Thursday, January 15, 2015

End of CB Power – SNB Folds


I wrote about the Swiss National Bank being forced to abandon its currency peg to the Euro on 12/3/14, 12/8/14 and 1/11/15. That said, I’m blown away that this has happened today.


Thomas Jordan, the head of the SNB has repeated said that the Franc peg would last forever, and that he would be willing to intervene in “Unlimited Amounts” in support of the peg. Jordan has folded on his promise like a cheap suit in the rain. When push came to shove, Jordan failed to deliver.

The Swiss economy will rapidly fall into recession as a result of the SNB move. The Swiss stock market has been blasted, the currency is now nearly 20% higher than it was a day before. Someone will have to fall on the sword, the arrows are pointing at Jordan.

The dust has not settled on this development as of this morning. I will stick my neck out and say that the failure to hold the minimum rate will result in a one time loss for the SNB of close to $100B. That’s a huge amount of money. It comes to 20% of the Swiss GDP! If this type of loss were incurred by the US Fed it would result in a loss in excess of $2 Trillion!

In the coming days and weeks there will be more fallout from the SNB disaster. There will be reports of big losses and gains from today’s events. But that is a side show to the real story. We have just witnesses the collapse of a promise by a major central bank.

The Fed, Bank of Japan, ECB, SNB and other Central Banks have repeatedly made the same promises over the past half decade:


Don’t worry! We are here. We will do anything it takes to achieve the stability we desire. We are stronger than the markets. We can overwhelm all forces. We will never let go – just trust us!


I never believed in these promises, but the vast majority of those who are active in financial markets did. The entire world has signed onto the notion that Central Banks are all powerful. We now have evidence that they are not.

Anyone who continues to believes in the All Powerful CB after today is a fool. Those who believed in Jordan’s promises now have red ink on their hands – lots of it! 

The next central bank that will come into the market’s cross hairs is the ECB. Mario Draghi has made promises that he would “Do anything – in any amount”.  Like I said, you would be a fool to continue to believe in that promise as of this morning.

We’ve just taken a huge leap into chaos. The linchpin of the capital markets has been the trust in the CBs. The market’s anchors have now been tossed overboard.








  1. Good job

  2. In theory you’re right, of course. But in practice, I wonder if you shouldn’t have qualified the loss of trust in CB’s merely to small CB’s acting on their own? As you have previously pointed out, the SNB had essentially no support from other CB’s for keeping the peg. So there is in fact a huge difference between the SNB losing its credibility and the Fed or ECB losing theirs (particularly when they cooperate). The latter isn’t necessarily implied by the former, I’d say. Ultimately, yes. But that may well take longer than one’s capacity to wait for it…

    • Walter –

      The SNB was diametrically apposed to the bests interests of the ECB.

      The Japanese CB is acting in a manner that is against the desires of the Fed and the ECB.

      The ECB is going to act, when they do it will be at the expense of the US and Japan.

      This has nothing to do with “small” CBs. The SNB is not not small at all. The fact is that all of the CBs are working against themselves. This can not, and will not work for long.

  3. On the one hand, you are quite right: fall out will be huge, both for Swiss and for mkts/cen bank relations.
    That said, the SNB were running a classic picking up nickels in front of a steamroller trade (didn’t you once say that?). My guess is that they are more worried than they let on about Greek elex and ECB QE. They had written the world a free ticket out of euro at an agreed price, in any size. Dangerous.

  4. Greek elections, ECB QE – SNB could have waited out the results at little additional downside. So something must have happened between the gold referendum and the ECJ decision. If the SNB gobbled up 100bn Euros since Jan 1st, the ECB would have known about it; after all, the Euros are not “held” in Switzerland. The ECB could have threatened to leak some info. Or, ECB called SNB and said “Your gig is up – we’re gonna go all-in at the next meeting. We can buy your Euro-bonds off your super-leveraged balance sheet, but in return you must let the peg fall”.

  5. great call Bruce….

    Draghi QE must be massive…

  6. Let me first say that I am solidly against central banks and money printing. Fiat currencies are a cruel joke. With that said, if I were the SNB, I would have done this a long time ago and used all the capital flowing into my currency as an excuse to print more money. A central bank can easily neutralize capital inflows with money printing, but none of them seem to ever be willing to do this?

  7. Somebody made out like a bandit, was short EUR/CNF ahead of time, maybe SNB?

    What cannot go on forever does not go on forever. You can say that the Swiss are the first out of the euro …

  8. Bruce,
    Great analysis and reporting in your Dec and Jan postings prior to today’s. Just published today’s article link in a comment on Marketwatch, and hope that gets you more eyeballs.


  9. Bruce,

    you wrote an article some time ago (more than a year), that all this will end with some type of Plaza and Louvre Accord.

