Sunday, January 11, 2015

“Wise Man” sinks SNB?


The Federal Reserve made a whopping $98 Billion in 2014. That’s a huge amount of money. How big is it?

- It’s about equal to the state budgets of NY, California and Texas.

- It comes to $300 for every man woman and child in the country. It is equivalent to $600 for every worker.

- It is more than the top TBTF banks make in a year.

- The profit is equal to 175% of the Fed’s equity. Way-to-go!


I could on with this; $98B is a big pile of money. But it’s chump change compared to what is going on in Switzerland.


The Swiss National Bank earned an incredible $38B in 2014. Compare that to the Fed’s results:

- On a GDP comparison the SNB earned 9Xs what the Fed did.

- It comes to $5,000 per person, and $9,000 per worker.

- The SNB’s earnings cover half of the entire Swiss budget. The Fed’s profits are only equal to a half of one percent!


So if you worry about the size of the Fed’s balance sheet you should be horrified by what is happening in Switzerland.  These incredible numbers from the Central Banks are not a sign of health – They are a sign of weakness and distress.


I bring this up because there has been a development. In today’s Neu Zuricher Zeitung (NZZ) there was an article featuring one of the Swiss “Wise Men” -Ernst Baltensperger. The following quotes are close to a stake in the heart of the Swiss National Bank:

- the National Bank to abandon the rigid connection of the franc to the euro.

- The rate floor has been served excellently Switzerland. But it was always clear that it also involves costs and risks.

- it would be desirable if the SNB might loosen their minimum rate policy, at least in the foreseeable future.

- you could replace the current minimum rate by a lower limit for a basket of currencies, for example, each is half dollar and euro.

- (the change to a basket) would create the possibility that the Swiss franc appreciates against the euro in a certain degree.

And finally, the question about the SNB profits in 2014:


-It would be very dangerous to keep this asset to normal.


I said on 12/19, that the SNB’s resolve to defend the Peg would be tested in January. Baltensperger’s comments will stoke the fire. The fact that this discussion appeared in the most influential newspaper in Switzerland adds to its significance. I also said that the test of the SNB’s resolve would have far reaching consequences to the concept of the All Powerful Central Banks.


Side Note:

Baltensperger was asked what will happen if the ECB initiates a QE program, his answer:

– Quite possible that the rate floor (EURCHF Peg) is then retested.

Mario Draghi will announce an ECB QE plan in eight trading days. The EURCHF FX rate is a small factor in the global markets. It might soon take center stage at the big circus.


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  1. As the Fed’s cost of funds is zero, it can maximize profits by holding large quantities of assets with yields in excess of zero. It is important to note that the Fed has exempted itself from GAAP, such that it does not have to mark its book to market. Had it done so, it would have made big gains as bond yields fell from 15% to 1.5%, and would report big losses if yields ever rise again. Since the Fed is 100% owned and controlled by the Federal Government, under GAAP it should be consolidated for accounting purposes, which would eliminate the Fed’s “profits” and the Treasury’s interest expense on the Fed’s bond holdings.

  2. What would you do from a trading perspective?

  3. @Chris Mahoney –
    From Wikipedia:
    The Fed is an independent financial institution formed within the United States, that works separately from the executive or judicial branches of government. The Federal Reserve System is considered to be an independent agency that exists outside of the cabinet of the executive and its powers are derived directly from Congress.

    In Lewis v. United States,[8] the United States Court of Appeals for the Ninth Circuit stated that: “The Reserve Banks are not federal instrumentalities for purposes of the FTCA [the Federal Tort Claims Act], but are independent, privately owned and locally controlled corporations.” The opinion went on to say, however, that: “The Reserve Banks have properly been held to be federal instrumentalities for some purposes.”

    All nice and opaque….just the way the “owners” like it.

  4. ETUAC – I don’t think a break in the CHF peg is imminent. You can wait to position this.

    In the meantime short EURUSD is a decent proxy. I also favor long USDJPY.

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  9. Bruce, right now 4:40 AM Swiss Central Bank Ends Minimum Exchange Rate, Lowers Interest Rate to -0.75%…???

    I would love to hear your opinion about where and how it ends…

    EUR/CHF 1.07 FROM 1.20 FLOOR

    USD/CHF 0.95 FROM 1.01

  10. Wow I enjoy reading your posts, saved to favorites!

  11. Well Bruce, looks like the peg finally broke. I appreciate all you wrote on this. I always thought it would break, but the wait was so long that I did not have a trade on. So it goes.

  12. Nice work on anticipating the Swissie debacle this morning!

  13. Bruce: Hope you made some money.

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