Financial analyst and writer Jim Grant has done it again. Grant, who became well-known for his amazingly accurate predictions regarding the Financial Crash of 2008 and the ensuing Great Depression, noted just four months ago that there was a real chance the Swiss national bank was going to let the franc run sometime in the next year or so.
Thursday’s stunning news from the SNB that it was removing it’s long-standing cap on the Euro sent the Swiss franc flying against the Euro, at one point up as much as 30%. Chalk another one up for Jim Grant.
Jim Grant’s call on the Swiss franc back in September
In the September 19th issue of Grant’s Interest Rate Observer Jim Grant wrote: “…we venture that the SNB will sooner or later be forced to permit the franc to appreciate and thus to enrich the holders of low-priced, three-year call options on the Swiss/euro exchange rate. It’s a long shot, to be sure—the options are cheap for a reason—but we judge that the prospective reward is worth the obvious risk.”
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Protecting the Swiss franc was just getting too expensive
Grant’s argument in a nutshell was that the SNB program to protect the franc from too much appreciation against the euro was simply becoming too expensive, and moreover, was creating macroeconomic imbalances that had to eventually be addressed (imbalances that were clearly reflected in the real estate market). The investment thesis was the cap had to come off eventually, and the franc was almost sure to move up when it did.
Any way you look at it, the scale of the Swiss effort to protect the franc has been gigantic. From December 2007 to July 2014, the SNB’s balance sheet grew from 23% of Swiss GDP to reach a shocking of 83% of Swiss GDP. Grant notes that “over the same span of years—and after three successive QE programs that boosted the Federal Reserve’s assets by $3.5 trillion—the Fed’s balance sheet as a percent of U.S. output expanded to 25% from 6%.”
He also points out that interest rates in Switzerland have continued to shrink as the SNB’s balance sheet has expanded. In January 2008, the average rate on a 10-year, fixed-rate mortgage was 4.17%; as of June 2014, 10-year loans were available at an average of 2.25%.