    I believe that we are quite far away from a global recession (2-3 years at least), which will make everyone sit on the same table.

    What are your thoughts

    • The Yen has moved 40% in 2 years. The Euro has lost 15% in six months. The CHF has moved 20% in a single day!

      This much volatility is trouble. Economies can’t adjust as fast as the markets are moving. So yes, some type of agreement to end the currency wars is in the future. We are a long time away from when something like this could be considered. Things must get more chaotic to force the issue.

      Also, who will lead this? Yellen? An academic? Not a chance….

  10. Hi Bruce,

    No offense, but I think you are entirely missing the importance of what has just transpired. The era of the dirty float/pegged currencies is coming to an end. If, over the last few years, you had read the relevant literature and parsed it and the news using a particular model, what you would have seen coming is precisely what just transpired and what will continue to occur. A new monetary system is on the way, and currencies will float freely against one another and physical gold, in the absence of paper derivatives, is going to float freely against the world of free floating currencies.

    It’s much, much bigger than the Plaza Accord.

    • When the existing paradigm is failing it is only natural, after repeated attempts to salvage it, results in failure, a new paradigm is embraced The question is, and inquiring mind want to know, is the economic collapse a planned event in which to usher in a world centralize economic system or is this economic chaos a frantic response by the CBs to a systemic discombobulating economic events.

      One’s ultimate course of action, I think, rests on the answer to this question.

      • NO ECB QE would confirm the era of free floating currencies with the international monetary system in place to discard the USD as the world reserve asset and unit of account. There will be tough negotiations on the composition of the SDR retrofit. If the USA doesn’t play ball, the USD will explode in a monetary super-nova. The SNB reversing the peg is a return to banking for a well managed CHF, rather than the central bank being a vassal of the USD Empire.

        • Bob–I feel that there has to be a standard and I don’t think that SDRs fill the bill.
          SDRs are as elastic as what is in place now. The man on the street has to know the value of the money in his pocket, not what someone is willing to give him for it. Money is the grease that makes civilization possible. Gov and CBs game it for their own advantage. We have standards for time and length. Money is more important. It needs a standard and the buck or SDRs aint it. What it will be I don’t know. Until then chaos is the order of the day.

      • Couldn’t agree more about the floating currencies, which include gold weight where weight is the unit of account. That’s a small detail that is often overlooked. In a new liquidity hybrid (yin-yang) , the dark side is dominated by debt based currency while the light side is comprised of asset based currency (bullion). The development of the “dark side” has been the forerunner and the necessary evil before the light could follow as a matter of order.

        Once again, we witness that it’s light that springs forward out of darkness.

        • Homer … I want to add something to my last post based on re-reading yours. I detect a slight assumption on your part, one that suggests that you may see these monetary changes as being top-down issues and thus creating a search for “an event”. I submit that this may be the biggest “this time is different” factor of all. Look for a process that is current and ongoing …. a morphing.

          Because we are in real-time application, rate of change is critical. No crashes please. Destroy nothing on the basis of the preservation of the 2 yin-yang components, the dark and the light.

          The implementation must, therefore, be regulated and controlled by the market. Any top-down policy by political decree, by fiat or by proclamation, could prove disastrous to the whole debt paradigm . Debt is not our problem. TOO MUCH debt is our problem. We can correct it by a market process of osmosis. Just add assets and stir gently.

          We must be as wise as serpents, yet as gentle as doves.

          • Michael–I agree with much of what you said. God’s way is not from the top down but from the bottom up. It starts with the family. Man’s way is from the top down. In other words, do what we tell you to do or we ‘ll kill you.

            I’m sure God didn’t say, “Do what I tell you to do, follow the ten commandments or you’ll burn in hell.” Sound familiar? That’s man’s imposition on the concept of God for some people to control other people for their own advantage.

            As you are aware, because you used the term Yin-Yang, Yin-Yang is a balance. One side not being anymore important than the other side. They compliment each other, a cosmic dance. A three dimensional concept of the duality of God.

            Nature loves equilibrium and abhors an imbalance. Man runs willy-nilly through the Universe creating imbalances, some good some bad. Electricity, nuclear energy, air flight are all an example of imbalances which nature tries to bring to equilibrium. It could be called, a creative process, I guess.

            In the economic sphere, these imbalances are called cycles and the return to equilibrium is call corrections, a return to balance, to Yin-Yang. If the imbalance is caused by too much debt, what’s necessary to bring it back to financial equilibrium? More debt? The CBs think so. But…I suggest that they’re not at all dumb, so what’s their gain by subscribing to more debt?

            In the past, the 50 yr Jubilation, bankruptcy, the forgiveness of debt was the mechanism for balancing the Yin and the Yang. Anything that the ‘Powers That Be’ do that doesn’t re-balance the imbalance will end in failure.
            Ludwig Von Mises was right. Keynes was a fraud.

