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The Swiss will decide how long this rally lasts

This headline in MarketWatch this afternoon has got to be one of the most fatuous in financial history.

NEW YORK (MarketWatch) — U.S. stocks soared on Thursday after a surprising fall in jobless claims curbed worries about the economy.

I’m really supposed to believe that because the US  jobless claims decreased by a whole 7000, in a nation where 43 million are on food stamps, that this was the cause of the Dow regaining 293 points?  I cannot bring myself to believe this piffle.

The only credible reason for the global rally is slightly more important ‘news’ – a rumour that the Swiss are going to peg the Swiss franc to the euro. In Europe that news caused a big drop in the value of the Swiss franc versus both the dollar and the Euro.  The drop was 600 Pips.  A Pip for those of you not sad enough to know already, is 1/100th of a percentage point.  So 600 Pips is 6 percent. Which in currency trade terms that is BIG.

That, in my view is what caused the rally.  The reason it caused the rally is probably because the speculators, AKA the Big Banks, fairly salivate at the opportunity this would present them for speculating against the Swiss Central Bank.

The other effect of any peg, and probably nearer to why the Swiss might contemplate such a move at all, is that it might save the collapse of all those countries who are currently approaching default due to the strength of the Franc relative to their currencies: Hungary and Romania in particular.  I really do think the banks I have mentioned repeatedly in this context are feeling very insecure right now and would love some Swiss relief.

What this says to me is that the two questions in front of us are: 1) Will the Swiss really peg to the Euro at any level which means something?  And 2) if they do how long for? The answers to those two questions will tell you exactly how long this rally will last.


35 Responses to The Swiss will decide how long this rally lasts

  1. Neil August 11, 2011 at 5:20 pm #

    Golem, you described this as a rumour, and until it's confirmed, that's what it remains – albeit (and this is the crucial point) a rumour that has had a big effect in the "real" financial world.

    There have been rumours and speculation galore lately amidst the general uncertainty, and the markets have been going up and down like yo-yos as a result.

    Perhaps we need to think about who stands to benefit most from this hypervolatility (which is perhaps an extremely exaggerated form of the manipulation that has always gone on in financial markets).

  2. bill August 11, 2011 at 6:21 pm #

    This is impossible. If they even try to I will take you and all your readers for breakfast at the Restaurant At The End Of The Universe.

    I mean, for the love of God, I know they're desperate but surely not this.

  3. Golem XIV - Thoughts August 11, 2011 at 6:32 pm #


    I think you ask exaclty the right question.


    They are, I think, quite that desperate. Though it would be, as you indicacte, folly.

  4. cynicalHighlander August 11, 2011 at 10:01 pm #

    You guys might understand the implications of this.

    Official Statement From French Regulator On 15 Day Financial Short Selling Ban

  5. Neil August 12, 2011 at 8:58 am #

    Peston notes a precedent: "On 18 September 2008, the UK regulator, the Financial Services Authority, introduced a temporary ban on the short-selling of bank and financial shares. Within days, Bradford & Bingley collapsed and was nationalised, and that was followed in mid-October by the taxpayer rescues of Royal Bank of Scotland and HBOS/Lloyds."

    More at http://www.bbc.co.uk/news/business-14502291

  6. Jimmy SS August 12, 2011 at 9:56 am #

    I know that this isn't directly relates, but I saw an article at the ft about the future of banks, where their world importance is diminished:
    "The coming world of smaller banks"

    I know this doesn't mean we won't have serious bank collapses which will cause government problems die to their exposures, but perhaps this offers a possible view of the post-second dip future where Banks return to their money-shifting roles rather than being wealth generators. If this is the case, then of course the outlook isn't good for Britain with its reliance on the City! Although, as I'm sure you (Golem) and many others will agree, this is something that may be positive for the UK in the long-term.

