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Presenting The Swiss (Black) Loch Ness Monster
We would call the following just released chart of the Swiss monetary base a black swan, if not for two reasons: i) since this is precisely what Philipp Hildebrand demanded it is not unexpected and is in fact perfectly in line with a central banker's wet dreams, and ii) it looks far more like a Loch Ness monster. And while for the time being the monster is tame, thanks to what Kocherlakota said earlier, namely that "the old and familiar link between increased bank reserves and higher inflation has been broken," if ever the global economy were to actually improve, somewhat paradoxically, then the trillions in cash currently parked with banks the world over (assuming they are not secretly being used to plug trillions in capital shortfalls, to borrow, pun intended, an approach from MF global which commingled client capital; why should global banks not commingle central bank capital?), will immediately spill out into the street. What happens next will be amusing to quite amusing.
Source: SNB
h/t Alexander Gloy
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Emmentaler, bitchez!
Whhoooahh Nessie!
I'll never forgive the Swiss for pegging.
That pegging was certainly the final Sargnagel (nail in the coffin) of any Swiss banking/financial independence. They have sold out lock, stock, and barrel.
'They have sold out lock, stock, and barrel.'
Isn't that the story of how Swiss banking originated?
Switzerland Exports Switzerland exports were worth 17 Billion CHF in October of 2011. Trade has been the key to prosperity in Switzerland. Exports accounts for 50% of its GDP. Swiss main exports are: medicinal and pharmaceutical products, watches and clocks, machinery for special industry and metalworking machinery and tools. Swiss main export partners are Germany, United States, Italy and France.Swiss Trade Surplus Wides in October
Switzerland's trade surplus widened in October to CHF 2.2 billion from CHF 1.9 billion a month earlier, data from the Federal Customs Administration showed on November 22nd.Published on 11/22/2011 12:14:42 PM | By TradingEconomics.com, Federal Statstical Office
Exports rose 9.5 percent year-on-year in October in real terms, compared to 9.9 percent growth in September. Imports increased 3.4 percent, following 3.6 percent annual increase recorded during the month before.
Total exports were boosted by higher demand for Swiss watches and chemicals. The chemical industry saw 23.2 percent more shipments in October than a year earlier.
Separately, the Federation of the Swiss Watch Industry, FH, said that monthly value of watch exports rose to an all-time high in October. The total of CHF 1.9 billion exceeded the October 2010 level by 18.6 percent.
Switzerland Unemployment Rate The unemployment rate in Switzerland was last reported at 2.9 percent in October of 2011. From 1995 until 2010, Switzerland's Unemployment Rate averaged 3.38 percent reaching an historical high of 5.40 percent in March of 1997 and a record low of 1.60 percent in November of 2000. The labour force is defined as the number of people employed plus the number unemployed but seeking work. The nonlabour force includes those who are not looking for work, those who are institutionalised and those serving in the military.
Switzerland Inflation Rate The inflation rate in Switzerland was last reported at -0.1 percent in October of 2011. From 1971 until 2010, the average inflation rate in Switzerland was 79.12 percent reaching an historical high of 4617.84 percent in June of 1994 and a record low of -0.10 percent in November of 1986. Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well known measures of Inflation are the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy. This page includes: Switzerland Inflation Rate chart, historical data and news.
http://www.tradingeconomics.com/switzerland/exports
http://www.tradingeconomics.com/switzerland/inflation-cpi
Cute little guy!
Just crossing the wires:
Joint statement by Abby Joseph 'Dutch' Cohen, Joe Lavorgna, Cristina Romer, Mark Zandi & Barton 'AUM Smalls' Biggs.
You better not short
You better all buy
Better invest
I'm telling you why
Bernanke Claus is printing right now
He's says he won't be printing
But you know he’ll do it twice;
Gonna bail out Who's naughty not nice
Bernanke Claus is printing right now
He calls it quantitative easing
ZIRP a QE fake
He knows what interest rates should be
So buy treasuries for goodness sake!
O! You better not short!
You better fucking buy
Better invest
I'm telling you why
Bernanke Claus is printing right now
Bernanke Claus is printing right now!
Merry quantitative easing to all, you'll be millionaires tonight.
Can we have a Merry Zimbabwe Christmas this year!
I have visions of sugar plums and mud pies dancing in my head already!
Brilliant!
I tried to edit in "Buy the Fucking Dip" in replacement for Better invest, but I have premature posticulation.
