Even though traders say they like volatility, their attitude is straight out of Goldilocks: not only is too little too bad, but so is too much. The recent oil price plunge has sent rattles across financial markets around the world, with more knock-on effects expect as shale gas players start to show signs of stress.
And today’s big event was so unforeseen as to verge on being in black swan terrain. The Swiss National Bank, which had a program in place to keep the euro from falling below 1.20 to the Swiss franc.
The Swiss National Bank abruptly terminated the cap today. The stated reason was, in effect that the euro had weakened so much that even though the Swiss franc might wind up being more overvalued against it, it was not as overvalued versus other currencies (read the dollar). Analysts believe a second reason was the widely-expected launch of QE in the eurozone, which will weaken the euro further and would required considerably more intervention by the Swiss National Bank to maintain the cap.
The currency move was brutal. The euro fell 30% against the franc.* Customers in trading accounts of the trade had their account equity wiped out, according to Bloomberg, in turn leaving the brokerage firms short.
The Wall Street Journal describes the carnage:
A major U.S. currency broker said it suffered “significant losses” that wiped out its equity and a New Zealand foreign-exchange trading house failed as the fallout from the decision by the Swiss National Bank to cease capping the nation’s currency spread across the world.
FXCM Inc., the biggest retail foreign-exchange broker in Asia and the U.S., said in a statement that due to unprecedented volatility in the euro against the Swiss franc, its losses left it with a negative equity balance of around $225 million and that it was trying to shore up its capital.
“As a result of these debit balances, the company may be in breach of some regulatory capital requirements. We are actively discussing alternatives to return our capital to levels prior to today’s events and discussing the matter with our regulators,” the company, which has a market capitalization of around $701.3 million, said in a statement. Shares of the company fell 15% in U.S. trading and tumbled another 12% after hours…
Earlier, small New Zealand currency trading house Global Brokers NZ Ltd. said it would close its doors as it could no longer meet regulatory minimum-capitalization requirements of 1 million New Zealand dollars (US$782,500).
The company said the SNB’s decision resulted in rare volatility and illiquidity in the currency market. “Both our primary and backup liquidity providers became unresponsive or illiquid for hours after the event,” said the company, whose shareholders are listed as being based in the British Virgin Islands.
More detail from Bloomberg:
“I would be astonished if we did not see more casualties,” Nick Parsons, the London-based head of research for the U.K. and Europe at National Australia Bank Ltd., said by phone from Sydney. “This was a 180-degree about turn by the SNB. People feel hurt and betrayed.”
Dealers in London at banks including Deutsche Bank AG, UBS Group AG and Goldman Sachs Group Inc. battled to process orders yesterday when the SNB shocked markets with its announcement on Thursday morning in Zurich. The franc surged as much as 41 percent versus the euro, the biggest gain on record, and climbed more than 15 percent against all of the more than 150 currencies tracked by Bloomberg.
Notice the expectation by traders that central banks will watch their backs? In its statement FXCM said most of its customers were on the wrong side of the trade.
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* The move was so disorderly that Bloomberg and the Wall Street Journal differ substantially as to its maximum amplitude, with the Journal putting it as 30% versus the euro and Bloomberg at 41%
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“I AM THE GREAT OZ!!!” and all of the people quake and scurry and tremble. I mean really, people, the myth of the all-powerful central banker needs to die a horrible death. That myth is horrible enough while it lives, what wealth is not racing upwards to fewer and fewer hands is circling the drain downward on its way to the fiat currency event horizon.
One last time: first comes production. Then comes income. Then comes savings. Then comes investment. Printing scrip in “unlimited” quantities to try to skip the first three steps is moronic.
Charles Walters at Acres USA never said it “one last time”. He said it over and over in different ways as long as he ran the paper because he knew it would take repetition and re-explanation to begin to get the meaning across.
So no need to make this your “one last time.”
Sadly we don’t live in a agrarian economic reality anymore and as such the planting schedule you refer to is no longer applicable Hal.