  7. Demon August 12, 2011 at 10:03 am #

    It seems that there's some level of agreement in that temporary suspension of short-selling brings hell quickly. But that's what happens with temporary bans, which normally are an emergency resort when things are already tits up.
    But as a long term solution (a prohibition for good, I mean), I think it would be a good idea. Call me narrow minded if you want, but to me short selling does not produce anything, does not help society. It only produces profit for a bunch of traders. But there's no product, no service. It's a purely speculative activity and therefore should be forbidden. We would see then whether the long term effects of a short selling ban are so evil.

  8. forensicstatistician August 12, 2011 at 10:34 am #


    You are right to question the role of short selling. How can anyone in a society profit at the hands of a decline in an asset's worth?

    How does that help wider society?

    I can just see the consequences: "The City has just made a shed load of money!! Slight problem is that the value of the money has collapsed."

    A bit like saying "alas, the patient died, but the operation was a success!!"

    An important point though is the difference between normal short selling and naked short selling.

    The "Naked" aspect refers to no underlying asset changing hands. It is merely ficticious leverage, which can actually be used to manipulate prices rather than "predict" future prices.

    No matter the argument about short selling, the naked aspect should be completely outlawed as it is tantamount to counterfeiting!

  9. carl August 12, 2011 at 4:22 pm #

    Well the Swiss are doing this in an attempt to devalue their currency. Because of all the turmoil in Europe, everyone sees Swiss Francs like, US Treasuries, to some extent as a safe haven. That in turn hits the Swiss because their exports become more expensive.

    I can't say for any other nefarious intentions, but due to Swiss ties I have been following this for some time…

  10. carl August 12, 2011 at 4:24 pm #

    In regards to what benefit short sellers can be – well they can signal to a crazed market that it's overpriced.

    I haven't read it yet, but "The Big Short" supposedly gives some insight here.

    Of course don't take this as particularly advocating free markets or shorting.

  11. Neil August 12, 2011 at 7:38 pm #

    Given the current hypervolatility in the markets, it's worth recalling something that David wrote back in 2009 (an excerpt from The Debt Generation available on this site):

  12. Neil August 12, 2011 at 9:22 pm #

    Peter Oborne, for whom I have a lot of respect, tells it like it is about the riots (sorry if this is off topic, but the format of the blog makes it difficult to place it where it will be read): http://blogs.telegraph.co.uk/news/author/peteroborne/ .

  13. Neil August 12, 2011 at 9:29 pm #

    Nicholas Shaxson on Swiss withholding tax deal with Germany and the UK (follow the links): http://taxjustice.blogspot.com/2011/08/swiss-german-tax-deal-signed.html .

  14. Neil August 12, 2011 at 9:40 pm #

    This post is more up to date: http://www.financialtaskforce.org/2011/08/11/15250/ .

    Follow Nicholas Shaxson's Tweets (whence this stuff came) here: http://twitter.com/#!/nickshaxson .

  15. Crinkly & Ragged Arsed Philosophers August 13, 2011 at 7:52 am #

    Time to invest in a wheel barrow.

  16. TD August 13, 2011 at 11:15 am #

    There are 50.000 romanians borrowing the equivalent of 3.2 billions of euro in swiss francs.
    That is hardly an amount to make you say :"the collapse of all those countries who are currently approaching default due to the strength of the Franc relative to their currencies: Hungary and Romania in particular".

  17. richard in norway August 13, 2011 at 11:20 am #

    Soon your wheel barrow will be worth more than the montain of money in it

  18. Golem XIV - Thoughts August 13, 2011 at 11:32 am #


    Thank you for that figure. Please don't think I am in any way blaming people in Romania and Hungary. I am not. As you say, the amounts borrowed in the UK etc dwarf whatever was borrowed in the Eastern countries.

    I would be interested to know if the 3.2 billion you quote is all Swiss Franc debt in Romanai or only Domestic. I suspect, that like Hungary, a lot of businesses and government backed entities (both local governments and state enterprises) also borrowed in Swiss Franc.

    In Hungary for example, the most recent figure I have seen is that total Swiss Franc borrowing (private and public) is 140 billion in foreign currencies – a great deal in the Swiss Franc.

