The Black Swan’s Wings Over Switzerland

Nicholas Taleb’s book The Black Swan has this chart at the beginning explaining what the Black Swan is. It’s a chart of the life of a turkey up until the day before Thanksgiving. Here’s the chart.

Turkey Chart

Here’s an eerily similar chart from January 15th of the Euro traded in Swiss Francs.

Screen Shot 2015-01-18 at 11.41.59 PM

The point is, when central banks do something unexpected, the markets can flip in ways that will shock you.

The Swiss National Bank decided it was too expensive to keep a 1.20 Euro to Swiss Franc peg. In order to maintain that they had to buy a bunch of Euros and take them out of circulation with Swiss Francs they would print and put into circulation. Basically absorb the inflation that the European Central Bank was creating and stick it on its balance sheet.

By November 2014, the SNB had absorbed 475B Swiss Francs worth of foreign currency. At that point they decided it was too much. So all they did was say they were no longer buying Euros, and the Euro fell through the floor.

475 billion. That’s it.

Do you know how many US Dollars China has on its balance sheet, sopping up American inflation like a neverending sponge that just will not saturate? Almost $4 trillion. That is about 8.5x the amount of Euros the SNB had when it announced it was no longer buying Euros, and the Euro fell 30% in a day.

Can you IMAGINE what will happen to the US dollar when – not if, but when – China says it is no longer buying?

And keep in mind that the SNB never said it was selling any of its Euros. Just that it would stop buying them.

Now, here is the $4,000,000,000,000 question. Can you fathom what would happen to the US dollar, the US economy, treasury bonds, the Federal government, if and when China announces not only that it will no longer buy US dollars, but that it will actually sell them? Try to get something for its paper they’ve been stacking there for decades?

Here is the simple truth. Economic armageddon is in the hands of the People’s Bank of China. All it has to do is announce they are selling their dollars, and the game is over. That’s it. The only thing stopping them is that for some crazy reason, the Chinese think that it benefits them to import American inflation.

When they figure out that it only hurts them, they will simply stop doing it.

The Swiss National Bank already figured it out. It now looks like the Danes are next.

Pretty soon, China will figure it out, too.

Get ready. The Black Swan cometh.

WOW Swiss National Bank Ends Euro Peg, Gold Skyrockets

This makes absolutely no sense, which is why the Swiss Franc (CHF) just had the most insane trading day in its history. It was up by as much as 30% against the Euro this morning, and is now up something like 15%. Currencies don’t move that way unless something really strange is up.

This makes no sense because the Swiss National Bank (SNB), just a few months ago, came out hard against the Swiss Gold Initiative, saying it was crazy and dangerous precisely because it would cause the CHF to skyrocket. The purpose of the Gold Initiative was to muzzle the SNB at a 20% gold reserve so they couldn’t keep printing CHF in order to support the Euro. This robs purchasing power from Swiss consumers, and is basically stealing.

So now that they have basically said they will stop printing CHF to support the Euro, they seem a bit schizophrenic. They have basically just done exactly what the Swiss Gold Initiative was going to force them to do, so everyone is really confused.

Gold, by the way, is up about 2.5% on the news.

My guess is that the SNB is fearing a Eurozone collapse in the next few weeks/months when SYRIZA is elected in Greece and goes sour on the bailout, forcing a Grexit. Just a Grexit does not pose existential danger to the Eurozone, but if it causes a bond run on Portugal or Italy, the whole pair of dirty underwear that is the Eurozone is going to unravel at the seems and Europe will be exposed in all its monetary nakedness.

The SNB, back in November when it railed against the Swiss Gold Initiative, was assuming the Euro would float back up eventually. But it just keeps falling. And they want out. That’s what I think happened here.