Hard is what it is

It is a remarkable coincidence that I visited Switzerland 4+ years after I last visited the place in 2010 last week and a week later, the Swiss National Bank (SNB) chose to abandon the Swiss franc cap versus the Euro. No kidding. Thomas Jordan must have read my mind. I lamented to friends at the dining table that Switzerland had come to such a sorry state that it had abandoned its hard currency reputation for the sake of exporters. Keeping the currency from appreciating helps only if the underlying demand in the Eurozone was reasonable. That was far from the case. It is easy to say that the SNB found that the costs outweighed (or, going forward, would outweigh) benefits. That is what Thomas Jordan had said at the press conference. He said that the policy was not sustainable any more. Here are the Bloomberg stories on this dramatic development. The official press release is here. The introductory remarks of the President of the Swiss National Bank can be found here.

I found that Switzerland had a real estate bubble that was worse than Singapore’s. Prices of apartments in Zurich and extending up to Meilen were more expensive than prices of top-end apartments in prime districts in Singapore. Singapore, at least, is surrounded by three populous and relatively better growing nations – India, Indonesia and China. Not Switzerland. SNB balance-sheet was around 80% of GDP, probably the highest ratio in the world. I was really shaking my head at their policy madness.

I am very glad that it had ended. The Swiss franc is a hard currency now and investors have a choice for currency diversification. That is a welcome development. As I write this, the EURCHF exchange rate is 1.05. It had come a long way after the exchange rate plunged to around 0.85, earlier in the day.

Simon Kennedy writes for Bloomberg that world central bankers are diverging. I say, ‘about time’. When they acted in concert, they created bubbles and busts. When they diverge, they will cushion the blows and give investors opportunities to diversify. For too long, the world has been acting as though it was on a fixed exchange rate with the US dollar. If it were broken, it would be good for the world. Uni-polarity in geo-politics and geo-economics are not desirable.

Swiss exporters react as do Davos hoteliers. The World Economic Forum is approaching.

There are many speculations out there in the market place as to what are the reasons and what are the implications. Of course, those who are short Swiss franc – those with borrowing and those with trading positions (short CHF and long EUR or any other carry trade currency) would be badly hurt.

I was rather amused at the tone of the comment by the economist at Deutsche Bank cited in this article:

“It’s amazing that such a stoic central bank could end up abandoning such a long held policy with such short shrift,” said George Buckley, an economist at Deutsche Bank AG in London. “I thought we were out of the situation where central banks surprise so significantly as this.”

He is chiding SNB for dong what it did, as though it had done something wrong. What chutzpah?! Policy surprise is a legitimate tool in a central bank’s tool-kit. It is a shame, a tragedy and a pity that they had abandoned it. Transparency helped none but speculators and trading desks in financial institutions. Transparency was one more financial sector bailout policy. I am very pleased to see that a central bank asserted its independence, not just with respect to politicians but with respect to financial institutions and financial market participants. Arguably, the latter had become even worse than politicians in keeping central banking in chains.

FT Alphaville had some interesting comments on the move. You can read them here and here. The second link has the header, ‘Sack Thomas Jordan?’. If I were the Swiss government, I would confer on him a high civilian honour. The first one has an interesting comment:

As we’ve noted before, whether intended to or not, the SNB’s floor mechanism recapitalised eurozone assets just when the Eurozone was most in need of capitalisation.

The process by which this happened, of course, was the open bid for euros in the market. Not only did this support the euro, it amounted to a giant bid for what were at the time extremely toxic Eurozone assets that no-one else was prepared to touch, helping to support their value vis-a-vis non euro-denominated assets.

Now, if we assume that ECB QE is really about to take place, we should not be surprised that from the SNB’s perspective this sends a signal that their time recapitalising the eurozone is over. Those Eurozone assets can now swiftly be handed back into the market, because the ECB will be standing by to support them instead.

Looks like many are now taking the next round of Quantitative Easing (QE) by the European Central Bank (ECB) as a given, after this SNB move. The ECB QE will be a failure as the Swiss exchange rate cap has been. The world has to be prepared for much worse than this.

I must personally thank Thomas Jordan for he has forced me to return to blogging sooner than I had thought possible. Inertia sets in once one does not blog for several weeks. I could not do so for the last several weeks for various unavoidable reasons.

(Tailpiece: It is barely fifteen days into the New Year. We already have the best entry for the most humorous news-story of the year. Here is the link)

3 thoughts on “Hard is what it is

  1. HNY, & all. But uncharitable at the end there, for a good piece…let’s see how Yellen plays it when the rubber hits the road, shall we?


    1. HNY to you too. It was not uncharitable. It was based on their actual conduct, even after the most recent brief sell-off in November. Fed officials came out swinging after about a 9% drop from the peak in S&P 500. I do remember writing a post that it is official that the Fed was targeting asset prices. Even the Minutes of the Meeting of the FOMC held in December 2014 confirm this attitude, indirectly.


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