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Swiss Quantitative Easing, Where are the Safe Havens Now?

Interest-Rates / Quantitative Easing Mar 15, 2009 - 05:36 AM GMT

By: Michael_Pollaro


Best Financial Markets Analysis ArticleWhere or where have our safe havens gone? Ah yes, there is always the Swiss Franc, right? Not any more!

First, the Swiss National Bank (SNB) sold off its gold reserves. Next, it began cutting interest rates. Later it announced a bias towards “quantitative easing.” Then we learn it's even willing to loosen bank secrecy rules. Now, this headline from MarketWatch:

Swiss central bank to begin quantitative easing

SNB plans 'extraordinary measures,' intervenes to arrest franc's rise

By William L. Watts , Last update: 1:17 p.m. EDT March 12, 2009

The Swiss National Bank on Thursday announced it would take extraordinary steps to prevent a deflationary spiral, including the purchase of corporate bonds and intervention in the foreign-exchange market to arrest the Swiss franc's rise versus the euro.

And why would this traditional hard money country do this, you say?

…the SNB said it would wade into currency markets to halt the Swiss franc's long-running rise versus the European single currency. The franc has been on the rise versus the euro since the global financial crisis took hold in August 2007, and has accelerated its momentum since last December, the central bank said.

"Under the present circumstances, this represents an inappropriate tightening of monetary conditions," the SNB said in its statement. "In view of this development, the SNB has decided to purchase foreign currency on the foreign-exchange market, to prevent any further appreciation of the Swiss franc against the euro."

As Bill Fleckenstein put in:

Said differently, they want to trash their currency. And, they wasted no time -- by actually entering the market to effect that trade…So, anyone with money in Switzerland as a safe haven has to be a little bit concerned, as the Swiss are definitely playing the game of let's-debase-our-currency-to-the-bottom.

So what happened to the market's long standing hard currency? It plunged versus the Euro, the USD and Gold. It's been coming for a while, but this is a marker for the world to see, that there is no safe haven, no hard currency anymore, not even the Swiss Franc.

So where does that leave us? Where are people going to go to protect their wealth? Today, it seemed the market showed an affinity to the Euro, the USD and my favorite currency Gold. Let's look at the prospects for each and see what is in fact the safe haven.

For years the Euro has benefited from the fact that it wasn't the USD, supported in part by the mystique that the ECB actually cared about the value of its currency. Yet the ECB is now cutting interest rates, printing money at double digit rates and facing the bailout of Eastern Europe , the latter estimated to be as high as $16 trillion. I'm sure I don't have to tell you where they are going to get that amount of money. For a currency that is tenuously bound together by politicians of 16 different countries, would you buy the Euro as a safe haven store of value?

What of the mighty USD? Many bulls point to its performance through the banking crisis as proof positive that the USD is still the ultimate safe have currency. I have no doubt that the recent bid for the USD was in part a safe haven bid. The USD is still the world's reserve currency. More important, I think, was and still is the bid coming from the unwind of USD positions held versus USD Mortgage and Asset Backed credits. My bet is that bid is still strong. But make no mistake; it is a TRANSIENT bid which someday MUST end. And when it does, the USD, could be in for some serious trouble. As Jim Rogers says, in the end, the USD is “a terribly flawed currency” underpinned as it is by the largest debtor nation in the world, a nation of exploding US Government deficits, financed largely by foreign central banks, little domestic savings and home to a central bank threatening to monetize every bit of debt with money printed out of thin air.

Please, don't take my word for it, or even Jim Rogers' word. Have a look at what Premier Wen Jiabo of China , the United States ' largest creditor nation, had to say about the USD. From Bloomberg news, published on March 13 th :

China , the United States government's largest creditor, is “worried” about its investments in the country and wants assurances that they are safe, Prime Minister Wen Jiabao said.

“We have lent a huge amount of money to the United States ,” Mr. Wen said on Friday in Beijing at a press conference closing the annual National People's Congress meeting. “Of course we are concerned about the safety of our assets. To be honest, I am a little bit worried. I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China 's assets.”

And the Premier is doing something about it, too:

China should seek to “fend off risks” as it diversifies its $1.95 trillion in foreign-exchange reserves and will safeguard its own interests, Mr. Wen said. He said that the Chinese had invested $696 billion in United States Treasury bonds as of Dec. 31, an increase of 46 percent from a year ago.

And note this extract from a Wall Street article authored by Andrew Baston and Andrew Browne:

…Mr. Wen said that China is also closely watching to see the effects of the policies taken by U.S. President Barack Obama aimed at returning the world's largest economy to health.

The Austrian economist in me, not to mention history, tells me that Obama's policies won't work, indeed they are about to make things worse. Do you think Premier Wen suspects the same? Do you think he suspects that the US , led by perhaps the greatest money printer in history, Ben Bernanke, is about to try and print its way out of its problems and its debts? His words would indicate he does. Better yet, so does his actions, else why is China ALREADY “diversifying its $1.95 trillion in reserves.” Do you think other US creditor nations are having similar thoughts about the USD? Don't want to be the last one holding the bag, right? I ask you, is the USD worthy of safe haven status?

So, if not the Euro or the USD, then where is the safe haven. Indeed, in every country of the world the answer to every problem is the same, to print money and debase the currency. Now even the Swiss. But there is one currency that can not be printed. It's Gold people, and because it can't be printed it is the ultimate store of value. Despite being overbought short term, Gold was up on Thursday and again on Friday. With the Swiss Franc now done for the count, seems at least some people “got it' and my guess is the rest of the world will be “getting it” soon enough.

By Michael Pollaro


I am a retired Investment Banking professional, must recently Chief Operating Officer for the Bank's Equity Trading Division. I am also a passionate free market economist in the Austrian School tradition and private investor

    Copyright © 2009 Michael Pollaro - All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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