The BOJ, the ECB, and the Fed have gone on an asset buying spree since 2008.
Meanwhile, the more sober-minded gnomes of the Swiss National Bank expanded their own balance sheet at a much steadier pace.
Though in percentage terms, it blew it up far more than the Fed or the BOJ did theirs. And now the Swiss National Bank is the world’s largest hedge fund.
The Swiss Are Printing Francs out of Thin Air to Buy Equities
My friend Dennis Gartman wrote me yesterday, saying,
We have written many times about the fact… and it is a fact… that the Swiss National Bank has effectively become both the nation’s central bank and one of the largest, if not indeed the very largest, hedge funds in the world. The process began several years ago when the SNB swore that it would do what it could and using what methods were available to it to weaken the Swiss franc relative to the EUR and to the US dollar. It has succeeded, until recently, creating Swiss francs out of the thinnest of air, and selling those Francs vs. the EUR and the dollar, and then taking those EURs and dollars to buy European and US equities and debt securities.
The SNB’s balance sheet is a CHf 813 billion (and given that the CHf and the US dollar are effectively at parity one with the other that CHf 813 billion is the same as $813 billion) and this is very nearly 125% of the Swiss GDP. By comparison, the Fed’s balance sheet of $4.5 trillion is but 25% of the US GDP. In other words, if the Fed is taken to task for being expansionary, the SNB is truly explosive!
Of the CHf 813 billion on the Bank’s balance sheet, 760 billion of it is the form of securities, of which 90 billion are in equities. The other 670 billion are held in EUR and US debt securities.
Thus far this has been a huge, stunning, almost unimaginable profit for the SNB and theoretically for the people of Switzerland. However, the problem is that the SNB will have enormous difficulty in liquidating this massive portfolio, for once the news leaks out that the Bank is selling the bids will disappear; the CHf will soar in price while debt and equity markets melt away.
What the SNB has done here is stunning; some have even called it nearly “criminal” in nature. We suggest that there is nothing at all criminal in what the SNB’s leaders have done and that they are well within their legal guidelines; however, what they have done is optically and philosophically wrong and very badly so. This is QE gone very badly wrong, rivaled only by the same actions taken by the Bank of Japan that openly deals in the forex, debt and equity markets in Tokyo, buying ETFs on a very regular basis and becoming one of Japan’s largest public shareholders. This is central banking gone very, very badly awry. It will be stopped when equity prices collapse.
What Will the SNB Do?
The SNB owns about $80 billion in US stocks today (June, 2017) and a guesstimated $20 billion or so in European stocks (this guess comes from my friend Grant Williams, so I will go with it).
It has bought roughly $17 billion worth of US stocks so far this year. And it has no formula; it is just trying to manage its currency.
Think about this for a moment: It has about $10,000 in US stocks on its books for every man, woman, and child in Switzerland, not to mention who knows how much in other assorted assets, all in the effort to keep a lid on what is still one of the most expensive currencies in the world.
Switzerland is now the eighth-largest public holder of US stocks. And apparently it is concentrating on the largest of the large-cap stocks. It owns 19 million shares of Apple (as of March 31). That is roughly 3% of the current market.
I was in Switzerland as I wrote this, so I personally experienced the reality of currency strength. Have you ever paid $12 for a Diet Coke? (Seriously!) No wonder the SNB is worried about the valuation of its currency.
Gartman is right: How can the SNB sell? The Swiss franc would levitate almost instantly, which is the one thing it is desperate to avoid. As long as people keep trying to convert their money into Swiss francs (at -0.75 basis points!), the natural direction for the franc will be up unless the SNB continues to intervene in foreign markets.
My bet is that it will do so—and that this will not end well. Or maybe it’ll get lucky and its even more massive bond portfolio will offset its losses.
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