Hildebrand the red-faced bankster
had a very sweaty brow
and if you ever saw it
you would even say "And how!"
All of the other banksters
used to laugh and call him names
they always pressured poor Hildy
to join them in their printing games
Then one rising Swiss franc eve
Merkel came to say:
"Hildy with your press so tight
won't you guide the Euro-bailout tonight?"
Then all the banksters loved him
as they shouted out with glee
Hildy, the sellout bankster
you'll go down in infamy!
Outstanding!
+1 Zimbabwean Dollar or 10,000 BernankBux
Keep interest rates low
Central banking today
Let the printers go
Profit all the way
Dow rises before bells ring
Making bonuses bright
What fun it is to steal and grift
A printing song tonight
Oh, market bells, market bells
Profit all the way
Oh, what fun it is to steal
From everyone’s 401K
OHHHHHHHHHHHHHHHHHHHHHH market bells, market bells
Profit all the way
Oh, what fun it is to steal
From everyone’s 401K
Benny the Snowman
was a shifty, lying soul
with a shiny pate and a cheesy beard
and a heart as black as coal
Benny the Snowman
loved those fairy tales of Keynes
theories full of holes, but the Austrians know
how he went insane one day
He led them down the road of debt
right to a printing top
And he only paused a moment when
gold's rising price said "STOP!"
Oh, Benny the Snowman
had to hurry and print all day
but he sneered "goodbye", saying "Go ahead and cry,
your savings have gone away."
Thumpety thump-thump, thumpety thump-thump
look at prices grow
thumpety thump-thump, thumpety thump-thump
where'd my paycheck go?
I've been working on this, off and on. Gonna sing it while Christmas Caroling this year.
Mine eyes have seen the glory of the ending of the Fraud
The Banksters will take a haircut and then they’ll get the rod
Joe SP will find his mortgage will finally get the mod
Bondzilla is marching on!
I have seen him in the cook-fires of OWS’s squalid camps
Italy’s bonds have broken 7% while Greece’s quickly ramps
All commerce congeals as credit slowly cramps
Bondzilla’s day is marching on!
40 years of fiat’s time has come at last
Now our run is over, the dollar’s finally passed
Gold will be again, as it was in the past
While Bondzilla lumbers on!
We’ve surmounted the peak, now down the other side
Buckle up buckarro we’re in for quite the ride
While working in your garden, keep a carbine by your side
And Bondzilla marches on.
Will we end in ice, or will we end in fire?
Another regional war, or engulf the world entire?
Hunker in you bunkers lads and watch the Fraud expire –
Bondzilla is coming on!
Pop yourself some popcorn and pour yourself a glass
It’s time to reap the whirlwind you might as well be gassed
Banzii where art thou?
You are correct, that is exactly how it got started.
I got a Groupon in my e-mail this morning, 75% off UBS stock*
*Based on 4/27/2007 closing price, see store for details
GRPN now barely worth more than a Jackson, off better than 10% today, eat it momos
Groupon is apparently doing a GRPN on GRPN stock, with more GRPN GRPN deals to come.
It'll be buy one get one free in two weeks.
Junk, bitches
http://azizonomics.com/2011/08/27/groupon-unsustainable-parasite/
I love using groupon - it's already shown me two restaurants I never want to go back to again, for half the normal price. WINNING!
Its the most private of CBs for Fuck sake - I love it when Zero hedgers thinks they are Fallen Fucking Angels.
I had to rotate the chart a quarter turn counter clock wise to see that.
Nessie is Scottish, not Swiss!!!
-John
http://johnu78.blogspot.com/2011/11/how-to-get-started-in-amateur-radio.html
You've been promoted, Rear-Admiral Obvious
The intent of the post is to show that the Peg isnt going to hold..........
Is that the black swan?
libertarian86.blogspot.com
http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2011...
Wow, a chart of black swans that looks like a black swan.
*head asplodes*
Thumbs up if you're erotically touching your percious metals supply in delight right now!
I took two rolls of my silver quarters and put them in my sack.
not much expansion here.......TIMBER......oh wait np here monetary base up 150%+ in a couple months........is hildebrand a rogue trader??????
Central Banksters/Fractional Reserve Banking High Priests:
Please report to your printing stations. We are at DEFCON 2.
Looks like a (black) woodie to me.
