THE “NEUTRAL” SWISS JUST CHANGED SIDES!
by Bill Hotler, Miles Franklin The Swiss have been known for many things. They are renowned chocolate and watch makers as well as financiers. They are well known as a very low crime society where nearly everyone has a gun (maybe this is why crime is low?) but their greatest claim to fame has been their “neutrality. They did not participate in either World War I or WWII. They did however do business with both sides during World War II and profited handsomely. If you recall, many accounts they had held went unclaimed for years because many of the “depositors” were killed during the holocaust. When the settlements were made some 15+ years ago, the survivors and heirs received “paper” settlement for their gold deposits. It is also highly likely Switzerland still has untold tons of gold in their vaults from the Nazi Germany regime which was stolen from overrun people and even nations. I bring this up because it is important you are fully aware that Switzerland “knows” gold. Not only do they know gold, they know which is better, paper or gold …which is why they reimbursed claims with paper rather than gold. With the above in mind, the Swiss National Bank as you know were very big “supporters” if you will of the European paper currency unit, amassing nearly 600 billion euros on their balance sheet. They shook the financial world last week when they announced a drop to the peg floor of 1.20 after publicly confirming it just three days earlier. In fact, the ripples (unintended consequences) have yet to fully play out or be disclosed as derivatives of all sorts were affected. We asked the question “why”, last week. Why did they drop the peg, especially after confirming it just 72 hours earlier? The common sense reason was because they had to. Euros were piling up on the SNB’s balance sheet with the current 60 billion per month more staring them right in the face. Why accumulate more of something the issuer publicly and purposely wants to dilute?
Fast forward less than one full week and another, maybe the BIGGEST piece to the puzzle has emerged! It appears the Swiss may have been given an offer they couldn’t (shouldn’t) refuse? It was announced yesterday that the Chinese and Swiss have agreed to opening a “renminbi hub” based out of none other than Zurich.
Do you think this deal just came out of the blue? Did the Chinese request, or offer, a renminbi hub AFTER the Swiss announced the end of their euro peg? Or, do you believe the louder Mr. Draghi became and the closer the date of QE announcement came, the Chinese and the Swiss were meeting behind closed doors? As an earth shattering side note, the Chinese publicly and formally also announced yesterday of their intentions for the yuan to be an internationally traded currency! The obvious takeaway from these announcements is twofold. One we could have certainly speculated on, the other a surprise. First, it is and has been common sense that the yuan (renminbi) was going to eventually become an internationally tradable currency with the speculation of eventually becoming “a” if not “the” reserve currency. This, we could have expected, the timing though was unknown. The not so obvious take and maybe just my own opinion, the Swiss just took and changed sides! I know this is a big statement so I will try to explain my thinking here. The Swiss surely had to know when they dropped their peg, speculators, financial institutions and even some central banks would be offside and take losses, BIG losses. They could have dropped the peg differently. They could have even moved the peg slightly and not forecast further moves. In other words, they could have made the move slower. They chose not to and according to Christine LaGarde, they gave no prior notice to the IMF. I was not sure last week but now, after the Swiss/Chinese alliance I believe her. I believe this was a bolt of lightning out of the blue to the Western banking system and probably a shot across the bow by the Chinese. Continue Reading>>>