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George Dorgan  

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  • How Safe Is The Swiss Franc? [View article]
    Dr. Duru,
    I think you got a misunderstanding about influence on FX rates by the terms monetary base, money supply and price inflation.

    Price inflation: A currency depreciates when prices are going up but (central) banks pay low interest. This is the typical financial repression case and a currency weakens.

    Money supply: True, Swiss money supply and lending has effectively risen far more strongly than the one in the Euro zone.
    This can have two market anticipation effects:
    1) higher interest rates --> currency rises
    2) no rate hike mounts into financial repression --> currency falls

    Monetary base: Similarly as Japan, the SNB has increased the monetary base rapidly. Until the 1980s central banks managed money supply through the monetary base, i.e. via quantity of bank reserves at the central bank. Central banks in emerging markets do this still today.

    The effect of a monetary base increase on money supply can be void or very limited in case of high risk aversion and weak lending, like happened in Japan for decades or in the U.S. and UK until recently.
    These are typical signs of a balance sheet recession.

    Essentially Japan bought JGBS, sometimes called "monetization of debt", an operation that hardly has an influence on money supply and is therefore void as for inflation. Like you, Forex markets believed in the influence on inflation and thought that financial repression and that potentially even a bankruptcy was looming. For me the reason for the weak yen was rather a reduction of risk aversion towards the US than the fear of monetization of debt.

    The case for Switzerland is different: As opposed to Japan, the SNB buys foreign securities. She had (or she thought that is was necessary) because foreigners bought (essentially) Swiss stocks. They did this not currency- hedged, as opposed to investments in the Nikkei, because the fear of bankruptcy is very low for Switzerland. details:

    As long as Swiss multinationals generate high profits and there is no interest rate differential between the Euro zone and Switzerland, the franc will remain strong, the asset market model explains why.
    Aug 11, 2013. 11:59 AM | Likes Like |Link to Comment
  • Excessive Money Supply: Switzerland Could Follow In Spain's And Ireland's Footsteps [View article]
    Since the financial crisis, a top in EURUSD was always accompanied by a bottom in USDCHF. CHF is a proxy for the main trading partner Germany.

    With the recovery of the United States and cheaper factor prices, some peripheral countries could improve. On the other side the China issues weakens exports especially for Germany. Therefore manufacturing PMIs for the periphery were recently better than for Germany.

    This moves us to a situation such as 2005/2006. US strength results in lows of EURUSD and highs of USDCHF and EURCHF.

    As opposed to Germany, the U.S. have a bigger share in Swiss exports than in German exports. Therefore the CHF weakness is not really fundamentally justified, similarly as the CHF strength in Summer 2011. More details here:
    Jul 11, 2013. 10:41 AM | Likes Like |Link to Comment
  • Excessive Money Supply: Switzerland Could Follow In Spain's And Ireland's Footsteps [View article]
    Having learned from Ireland and Spain, the Swiss National Bank is applying macro-prudential measures, like more equity for banks. But UBS judges that the current value of 1% more equity is the equivalent of only 0.1% higher mortgage rates.

    Downpayments are typically 20% and fortunately most Swiss banks are risk-averse enough to maintain this rule, but there are exceptions.
    Until 2012 it was possible to use the money in your company pension fund to pay these 20%. This has been reduced to 10% now. Hence you need 10% real cash.

    For me, the only chance to really weaken real estate prices is to hike interest rates. But due to the cap on the franc this way is currently blocked. As long as the euro zone does not improve, it will continue to be blocked. 10 year mortgages are at 2.3%.
    As opposed to the UK, Ireland or Spain, Swiss home prices change quite slowly and this the Swiss advantage. I expect the end of the boom in 10-15 years.

    One thing for me is clear: SNB will either hike interest rates before the ECB, but we are still around 5 years away from that moment. Or a second possibility is to exit the cap on CHF and to use CHF appreciation to dampen inflation pressures.
    See also my post: The end of Swiss deflation
    Jul 10, 2013. 01:58 AM | Likes Like |Link to Comment
  • The End Of Swiss Deflation [View article]
    The HICP "Harmonized index of consumer prices" is the European CPI, nearly all countries indicate both measures: "local CPI" and HICP.

    Eurostat gives common guidelines how to calculate this "European" CPI, for example it excludes ower-occupied rent, that sometimes is included in the local CPI.

    Clicking on the text, opens my reference to the monthly Morgan Stanley's FX Pulse.

    If you click on the image you should see it again on our website, where you can enlarge the image.

    the general rule is:
    Only a currency with low or negative inflation or negative real interest rates can be used as funder. The floor on EUR/CHF makes the Swiss franc even more interesting.