Noooooooooooo!
http://www.youtube.com/watch?v=WuO8IMfF-Us&feature=related
(Woody from Toy Story: :))
Again, as I stated up thread:
"I had to rotate the chart a quarter turn counter clock wise to see that."
It's a little known fact that swans are the only birds with an actual penis (remember Ganymede?).
<<<<< insert black swan joke here >>>>>
Is that a black swan in your pocket, or are you just happy to see me?
Once you go black swan, you never go back.
Black Swan Power.
Black swan is back.
Black swan is beautiful, baby!
The black swan is so big, that when it arises, it causes a total eclipse.
The black swan is so big, that when it arises, the earth develops an eliptical orbit.
The black swan is so big, black holes fall into it.
The black swan is so big, the man always be tryin’ to keep it down.
These may not be funny, precisely...
Yo Black Swan so big, when she sit around da House -- she sit around both the House and da Senate. Bruh.
<golf clap>
Chuck Norris doesn't get a boner. He gets a Black Swan.
But- but- black woodies are much er, taller than that, right? They need to print some mo'.
They will avoid hyperinflation by orchestrating a massive deflationary death spiral.
Never say they didn't have a plan.
By taking the monetary base from 40 to 240 in three years? And the printing hasn't even begun.
The religion around here is so thick the humor can't breathe.
I guess my prediction came true and we really are returned to the Middle Ages. Nobody laughed back then, either.
Ah, man, normally I pick up on that stuff. Am I red?
Or perhaps my half-assed humor veers so close to the actual truth as to pass for adroit financial industry commentary.
Okay, so that is probably really scary right there.
I asked you this on another thread but never saw the answer. Your avatar, did she ever, by any chance, impersonate an angel in a church? She, uh, met a broker... A story I read once...
Impersonating an angel -- must be a serious crime. And in a church, no less.
Sounds like something Fortran would do, though. Her sister is even worse. Did you ever hear the one about the time they both got really drunk, accidentally stumbled into a biker bar thinking it was a produce market, and proceeded to -- -- no I'd better not. They made me promise not to mention that to anyone ever.
She's not much of an angel, no. But we try to overlook all that on account of she's so darn cute.
Delicious.
"the old and familiar link between increased bank reserves and higher inflation has been broken"
This is the most important condition for the hyperinflation scenario. Its when the loss of faith in the currency begins that the banks will unload these reserves and buy buy buy anything they can to protect from devastating inflation.
Did you say "buy, buy, buy"?
Somewhere out there, a bald, coked-up, ADD-afflicted Wall Street pumpmonkey just wet his pants.
Bullish!!! (Or is that bullshit? I am confused, ah my precious...)
They need Nessie to stay in her "loch." A surge in money velocity will unleash the Kraken of all inflationary spirals.
What's black and white and red all over?
Never mind.
Obama
Do black swans do swan dives?
No, only Italian football (soccer) players.
'Do black swans do swan dives?
JEF certainly does.
100 years of trust in the Swissie decimated in one day.
Well I'm sure glad bankers have confirmed all economic rules have now been deemed irrelevant.
Core tenet of biflation: economy improves then hits an inflationary escape-velocity. So economy must dis-improve and in so doing hits delfationary escape velocity. Fed then intervenes. Wash-Rinse Panties, then Repeat
250 billion Swiss Francs, huh? That equates to about ten million or so Francs per inhabitant.
...assuming they are not secretly being used to plug trillions in capital shortfalls,
And why would we assume that?
There is no doubt in my mind that these criminals are completely lawless. You can be sure that the men behind the curtain are doing everything they can to keep the ponzi alive.
Yes, central banks are stuffing the slush-funds at every connected financial institution that's in on the Ponzi. Call 'em kissing Ponzi cousins.
Guess how that excess cash gets put to work when the economy improves a bit? Why in every ultra-pro-cyclical high-risk paper asset available, as we saw at least 3-times so far during the "recovery". That of course is ultra-inflationary without the least benefit to the real economy.
And ultimately it starts the next leg down as margins get squeezed al over the place once again and consumer buying power shrinks
It is funny. In Weimar they also insisted printing money had nothing to do with inflation. Any delusion will suffice.
"the old and familiar link between increased bank reserves and higher inflation has been broken," also sounds a like "Stocks have reached a permanently high plateau".
It really is different this time....
"I do not foresee any decline in the housing market."
"The subprime crisis will not spread to the broader economy."
"Any current inflationary pressures are purely transitory."