            • Michael–Quite often we talk about something as if everyone has the same concept that we do. Words like market, society, etc. are bantered about as it they are real things. These things are mental constructs and not real things. Show me a market, show me a society. You’d be hard pressed to point one out to me. A financial consultant would have a different concept of a market than a person asking a butcher for a pork chop.

              You say,”The implementation must, therefore, be regulated and controlled by the market.” Heck, that’s just what the CBs and financial planners think because they think that they are the market. I say people should control money after all it belongs to them. It shouldn’t be relegated to a financial priesthood or government, anymore than your relationship with God should have an intermediary. The financial priesthood and governments are the usurper of your freedom, not the provider of your freedom. God is the Provider.
              I know what you’re thinking, God is a mental construct. True.

              The Higgs-boson (the God Particle) was a mental construct (a theory of a ‘particle’ reality of the Universe) by Prof. Higgs, a physicist. It has recently been confirmed as a real part of the Universe through extrapolation from experimentation. The God Construct given time may also turn out to be real.

              I don’t know if ‘Market Osmosis’ will correct anything, ” just add assets”, you say. I was watching Marco Rubio on tv and he said, “What we need to do is grow the economy.” to get us out of our pickle. I almost choked on my foi gras. Meaning “just add assets and stir gently”. He had no concept of economic reality or what’s happening.

              Increasing the asset side of the balance sheet would certainly do that, so would decreasing liabilities, like financial repression, ZIRP, and the Big “D” word–Default. There comes a point in debt accumulation, where
              talk of increasing the asset side is ‘pablum’ for the masses. We’ve reached that point, it can’t be done. If you find a way that it can be done, the Nobel Prize awaits you. Ludwig Von Mises was right.

              • Higgs\Boson jokes–The Higgs-Boson walk into a church. The priest say, “We don’t allow Higgs-Bosons in here.:”
                The Higgs-Boson says, “But….Without me how can you have mass?”

                “Are you there ‘God Particle’ ? It’s me, average person that doesn’t understand you.”

                A Higgs boson and a quark walk into the bar at CERN. The barman says “oh, smashing”.

                If you’re not laughing. you’re sorely under educated.

  11. Hard assets are starting to look shinier and shinier…

    • Hi Bruce, inYour previous article You talked of SNB profit of about $38B in 2014. Now You talk of losses in the order of 20% Swiss Gdp. So Why has SNB removed the eurchf floor and shooted in his own foot? I have not clear in my mind this game perspective seen with the eyes of a CB. Perhaps I would need som article written by Martin Sibileau, but his blog is closed since 2013

      • Imagine, today you have people putting mounts of cash in your banks in Switzerland, they buy your chf and sell whatever they have (be it: EUR, USD…). Your currency appreciates to much do the central bank puts a stop to it and start buying EUR, USD… and selling CHF on the market. On top of it : the central bank says : I will maintain a fixed exchange rate at 1.21 against EUR.

        Over time you pile up fx reserves. In the case of the Swiss central bank : a lot of EUR. Apparently the SNB had the equivalent of 80pct of the Swiss GDP in EUR. (at which point you cod wonder if they are not better off joining the EU…)

        Imagine that next week Draghi and his buddies announce QE.
        The ECB can outgun the SNB, flood the market with EUR and bring the EUR down. In which car the SNB with have to buy even more EUR to maintain its cap.

        By removing the cap, the SNB takes the pain now instead of having to continue buying even more EUR.

        • Tnx for Your explaination ;-)
          but what do You think SNB will do in the future? They will let the eur depreciate steadily vs the CHieF or they’ll adopt more complex strategies?

          • The SNB has created a dirty float. That means that the SNB will continue to intervene in the currency markets. This will not be a free float where markets, by themselves determine prices.

            I would imagine that the big move in EURCHF is done for the time being. A year from now EURCHF will be 95, so additional losses of smaller proportions are in front of us. I would not anticipate that this turns into an orderly situation. I think volatility in currency pricing will continue for a long time.

