Newsflash: Even the Central Banks Aren't Bigger Than the Market
I don't want to make too much of today's news and market action, but on the other hand, I want to make sure to acknowledge what importance it does have and the fact that I think today will be looked back on as a red letter day for "administered rates" on the part of the central planners who call themselves central bankers.
By now I'm sure everyone knows that the Swiss National Bank last night abandoned its promise to defend the floor of the euro-Swiss franc exchange rate at 1.20CHF. It also announced it was going to expand its negative deposit rate by 50 basis points, which will now range between -1.25% and 0.25%. (I have no idea how the SNB can administer that rate or how much money printing will be involved, but in all likelihood it will be less than it would have been forced to do to defend the peg further.
From Neutral to Neutron
That unleashed incomprehensible volatility, as the Swiss franc quickly exploded 40% versus the euro before trimming the loss to "only" 15%. I seriously doubt there has ever been a major currency move that far, that fast. (There was similar motion versus the dollar as well.)
Before discussing the various market responses (and I'm going to miss a lot because it's not possible to capture them all), I'd like to focus on what the big takeaways are from the SNB's action. First of all, the most important lesson to be learned from this is: no one (not even a central bank) is bigger than the market. I know a lot of people have trouble understanding this because the only history that they have seen firsthand has been the central banks getting their way with virtually every market they command to do their bidding, but that won't always be the case, and today is a perfect example.
The Swiss had said they would defend the peg no matter what, and all they had to do was print money to accomplish that. However, the consequences of that money printing in terms of speculation inside Switzerland obviously became a cost that was too high for them to continue the process. Therefore, the markets have won. If we have reached the zenith for belief in the ability of central bankers to control any and all markets, there will be big ramifications as a consequence.
Peggy, Bar the Door!
The second most important takeaway is that we are going to continue to see intense volatility virtually everywhere. When central banks print money to suppress (or redirect) the action of the economy because they don't like the direction it is going, markets are going to become volatile. Just like if they try to peg a currency or some other financial instrument, and monetary policy swings wildly to achieve that, so would the economy.
Thus, oil has collapsed 50% in a few months. Copper has been hammered 15% in six weeks. We've seen the ruble obliterated, and now the craziness in the Swiss franc and other currencies (the Swiss stock market also lost 10%). Immense volatility is liable to be the order of the day in the future, not the completely suppressed volatility we saw in 2014. (As I said at the end of last year and repeated at the beginning of this one, 2015 is not going to look anything like 2014. The year is barely a few weeks old and that already looks like a drastic understatement.)
The next conclusion I believe is going to be that folks are no longer going to be able to "trust" the central banks, since bankers can change their minds. We are going to see that in America when it turns out the Fed is unable to raise rates, except instead of breaking a promise like the Swiss did it will be more like, "Gee, we changed our mind." That, too, will add to volatility and eventually lead to lower multiples in financial assets I would think.
Currencies Take Up Tai Chi
Though this is a bit of speculation on my part, I also believe it is going to become clearer to many people that, as far as paper currencies go, nobody wants to have a strong one. They are all battles of wits between unarmed opponents. Gold, on the other hand, is viewed by many as a currency, even though a lot of so-called enlightened people view it as a "barbarous relic." I expect gold will come to be looked at as the one currency that doesn't mind if it trades higher versus others and doesn't really have a central bank to manage it. Therefore, it is no one else's liability.
Colored pieces of paper can wage war against each other as they all do laps around the drain versus real assets, and gold will be the store of value that people use to preserve the purchasing power of their colored paper over time. This also probably means that the ECB is getting ready to do something hefty in the QE department, and the Swiss knew that would be untenable for them, so more liquidity is probably on its way, though the response may not be the same in all markets as it has been based on the fact that some confidence (and money) has surely been lost.
Volatility a Double-Hedged Sword
Lastly, I think it is a virtual certainty that there are going to be a lot of "dead bodies" in the leveraged hedge fund community, as the size of the moves we've seen have undoubtedly hurt some people, especially anyone who was playing along and assuming the SNB would be true to its word.
So that's my quick summation of the important ramifications of today's action on the part of the SNB. Obviously, there are more conclusions to be drawn and actions to take, but that is at least some initial food for thought.
With all of that blather out of the way, turning to the action, overnight our stock market had been strong, but (post the SNB news) it didn't take long for the buying to turn to selling and through midday the indices were modestly lower. Over the course of the day, the market just sort of wandered around the early lows (in a sort of stunned fashion) before it limped into the close with a loss of around 1% (the Dow was a bit stronger).
Away from stocks was where the real action was. The euro was hit for 1.5% versus the dollar. The Swiss franc was extraordinarily volatile but spent most of the day 15% higher — note: this is a major currency, not a $2 stock — versus the dollar. As for the bond market, it was higher, and of course we are going to see even more negative rates in Switzerland's and Germany's bond markets, so the lunacy there continues and will, I expect, until it too teaches everyone the lesson that no central planning is bigger than the market when Mr. Market decides it is time to change his mind about where he wants prices to trade.
Is Gold Finally Ready to Floor It?
Oil lost 1%, while gold spiked almost 3% and from a technical standpoint has broken a serious downtrend line and managed to trade back to and slightly over its 200-day moving average. Exactly what technical factors are really going to matter to gold in the short run, given its explosive move in every currency, I can't say, but I think the world has changed and we are not going to visit the sub-$1,200 price level. I guess the big question is when the Goldman Sachs of the world throw in the towel on the idea that whatever the Fed is going to do it will categorically be bad for gold.
For the last couple of years the gold market has been hostage to whatever folks' whims were about the U.S. economy, the Fed, or the dollar. However, it is a much bigger world than that, and I believe the important variables have shifted, though I don't know exactly what the keys will be. The most important thing to understand, in my opinion, is that the bull market in gold has resumed. That means it is going higher, and that is all anyone really needs to know.
In summary, folks are going to need to prepare for the chaos and volatility that are going to be with us prospectively.
Positions in stocks mentioned: none.
CLICK HERE to subscribe to the free weekly Best of Financial Sense Newsletter .
About Bill Fleckenstein
Author & Columnist at Fleckenstein Capital
https://www.fleckensteincapital.com/index.aspx
https://www.fleckensteincapital.com/index.aspx
<script async src="//pagead2.googlesyndication.com/pagead/js/adsbygoogle.js"></script>
<!-- nomorefiatmoney_sidebar-right-1_AdSense2_250x250_as -->
<ins class="adsbygoogle"
style="display:inline-block;width:250px;height:250px"
data-ad-client="ca-pub-9205484028477356"
data-ad-slot="1299304822"></ins>
<script>
(adsbygoogle = window.adsbygoogle || []).push({});
</script>
No comments:
Post a Comment