January 15th, 2015 is the day that may live in financial infamy. There were no qualms about it; the Swiss National Bank (SNB) shocked the world when it removed its peg to the Euro, creating an astonishingly large and instantaneous transfer of wealth. This has left all parties involved feeling like deer in headlights.
Within minutes there was a 20%+ top to bottom swing in the Swiss Franc against almost all currencies. The immediate shock caused a number of forex dealers to become insolvent, caused 100's of millions of dollars of losses for a number of major banks and as much as 60 billion dollars of losses on the assets held on the Swiss National Bank's balance sheet. This does not even take into account to the massive losses to Swiss citizens and businesses. To try to deter substantial new capital inflow, the SNB announced negative interest rates of -0.75% and as of this writing, there is zero to negative yields out to the 10 year bond. (Click to read the press release).
But it is not the currency move and immediate financial loss that bothers me, it is when you start reading between the lines that the structural problems emerge. It was just a few short weeks ago that my 2015 Market Forecast was released. We discussed our key investment themes but stressed that we needed to be on the watch for new emergent properties from the out-of-equilibrium dynamics in the ever-changing macroeconomic landscape. Well, it didn't take long for the first major curve ball to be thrown.So let's discuss a few "What if's":
- What if the entire 6 year bull market has been hinged on the confidence and belief that the central banks are in control?
- What if the SNB destroyed that confidence in central bankers? No one said it better than Anatole Kaletsky of Gavekal Dragonomics in a CNBC interview on Friday (click to watch). He said that Central Bankers have a licence to lie. Only a week earlier the SNB Chairman Thomas Jordan reinforced their commitment to maintain the currency peg and then…Kaboom. Those that trusted Jordan, just took a solid kick to the solar plexus (and the wallet) to remind them that the central banks are not philanthropists to the common investor.
- What if this signals the out-of-equilibrium dynamics in the global currency war and worries the market about a potential revaluation of the Chinese Yuan currency peg in retaliation to the Japanese devaluation?
- What if the now blatant negative interest rates in the Eurozone finally expose the flaws of fiat currency systems to main street investors that still have confidence in money?
- What if Draghi pulls out the QE bazooka and after firing it, everyone realizes months later that he didn't dent the structural deflationary spiral haunting the Eurozone?
- What if this deteriorates global confidence and it spills into investor confidence in the stock markets?
In the 2015 Market Forecast I have discussed that the stock market is very mature in its valuations and the fact that we are in the 6th year of one of the most robust bull markets in history, it is becoming more and more vulnerable to a turn. I can assure you that we will be watching to see if the Swiss and the Europeans present the catalyst that begins the chain reaction to a major intermarket shift. Many investors feel it is most important to forecast what will happen in the future, but I rather feel it is most important to recognize what is happening RIGHT NOW. The unfolding reality trumps everything.
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