Skippy…. seems that might be part of the sociopolitical problems due to the last decades.
Planting schedule? Ok John Barleycorn, you tell me where income comes from then. Ben Bernanke’s computer keystrokes? OK I’ll bite, “income” as a claim on future tax payments. And the income that supports those tax payments? Also conjured in the current system, where the CB now has three mandates: 1. Price stability; 2. Full employment (whatever that is); and 3. Administration of stock prices. If that’s the new system then let’s all admit it, we can tell all of those asset managers to just go home, Father Oz will determine what enterprise cash flows are worth.
It’s not the money that they’re printing that’s the problem. It’s the money they’re printing not reaching 99% of the people that need it that’s the problem.
We need a lot more of it. There are people wanting to work, work that needs doing, and the stuff to do the work with isn’t selling. Just add money and stir.
It’s not that difficult. When all those factors are brought together with bits of cheap paper, growth ensues and makes “debt” disappear. Every time.
All this weirdness about budgets and austerity is just getting in the way of work getting done.
Zap I tend to acknowledge two key activitys, those that funded the parade and those that payed to walk in and out of the house of tilted mirrors, confusing it for an education [possibly pretending], everything after that is just a bad case of food poisoning.
What Hal forgets is now days someone owns the ogallala aquifer, so even before you can plant a seed, to grow a cob of corn, to take to market, someone has front run you, before you can play IS-LM game.
Skippy… No Hal its issued as a tax credit from inception and always has been.
The US consumes somewhere around 20-30% of world energy. Do you think only the rich consume energy?
We could argue that the middle class consumes way more energy than the rich.
Take a rich household living in the downtown core in a 1500-2000 square foot 800K paid off town house. One BMW parked on the street. 2 kids go to private school. Take a trip to Europe.
Now let’s look at the middle class living in a 300K, 2000-3000 square foot house with no equity. With all kinds of toys in the garage. 2 cars in the driveway, one is a Ford pickup. Long commutes and drive everywhere on energy intensive I frastructure. Kids go to public school on yellow buses. Go on trip down south ton an all inclusive resort which raped the environment.
You will notice that this rich household will be spending a lot more money but consuming way less energy than the no equity household.
With 7 billion people on the planet, chances are energy consumption will get redistributed. This means the middle class will be forced to cut its consumption.
That’s the reality it is facing but in the mean time it is fighting to preserve the status quo thinking that all they have to do is redistribute the 1%ers wealth.
The reality is that even if this paper wealth is redistributed, their energetic lifestyle will not keep up.
“The US consumes somewhere around 20-30% of world energy. Do you think only the rich consume energy?”
Actually, yes I do. But whatever helps you sleep at night.
The rich at least profit on the system that consumes energy and are the obstacles to changing it, so there is that.
Moneta;
Huh? An $800K 1500 to 2000 sq ft townhouse? Good heavens man, that will buy you a real honest to God Manor down here. I can see larger sized houses if energy conservation measures are built in. I’ve never lived up North, so don’t have sufficient experience with winter heating to comment, but, here, summers can be brutal and cooling is the big expense. Older houses, like the one we own, were built for a pretty efficient passive cooling regime. Retrofit good insulation and you have instant cost amelioration. Add zone cooling and you have the world by the short and curlies.
Sure, we’re not a world class metropolis, but, soon enough, the Lockdown is going to come to a street near you. (I call it, Broken Ideology Policing.) When trouble starts, there is a certain comfort in being the “farthest from.”
Your middle class household seems upper middle class to me. But yea the rich don’t have to work I guess, so they don’t spend energy commuting to work.
The problem is production. No one produces anything in our society. Think about it, how many people do you know who actually make stuff others need to survive. How many farmers or steel workers or miners do you know? How many people in this society are in the financial industry – shuffling papers? How many people don’t even work?
How can a rich society stay wealthy if it creates little of what it needs? How can any society even survive if nearly all its people make nothing that is a necessity of life?
