Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Why Most Investors LOST Money by Investing in ARK FUNDS - 27th Jan 22
The “play-to-earn” trend taking the crypto world by storm - 27th Jan 22
Quantum AI Stocks Investing Priority - 26th Jan 22
Is Everyone Going To Be Right About This Stocks Bear Market?- 26th Jan 22
Stock Market Glass Half Empty or Half Full? - 26th Jan 22
Stock Market Quoted As Saying 'The Reports Of My Demise Are Greatly Exaggerated' - 26th Jan 22
The Synthetic Dividend Option To Generate Profits - 26th Jan 22
The Beginner's Guide to Credit Repair - 26th Jan 22
AI Tech Stocks State Going into the CRASH and Capitalising on the Metaverse - 25th Jan 22
Stock Market Relief Rally, Maybe? - 25th Jan 22
Why Gold’s Latest Rally Is Nothing to Get Excited About - 25th Jan 22
Gold Slides and Rebounds in 2022 - 25th Jan 22
Gold; a stellar picture - 25th Jan 22
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The "Gnomes of Zürich" Created a Financial Nightmare

Stock-Markets / Financial Markets 2015 Jan 18, 2015 - 08:33 PM GMT

By: Money_Morning


Michael E. Lewitt writes: On Halloween, the Bank of Japan unleashed a massive quantitative easing program that included the purchase of bonds, stocks and ETFs in a desperate attempt to revive the terminally ill Japanese economy. This coincided with the end of the Federal Reserve's third round of QE in October.

At that point, the world entered the terminal phase of central banking that unleashed heightened volatility in stocks, bonds and currencies.

This week, the Swiss National Bank effectively abandoned the euro by removing the peg between the Swiss franc and the common European currency. With this move, which shocked financial markets and inflicted huge losses on currency traders around the world, the terminal phases accelerated to a dangerous new level.

Make These Moves Before the Next Shock

Next Thursday, the European Central Bank (ECB) is expected to announce a massive QE program (sources are targeting €500 billion in bond purchases) in its own attempt to stop European deflation in its tracks.

The odds of such a program creating sustainable economic growth in the region while fiscal policymakers do nothing is roughly akin to the odds of Bill Gross returning to work at PIMCO.

And once markets come to lose faith in the ECB's ability to do its job, the world will be down to just one central bank to whom it can continue to genuflect – Janet Yellen's Federal Reserve.

We all know what comes after the terminal phase of an illness – and investors need to prepare now by sharply reducing their exposure to the most expensive parts of the stock and junk bond markets, buying gold and municipal bonds, and increasing their cash positions to be in a position to take advantage of future bargains.

They can also earn huge profits by going long the dollar and shorting the euro and the yen by buying the PowerShares DB US Dollar Index Bullish (NYSEArca:UUP) ETF or the ProShares Short Euro (NYSEArca:EUFX) ETF.

The Franc's "Deadly" Allure Trapped Many

The Swiss National Bank's move was not just another stumble by a central bank. Those happen all the time. The Swiss franc holds a special status in global finance despite Switzerland's small size.

For many, Switzerland still holds the veneer of financial stability despite the fact that its central bank balance sheet has grown to 80% of its GDP. Ultra-low interest rates lured a wide cast of characters including Russian oligarchs and average Eastern Europeans to borrow Swiss francs to buy or finance their real estate.

Speculators around the world engaged in carry trades in which they borrowed Swiss francs and invested in other higher yielding assets. All of these investments came crashing down this week when the Swiss franc collapsed by 20% against the euro and the U.S. dollar.

A number of forex trading firms went belly-up, literally overnight, with one of largest U.S. retail firms, FXCM Inc. (NYSE:FXCM), having to be bailed out to the tune of $300 million by Leucadia National Corp. (NYSE:LUK) (the parent of investing banking house Jefferies) on Friday. Other brokers, including Alpari (UK) Limited and Global Broker NZ Ltd. also vaporized after their customers were wiped out and their lenders refused to rescue them.

