Switzerland

Events in Italy must be watched closely. The country that gifted Fascism to the world in the 1930s was widely admired even by FDR, who held Mussolini in high regard and was no doubt inspired in many of his own policy choices. Will Italy lead the way once more, as politicians in Europe and the US watch to see what oppressive policies they may get away with? And while Russell Napier (correctly) foresees capital controls being imposed and suggested that one parks his cash in Singapore dollars, Italians may want to get themselves out as well before the current group of Professors slams the gates shut. Things are moving even faster than one of the world’s leading financial historians could foresee.

This is the question of the hour. Which way was it?

• So very encouraging - IMF's Lagarde: euro likely to survive 2012 (Reuters)
• Drop Greek bond plan, urges ECB council member (FT)
• Soros says EU break-up would be catastrophic (Reuters)
• Japanese Banks Get 'Stress Tests' (WSJ)
• Hungary Pledges Compromise on IMF Loan (Bloomberg)
• Confidence in London property falls (FT)
• Fed nears an adoption of an inflation target as Bernanke pushes transparency (Bloomberg)
• Seoul and Tokyo seek to ease Iran oil ties (FT)

• Tight race in Iowa kicks off 2012 campaign (Reuters)
• West Is Using Cultural Means to Divide China: Hu (Bloomberg)
• Economists see bleak year ahead (FT)
• Billions needed to upgrade America’s leaky water infrastructure (WaPo)
• Sarkozy, Merkel set bilateral euro talks (WSJ)
• Romney’s hope of Iowa lead in balance (FT)
• Greece: Clinch Bailout or Face Euro Exit (Reuters)

The year is just a few hours old, we already have a stink.

According to an article in Swiss newspaper NZZ (Neue Zuercher Zeitung) the SVP party (Swiss People’s Party) launched a referendum to “protect” the 1,000 tonnes of gold owned by the Swiss National Bank (SNB). Their aim is to:

• make it unconstitutional to sell gold
• force the SNB to hold 20% of its assets in gold (currently 16%)

The SVP said the sale of 1,500 of the SNB’s 2,500 tonnes of gold was regrettable, especially given the Swiss population had no say in this.

There is just one chart that must be seen to appreciate the rationale behind the SNB's action earlier today: the relative performance of any given currency against the absolute: gold. Just like back in FDR times, the only thing that mattered was how to devalue the dollar against the yellow metal, so too now various fiat issuers realize that while they all devalue relative to each other on a step-wise basis, they all must devalue in absolute terms against such undilutable "constant curerncies" as gold. As the chart below shows, the CHF was dangerouly lagging its own devaluation relative to gold, with even the Brazilian Real doing far better, er, worse, in absolute terms. Which is why today's action resulted in a nearly 10% devaluation in the currency against what matters. As for the relative devaluation, well, trade flows will take care of that. Or so the rabid Keynesians roaming the countryside believe. The final take home from the chart is that the SNB still has quite a ways to go in devaluation before it catches up with the rest of the 'developed' world.

Or will they help out their old pal?

Barely an hour has passed since Mubarak's departure, and the religious tensions in the middle east are already starting to flare up. First up: the Jordan Muslim Brotherhood has immediately taken advantage of a vacated podium and said that what happened in Egypt should be a lesson to all Arabs. While hopefully nobody will be able to hijack the success of the Egyptian people, one wonders just how heavily the various Middle Eastern regime are sweating tonight. Elsewhere, Al Arabiya reported that the Swiss foreign ministry has announced that all of Mubarak's assets have been frozen. That, of course, excludes all the gold that Mubarak has with him. Notably, however, Switzerland refuses to indicate how much money was frozen.

Headlines from Sky News for now. Swiss police arrest ex-banker Rudolf Elmer on new charges relating to handover of bank client data to WikiLeaks. Just justice being served.

For those who were wondering why deposed Tunisian president Ben Ali recently pulled a ton (literally) of gold from the country's central bank, here is your answer: Reuters reports that Switzerland has just frozen all of his (paper) assets. Unfortunately, they have little access to his holdings of actual physical assets, such as the case may be, gold. And as we speculated when we discussed the curious case of deposed Ivory Coast's president Laurent Gbagbo (who in a clever scheme is using bondholders as leverage to legitimize his regime), that the world's largest cocoa exporter would be next to part with a substantial portion of its gold (which it does not technically have), this appears to be shaping up to be the case: Switzerland has also frozen assets of Ivory Coast president Laurent Gbagbo. Which also means that all those bondhodlers which were used as leverage by Gbagbo to legitimize his regime may be now irrelevant. Look for some interesting action in Cote D'Ivoire bond prices as a result of this development, demonstrating the curiously interconnected nature of globalized markets .

The "talkers" are talking. I'm listening and trying to guess what it means.

Yesterday we disclosed that the reason for numerous SNB interventions in the EURCHF was due to billions in deposits rushing out of Germany and seeking the relative stability of Swiss neutrality. A quick look at the trading pattern of the GBPCHF shows that it is now UK depositors who are panicking and shifting their money to unnamed (not so much anymore) Zurich bank vaults. The result: a 300 pip move in the GBPCHF as the SNB rushes to put out this particular capital flight fire. Too bad it only succeeded for about 12 hours. The run on the bank (to another bank) in Europe is now on.

Earlier today we disclosed what were not one but several massive central bank interventions in the Euro-Swiss Franc exchange rate. The intervention was large enough to push the rate up by 300 pips, a gargantuan amount in a world where applied leverage is often in the thousands. The amount of capital required to achieve this was likely unprecedented. Yet what bothered us was why would the SNB so glaringly intervene in the FX market not once but three or even more times. Thanks to the Telegraph we find out that the reason was a massive €9.5 billion capital flight from Germany into Swiss deposit accounts just this morning, according to BNP. Unfortunately for Germany this is only the beginning of capital reallocation from the country into neighboring Switzerland. And the technical bounce in the EUR today was in fact an even greater sign of weakness: in fact, as the IMF's Tim Kingdon pointed out, the money run in Club Med banks last week resulted in a massive €56 billion of interbank lending as the move from the periphery to the core accelerated. Now that the next stage of the run is from the core, Europe will very soon find itself with depleted depository capital very soon. Because if money is fleeing Germany, it is certain that France, Italy and the UK can not be far behind.

"World War II was fought over the control of people, whether they lived or died, their philosophical beliefs, and their land. In the end, the Swiss were willing to give up almost everything to not succumb to the National Socialists. Today, the Swiss are in a less stark, but surprisingly similar spot. They are surrounded by another all-encompassing concept: the euro. At first glance this might seem comical, but the German government stands ready to pay very large sums of money to any thief who can produce a list of German account holders at Swiss banks and the Italians are photographing the license plates of all cars crossing into Switzerland to check them against their tax records. Government agents and spies are involved as well. As far as we know there are no deaths in this war, but there are many financial losses, jail terms, and bankruptcies. In the past, the victims were wealthy men and corporations, and the battles had significant moral overtones, but the recent movement toward euro disintegration expands the battlefield, increases the risks astronomically, and will victimize all of western continental Europe, including Switzerland , from the lowliest clerk to the mightiest corporation." John Taylor, F/X Concepts