You remind me of a piece that 60 Minutes Morley Safer did many years ago (IIRC early ’80s) on Victor Kiam (among other things a former owner of the New England Patriots). Kiam had bought the Remington razor company and was personally doing TV commercials selling razors. At one point Morley asked Kiam why he had purchased the company. Kiam replied to the effect that it was a good company that made a good product right here in the good old USA and “Morley, if we keep selling our companies that make things to foreigners, in a few years you and I will have nothing to do but sell insurance to each other”. Maybe it’s taken a little longer than Kiam expected, but is seems we are on course to that fateful day.
Bingo. The two times in modern history where money printing “wrecked” the economy, the production capacity of the economy was already trashed. This from (civil) war and/or mismanagement. what then happened was that the exchange rate went to the dumps, and so society could not be propped up via imports.
Income is a product of spending.
If that’s true, where do the tax payments come from? Future tax payments, ad infinitum? Which IRS agent travels into the future to get dollars for us to spend, and how big a bag does he need to carry it?
My Spending is your Income…..
This discussion could rapidly become a chicken/egg exercise. “Income is a product of spending”. Technically yes, since the thing I *produced*, you need to *spend* to acquire. But you tell me how the egg gives birth to itself? The money you need to spend, and the amounts it is available in, are somehow completely disconnected from the production required in the first place? Seems to me that’s our problem, in an (egg)shell.
When I said “income as a claim on future tax payments”, I meant income that is transubstantiated in the form of printed scrip, Ben Yellen hands us all free money, true manna. The quantities it is made available in disconnect further and further from productive labor and manufacturing and farming.
There was a column in the FT not long ago that said “Thank you for your explanation of QE, I now understand what it is. My problem is now I no longer understand what money is”.
Law has nothing to do with chickens or eggs, pettifoggery on the other hand.
You aren’t asking about income, you’re asking about money which is nothing more than an IOU. Anyone can create IOUs, many as they wish. You can create 100,000 Hals right now, though you will likely find difficulty getting others to accept them as payment.
Governments create IOUs that everyone accepts; if they don’t they can’t settle their tax bills and then go to jail. Banks piggy-back by issuing IOUs denominated in the state IOU. Income is therefore created in the present by a combination of state spending and bank-loaning which itself is then spent into circulation.
It used to be that 70-80% of the population lived off agriculture. Then we leveraged oil.
Over the next few decades, we might just end up with 70-80% working in the producti9n of energy, gradually squeezing out all other sectors with the middle class kicking and screaming “no fair”.
I dunno about energy. My moneys on 15% being in the business of keeping the other lower 80% in line.
And this:
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/01/20150115_BLR1_0.jpg
Unfortunately there is no global lack of production except for things no one will pay for.
Yes and no.
Yes, skipping the steps are moronic. But just as moronic is to ignore that the line loops back on itself. Anything held in savings do not wander into investments or income. So long term savings, in particularly by governments and other large organizations, slowly bleed the general economy dry.
Sad. Hotels, hors d’oeuvres and hotties will now be proportionately more expensive for those Davos 2015 attendees and their entourages who can still afford the venue, although I imagine the food and beverages in the Swiss National Bank hospitality suite will be suitably elevated. /sarcasm
Interesting developments in oil, currencies and the carry trades this new year. Wonder if anyone of size h/b taken down by this latest move and whether pixie dust will be sprinkled by morning.
Chauncey, I beg to remind you that if you are actually welcome at Davos, you won’t need to ask what the price of a Beluga caviar canapé is or of a “hotel hottie.” If you need to ask, you simply don’t belong. And, being paid for with those hyper-valuable Swiss Franc, the bill will look cheap compared to what it would have been in Ruble or old-Lira. It’s just numbers, dontcha know?
I’m sure Ms. Yellen, Head Pixie, will have much to say to calm our fevered nerves.
Re: …” I’m sure Ms. Yellen, Head Pixie, will have much to say to calm our fevered nerves.”