Can someone explain exactly how this money will spill in to the streets? I don't see it. Certainly not through employment. Wages aren't rising?
The same exact way it always spills out onto the streets.
It spills out into the streets by inflation.
Inflation is a very simple concept to understand: More money = less value. It may seem contradictory but it’s very straightforward. That’s how Ron Paul explains it in "Sound Money.".
A flood of money rushing after fewer goods means higher prices. And you're right; the increase in wages never keeps up with the inflation. It was planned that way. It's called asset-stripping.-- trillions for the bankers, debt slavery for the people.
Says Paul: “As a matter of fact, some people, companies and banks have managed to develop an inside connection to the “money elves”, allowing them to receive new money into their bank accounts whenever they want to. The money is officially a loan (credit), but they know they never have to pay it back… they just ‘roll it over’, i.e. take up even more debt. With all that easy money in their accounts, and after hearing on TV that stocks only go up and that real estate prices will continue to rise forever, they tend to get a bit lightheaded and start making bad investment decisions. They know that if anything happens to their investments they will be bailed out by the government, so they do not hesitate to take huge risks with their new found ‘wealth.’.
“Let’s stop dreaming and look at the reality of things. What if I told you that these ‘money elves’ do exist and that they spring into action not just once in a lifetime, but every couple of weeks? And that they repeatedly give money to their closest friends, but not to you? That prices are going up because the total amount of money in circulation increases, but that you’re missing out on all the fun?
“Well, that’s inflation at work. Who benefits from inflation? Only those who are at the top of the pyramid and receive all that new money directly from the source. As you might have guessed by now, the source is the Federal Reserve, and its recipients include the government which ‘borrows’ a lot of new money each year, without any intention of ever paying it back. Another beneficiary these days are failed banks that are being ‘bailed out’ for the good of the ‘economy,’ or defense contractors that receive money to build up our military so we can have a constant presence all over the world and fight never-ending and unnecessary wars. There was even a huge number of small-time beneficiaries who received consumer loans and sub-prime mortgages they would never be able to pay back…
I understand it now. Certain people have to be killed. I don't know their names.
We are at the point where there isn't enough money to service the existing debt, let alone retire it. Game over.
That looks familiar: http://www.zerohedge.com/news/gold-silver-surge#comment-1808379
+17oo
Shouldn't the gold chart look the same as this then?
Not when the market is flooded with paper "gold".
"Black Ness Monster" just rolls off the tongue...
-xq
Sure, it's an "actor's" name, isn't it?
And here is Egan-Jones again: Synopsis: Unsustainable, in our opinion - JEF needs to raise equity (i.e., $1B) AND deleverage to reduce its 9.5+% LT yield. JEF's total debt to capital is 90.4% vs. 67% for IBKR, 62% for RJR and 43% for GFIG. GS and MS have ratios near 88% but they are significantly larger and should have some federal support via their banking charters.
Maybe the Swiss will fund the IMF by themselves and save the EU - oh hell - the world!
But wouldn't that jeopardize their storied neutrality? Maybe they should just save part of New Jersey.
Is there a part of New Jersey worth saving?
Maybe they will then join up.
That Central Banks around the world did not helicopter-drop the trillions and trillions of dollars they've printed over the last number of years should tell you that a hyperinflationary outcome was not their intention.
The hoarding of these "reserves" should, instead, have told you something.
Deflationary spiral, dead ahead. And the bankers will be there with the only surviving paper capital, and they will swoop down and buy everything for pennies on the dollar/Euro/otherfunnyfiatmoney.
Just as it ever was.
That Central Banks around the world did not helicopter-drop the trillions and trillions of dollars they've printed over the last number of years should tell you that a hyperinflationary outcome was not their intention.
**********
Correct-they can print all they want but if the money/credit does not move into the economy-it has no inflationary effect-
Velocity was collapsing while printing was rampant-
Deflation is the bankers bet and i agree with them-the bastards-
I worked for my pension. How do the banks get money for free?
I'm confident that this increase in monetary base will be leveraged as high as possible in order to ensure the best possible outcome.
The Mastercard numbers are showing a decline in US #gasolinedemand that goes beyond price-related demand destruction; sea change underway.
Goldman Squid has put Nike, North Face & Schwinn on their 'conviction buy' list as a result.
Very bullish.
I filled up some time last month. Ten whole gallons.
That makes maybe 8 trips into the service station so far this year.