    But, even if the floor exists today, markets price in the expected future developments, potentially without floor and one day with higher funding costs in Swiss francs. Even if we do not speak explicitly about "currency risks", given future Swiss inflation, using CHF as funding has some currency risks.

    This is not the case in Japan, where interest rates seem to be nailed to zero for decades.
    Jul 7, 2013. 12:42 AM | Likes Like |Link to Comment
  • Outlook On SNB Monetary Policy Assessment Meeting [View article]
    Wonderful, another one who only follows the mainstream news; the SNB was successful with infiltrating their point of view.

    1) Firing in industrial sector: As opposed to UK, that more and more concentrates on services and on the City, Switzerland has a big pharmaceutical and chemical sector, that nearly price-insensitive to exchange rate movements.
    Their success leads to a bigger and bigger trade surplus

    2) Firing in financial sector: Swiss banks have laid off many employees in Investment Banking, maybe most of them in London and New York. The Swiss economy has a total of 5% financial and insurance jobs. Certainly the main-stream financial news feels more concerned by job losses in their area.

    3) Tourism industry: Yes, there are less tourists but the total revenue is the same. Tourists are simply richer and spending more.

    4) Big Mac or Starbuck expressos are more expensive, yes, but this does not matter. What matters are traded goods in the international competition. As for traded goods the franc is already fairly valued. Look at purchasing power parities:

    5) The socialist pressure against the "forfait fiscal", that rich foreigners pay taxes based on consumption not on income, has been there for years and decades.

    6) Youth unemployment in Switzerland is 3.5%, in Spain it 55.9%
    Dec 13, 2012. 07:43 AM | Likes Like |Link to Comment
  • All You Ever Wanted To Know About The Swiss Trade Surplus [View article]
    I "miss the point" because we have completely different investment horizons.

    As I explained before, FX traders (or like ordinary people say, "speculators") are on the side of the SNB. FX traders open and close positions, they never represent a long-term movement, like it was during the carry trade era between 2005 and 2008, when they were continuously long AUD and short CHF.

    As you say, FX traders open a EUR/CHF position near to 1.20 and close it when it is near to recent highs (like September's 1.2190, or like you say max. 1.2120). Some others, think that EUR/CHF can get even higher, but when a sustained downwards movement starts, they take profit. And as you say, some FX trader follow the opposite movement from 1.2150 to 1.2050.

    As for the long-term, the whole thing is a null-sum-game. FX trading is no "real" money that can fuel inflation.

    In August 2012, the SNB was fighting against these speculators, that pushed the EUR/CHF down to parity. With the choice of the 20% higher 1.20 floor level, however, the central bank took up the fight also against real money:
    - against the ordinary Swiss who prefers to invest in Swiss real estate and who sold his Spanish residence
    - against the Swiss companies who repatriate profits
    - against the long-term oriented risk-averse foreign investors.

    This was visible in the huge SNB balance sheet expansion in early 2012 and no substantial reduction despite ECB's OMT measure.
    We think that this wrong choice of the EUR/CHF floor will cost Swiss payers billions of francs in some years, but it prevented some immediate job losses especially for the machinery exporters mentioned in the article.
    But with the upcoming huge SNB losses, a lot more jobs could have been created. Fortunately for Switzerland, most SNB losses will come back to Swiss private investors and Swiss companies (that however have many foreign shareholders).

    With rising Swiss inflation, your long EUR/CHF FX trade is getting more and more dangerous, because the SNB will start to sell euros and buy francs to prevent inflation, like they did between October 2011 and February 2012.

    Seeking Alpha is for rather long-term investors, who like to sleep in the night. They do like to wake up in the morning and look at the FX charts first before they give a good-morning kiss to their wives.

    Therefore we recommended Swiss bonds and stocks to be held to months and years and if it is the FXF ETF, then only "when EUR/CHF trades clearly above 1.21". See our on the bottom.

    A 20 year Swiss bond yielded 1.21% one year ago, now it is 0.91%, a nice price gain for a long-term investor, the CHF FX rates are nearly unchanged since then. Novartis was at 52.50 one year ago, now it is at 62.50 CHF.
    Dec 5, 2012. 03:32 AM | Likes Like |Link to Comment
  • All You Ever Wanted To Know About The Swiss Trade Surplus [View article]
    @puda To your questions:
    As opposed to real estate, stocks or bonds, precious metals are not country-specific. On the contrary precious metals give a hedge against financial repression. We overweighted this asset class with values around 20% (for USD ref. currency clients) until September with the QE3 introduction, but we reduced the share and overweight "CHF investments" but also "USD investments" since then.
    Dec 5, 2012. 12:37 AM | Likes Like |Link to Comment
  • All You Ever Wanted To Know About The Swiss Trade Surplus [View article]
    In the year 2011 we decided to upgrade the currency dimension to the major dimension. The reasons were the central bank policies, at first the Fed, that want to systematically repress their currencies. A second player of this game is for us the ECB, that despite 2.5% inflation and a maximum inflation target of 2% wants to maintain the rates low.

