1. An appreciative shout-out to the sympathetic specs who checked in with me during the recent hurricane. I'm happy to report that neither the family nor our two genetically optimized felines suffered any bodily harm. The experience, however, was a "refresher" course in fluid mechanics, and more specifically, the awesome power of Hydrostatic Pressure. Like many in the Northeast, we lost electricity for an extended period of time. Fortunately, my prescient wife (who oversaw the construction of her corporate headquarters a decade ago) designed her HQ building to not only maintain the utmost Feng Shui, but also survive a 1 megaton blast (and remain fully functional until the fallout cleared) — hence my business activities continued uninterrupted while sitting in one of her "work rooms." It was also fortunate that my wife spent the entire period traveling out-of-state, so she did not have the opportunity to remind me that I had vowed to install a 200A Transfer Switch and diesel generator at our home some years ago. She saved that reminder for her return. (Obscure pun for those who haven't mastered Chinese from reading fortune cookies): Feng Shui literally translates as "wind-water" in English.

I am SHOCKED, just SHOCKED that the highly intelligent members of this forum have mostly refrained from extensive discussion of the Swiss National Bank's peg decision. (Disclosure: I had no CHF position prior to the news as my Purchasing Power Parity rules prevented me from staying with that trend.) I submit that this has all of the elements that makes ever-changing cycles ever-changing. I also submit that, despite my complete antipathy towards the Chair's embracement of so-called Flexionism ("can you say Military-Industrial Complex?"), that the SNB's Hildebrand (a former Louis Bacon protege/employee) should get the Flexion Of The Week award. Leaving the economic discussion for the next bullet point, his play yesterday made Mr. Soros's Bank of England trade look like a piker. I reckon Hildebrand made about $25 Billion yesterday. Here's his flexionic bio.

3. As for the CHF peg, I think that this deserves some serious discussion and contemplation — as it may be (a) a game-changer for Europe; (b) a harbinger of the next step in Central Bank policies; (c) arguably a much bolder/riskier move than everything which we've seen from the Fed. Just imagine what you all would be saying if, instead of the Fed buying FNMA/FRE paper or various other securities backed by US-based real estate, the Fed committed to UNLIMITED purchases of Euro currency??

Here are some questions for you-all to think about:

a) What are the similarities and differences between the Swiss situation and the Japanese situation?

b) Will the peg hold? And if it does, will the Japanese try it? What about the Brazilians? If the peg doesn't hold, will the Swiss really buy "unlimited" amounts of Euros?

c) Are we on the cusp of a new Bretton Woods accord?

d) Should this news be bullish or bearish for gold? And why?

e) What does this mean for Switzerland's trading partners? If other countries adopt similar regime changes, what does this do to global trade? For stock markets?

f) This is the FIRST NEW CURRENCY PEG IN 30 YEARS! (The world had been going in the opposite direction — with China slowly moving towards a floating currency.) Is this a fluke? Or if the uber-righteous Swiss say it's ok to peg, why won't everyone else peg too? Is this perhaps a harbinger of exchange controls?

g) Must this be inflationary? If the Swiss print tons of cash to hold their currency below 120, they will be buying more Euros (and by relationship more Dollars) at prices that are still extreme based on PPP. Why should that cause inflation? The Swiss economy looks more like Japan than any other right now.

h) The Swiss stock market rose 4% yesterday (while other European markets plunged). Should one buy Swiss stocks now? (Even though the currency remains horribly overvalued.)

i) Switzerland is the world' oldest continuous Democracy; and is a direct Democracy. (Swiss referendums include the most mundane topics.) Excluding the non-Democracies, they are also in the top 10 GDP's in the world. Hence, is it appropriate to dismiss this as a footnote that is irrelevant to your "counting." Shouldn't one be asking whether this is a REALLY BIG DEAL? And whether something very important cyclical/structural changes are afoot. Did Switzerland just become part of the Euro zone??? (Note that there have been quite a few calls for Hillebrand's resignation. How does one say Ron Paul in Schweiss-Deutsch?)

4. As everyone knows, I have no clue where market prices will be next week or next month. However, my models (which have served me well over the years) now suggest that the most probable result is that we'll have a compounded high single digit return in the broad US stock market over the next 3-5 years — absent something that is exogenous. This isn't particularly exciting, until one considers what treasury bonds yield. Hence I am an occasional but persistent nibbler of stocks at these prices, torn between the realization that stocks could drop a lot more; and that my excess liquidity (i.e. cash) is losing value every day.

5. There's a famous old advertisement, "They Laughed When I Sat Down At The Piano … But When I Started to Play!". See l I use a slightly different version: "They Laughed When I Sat Down At The Piano … I didn't know someone had pulled the stool away!"This relates to my less-than-glorious exit in HPQ. For those who took the other side, congratulations: you made a couple of points as should happen more than 90% of the time. I will observe that it has now traded well through my exit price. So as Mr. Seykota is fond of saying: "Everyone gets what they want out of the markets." In my case, I got what I wanted out of the market, which was to be out of the market.





Speak your mind

5 Comments so far

  1. Arthur on September 9, 2011 12:51 am

    I was thinking the same thing (Yen would follow), been short yen for weeks now. Hopefully it will hit. Would love to hear from someone with more expertise in the area. I am still new at this. Seems with Yen so high Japan won’t make it, but again, I am not an expert.

  2. Alec Misra on September 9, 2011 3:46 am

    Hi Rocky,

    Incredibly intelligent post as per usual from you. I recently posted an article on the solutions to the Japanese crisis/malaise and it occurred to me at the time that the monetary solution for Japan was identical to that for Switzerland, but I forgot to reference this as I had intended. Other than this there seems to be no similarity between the two cases as Switzerland is fiscally uber - responsible and lacks a democratic deficit. I think a formal peg is perhaps unnecessary but I suppose it gives them consistency and a competeive advantage in what now seems to be the era of currency wars. They are I believe purchasing German and French bonds with the procedes which seems quite rational. I wouldnt abuse Hildebrand as I think he has broadly got it right. Commentators seem to think that interest will now move to the Scandinavian currencies, not so much gold which seems to be topping out due to the lack of any clear direction on qe3.
    I think you can be confident by the way that the peg will only hold so long as the Euro does not crash and burn, it is more a self-serving shadowing exercise in that respect. One would think that this will amount to a prolonged easing program in Switzerland and as such ought to have a persistently beneficial influence on their stock-market. Now might indeed be a good time to buy, perhaps hedged with a short in the euro-zone markets.
    Anyway my article, if you are interested is here:
    And another highly pertinent post may be found here:

  3. Ed on September 9, 2011 9:23 am

    Couldn’t the fixed rates established when creating the euro be considered a currency peg?

    Also, is there a non-proprietary source for current PPP information?

  4. Rocky Humbert on September 9, 2011 1:41 pm

    @Alec - thanks for the undeserved compliment.

    @Ed - Good point on pegging. However, the Euro peg dates to the ECU peg from 1979 to 1999. See: … so it’s at least 20 years … but who’s counting?? ;)

    For some non-proprietary PPP data, visit the OECD website:,2678,en_2649_34357_2734617_1_1_1_1,00.html

  5. steve on September 10, 2011 7:01 am

    It’s not a peg. The SNB put a floor under EURCHF, which is a different thing.

    Reuters reports the SNB in the market selling volatility by the truckload as a way to offset losses from its fx purchases keep fx dealers on their side.

    The floor will work until it doesn’t. At some point, markets will overwhelm the SNB, which will then have to decide if it wants to impose China-like capital controls (thus destroying the fabled Swiss banking industry) to continue holding CHF 1.20.


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