I'm only worried about what my oil-addicted neighbors will do when Brent finds a home above $120 and stays there. I guess they'll siphon all the gas out of my truck on the principle that I should suffer like everyone else.
Early steam-driven cars could be retro-fitted to burn coal. Maybe even bbq brickets!
But could they be made to run on raccoons? An entire family of such have taken to raiding my garden and treeing the house cats. I need to find a proper "use" for them before they invade the house proper and evict the rest of us.
Jerky? Lots of Terriaki? Or pepper?
I know Ive cut my gas usage way back. Whats there to drive to anyway, the mall?
OH BTW here in Colorado Springs just read the 2 large malls here Citadel and Chapel Hills have basically sent the keys back to the bank and walked away.
Those malls will end up in the Fed's super secret sludge fund, Iron Maiden Lane XXXVII, purchased at 1550% over FMV from JP Morgan.
Or the other fund, AIG-In Chains XIX. Heavy metal gives Fed slush funds an air of legitimacy these days
Excellent points concerning the Swiss.
As of September 30th, we have a record trade deficit with China of over $217Billion. They are ripping us off. -Donald Trump
If the rich ever pull their money out of Swissy it's gute nacht !
A Japan or even UK outcome would be considered good luck.
God. That is one scary looking chart.
But all is WELLLLLLLLLLLLLLLL!!!!
Indeed....remain calm...
http://www.youtube.com/watch?v=zDAmPIq29ro
I am sorry, but can anyone tell me: what are the catalysts for a bull market now? Are there any? I seem to have forgotten.
Even rumors of money printin' seem to only have a 1 hour positive effect now.
Thanks sheep dog, but I think I know where you are positioned. My question is for the non/SD-1s: are there any EQUITY BULLS here at ZH right now? I mean, what is your trading thesis? What are the catalysts for a rally at this point? Because the last few weeks have completely wiped them from my memory.
Insanity? Corruption? Manipulation? Fraud and deceit?
Those are the only catalysts that come to mind.
It seems to me that everybody gets orgasm thinking about all those millions of cash stashed somewhere on the sidelines. Let's say I bought 100K bonds of whoever at 3% margin and I pay 5% on it. They gave me 97% loan backed by what? My bonds. They borrowed money from somebody for 2.5% margin and interest at 4% then the next one did it at 2% margin and 3.5% interest and so on. What the fuck is that money comes from? And everybody counting the same money in circular patern for ever making stories about trillions sitting on sidelines. Fuck it!
Reminds me of Worldcom.
That's finance for you. There is no spoon.
OT: This is how the "austerity" leading to "smaller deficits" is "done" in Spain. Now, where's Salgado with the daily "all is well" comments? And Rehn+ the mao-extremist Barroso telling they are confident Spain has implemented "measures"? Well, it's not exactly "the measures" Spain has implemented. It's the CONTINUING of the same fraud which doesn't find it's way into official debt/deficit statistics!!! My reco: short until zero.
http://www.elpais.com/articulo/english/Healthcare/in/crisis/as/regions/d...
Healthcare in crisis as regions' debt to suppliers reaches recordThe accumulated debt the regions owe suppliers that furnish prescription drugs, medical technology and other products to public hospitals has now reached a record high, threatening the very survival of the system, industry insiders say. All the bills piling up in boxes throughout Spain's regions now add up to more than 10.56 billion euros - more than half of which relates to medicine while the rest is owed for everything from syringes to scanners.
It is an unbearable situation for the suppliers, who complain that they haven't seen any payment for more than 400 days in some regions. In Andalusia, Murcia and Valencia, the pay due period has passed 700 days.
Regional officials take approximately an average of 431 days to pay their medical suppliers - about eight times the time limit allowed by law. In Valencia, it can take as much as 765 days before a supplier sees his money.
This is insane reasoning I QUOTE
"But it is important to understand that this expansion need not trigger inflation now or in the future, because the Federal Reserve can now pay interest on bank reserves."
WTF is going on here? Can someone help me with this? Krugman explain why you are calling the Austrians crazy....
Black Swan indead.
Not to worry. The Bernank can press a button and slurp all that extra liquidity back in like 15 minutes. - Ned
Yup, he can dump all those 2.5 trillion dollars worth of treasuries on the market in 15 minutes to suck all that excess cash back in.
What could possibly go wrong?
yes ment indead not indeed.
