Switzerland

Since the creation of the Federal Reserve in 1913, the dollar has lost over 97 percent of its purchasing power, the US economy has been subjected to a series of painful Federal Reserve-created recessions and depressions, and government has grown to dangerous levels thanks to the Fed’s policy of monetizing the debt. Yet the Federal Reserve still operates under a congressionally-created shroud of secrecy. No wonder almost 75 percent of the American public supports legislation to audit the Federal Reserve.

It appears the actions of the Swiss National Bank have prompted questions for all central banks as cash squirts away from the looming Euro crash (if France's Hollande is to be believed) to any and every other currency. As the Danish Krone rallied to its strongest in 10 years against the EUR in the last few days, worries over the currency breaking its peg have apparently prompted the Danish Central Bank into action:

• *DANISH CENTRAL BANK CUTS DEPOSIT RATE TO -0.2% FROM -0.05%

The immediate reaction was DKK weakness, but that has been completely unwound and follows worrying reassurances this week from Oestergaard that "Denmark's Krone peg to the Euro is secure."

My conclusion is that the SNB deliberately screwed the market, and in the process shot itself in the foot for 30-50 billion dollars. What were they thinking?

Top ten things that investors will likely be watching in the week ahead.

Since the European sovereign-debt crisis erupted in 2009, everyone has wondered what would happen if a country left the eurozone. The risks created by the SNB’s decision – as transmitted through the financial system – have a fat tail - and the consequences will not be limited to Switzerland. After years of wondering whether the exit of a small, fiscally weak country like Greece could undermine the euro, policymakers will have to deal with an even bigger shock stemming from the exit of a small, fiscally strong country that is not even a member of the European Union.

The utter lunacy of the ECB is reaching its inevitable end because lunacy itself cannot create economic, or even financial, normalcy. The Keynesian heart of all of this is that they fully believe redistribution can make for potent economic tonic, but redistribution is at its root a very negative factor.

At the moment, the US dollar is choice. This isn’t necessarily a vote of confidence for the dollar. It’s more like a vote against all the others. If big institutional investors must choose between bankrupt America and bankrupt Europe, right now they choose America. But this is a decision that can and will be changed in an instant. Just look at the Swiss franc...

First the good news... European Stocks (ex Greece and Switzerland) exploded higher this week with 'great' nations like Portugal (up over 7%) and Italy (up over 5.5%) and Germany's ADX over 10,000 to record highs. EU bond spreads compressed notably (Spain/Italy down 20bps or so on the week) and EURUSD crashed below 1.15... all on hopes that the SNB decision means Moar-Massive ECB QE comes next week (not priced in). But the bad news... Swiss stocks collapsed-er again today for the worst week since Lehman. Swiss bond yields are negative to 12 year maturity and EURCHF is back below par at 0.9820...

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One day after the SNB stunner roiled markets, overnight global markets have seen - as expected - substanial downward pressure, with the Swiss market slide resuming post open, while European stocks have seen some pressure despite what is now an assured ECB QE announcement next week. However, the one trade that can not be mistaken is the global rush into the safety of government paper, with every single treasury yielding less today than yesterday (the Swiss 10Y was trading below 0% at last check), except for Greek 10Y which are wider on deposit run fears. That said, with capital market liquidity absolutely non-existent even the smallest trade has a disproportionate effect on futures, and expect to see much more rangebound trading until the damage report from the SNB action is fully digested, something which will take place over the weekend.

Today, the "developed nation" hecklers are deathly silent after what may be the biggest western central bank faux pas in recent history, and which has - perhaps for the first time in history - manifested in lines of people in front of currency exchange bureaus nowhere else but in that bastion of capitalism: Geneva.

By ending its three year currency peg to the weakening euro Switzerland has become the first major economy to surrender in the international currency war, and in so doing has given a long-delayed victory to the Swiss people. Contrary to the indignant reaction by the media and financial establishment, the decision is not a disaster for Switzerland, but may be looked at in the future as the first significant counter-attack against our current global system of monetary insanity.

Remember, years ago, when the markets were a mechanism for honest price discovery and a gathering place for buyers and sellers to participate in open, unvarnished capitalism?

"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." - Jim Grant, Sept 14th, 2014

Swiss 10Y rates crashed over 10bps by the close (having plunged as low as 3.3bps at one point) but the entire Swiss curve is negative at any maturity less than that. EURUSD crashed over 200pips back below 1.16 - the lowest since November 2003. Swiss stocks crashed around 15% before bouncing back to a 8-9% loss - the biggest drop since 1989. Away from Switzerland (and Greece) European stocks and sovereign bonds saw initial dips bought on ECB QE implications but EU Sovereigns did bleed back wider. European VIX spiked from sub-29 to over 32 and all the way back down to close lower on the day.