The Swiss Central Banker widely viewed as the driving force behind the pegging of the Swiss Franc to the Euro is a fellow by the name of Phillip Michael Hildebrand. He took over as head of the Swiss National Bank in 2010, but had to leave in January 2012 after a little bit of a brouhaha regarding his wife’s currency trading. Hildebrand’s Franc pegging policy was inherited by his successor, and was valiantly adhered to for the next three years. However, the policy was really doomed from the start, and there can be no doubt that Hildebrand set the Swiss Central Bank on a road that was destined to end badly.
The Swiss should have really known better. Hildebrand was an ex-hedge fund manager that had previously worked on Wall Street and in London for Moore Capital. When he joined the SNB he was said to the “youngest ever policy maker.” Bragging about your Central Banker being young is never a good thing, and it is doubly bad when he comes from a hedge fund. Hedge fund guys are never lacking in hubris at the best of times, so handing the keys to a Central Bank over to one of them is just asking for trouble.
Hildebrand’s lack of judgement was exemplified by his wife’s currency trading which ultimately led to his departure. Sure Hildebrand was not convicted of any wrong doing in the matter, but you don’t see Bernanke’s wife front running Central Bank decisions. It is just something that grown ups know better not to do.
Hildebrand’s policies had bad news written all over them from the start. He left the SNB in a real bind that had no easy way out. Today he is cozily teaching at Oxford and everyone else is left to clean up his mess.
And what a mess it is. After three years of capital flowing into Switzerland, the SNB was finally forced to give up the 1.20 EUR/CHF peg. The SNB balance sheet was simply growing too quickly.
The total assets of the Swiss National Bank is only 525 billion, so in attempting to defend the peg, they were forced to pervert their balance sheet to a point where almost 90% was foreign currency assets.
Most of these assets are held in either Euros or US dollars, but the sheer size of the balance sheet forced the SNB to also diversify into other currencies.
One of the most interesting things about this report is the equity component of their assets. As of the end of the third quarter of last year, they held 16% of their assets in foreign equities. Assuming that ratio stayed roughly the same, that means that the SNB owns over 75 billion in equities. That’s approximately 750,000 S&P 500 emini futures. The total open interest is only 2.7 million for e-minis, so don’t under estimate how much Central Bankers have influenced the price of the equities.
But as the great Herbert Stein said, “if something cannot go on forever, it will stop.” The trend of ever increasing SNB balance sheet was not sustainable in the long run. The SNB used all sorts of words like “we will defend the peg in unlimited amounts”, but the reality is that the numbers were so large, there was no way it could continue. I made up a chart of the SNB foreign currency as a ratio versus the GDP of Switzerland.
The Swiss National Bank had simply become a hedge fund masquerading as a Central Bank. You can’t have your Central Bank holding foreign assets more than 3 times your GDP. That policy is simply asinine.
What was strange was the timing of the move. Why did the SNB decide to give up the peg today? Do they know something about the ECB’s plans in the coming days? There is no doubt that if Draghi has plans to shock and awe the market, the SNB’s ability to maintain the peg would become considerably more difficult. Is the SNB getting out ahead of a big ECB decision? I don’t know, and it looks like market players were caught off guard by this move as well.
The initial reaction to the news was massive. It might very well be the largest 5 minute bar range in the history of major currencies.
In a desperate attempt to limit the damage, the SNB also lowered their overnight rate to negative 75 basis points! In doing so, they pushed the entire Swiss yield curve under zero all the way out to 9 years!
That is crazy! For the privilege of the Swiss holding your money for 9 years, you get a return of zero! The world has gone bat shit crazy.
The Swiss stock market got absolutely annihilated on the news.
The ramifications from the this move are going to be felt for a long time. I think the important thing to think about is how much the SNB’s purchases have affected other asset prices over the past few years. How much has the 471 billion Francs affected all sorts of other asset prices?
And the really important take away is to realize how much these Central Bankers have strung together their policies with duct tape and band aids.
The markets console themselves that everything is fine because the price movements seem reassuring. But the EURCHF was deceptively quiet as well for many years.
Don’t confuse price action with risk. Central Bankers have been busy pegging much more than the EURCHF over the past 5 years.
I think we are approaching a period where the veil is lifted. The markets are about to realize that these Central Bankers are much more devoid of a plan than they could ever imagine.
Remember the conversation with the recently retired Bernanke that David Einhorn paid $250,000 for?
“I got to ask him all these questions that had been on my mind for a long time,” Einhorn said in an interview today with Erik Schatzker and Stephanie Ruhle on Bloomberg Television, referring to a March 26 dinner with Bernanke. “It was sort of frightening because the answers were not better than I thought they would be.”
Einhorn’s key takeaway from the meeting was that the Fed had much less of a plan than he ever would have imagined.
Which brings me to the only trade that I really feel strongly about. As this realization that Central Bankers are lost, the desire to own a real monetary asset are going to sky rocket. I hate to say this as I don’t want to sound too much like some crazed gold bug, but I think that the precious little yella’ fella has the best chance of being the main beneficiary from this Central Banker confidence collapse. I am long gold and silver, and I am becoming even more emboldened from the SNB decision. Negative 75 basis point overnight rates are the stuff that powers gold bull markets.
Recently I have also being buying some gold miners. The GDX ETF had made a big run off the bottom, but over the past couple of days some new supply from secondary issues has weighed on the miners. The breakout failed and it sagged back under $21.
I am a big believer that most indexes don’t trade “clean”, so I am not fussed that the breakout didn’t immediately explode higher. Yesterday I started picking away at some GDX, and unfortunately I did not get my full position. I am going to continue buying GDX to complement my precious metals position. This group is universally hated. I think they are a screaming buy.
We are approaching the end of the era of the omnipotent Central Banker. Trade accordingly.