Economics

Jim Grant On What He Would Do If Appointed SNB President

And what’s your take on the Swiss National Bank?
The SNB (SNBN 3905 1.69%) now owns well more than $80 billion worth of American stocks which it buys programmatically,  I guess with an algo or with some other mechanistic technique. I’m not sure this is central banking. Central banking was meant to be about the stability of prices. But today, through its intention to stabilize, it paradoxically has become a source of great underlying instability and of risk.

So what would you do if you were the president of the SNB?
Resign! No, seriously: I do sympathize deeply with the problems of the Swiss having to live with the regime of the European Central Bank and with its determination not to allow the Euro to appreciate. I’m also aware of the dilemma of the Swiss in the face of the Franc which for some reason has been pronounced the world’s safe haven. »You must own it», say the wise ones. But I’m not quite sure why.

How come?
In the past, Switzerland had a certain franchise. It was a financial franchise based upon prudence, discretion and judgement in banking. It was based upon tradition and upon some kind of a stiff-necked independence from the rest of the world and the world’s central banks. I think those traditions and that franchise have been eviscerated to a great extend through pressure from the outside world and through the changing mores of worldwide regulation. So the Swiss franchise in judgment and discretion has now been rebranded to a franchise in secrecy which is all about the despots of Africa secreting billions of US dollars into Swiss bank accounts.

That doesn’t sound very pleasant.
That’s my opinion as an independent observer. I can describe the problem but, for the life of me, I don’t know what Switzerland should do to revert to its privileged place – a privilege well-earned in a world that has gone rather mad. The Swiss brand is still recognized worldwide. »Made in Switzerland» is one of the great phrases in the world of commerce. But I question the validity of the specific financial franchise and the desirability of the Swiss Franc. However, that’s my opinion. The world’s opinion is that the Franc is not the storm in a port but a port in a storm. That’s what the world thinks. So the Swiss must live with that and the way they do that is to depreciate the once sacrosanct Franc. They do it by creating Francs at no costs, convert them effortlessly into Euros, trade in those Euros into Dollars and then buy American equities at record high valuations.

Are you implying that the Swiss Franc is overvalued?
I don’t know what would happen if the Swiss national bank would let the Franc to find its market clearing way. What would the Swiss reinsurance businesses say? What would the exporters say? It would perhaps be a national disaster. I don’t know. But what I do know is that the extraordinary steps that the Swiss have taken to try to neutralize these outside pressures have had the effect of putting Switzerland right in the middle of the craziness of the world. The gnomes of Zurich, the most prudent people in the world, are doing just the kind of things that the rest of the world is doing. To me, that’s a sad thing to see.

Is there no way out?
I could suggest something utterly implausible, but not utterly impractical: A worldwide monetary conference to move toward fixed exchange rates and to reinstitute a fixed standard of value which would be gold. That would get currency exchange rates out of the realm of international competition. The idea would be that we, instead of moving around exchange rates and interest rates to fix problems, actually fix the problems. In the past thirty or more years, what we have done collectively with respect to money is to treat interest rates and asset prices as instruments of national policy rather than as prices to be discovered by the market place.

So what should investors do with their money today?
Almost ten years after the financial crisis we still have some of the lowest interest rates in the history of mankind. We have some of the highest asset values in modern history and it is a big problem. What’s more, very few people seem to see that there is a problem. That is one of the concerning things: the complacency in the face of these very unsound and short-sighted policies. But that’s what bull markets do. People rather enjoy them. So at «Grant’s», we don’t set up as stock market authorities or as gurus in stock market timing. But it’s quite common knowledge that valuations as customarily and conventionally measured are near their all-time highs. Of course, that does tell you nothing about what’s going to happen tomorrow, next month or next year. But I can observe rather tritely that risk at these levels of prices and valuations begins to move rather larger than reward does over the course of many years.

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