… and then, to paraphrase Dear Leader: “We short-squeezed some folks.”
Am I the only one reading something different as to the motivation for the SNB to end its peg to the Euro? I don’t see this as a preemptive move in anticipation of a robust QE program. It seems to me that somehow it has gotten leaked to Thomas Jordan that the ECB is going to try to either postpone it’s decision to March (and cause a market shock) or its proposed plan is so inadequate it is going to cause a market shock. Either way, the Euro will appreciate rapidly instead of depreciating and having a peg to it would leave Swiss exporters highly non-competitive. Instead of the forecast flight to safety (Switzerland), the Euros all stay in the Eurozone, causing the Swiss Franc to incur a de facto devaluation. Possibly in a week, Swiss exporters will be highly pleased that Jordan ended the peg when he did.
There never was a upward peg. Only a “half” peg on the downward side, a lower boundary of 1.20 CHF per Euro.Because of that lower boundary, Switzerland is/was like a little China, with a heavy trading surplus and a sh..load of Euros we cannot use… And because imports are heavily regulated, protected and monopolized, we (normal 99%) Swiss don’t even benefit that much from the appreciation.
@Sanctuary: Bingo. That was my initial read on it. This could turn into an extremely painful week for many if in fact the ECB kicks the can on QE to further flesh out the details. No doubt being short the euro is quite a crowded trade…
Wow. Imagine the few who cleaned up with this tidbit of inside information.
timing’s still everythang…from 1/9/2015:
Swiss National Bank says it will report a profit of 38 billion Swiss francs (37.5 billion) for 2014 on gains in foreign currency and gold holdings.
The massive profit from Switzerland’s central bank includes some 34 billion francs in profit from foreign currency positions.
In a statement Friday, the bank said the currency profit came mostly from price and exchange rate gains and the rest came from interest and dividend income.
The other 4 billion in profit came from the gain in the value of gold holdings.
After setting aside 2 billion for currency reserves, the SNB said the profit to be reported in March will be distributed in accordance with law to national and cantonal (state) coffers, with the rest put in a distribution reserve. http://www.independent.com.mt/articles/2015-01-09/business-news/Swiss-central-bank-reports-profit-of-38-billion-Swiss-francs-6736128404
yes, and the expected losses on yesterday’s move are about 75bn CHF, possibly forcing recapitalization.. (source, BBG)
You know, SNB made the right move in 2011 (when it put in the floor). They did a stupid move now, and wasted time between 2011 and now.
Look at CNB (Czech National Bank), which one the only other CB with a floor, and now is the only one in EU. They put the floor, and then unexpectedly lifted it. That wiped out people who were willing to bet against it, and since then markets did the heavy lifting. Even now it’s trading 3% above the floor (when pepole keep saying how a floor is indefensible..).
SNB for some reason though that pidly 25bp would do something in December (reversed in about 3 days), and that more pidly 50bp would make it more orderly yesterday. Do they live in a cuckoo land? oh, wait.
The reasons they gave were dumb. I could see how they would be worried about propping up EUR when/if ECB goes (what happens if it doesn’t?). But there were at least two different options they could take even yesterday.
First option, they could switch the floor from EUR to USD. That means they would accumulate USD and the action in EUR/USD would likely depreciate CHF against EUR for free (markets would do the heavy lifting). US assets are also now easier to get than EU since Fed stopped QE (and Fed might actually like this…)
Second, they could slam in not pidly 50bp, but 500 (which happens to be the implied tightening at the levels we saw yesterday BTW). I’m pretty sure CHF would massive drop against EUR (which would give SNB opportunity to liquidate its EUR assets at a profit, while making the decline more orderly at the same time – what’s not to like?). Then on day 2, when EUR is at 1.30, you can remove the floor saying it’s clearly not needed anymore. Then, after ECB goes or not, you increase the rates to say -300bp and see what impact it has, and do the next step accordingly.