    The real point, however, is that the figure, even 3.2 billion, is enough I think to tip local banks, foreign banks who lent and local governments from a debt they can just about manage to one that they can't. This appears to be the case in Hungary where, since the reent rise in the Swiss Franc, the local governments have now asked for a 1-3 month halt in payments.

    The problem in the West, is that the Big Banks are in such an unstable state that relatively small defaults are enough to swing investor confidence a long way.

    But as I said I do NOT think this is a matter of blaming ordinary people in the East. The banks were the self proclaimed experts in what to lend, how to lend and on what terms. If it went wrong – and it has – it was their faulty advice.

    I hope you will comment again.

  19. richard in norway August 13, 2011 at 11:34 am #


    3.2 billion euros is a very big chunk of Romanian GDP, while in British terms it's almost nothing. Also at an mean average of 130 thousand per borrower it's unlikely that the money has not been invested in either banking or industry(I would geuss that this amount would be the evivelent of at least 2 million pounds), so the knocking effects could be very servere

  20. richard in norway August 13, 2011 at 11:48 am #

    Talking about short selling is very much in vogue, it seems we are being fed a concept that speculating and driveing prices up is good but the other way is bad. The truth is that all speculation is dangerous but to have one without the other would be really irresponsible. Ban all speculating, both naked shorting and naked buying, tax profits from shares at 110% when they are held for less than 3 months, 90% if held for less 6 months………….dropping to normal income tax rates after one year. Stability and real long term investment should be the goal

  21. TD August 13, 2011 at 11:57 am #

    David, Richard I am not saying that we do not have a problem with foreign denominated debt, I am saying that for Romania luckily debt in swiss francs is much smaller than in euros.

  22. TD August 13, 2011 at 12:25 pm #

    I did search for a total amount of swiss francs loans in Romania. That 3.2 billions amount is all I could find and is mortgage related.
    I have a friend who borrowed at 2.8 RON = 1 CHF and now is paying 3.9 RON for 1 CHF.
    It is very hard for him but he pays because he wants to keep his house.
    I borrowed in euros luckily but even for me it sucks: in 2006 it was 3.5 Ron = 1 euro, now it is 4.28.
    I keep on paying because the value of the house is aprox. the same (2006) and because if I stop paying the bank will sell my house and still have to pay whatever difference may be.

  23. Golem XIV - Thoughts August 13, 2011 at 2:32 pm #


    I am sorry for your situation. I do know how its feels. The last few years have been very difficult for my family.

    I take it that in Romania it is not as it is the US where you can simply walk away from the debt? Doing so kills your credit rating but you do not carry the debt. Though I think they are trying to change that law.

    What angers me most about all of this, is that teh banks not only walk away form any bad advice they gave, but expect everyone who owes tehm money to pay their debts AND YET are not paying their own debts at all. Their debts have been put on to the tax payers.

    Anyway, as I said before, I hope you comment again and help us better understand the real situation in Romania.

  24. Gordon August 13, 2011 at 3:02 pm #

    Does short selling really reduce the value of an asset? Or does it merely expose its true value? If the latter, it's a public service AKA "price discovery".

    Banks, even more so than politicians (and that's saying something!) are experts at concealing the true state of affairs – doing so is an essential part of their business model. And when things start to screw up this is a skill that becomes even more important. As we know from previous posts by Golem and others, the banks have a LOT to conceal – ranging from outright criminality like the wholesale forging of mortgage documents in the USA to borderline legal activities like regulatory arbitrage (see earlier posts on German-Irish banks relations for instance) to simple stupidity and bad management.

    Of course they don't want their shares to be properly valued. That could imperil future fundraisings and executive bonuses. Even worse, it might turn out that the true value of shares is less than zero – that the bank is bust.

    So, if there are those out there who want to dig into the true state of a bank's finances and bet against it I say good luck to them. Exposing zombies is a public service when done by shorts just a much as when done by bloggers.

    For the accounting-minded, see past posts on John Hempton's excellent blog which gives an insight into how one hedgie goes about this (his speciality is Chinese "fraudcaps", rather than banks).


