“Manipulation on a Grand Scale”
In recent months we introduced you to one of our early warning signals – the Swiss franc.
The importance of this signal is that it can give you a clue as to how nervous – or not – the market is.
For instance, when investors piled into the Swiss franc in late July through early August, it warned you to be cautious about the market.
And when they piled out in mid-August it still warned you to be cautious, but signalled that you could take advantage of the change in sentiment. For example, by selling your stocks on the rally.
For the past two months the Swiss franc has been volatile. From one day to the next, investors can’t know for sure whether they should be bullish or bearish.
So, in August the Swiss franc soared in value against the risky Aussie dollar as the market hit bottom. And then it lost value as markets calmed.
Then last night, this happened:
After gaining against the Aussie for the past week – from CHF0.87 to CHF0.82 – all heck broke loose in the foreign exchange markets. The Swiss dropped from CHF0.82 to trade at CHF0.90… a 10% move.
What caused this move? Check out this statement from Philipp Hildebrand, chairman of the Governing Board of the Swiss National Bank:
“The Swiss National Bank is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below one Swiss franc twenty. The SNB will enforce this minimum rate with the utmost determination. It is prepared to purchase foreign exchange in unlimited quantities.”
In other words, at the stroke of a button, the Swiss National Bank intervened in the currency market to devalue the Swiss franc.
It takes us back to the early 1990s when the U.K. government tried to keep pound sterling in the pre-euro, European Exchange Rate Mechanism (ERM). In short, the pound was allowed to trade within a range against other currencies…
It worked for a while (just), but eventually no amount of manipulation could stop the pound falling out of the ERM. Of course, George Soros’s famous punt against the pound didn’t help things either.
The point is the artificial restraint of the pound only masked the real problems. It created more volatility in FX markets and ultimately, when the pound was dumped, it fell 30% in just a few months.
So what can we expect from the SNB’s intervention?
For a start, it means the same as all intervention. It means a distorted market that only serves to deceive investors.
While the currency was free-floating it gave you, and every average Joe or Joanne Investor an insight into what the big market players were up to. But now, the Swiss central bank has effectively blindfolded investors.
Or put another way, yet again central bankers have acted to protect their own interests and harm the interests of ordinary punters.
But if the Swiss or any other banker thinks this is the way to calm markets and help the global economy, they’re sadly mistaken.
As Stuart Thomson, portfolio manager at Ignis Asset Management told Bloomberg News, “We will see a lot more intervention now, we will see manipulation on a grand scale.”
Or as our Slipstream Trader, Murray Dawes said this morning:
“We are now entering the next phase of this crisis where all-out currency wars have begun. A quick survey of past currency intervention shows that it often works in the short term but rarely works in the long term. Traders will have been shaken out of many positions and taken some bruising losses in the last couple of days.”
Boy, have they got that right.
Of course the Swiss aren’t the first to manipulate their currency. They’re simply joining a growing line.
The Japanese are regular money manipulators… Brazil introduced a tax on currency trading last year… And the U.S. Federal Reserve – even though its mandate doesn’t include managing the U.S. dollar – has manipulated the Greenback almost non-stop for the past three years.
But our guess is the Swiss intervention is unlikely to have the effect it hopes for.
On the one hand, sure, the SNB has said it will buy “unlimited quantities” of foreign exchange. That’s another way of saying it will print as many Swiss francs as it likes to weaken the currency.
But on the other, we’re not sure we believe the SNB will devalue its currency so much that it destroys the Swiss franc’s reputation as a haven currency.
The way we see it, the SNB’s intervention creates more, not less, uncertainty. Whereas in the past, the currency markets ebbed and flowed in an orderly fashion, now you’ll get a pressure cooker effect.
You won’t get to see the real value of the Swiss franc until so much pressure has built up that the whole thing explodes.
So our bet is… whether it’s next week, next month or next year… the Swiss franc’s 10% slump will be reversed in equally spectacular fashion.
But rather than the Swiss franc signalling bad news ahead of time, thanks to the meddling central bankers, it will only reveal its secrets when it’s too late to do anything about it.
Cheers,
Kris.
September 7th, 2011 at 11:01 pm
Why should we not have a single global, gold standard, currency? it would remove all this speculation – which doesn’t produce anything. International trade would be much simpler and individual countries could not merely “print money” when the spend too much.
Of course an accountant or garbo in Sydney would be paid a different rate to the accountants and garbo’s in Mumbai, New York or Johannesburg but the local markets would be free to determine that.