I feel really sorry for Swiss, as I have serious doubts of how many of their SME EUR exporters can now survive with their products being at 20% premia to start of this week. IIRC, more then 50% of Swiss exports are into EUR (I vaguely remember it could be as high as 80%), and if EUR demand doesn’t pick up, and CHF appreciates as a safe-haven even more after ECB goes, Swiss economy is a toast.
40%
This seems like a multi-tiered strategy. The least is the effect on SNB, with offsetting gains for informed insiders doing backdoor cuts on Wall St.
Then there is the punch in the nose to the MIT cohort of central bankers. The Swiss are blow-the-bridges-and-tunnels nationalists, with a banking tradition that predates MIT. Europeans have an historical awareness of what happens when some group starts aiming at absolute power, and the list of countries without central bank ties that haven’t been crushed by NATO grows thin. The Nuland play in Ukraine had neonazis credibly talking about dropping nukes on the Donbas region, which is just bad for bidness. Such recklessness should be restrained, and the SNB vote of no-confidence probably creates an inflection point.
And then there is full-scale geopolitics. After Putin released the recording of Bandar threatening the Sochi Olympics, we know for a fact that there is a serious conflict there. Russia and China are low-tolerance on Islamic fundamentalism, which is also bad for bidness. The neocon strategy has Russia and China solidifying their physical ties, the BRICS bank is capitalized, and the BRICS have the population to develop market share. The Swiss strategy ensures that they aren’t doubled down on the wrong side of the “Putin v Dangerous Clowns” conflict for control of the next century or two.
Notice the expectation by traders that central banks will watch their backs? In its statement FXCM said most of its customers were on the wrong side of the trade
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Hubris. The elite often think they are special and that no one would ever lie to them nor keep them out of the loop.
That is the first lesson I learned when I started attending management meetings in my early 20s.
“This was a 180-degree about turn by the SNB. People feel hurt and betrayed.”
Oh the humanity! The SNB pulled an Obama bait-and-switch on the gambler class. Pundits and analysts are now tuning their dusty violins.
And how many people have similar beliefs about the stock market?
Jim Grant advised his subscribers to buy Swiss Francs in September 2014, arguing:
“the SNB will sooner or later be forced to permit the franc to appreciate and thus to enrich the holders of low-priced, three-year call options on the Swiss/euro exchange rate. It’s a long shot, to be sure—the options are cheap for a reason—but we judge that the prospective reward is worth the obvious risk.”
https://www.linkedin.com/pulse/balance-sheet-ate-switzerland-james-grant
And, of course, Grant’s soulmate, David Stockman, is also crowing, claiming vindication for his view that:
“Thomas Jordan is not the last central banker who has turned out to be a liar. He’s merely the first—with Mario Draghi already on deck.”
http://davidstockmanscontracorner.com/in-praise-of-price-discovery-the-market-is-off-its-lithium/
I’d like to know what Stephanie Kelton, Randall Wray, Yves Smith and other MMT-ers now believe, given that Switzerland, according to MMT, did not have to submit to being (in Kelton’s words) “bullied by financial markets” and forced to de-peg their currency’s exchange rate. According to MMT, the Swiss should have been able to maintain the peg indefinitely. What, according to MMT theorists, did the SNB do wrong? Why did Switzerland surrender to the bullies?
http://harryshearer.com/transcript-stephanie-kelton-interview/
I am not going to look through the Kelton interview to find something she may have said to support your thesis. However, MMT says that pegging a currency is one of the things that takes away the freedom you have with a fiat currency. So, in fact what happened with the Swiss Franc is not a contradiction to what Kelton, Wray, and Smith preach. This little episode proves that what MMT preaches is borne out by reality.
At least, that is the way I understand it.
Usually the adage is to practice what is preached. MMT is about a making a noise to preach what is practised. As such it finds little traction outside academia.
Well MMT got enough traction to get Stephanie Kelton appointed as the chief economist of the Democrats on the Senate budget committee.