  25. TD August 13, 2011 at 3:53 pm #

    No, you can not simply walk away from the debt. You are on the hook for the entire amount, you have important penalties if you are late on your payments and you can end up owing the bank far more then the amount they lend you.
    This crisis has been a rude wake up call for many east europeans who did not know much about credit and how it back fires if you hit a situation where your incomes decreases and your obligations increases.
    Only recently the central bank obligated the banks to tie the interest on the loans to euribor, it was up to the banks to set the interest after a period of one year, you had penalties if you wanted to reimburse the bank in advance etc.

  26. Golem XIV - Thoughts August 13, 2011 at 6:55 pm #


    From what you say it sounds as if the banks were free to charge what they liked how they liked? Are you able to tell us anything about the kind of rate schemes the banks pushed on people? And who are the larger banks there? I would be interested to see which West European banks have their hands in Romanian pockets.

    Don't wirry if you don;t know or have far better things to do with your time. I'm grateful for what you've already told us.

  27. Neil August 13, 2011 at 8:02 pm #

    My post about the new Swiss-German witholding tax agreement (still to be ratified) seems to have been overlooked. There's no need to apologize, but it looks important. To quote the Tax Justice Network blog:

    "A similar agreement with the UK will follow soon, probably within just days or weeks. It is important that civil society and parliamentarians in the UK and elsewhere understand the treaty and its implications. They will soon be facing a similar deal.

    The Swiss agreement with Germany consists of two main parts: a retroactive source ("withholding") tax on undeclared German assets from the past, and a withholding tax on various kinds of capital income in the future. In both cases, the tax will be raised and transferred to Germany anonymously. And it will be considered "final". That is, capital holders will no longer have to declare their assets to the German tax authorities. They can stay hidden."

    See http://taxjustice.blogspot.com/2011/08/swiss-german-tax-deal-more-dominoes-to.html

  28. Golem XIV - Thoughts August 13, 2011 at 9:07 pm #


    And what do you bet that the UK tax authorities never find any 'reasonable suspicion' to ask about any of the MP's, Lords, Bank CEO's, Lawyers, Accountants or Media owners who make up the Westminster nest?

    Thank you for the link. TJN are excellent.

  29. BobRocket August 13, 2011 at 9:32 pm #


    Romanian house prices, http://en.wikipedia.org/wiki/Romanian_property_bubble, it doesn't look good.

    The increase in the price of Romanian property has been due to the influx of 'cheap' credit into an 'unsophisticated' market (this is borderline fraud).

    There is little you can do about that now.

    However, if the wiki is correct, a defaulted property will not yield to the lender (or his insurer) the amount owed, this improves your situation (you have leverage)

    The lender most likely cannot afford for you to default which implies that you do have some can kicking ability open to you.
    Approach the lender, suggest that the current repayment regime is unsustainale, show them a sustainable one that involves a haircut (such as debt forgiveness, interest forgiveness, extended payment (at lower rate) etc.) for the lender but not a total loss (ala greece)

    Gather evidence of property prices since 2005 and lending practices in the same period, is there a case that these could be mis-sold.

    At the end of the day, if you bought the property in good faith then you should repay the debt, however we all need a roof over our heads, if you feel that you (and the Romanian people) have been unfairly exploited then you have every right to challenge the lien that has been placed upon you.

    Golem, I know that large amounts of Swiss denominated loans were sold to Eastern Europe, do you know if UK banks were involved with the selling of these loans (given these loans are fixed interest for a period and then revert to SVR as this is a common way for selling mortages in the UK (low start))

  30. Golem XIV - Thoughts August 13, 2011 at 9:51 pm #


    I don't know. My limited knowledge says the UK banks are involved in a very small way.

    I had the same notion about teaser and SVR. But I don't think the UK were much in evidence in Romania and the region in tehbubble years. It is mostly local, Greek, some French, Italian and Austrian.