Seems a sensible solution to me but there’s too many vested interests for it to happen – not the least, the financial services sector.
On a slightly different issue, I believe there is growing acceptance of “virtual currencies” from corporations – Microsoft etc. I don’t know much about it but might be worth someone with time and research skills investigating it.
Here’s an interesting link on the US debt level.
http://usdebt.kleptocracy.us/
September 8th, 2011 at 1:32 am
Great stuff yet again. What scheming can the Japanese do now? To sabotage yen which defy all logic. Confiscate savings?
Oh, and interesting comment from DM.
September 8th, 2011 at 1:06 pm
With the 10 year anniversary of 9/11 coming up, it would seem that the truth is sinking in with the masses … although still denied by the “mainstream”
http://www.youtube.com/watch?v=nlPweD6R3Cc&
September 8th, 2011 at 2:37 pm
Well JB that proves that there is no shortage of idiots on the internet.
I think that you are well acquainted with most of them. How is the mothership going? Is the Cryovac chamber still abuzz with excitement?
September 8th, 2011 at 5:11 pm
We cannot fault the SNB for that announcement. It has no obligations to investors piling into Swiss franc. And these investors are not your average Joes, they are international banks and hedge funds sloshing around cheap money they got from the Feb and ECB.
Instead, the SNB has the mandate to maintain financial stability in the Swiss economy and this is exactly what it is trying to do.
September 8th, 2011 at 6:17 pm
PF ……. The government could and should have stopped 9/11.
The fact that they didn,t is further evidence of government incompetence not complicity.
You are spot on with the rest of your post, hopefully the chamber is working perfectly and the mothership is going………..soon……..with standing room only.
September 8th, 2011 at 7:16 pm
Yes drood agreed, Remember it was George Bush at the helm at the time. His incompetence was unlimited.
Zero degrees Kelvin is what is needed for the chamber.
Preserved forever – rock hard permanent statues.
September 8th, 2011 at 8:38 pm
PF….but once they are inside…….mwahahahaha
September 9th, 2011 at 1:57 am
http://www.zerohedge.com/news/rick-santelli-tells-arch-globalization-advocate-friedman-he-idiot?page=1#comment-1646406
watching an alleged “smart” guy crumple under a simple question…and then resort to a personal slur…
September 9th, 2011 at 9:09 am
wolf – I don’t think he crumpled – Santelli is often idiotic. Calling social security a ponzi scheme is idiotic, regardless of whether you do or do not support social security.
They have a problem in the US (and elsewhere) because they are underfunded, but that is a planning problem.
Do you suggest that we completely drop all forms of social benefits?
September 9th, 2011 at 11:01 am
Peter – that’s Santelli’s point. SS is underfunded and was always under funded becasue it relied on new tax payers.
Wouldn’t it be better if social security was funded as we go like super?
That way (in theory) we wouldn’t have to rely on the kids.
I understand it’s one big actuarial game – but are you saying it’s underfunded becasue the mathematics (actuarial) then really it is a ponsi scheme.
Then we need more handouts to encourage child birth or more migration to help pay for SS.
Am I kinda on the right track?
September 9th, 2011 at 11:13 am
M&M – I don’t think you will ever get to a point where social benefits are funded in advance, although some level of advance funding would certainly be an advantage.
The labour force will certainly get hit hard when the boomers retire over the next decade or so, but the following generations are also about the same size if we work on a year by year basis, that is something that gets lost in most discussions because the boomer time span is larger than most generation time spans, people just look at the numbers.
We could create a Sovereign fund with the extra tax income from the current mining boom, but my only issue with creating a sovereign fund to help cover future costs, is that at some future point, all the money put away by the toil and savings of one generation, will get spent on a “noble cause” that a later generation dreams up. In essence it is a good idea with much scope for misuse.
September 9th, 2011 at 1:06 pm
Peter – Yes, a sovereign fund has merits and disadvantages.
The problem with the USA’s Soc Security, is that it’s effectively taxed and spelt out for them from their pay…. So people think they’re funding their own benefits.
The govenment then “invests” the money in itself (govt bonds) and then needs to pay benefits by cashing in it’s own government bonds…. relying in tax revenue to payout the bonds, to pay the benefits.
Smoke and mirrors.
Somehow we should ony be given what we can afford (which is what we earn). We shouldn’t rely on future generations.