The Swiss are better known for their Rats these days,than they are for their cheese.
visions of trillionz and trillionz of tonz of computer stuff spilling into Lower Manhattan. The expansion of all of those Ones and Zeros is endothermic and it will freeze the Hudson and East Rivers!
- Ned
So.....
Whats Jon Corzine been charged with...?
The US Justice Department must be doing their job....right...???
Don't the banks have to pay back the money they borrowed? Maybe the central bank didn't provide any consideration so the contract is null and void?
of course they do. There's "pay back" and then there's "pay-back". - Ned
{oh yeah, they'll pay!}
our grandchildren will learn about these charts like we have learned about weimar.
...who said pegging?
(sorry, no charts)
Donnerstag, 24. November 2011 17:51
The Big SNB Decision
This week we had a number of meetings with Swiss officials, including at the Swiss National Bank (SNB) and the Ministry of Finance, as well as independent observers. We discuss our call for the EURCHF floor to be raised to 1.25 on 15 December under the impression of these meetings.
We expect the SNB will largely base their decision on the growth and inflation outlook. If the deflation risk is deemed to have increased materially, then the conclusion would have to be that further monetary stimulus has to be provided, which at this point would seem to mean raising the exchange rate floor.
The strongest arguments in favour of not tinkering with the 1.20 may be that the franc may not be as far from ‘fair value’ as the SNB has argued and that speculative flows may be considerably more willing to test 1.25 than 1.20. However, we believe that both arguments will not be strong enough.
The 15 December decision will be a very difficult one for the SNB. But we think that for reasons of consistency and credibility, a perceived increase in deflation risks will require a move in the floor, despite the admittedly substantial risks involved in such a course of action.
This week we had a number of meetings with Swiss officials, including at the SNB and the Ministry of Finance, as well as independent observers. From a market point of view, the main issue for Switzerland is currently whether the EURCHF floor will be moved higher at the 15 December quarterly monetary policy assessment. There are three crucial aspects to the question: 1) Will the deflation risk be seen as having increased materially? 2) If so, will the exchange rate floor be the instrument of choice to provide further monetary stimulus?, 3) Would rising the floor increase the risk of the market testing it? Below we try to answer the questions based on our overall assessment and the impressions of our meetings this week in Switzerland.
Deflation?The SNB has been very clear that the reason for introducing the 1.20 floor on 6 September was the assessment that ‘massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development’. It is crucial to realise that the putting in place of a EURCHF floor was done within the framework of the SNB’s price stability mandate and has thus become an instrument of monetary policy. As a result, the key to any further action is whether the SNB sees increasing deflation risks. In practical terms, the question will be whether the inflation forecast will be adjusted downwards, and if so, to what degree. In their September assessment, the SNB forecast inflation to drop to a trough of -0.5% in Q2 2012 before increasing to just about 0% by the end of the year (see Chart 1). The October CPI reading surprisingly dropped to -0.1% already and the November reading on 6 December is unlikely to move back into positive, which will likely mean the SNB will have to lower at least their short-term inflation forecast. Whether they also substantially lower the longer term forecast, which of course is the one relevant for monetary policy, will probably depend on their view of 1) the sources of current deflation and 2) the outlook for the global and European economy in particular.
Our colleagues at UBS Economics have argued that negative CPI prints may not last for long as the domestic components have been solid while it has been mainly import prices that have dropped. If the pass-through from the exchange rate is faster and steeper than assumed, this would mean that the disinflationary impact may fade relatively quickly. It is also true is that Swiss leading indicators have been quite resilient, including on the export side. However, the SNB has long taken a more pessimistic view than most private forecasters, and now that this view has been confirmed to a large extent, it is unlikely to change course. Compared to the September assessment, the US outlook may have slightly improved due to recent solid data. For the eurozone, however, we expect the outlook will have to be downgraded, and possibly quite substantially so. It would seem only logical that the inflation forecast will also be moved lower.
A New Monetary Policy?Switzerland may be the only country in the world – apart from Japan – where interest rates are virtually zero, and money market rates in fact negative. Hence there truly is no more space to lower rates further, unless the SNB was willing to go down the route of negative rates, either via injecting additional liquidity or via administrative fees on certain accounts. We think that based on the experience earlier this year, the SNB has come to the conclusion that this route is not feasible without unacceptable detrimental side effects. As a result, should the SNB be of the view that the economy requires additional monetary stimulus in order to avoid undue deflation risks, then the exchange rate floor is the only instrument left at this point. It is often argued that for the economy it does not make much difference whether EURCHF is at 1.20, 1.25 or somewhere in between. However, the same could often be said for a rate cut of 25bp, which in many cases will only have a marginal impact on economic activity. The point is that the SNB has often and forcefully argued that it was ready to take ‘further measures’ if required. For example, in a newspaper interview on 6 November, President Hildebrand argued that the franc was expected to ‘depreciate further’ and ‘should that not be the case, it could lead to deflationary developments and weigh heavily on the economy. We are ready to take further measures in case economic prospects and a deflationary development should require it’[1].