    This financial repression is reflected in our portfolios in three key-points:
    1) Non-repressed currencies (e.g. NZD, AUD, SEK, NOK, MX peso and also JPY) are overweighted, as long as we are not heading for global recession.

    2) Inside the investment class of a repressed currencies (USD, EUR and currently also CHF) stocks are overweighted when compared to other investment classes.

    3) Inside the investment class of a non-repressed currencies there is a higher bond and cash share. In rare cases, like during 2011 for Australia, we even short stocks.

    From time to time we run a rebalancing towards stocks or bonds, for example in favor of stocks after Abe's recent verbal intervention and (for us only temporary repression) against the yen.
    Dec 4, 2012. 03:55 AM | Likes Like |Link to Comment
  • All You Ever Wanted To Know About The Swiss Trade Surplus [View article]
    @g saint @yrbe @botonicwater

    For American investors, we recommend to hold both Swiss stocks and Swiss long-term bonds. With one of the two variants you are quite sure to win: With stocks you win if the floor remains and with bonds in a recession case or in the case that the floor falls and CHF appreciates.

    In our tactical asset allocation (TAA) for rather risk-averse USD reference currency investors, the asset class "CHF investments" currently takes a higher share than precious metals, the value is around 15%, precious metals are down to 10%. We work with a two-dimensional tactical asset allocation model, the major dimension is by currency, the second dimension is by asset type like stocks, bonds, real estate. As opposed to UBS and Credit Suisse's investment management terminology, this second dimension is only a constraint.

    The composition inside this "CHF investments" (sub-)portfolio is up to your personal risk preferences. Our composition for risk-averse clients is 30% Swiss stocks, 10% real estate, 10% cash, 50% bonds. This is a far higher equity share than for other currencies.

    We monitor Swiss inflation and with each point, Swiss inflation creeps upwards, we are ready to reduce the equity share.

    Here the long-term USD/CHF chart.
    Dec 4, 2012. 01:43 AM | Likes Like |Link to Comment
  • All You Ever Wanted To Know About The Swiss Trade Surplus [View article]
    You remember August,26, 2011, when UBS only spoke of negative interests: EUR/CHF rose from 1.1420 to 1.1688. At the time FX traders and speculation were the main drivers of the EUR/CHF.

    "After record demand for the franc, UBS said it was monitoring franc cash balances in the current accounts of its franc clearing customers. The news helped the euro climb more than 2% against the franc to a one-month high ." source:

    Now both CS and UBS seem to be really introducing negative interest rates on clearing customers. But the result on EUR/CHF is a very, very poor improvement from 1.2059 to 1.2090.
    This means that most FX traders are out of this pair, they have been deceived too many times going long EUR/CHF. Clearing customers are for me mid-term money, with a horizon a bit higher than FX traders.
    You can imagine where the fair value models of big investment banks currently price the EUR/CHF, if even such important news do not give a strong push to EUR/CHF.
    The latest statements of the SNB are:

    With your long EUR/CHF, you must continuously monitor Swiss inflation and what the SNB says.Otherwise it will end up like in March 2010:
    "Swiss Franc Surges to Record High: Where was the SNB? (March 2010)"
    Dec 4, 2012. 12:58 AM | Likes Like |Link to Comment
  • All You Ever Wanted To Know About The Swiss Trade Surplus [View article]
    As long as the floor exists, there will be always periods when FX traders use risk-on periods to push the EUR/CHF upwards based on the (believed) strong support of the SNB. As long as there is no carry trade against the franc, FX traders are no real money. FX traders open positions and close positions after a while.

    Real money will be never on your side, as long as the euro crisis is not really finished and Europe offers clearly higher interest rates than Switzerland, a carry trade. Real money for me is:

    1) The Swiss themselves are sure of the superiority of their state and economic model. They are aware of financial repression in the euro zone and the US. Take this article in the leading NZZ Most interestingly the add on the site is for Swiss real estate. And that's were the real Swiss money will go.

    2) Foreign investors will continue to seek shelter from global financial repression in Swiss investments like stocks and real estate. The asset market model suggests that this creates demand for the franc.

    3) The SNB shifts its focus more and more from the "overvalued" franc to the risks in its balance sheet.
    So forget about EUR/CHF 1.25, the SNB has other problems to solve.