This is what happens in a crisis and is a small preview of what could happen if the global economy deteriorates further.

The Swiss Bank Made an Impossible Promise

Even worse than the financial losses, however, was the damage inflicted on the image of central bank competence. Only a month earlier, on December 18, the SNB had promised to defend its currency and maintain its peg to the euro.

Apparently, having had occasion over the holidays to study Emerson and come to the conclusion that "a foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines," the gnomes of Zürich realized they were fighting a losing battle and threw in the towel.

It was not this week's announcement that was the blunder so much as the December promise to keep fighting an unwinnable fight that set up markets for a shock. The move has delivered a serious blow to the confidence in central banks that is the thin tissue that has held markets together since the financial crisis. The news is still being absorbed by markets and further knock-on effects are sure to surface.

Coming after the oil shock and the collapse in global interest rates, the Swiss shock is another nail in the coffin of the global recovery thesis. And stocks reacted accordingly despite recovering on Friday. The Dow Jones Industrial Average shed 226 points or 1.3% on the week to close at 17,511.57 while the S&P 500 dropped 25 points or 1.3% to end the week at 2,109.42. The Nasdaq Composite Index lost 70 points or 1.5% to 4634.38.

These moves hide the volatility that rocked markets during the week, however, with stocks making huge intraday percentage moves as investors wrestle with increasing uncertainty.

Bond Yields Extend Their "Disappearing Act"

While stocks were weakening, bonds were again rallying with the yield on the benchmark 10-year Treasury collapsing by 15 basis points to 1.82% (after trading as low as 1.75%). Of course, this looks like a high yield bond compared to the rest of the world. Swiss yields are negative out to 10 years. German 10-year rates fell to a record low of 0.411% while France's followed to 0.635%. Spanish and Italian 10-year yields fell to 1.5% and 1.659%, respectively. One has to ask what Europe can possibly accomplish with rates already so low – and the answer is obviously very little.

QE may well drive these yields lower, no doubt setting up an eventual opportunity to short weak sovereign European bonds once markets tire of the fallacy that monetary policies that have failed to generate economic growth over the past six years are miraculously going to become effective. Japanese yields continued their disappearing act as well, ending the week at 0.23%.

Countdown to Zero

When interest rates are at the zero bound – that is, when central banks have dropped their benchmark rates to zero – the adjustments necessary to properly reflect underlying economic conditions have to occur in currencies and other financial instruments.

When the U.S. dollar started rallying in 2014 against other major currencies, that was the signal that those adjustments were beginning to occur. That triggered the collapse in oil and other commodity prices. Now it is only a matter of time before global stock prices adjust. Right now the S&P is only down 3.4% from its closing high of 2,090.57 on December 29, 2014.

In contrast, bond yields are at or near record lows around the worlds and commodity prices have collapsed. Such an obvious disconnect between equity prices, which are supposed to reflect the earnings power and economic health of the economy, and bond and commodity prices, which are extremely sensitive readings of the same economic fundamentals, is unsustainable.

Experience demonstrates that bonds and commodities usually lead the stock market downward. Investors should prepare accordingly.

It All Comes Back to the Fed in the End

All eyes will no doubt turn back to the Fed. The yield on the two-year Treasury note has dropped sharply to 0.47% Friday from 0.75% last month. The Chicago Mercantile Exchange's Fed Watch site shows that Fed Funds futures aren't pricing in a rate increase to 0.5% until October.

Markets are again expecting the Fed to delay its already belated interest rate hike. Having already promised not to move for at least its next two meetings (January and March), markets will remain on pins-and-needles as they watch for any hint of the Fed's intentions.

At the zero bound, however, they are dancing in the tip of a pin because there is less and less that the Fed can do to stimulate economic growth. Placing too much faith in what central banks say rather than what they do can be dangerous to investors' health as those who were on the wrong side of the Swiss National Bank's about-face learned this week.

Source :

Money Morning/The Money Map Report

©2014 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email:

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in