    That said when I was in Romania recently I did see this,(this is from this article – http://golemxiv-credo.blogspot.com/2011/05/money-laundering-and-drugs-in-romania.html

    "I was in Timisoara Romania last week. Timisoara is a city of roughly 320k people on the Western edge of Romania. On the drive in to the city I was struck by the huge number of different banks I kept passing.

    From one corner of the central square eight different banks were in sight of each other: RBS, UniCredit Tiriac, GEC Bank, CITI, Banca Transyvania, JTP Bank, ING, Volksbank and BCR (which is Erste – the Austrian bank). Elsewhere in the small city centre I also noted Raiffeisen Bank (another Austrian), BRD (which is actually Societe General), Piraus Bank (Greek)."

    As you can se lots of Austrian, Soc Gen, Citi, UniCredit and RBS.

    It would be RBS wouldn't it. So you never know.

    It's a regular roll call of the insolvent.

  31. BobRocket August 14, 2011 at 12:27 am #

    Golem, thanks for responding (I don't normally expect any comment, I consider the Internet to be a broadcast medium, I just say stuff)

    The Panama connection is Ollie North (and cohorts)(Isreali and Iranian contacts are, when you think about it, are ironic really)

    I know some people who bought properties in Bulgaria a few years ago, I will ask about the details of the financing but I'm sure a lot of them bought from the UK.
    (these people will have been partly responsible for the property boom out there, this is someones pension, sold to them by a FIRE salesperson on commission (who didn't know what they were) selling)

    I have no idea how much the illicit arms trading is worth but the Global illicit drugs trade is $500bn as estmated by the UN in 2009
    This is seriously liquid money
    This is seriously secret money
    We only see a bit of it.
    It does have an effects trail though.

    The trade in humans is in every way wrong.

    Assigning an Asset Value to a Human is wrong.

    People are Priceless not Valueless.

  32. shtove August 14, 2011 at 11:02 am #

    As far as I understand the Swiss constitution forbids a peg to any foreign currency. There would have to be a referendum to change it.

    Not going to happen.

  33. Golem XIV - Thoughts August 14, 2011 at 8:58 pm #


    I didn't know that. It dos rather cast the rumour and news stories reporting it in a different light.


    I'd be most interested in anything further you can tell us about UK proeprty puchases in the East. Even annecdotal opens a window.

    As for Panama (not sure where that came up from ) but the Panama Israel connection is deep, dangerous and live.

  34. wirplit August 15, 2011 at 1:29 pm #

    After all this major stuff some light relief a tale of everyday ( you couldn't make it up) international fraud with a full range of locations from Apache Junction in the Arizona desert, to Australian suburbs via Kensington, the Caymans, Italy, Spain,the Republic of Bashkortostan, Ireland, Russia … it gets dizzying…all researched by Reuters
    HERE Goes to show when you are trying to avoid the tax man be careful of where you land your dough

  35. TD August 23, 2011 at 8:53 am #

    David, I went in a short vacation but I am back.
    "I was in Timisoara Romania last week. Timisoara is a city of roughly 320k people on the Western edge of Romania. On the drive in to the city I was struck by the huge number of different banks I kept passing.

    From one corner of the central square eight different banks were in sight of each other: RBS, UniCredit Tiriac, GEC Bank, CITI, Banca Transyvania, JTP Bank, ING, Volksbank and BCR (which is Erste – the Austrian bank). Elsewhere in the small city centre I also noted Raiffeisen Bank (another Austrian), BRD (which is actually Societe General), Piraus Bank (Greek)."

    As you can se lots of Austrian, Soc Gen, Citi, UniCredit and RBS." – pretty much sums it up (JTP I belive is OTP Bank from Hungary).
    RBS came in Romania after buying ABN Amro.
    What I wanted to say was that in 2000-2007 Romania went through a big economic boom, people expected wages and propriety prices to keep raising to EU levels.
    As BobRocket said "The increase in the price of Romanian property has been due to the influx of 'cheap' credit into an 'unsophisticated' market (this is borderline fraud)".

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