt, none- the- less. Glibness aside, I take no pleasure in their pain. Any snarky tone detected was a result of feeling vindicated after six years of vocalizing disbelief and displeasure at the application of disastrous Keynesian policy that goes all the way to eleven.

The MSM meme is deflation or even "hyperdeflation". Let's call a spade a spade: it is inflation, and "hyper-" at that. http://www.thedailybell.com/news-analysis/36002/Deflation--The-Swiss-Sur...

I look forward to your reply!

Thu, 01/15/2015 - 15:50 | 5666209 TerminalDebt
TerminalDebt's picture

sounds more like hyperdeflation

Thu, 01/15/2015 - 11:01 | 5664771 Tao 4 the Show
Tao 4 the Show's picture

Bruce,

You really nailed it with respect to timing. Kudos.

And this time, I agree with Ghordius. This may well wreck havoc on Swiss business. My sense is that it is far more fragile than perceived.

Thu, 01/15/2015 - 11:10 | 5664833 jefferson32
jefferson32's picture

Possibly the SNB was coerced into letting go at the peg, which undermines any attempt at devaluing the Euro. In their minds, the Swiss central planners have sold out Swiss exporters. I doubt very much this morning's news is the consequence of sudden sanity by the komissars.

Thu, 01/15/2015 - 11:15 | 5664890 LawsofPhysics
LawsofPhysics's picture

The action in the DAX, which has been great all week would suggest that someone knew what the SNB was going to do.

There is no spoon, hasn't been for quite a while.

Thu, 01/15/2015 - 11:52 | 5665040 Thisson
Thisson's picture

You don't worry about the Swiss?  Seems to me that a pretty high proportion of their populace would be "useless paper pushers," as you like to say.

Thu, 01/15/2015 - 13:04 | 5665398 LawsofPhysics
LawsofPhysics's picture

Not the people I know.

Thu, 01/15/2015 - 12:12 | 5665122 MalteseFalcon
MalteseFalcon's picture

The SNB ducked out because they couldn't afford to hold the peg after Draghi gets done.

This does not mean the end of CB power or promises, however.

The proof of that will be Draghi's printing over German objections.

And the SNB may peg again at a more defensible level.

Thu, 01/15/2015 - 13:30 | 5665499 Soul Glow
Soul Glow's picture

What if they now back the franc with gold?  Maybe not tomorrow or the next day, but after US junk bonds tank due to the drop in oil, then after the non-performing loans show up on bank balance sheets, after US bank equity takes a hit, but before a Greek exit and before the Fed issues the next round of QE (not QE4 mind you, as their have been QELites and whatnot - we are likely on QE10, or as I will call it - QEX).

Thu, 01/15/2015 - 13:44 | 5665586 SofaPapa
SofaPapa's picture

If you're going to panic, be the FIRST to panic.  The SNB just did that.  Yes, they are taking a 20% of GDP loss.  But if the dominoes that fall behind them are 50% of GDP, more than 100% of GDP?  The Swiss move will then look like genius. I am now officially on the edge of my seat.  The real action sequence has begun - Russia currency moves, Russia cuts the gas line, SNB drops the peg.  Jesus, with excitement like this, bungee-jumping is a walk in the park.

Thu, 01/15/2015 - 17:31 | 5666719 Slowdrip
Slowdrip's picture

I was thinking, 'skydiving' out of an old rickety plane....

Thu, 01/15/2015 - 16:11 | 5666314 El Vaquero
El Vaquero's picture

That Russia was cutting the gas was a boo-boo by one of the Tylers.  Gazprom basically told Europe to connect to the gas lines running into Turkey in the near future or risk Russia finding another market.  It's what happens when you quote Daily Mail stories.

Thu, 01/15/2015 - 16:33 | 5666453 weburke
weburke's picture

indeed, and quote wrong at that. Readers that trade off tyler data could have made a bad move.

Do NOT follow this link or you will be banned from the site!