Over the last few weeks drum beats could be heard signalling the coming of troops from abroad to lay waste to any foe ahead of them. However, unlike what we first conjure up as troops from an opposing force made up of men and weapons. This battlefield is being waged in the ether of the currency markets.
Although barely covered by the main stream press Central Bankers have now shown they’re now far from working in unison or displaying any semblance of a cohesive group. Rather, they’ve now turned their attention and policies inward in a “shoot first, screw asking any questions later” mindset.
It wasn’t hard to extrapolate recent events happening if one only paid attention to previous clues. The swiftness along with the repercussions going forward are the only thing that were hard to calculate. However, we now see the brutality and to what extent even perceived smaller entities (such as the Swiss) are willing to take to save their own sovereignty just by counting the first wave of casualties through the metaphor of empty money bags.
Once the Swiss National Bank (SNB) decisively went rouge and un-pegged the floor between the Franc and Euro everything changed. We’ll never know who knew what, if, or when. (i.e. All the other Central banks.) Yet one thing is clear: The SNB didn’t care about who or what entity was pegged to their currency in a carry trade, nor the effects it might have on its economy.
It seems they viewed their stance as having no other choice – but to act first irregardless of other concerns. For now this is all one may interpret being on the outside. Yet one thing is perfectly clear – that’s a move usually reserved for battles during war.
I don’t use the term “war” willy-nilly. These are the types of moves when preservation is at risk. When bold actions knowing there will be great casualties (even if it’s monetarily) must be taken. For these are decisions between existing another day – and existence at all.
There’s also another issue within this hypothetical that must be thought through: The SNB did this out of the blue with no indication such a move were even contemplated. In fact, just days prior the SNB signaled its commitment to the peg. So why just days later do what many deemed the unimaginable? Easy, like I stated in an earlier article maybe “they believed they had no choice with what the ECB was about to unleash.” Problem now is – what exactly did the ECB launch?
By all estimations the so-called “Full Monty” bazooka of monetary mayhem which had been anticipated and rolled down the fictional parade-way in a N.Korean styled viewing spectacle of financial armament for all to gawk over, wasn’t all that impressive. Once again the promise of “what ever it takes” seemed more in line with “take it – or leave it.” With the SNB being the first to do just that.
Back to the hypothetical question I alluded to: Ask yourself, if you were the SNB reading over the details as well as listening to the speech given by Mario Draghi as this latest plan of monetary QE is both to be implemented as well as the timing. (for it doesn’t even begin until March) Would you feel possibly set up?
Everyone was expecting a minimum of an additional 1 TRILLION Euros to be expended. Some were even contemplating the need for 2 and for it begin near immediately. What did they get? Jawboning of how 600 this, plus what they’re doing now, carry the one, add in the weight of the shelves and presto – a little over 1 in total. And it begins in two months! If you’re the SNB you have to be thinking: Wait…what?
Does one think the SNB could have handled this news while giving some time (at least till their next meeting) to help prepare its economy for the shock of the un-peg; rather than throwing itself into monetary turmoil based on what was announced last week via the ECB? If I’m a Swiss banker I know what would be on my mind. Yet, that deal is already done.
The real battle and positioning of armaments begins in earnest now. Not for the Swiss, rather I propose every other Central Bank or sovereign with both currency as well as derivatives at risk. This is now war and the spoils will go to those that move first, move often, and move in ways others never contemplate – or can time. The SNB has shown by dint the efficacy (with further unknowns working out in real-time) of such a decision for all to ponder and contemplate.
Over the last few years the idea of centralized monetary power fueled with Keynesian dictates and philosophy have given rise to economic fallacy. Where economic activity and health could be initiated as well as maintained indefinitely, providing everyone involved believed the ruse.
However, that ruse fell to pieces once the Federal Reserve (Fed.) in its bravado believed that after nearly 6 years of an open credit card policy; the unforeseen consequences of their actions would be limited to both the U.S. and within their purview for control. It was a fallacy of thought then – and it’s showing just how dangerous that policy was to continue for so long.
What is the Fed. to do now for both its logistical concerns and actions, as well as its credibility when everything that was supposed to take place via their intervention is now being laid to waste? Have a press conference and say “Oopsy?”
What does the Fed. now do about the one thing all this monetary policy mayhem was implicitly devised for (e.g., 2% inflation) when other Central banks are reacting to the Fed.’s own cutting of the QE credit cards and acting in a self-preservation manner; which is now driving scared money from around the globe directly into the one monetary vehicle that proves the Fed. was clueless in its forethought of unforeseen consequences? e.g. The Dollar.
Now huge flows of scared money are directly flowing into the Dollar causing it to rise, and rise at an impressive pace. All this and its only been a little more than 90 days since the QE spigot was turned off.
Now that the SNB has sanctioned the firing of this first salvo along with the unimpressive releasing of monetary might displayed by the ECB; if you’re let’s say Germany: How do you view all of this? Stay in the Euro as you watch others leave? Do you watch the Swiss carefully and ponder, “Hmmm…they seem to be surviving just fine. I wonder…..” as the ECB once again jawbones more and delivers less; causing your economy to falter or import more inflation than you wanted?
How about Greece, France, Italy, Portugal? Do they look at the Swiss and pose the same thought process? And what are the implications for not just the Euro Zone as a whole but the wealth funds, currency trades, and all the others that are intertwined in a labyrinth of connectivity?
Does the money flee from one currency to another in an algo-fueled HFT manipulated cross paired trades and derivatives that are leveraged so high that the SNB calamity wrought to traders short any currency will pull that risk – and not trade at all?
Maybe they’ll just plow more, and more money into the daily currency of choice: leaving it to sit on whatever today’s Central Bank of choice may be rendering their board members to pull their hair out trying to counter.
Do they stand by raising interest rates? Or go negative? For both have consequences far more reaching in this environment than was just 3 months ago when the signals were to “raise rates.” How’s that going to work? And how will that change be explained in another FOMC conference? Oopsy? Again?
Just like war “safe harbors” are viewed and used depending on the threat and need of any side depending on what they understand is their need – not someone else’s Nor an others time scale. All bets are off when it comes to war, and we’ve now entered one unforeseen by the very generals that said “they knew how to avoid it.”
This is the problem with all Keynesian styled philosophy. It works well, and seems utterly brilliant on paper and in the classrooms of academia. When trouble arises its “To the text books!” for answers. Change a line in the speech here, change the meanings of this to that, and BAM! – crisis solved.
However in the real world it doesn’t work that way. Again just like war when the battle starts – all earlier plans get thrown in the dust heap. And make no mistake. This was all started via armchair generals who believed monetary policy could be manged only within the Ivory Towers or walls of academia. The consequences of these policies are multiplying by the day.
For as Mike Tyson once said so eloquently: (I’m paraphrasing) “Everybody’s got a plan – till someone punches them in the face.”
The SNB has just landed the first blow. Now what?
© 2015 Mark St.Cyr