    The USD/CHF might be stronger only in a potential global recession or a complete collapse of the euro zone. Thanks to ECB's OMT and the strength of the German export economy, the second scenario is for me prevented.
    A EUR/USD under 1.30 implies that an expansion of the US economy (thanks to consumer spending) only strengthens their trading partners like China, Japan, Switzerland or Germany. The only thing that would allow the US to expand in times of a strong dollar, would be a real estate or tech boom/bubble and high US interest rates. You admit that we are years or maybe decades away.
    Therefore I do not see the EUR/USD under 1.25 again.
    Thanks to the 5 years distance to last US crisis and the resilience of US consumers, of Chinese, German and (even Japanese) local economies I do not even see a global recession coming, but I neither see a sudden solution of Spanish, Greek or Italian problems. These issues will take another 10-20 years, a perfect repetition of the Latin American debt crisis of the 1980s.
    and much time for time EUR/CHF to depreciate
    Dec 1, 2012. 01:59 AM | Likes Like |Link to Comment
  • All You Ever Wanted To Know About The Swiss Trade Surplus [View article]
    "Zero growth": As the data above shows, growth is not zero, quite the contrary.

    "CHF to be higher based on fundamentals": SNB will the franc appreciate because inflation will force her to do so. 10% house price increase, 12% M1 increase last year, rising salaries, imported foreign/European inflation, currently still currency appreciation induced deflationary backlog.
    That's what I meant with Swiss National Bank law: "By law inflation must be prevented."
    I admit my foreseeable future may be more longer-term than your one, it is between 6 months and 4 years.When the floor is removed depends on central bankers, humans that do sometimes irrational decisions.
    In the meantime I use stocks as hedge against the floor, but every month Swiss inflation will creep upwards. Depending on the speed of this inflationary development, the part of Swiss equity will be reduced.

    I suggest long CHF already now, when CHF is cheap against the dollar. In some months time the franc might be more expensive.
    Nov 29, 2012. 11:15 PM | Likes Like |Link to Comment
  • All You Ever Wanted To Know About The Swiss Trade Surplus [View article]
    @g saint
    I personally think that after some years of austerity and weak growth, a Northern Euro will be introduced. Otherwise the huge German surpluses thanks to a weak euro will never end to rise. Switzerland is already now pegged to Germany with around 40% German bond holdings of all its FX holdings.
    See more on this:

    I do not see a recession coming. Nonetheless, my main recommendations are bonds and FXF (swiss francs), a conservative investment. The stocks and the ETF are additional investments for the case that the SNB maintains the floor, because Swiss companies take great advantage of this currency manipulation. Every day it takes more, the swiss franc gets more into undervalued territory and Swiss stocks must rise. You can see this in the 10-20% performance of the 3 cited stocks since one year ago.
    Nov 29, 2012. 02:23 PM | Likes Like |Link to Comment
  • All You Ever Wanted To Know About The Swiss Trade Surplus [View article]
    Today's Swiss GDP was 1.4% YoY, the one of Germany 0.4% YoY.
    Switzerland PCE change was 2.5% YoY, the one of the US 1.8%.

    I recommended not following main stream news, especially older ones. Please read my other articles, that suggest that:
    1) The Swiss franc is currently fairly valued, nearly undervalued.

    2) Can The SNB Make A Profit On Currency Reserves?

    That smart investors believe in my arguments can be seen in the 20Year yields of 0.95% for Swiss governments, as compared to 2.36% for US treasuries. They would never be so low if they are not sure that the Fed will continue to weaken the dollar for years or maybe decades and that the franc will appreciate against the dollar.

    A weak currency is not possible for Switzerland, by tradition and by the Swiss National Bank law.
    Nov 29, 2012. 02:12 PM | Likes Like |Link to Comment
  • Is The Swiss Franc Overvalued? Purchasing Power Parity [View article]
    Thanks to the UBS chief economist Daniel Kalt, I got to correct my assumption that the UBS PPP were based on consumer prices. Its producer prices.

    We obtain a discrepancy between the UBS and the Bloomberg PPP (both based on producer prices) for the EUR/CHF.
    Bloomberg obtains 1.16 as fair value PPP, UBS according to latest data 1.30. HSBC is in the middle with 1.22.

    The difference between Bloomberg and UBS, has probably something to do with the base year. Bloomberg uses the average exchange rate between 1982 and 2000 as basis. UBS probably uses the exchange rate of 1990 as basis. Both methodologies multiply this exchange rate for each following year with (1+PPI i (CHF)/(1+ PPI i (EUR)) where PPI is the producer price index for the year i. Before the establishment of Eurostat's common euro zone PPI, an average of future euro zone countries was used.

    Between 1982 and 2000 the franc was rather overvalued against the trade-weighted exchange rate trend channel, available here:
    In the UBS base year 1990, however, the franc was a bit undervalued. Since UBS assumes the weaker 1990 franc as basis for its calculation with the PPIs above, it equally obtains a weaker franc as PPP today.
    Nov 11, 2012. 03:21 PM | Likes Like |Link to Comment
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