The strongest fundamental argument against moving the floor higher might be that the franc is not in fact strongly overvalued anymore. Back in May, the IMF, for example, argued that the franc was ‘broadly aligned with fundamentals’, with EURCHF levels of just below 1.30 at the time. UBS Economics PPP ‘fair value’ estimate is also not too far above the 1.30 level, and it could be argued that based on current inflation differentials of around 3% to the Eurozone, it will not take too long for the franc to depreciate substantially in real terms. As a result, the real effective exchange rate will come down and make a 1.20 level economically much more feasible. However, listening to the SNB communication over the last few weeks and months, it appears that their view of ‘fair value’ may be quite a bit higher than the IMF’s and other observers. Note that in the official Swiss reaction to the IMF assessment, it was noted that ‘authorities do not share the staff’s assessment that the exchange rate is broadly in line with fundamentals. Rather, the SNB considers the Swiss franc to be overvalued’[2]. In the same vein, the SNB used the words ‘absurd’ and ‘massive’ to describe the EURCHF moves towards parity, and even after the imposition of the floor, Thomas Jordan in a TV interview on 14 November noted that the franc remained ‘very strong’ (EURCHF was at 1.24 that day).
Testing Market Reaction?The SNB has undoubtedly been very successful in implementing an effective EURCHF floor. Following the 2010 experience with FX intervention that were widely seen as a failure and EURCHF dropping to almost parity, it was far from obvious that a 1.20 floor could be imposed with minimal intervention. However, the dramatic step worked, not least because of the uncompromising language in the short but very clear statement. The usage of the term ‘unlimited’ did the trick to such a convincing extent that the SNB action is now seen by many as an example of how to stop ‘irrational’ markets from Japan to the Eurozone. In fact, it appears that the only investor categories continuing to buy the franc following the imposition of the floor were corporate and private clients, with the former flow typically driven by real economy flows rather than asset allocation considerations. Both asset managers and hedge funds, in contrast, sold significant amounts of francs both against the dollar and the euro (Chart 4). In terms of the cumulative flows over the last 12 months, USDCHF is now in positive territory, meaning that UBS investors overall would seem long, while on EURCHF they would seem almost flat compared to massive shorts earlier this year (Chart 3).
From a market point of view, the strongest argument to not tinker with the 1.20 floor may thus be the avoidance of ‘waking sleeping dogs of speculation’. There has so far been no meaningful speculation against the floor while moving the floor higher might make the proposition that much more attractive. Under a scenario where the SNB moved to 1.25 and subsequently was tested and forced to intervene heavily, many might say that by keeping quiet and the head low, this might have been avoided. However, it is of course equally possible, and more likely in our view, that following a move to 1.25 the market would fear a further move to 1.30, hence keeping any speculation against it once more in check.
ConclusionThe decision on 15 December will not be an easy one for the SNB. The exchange rate floor has worked very well so far, even though things could change quickly if market sentiment turned. At the same time, the European situation seems to be deteriorating on a weekly if not daily basis, meaning that the economic and financial downside risks keep increasing. As a result, it would seem difficult to avoid a downside revision of the growth and inflation outlook for Switzerland compared to the September assessment. And if such a downward revision was substantial and EURCHF relatively close to 1.20, then the warnings of ‘further measures’ will mean that for consistency and credibility reasons the SNB might feel that a move was necessary.
It is often argued that the increasing threat of a major adverse development in the Eurozone and the possibility of a major flight into the Swiss franc would deter the SNB from moving the floor higher. We would make the argument the other way round: Any further deterioration in the Eurozone means that downside risks to the growth outlook are increasing and with the deflationary threat. As a result, the SNB is actually more rather than less likely to raise the floor in such a scenario.
Overall, we continue to argue that the 15 December Quarterly Monetary Policy Assessment will likely result in a decision to move the EURCHF floor to 1.25.