            • I have no clue what the SNB will do in the future. If I did I would have made a killing on the CHF yesterday ;) as brucecsaid: I’m this a “dirty flat” si forex intervention will be done but the market wont know at what level. What I wld expect though given the bloodbath it was that lead brokers to close shop is higher margin requirements coming or way prior to 22nd January…

          • Apologies for the typos on my posts… I am in my phone and it is a pain…

  12. Just wondering if the SNB is electing NO QE and is playing both sides of the trade. After all: they lied 1x going on record about the peg being here to stay so 1 more lie about the QE being “mostly priced in” wouldn’t trouble them too much…

    Imagine: the remove the cap : currency appreciates, 1 week later NO QE: EUR shoots up and CHF goes down. Perfect plan to kill funds and traders…

  13. Just wondering if the SNB is expecting NO QE and is playing both sides of the trade. After all: they lied 1x going on record about the peg being here to stay so 1 more lie about the QE being “mostly priced in” wouldn’t trouble them too much I suppose…

    Imagine: the remove the cap : currency appreciates, 1 week later NO QE: EUR shoots up and CHF goes down. Perfect plan to kill funds and traders…

    Now the big issue at hand us the one of trust. Where is the world going of one cannot trust a Swiss Banker!…

  14. The markets hate uncertainty and will test the policy resolve of other CB’s. The markets will want to discover and will discover the “line in the sand”. I agree with Bruce, this will get more “chaotic” and only resolved through pain

  15. Thanks for great analysis of this as it unfolded. There are very places I can read such honest, accurate views. Your experience and insight is much appreciated!

  16. Reading your post last 2 years,this was no surprise to me.Like all CB’S as with anyone,you will protect your own.The next shoe to drop will be the Hong Kong Doller peg to US being dropped.You can bet on it.

    • I tend to think the same…let the dollar ride higher and unpeg the yuan at the $ top…they will make out well on the conversion…

    • Hi, I live in Asia so the topic is of interest to me. Why do you think they would give up the peg? (I thought it was a good way to stick it up to the Chinese to keep it). What wood be the impact for the hkd? Up/down?

    • While I do believe that markets ultimately win out……Politics wins out more often than not in the “short run.” By that, I mean as long as the politics support going against the “market”…politics will win. Politics is a fundamental consideration. As long as the players believe the politics are sustainable, no one will be willing to challenge it.

      I don’t think there is enough rebellion yet to challenge the peg in HK.

  17. Interesting, the question is what does this mean to the HK$ peg?

    First – if the HK did float would it rise versus fall vs the USD. My answer: it would rise, the recent political stuff is not driving the fx flows.

    Will the HK peg break? Not anytime soon. The HK is not a ‘safe haven’. So the big capital flows that might trigger a revaluation of the peg are just not there. As of now, the HK CB has this under control.

    Stay tuned on this however. If the money starts moving, one never knows where it might end up, or what problems it will cause when it gets there.

    • BK–I happen to know where all that fiat money will end up! After being
      thoroughly put to use, down the toilet. Good blog, BK!

    • I’ve always been fascinated by the fact that China has kept the HK$ around after all these years since taking HK back from Britain in ’97. They’ve had enough time now to have slowly “wound down” the HK$ had they wanted to do so. So, this begs the question : Why? Then it occurred to me : flexibility. Consider that China is the only country with purview over not one, but two, currencies : the Yuan and the HK$. Watch for China to use the HK$ as a “currency laboratory” in which to conduct a proof-of-concept experiment with gold-backing for the HK$. If that POC works, then the Yuan will be centre stage for the Main Event, the HK$ having been a successful “warm-up” act.

  18. This is not the end of central banks, but a new beginning as the market introduces bullion backed currencies. Floating fiat currency will then take on a greater secondary role, a role that bridges the debt world and the asset world via the real-time floating measure of USD/oz.

    It must be noted that the world prices things in fiat currency. Those fiat priced economic widgets can be traded for weight based bullion (only now that it floats) for the sake of settlement. Fiat currencies (in real-time) act as real-time tools to calculate fair and appropriate amounts of bullion weight to settle those trades …. debt-free.

    You cannot pour new wine into old wineskins.

    • Michael–That is what Bretton Woods was all about, a gold back currency, the dollar.
      Big Problema–It was only redeemable by central banks.

      Every person holding a ‘bullion back currency’ must have the choice to hold their wealth in bullion or currency. Let the competition begin.

      Of course, you can vote for real money now, just trade in your old fiat currency for bullion. How that’s going to go over with those pushing the fake stuff, I don’t know.

      Just remember, “The gov is like a tiger. When you’re starving to death with a tiger, the tiger starves last.”

      your post sounds like the same ole, same ole.

    • Michael–Non other than the iconic Richard Russell seems to agree with you about gold backed currencies. See–KingWorldNews.com

      Of course, if such is the future, Please, bring in 100 or 500 or 1000 of your old bills and receive 1 new one, gold backed of course.

      Michael your in good company.

  19. In retrospect, the action of the SNB will come to be seen as the most courageous act of financial morality of the entire 21st Century. And that’s with 85 years still to go.

    As for the Euro, it ought to be obvious by now that the Euro is slowly, but surely, being transformed into The New Deutsche Mark. Once all the participants in the Euro who never should have been allowed to participate either leave on their own or are drop-kicked out the door, the Euro will be “Germany and those whom Germany deems worthy of inclusion”.

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