The SNB wasn’t forced to do anything, as evidenced by the rapidity of the decision and subsequent change of valuation. The franc remained right where the SNB wanted it for four years; if the problem was market pressure you’d have seen the Swiss enacting policy after policy to no avail, as the exchange rate moved away from the SNB’s target.
I have no idea why they changed policy in this way but it wasn’t because the SNB couldn’t hold the line.
Aren’t Swiss banks a big favorite of all the Arab Sheiks? And we know that the Gulf States are barely bringing in enough revenue these days to support their social programs and it is imperative that they do so because the entire region is a tinderbox. Swiss banks have had it good for a long time. It’s really hard for me to imagine that Switzerland is an exporting powerhouse. A bunch of handmade watches and a few hundred rounds of cheese? Please. Maybe the Swiss real estate market will even crash. Time to sell. How long will it be before the CHF is just as worthless as the Euro? They didn’t have a surplus of oil money to recycle, so they stopped buying Euro. And they are probably toast too. Oil is doing all the dirty work for central banksters. It looks like there will be no rush to save anything in this world “pegged” to oil.
Susan,
Yes, we generally think of Swiss exports as absurdly complex watches, cheese, and cuckoo clocks. But off of the top of my head I can think of the following:
Pharmaceuticals and medical devices
Aircraft (Pilatus)
Precision tools and manufacturing
Engineering services
Hyper-specialized manufacturing (e.g. Ski Lift Cars — if you snow ski, look at the newer lifts. If there are enclosed cars (not chairs), they’re typically made in Switzerland.
So actually, lots of high end exports and value added products (much like the US — we don’t manufacture Barbie but we do manufacture jet engines)
That’s an interesting list. I shouldn’t be so glib. But the timing is still suspicious. If they were recycling their export francs and buying euros why did they stop? Maybe a combination of worldwide depression conditions, a devastating shortfall of Arab money, and a euro that can’t be propped up anyway.
Susan – please don’t think that I was calling you out on your glibness — I’m wasn’t. But Switzerland is one of those countries that have what I’d call “low profile” exports. Expensive stuff. High margin stuff. Stuff that takes a LOT of knowledge and experience to make (much like the Germans).
See, for example: http://www.pilatus-aircraft.com/#10
Don’t be so quick to knock Swiss watches and Swiss cheeses, it doesn’t matter what category your product is in, it matters more what tier within the category your product is in. I’m sure there is a vibrant market for prodigiously priced watches and cheeses, especially considering most if not all the disposable income (and income growth more generally) is going to an ever shrinking group of people. I bet charging an arm and a leg for a watch with the most unnecessarily esoteric technology or cheese crafted in the most trendy and expensive manner would go a long way for making up quantity with quality. With products as with people’s incomes, success isn’t defined objectively, especially for the well to do, but instead by how close the earner (or product) just below you is and how close the product (or earner) just above you is.
“People feel hurt and betrayed.”
Business is business. Creative destruction is all part of a free market’s magic. Don’t currency traders understand this?
Add Alpari UK to the list of currency brokers that went tits up.
http://www.telegraph.co.uk/finance/currency/11349958/Swiss-franc-shock-forces-West-Ham-shirt-sponsor-Alpari-out-of-business.html
Here’s a handy chart but it doesn’t include all brokers and the suspensions on trading are not up to date.
http://elitetrader.com/et/index.php?threads/is-your-broker-weathering-the-chf-storm.289022/
I’ve mentioned this on other blogs but wanted to go on the record here. How can these traders and portfolio managers have the gumption to say they feel ‘betrayed.’ It’s like they almost expect CBs to do the work for them?
More reading of history may help these guys out a bit.
I like to think of leverage as a positive feedback loop. It takes a small change and makes it bigger. Positive feedback loops also make systems inherently less stable.
Anyway, there appears to be two lessons that never seem to be learned – beware of leverage and debt in a foreign currency.
Talk about outrage. Imagine, the financial sector having to bear some of the risk! Oh, the humanity. It’s high time the governments stopped pandering to the financial sector. We need a return to capitalism.