Burning of the Boogg

The Daily Reckoning Presents… January 16, 2015 Archives | Unsubscribe Burning of the Böögg The Swiss movement… the shocking outcome of the SNB decision to decouple from the euro... A Swiss tradition of ceremony and gold… Will it hold? Then, David Stockman with a behind-the-scenes look at what's likely to happen next… SHOCKING: your fellow readers caught on camera! You won't believe what we caught these five ordinary readers of ours doing on camera. Click here to see for yourself >> Baltimore, Maryland January 16, 2015 History can turn on a dime. The trouble is, dimes are the coin you're most likely to miss when fishing around in your pocket for change. "The triggers for major changes in history always seem insignificant at the time," our friend Egon von Greyerz wrote this morning. Egon's business is based in Zurich…. ground zero for the Swiss National Bank (SNB) decision to break their three-year peg to the euro. "The trigger in 1914 was the fatal shot in Sarajevo... or in 1931, the Creditanstalt in Austria. The first was the catalyst for WWI. The failure of the Austrian bank in 1931 ushered in the beginning of the Great Depression. "It is hard to say today what in history will be seen as the catalyst for the worldwide downturn that is just now about to start... not just in the economy but also politically, geopolitically and socially." We're due, Egon believes, for a meltdown. "This will not just be a temporary cyclical downturn," he says, "but a secular downturn that could last for decades or even longer." We visited Herr von Greyerz in his hometown of Zurich in April 2011. The Burning of the Böögg festival was going on. It's an annual affair, an attempt to destroy the boogeyman of winter. Burning of the Böögg At the same time, there was a meeting of institutional gold traders happening at a conference center nearby. Somehow, the confluence of the two events seemed appropriate. "The so-called Böögg is a giant 3-metre [10-feet]-high effigy of a snowman," explains a citation online, "made from straw and cotton wool and charged with explosives sitting on top of a bonfire. Burning the snowman doll symbolizes putting an end to winter. "Following their parade, guild members on horseback ride around the pyre while the bands are playing the official Sechseläutenmarsch tune. Of Russian origin, the melody probably found its way to Zurich during the Napoleonian wars. Zurich's guild members, opposed to the revolution depriving them from their privileges, must have liked it for political reasons as much as for its musical quality. "The pyre is set on fire exactly at 6 o'clock p.m. Legend has it that the quicker the poor Böögg 'dies' (i.e., his head explodes), the sooner summer will come, the hotter it will be and the longer it will last." It's hard not to derive parallels between the festival and the economic situation Switzerland finds itself in. After the festival, Egon took us on a tour of a gold vault in the Zurich free trade zone inside the airport there. Technically, this is probably illegal: Our son with a brick of gold in 2011. There aren't a lot of these bricks of gold available on the planet. In fact, there are only 176,000 tonnes of gold above ground, as we speak. Enough to fill a cube 60 feet on all sides -- or approximately the area under the Eiffel Tower. The Swiss franc has historically played a role in ensuring that currencies are pegged in some meaningful way to gold. Not so anymore. "The mainstream explanation is probably the most plausible," Chris Mayer tried to explain the bank's decision yesterday. "The Swiss National Bank (SNB) sees massive QE coming from the ECB. They deduce this will cause an awful lot of strain and expense in maintaining the peg. So they decided to let it float before it happens and becomes an even more costly proposition. "It's going to hurt Swiss industry -- all those exporters' goods just got more expensive… Swiss watchmakers, etc. It also hurts the value of their own bond portfolios denominated in euros." "Central banks are run by politicians," writes Rich Checkan, a longtime friend of The Daily Reckoning, "As a result, their guarantees and press releases cannot be counted upon and cannot be trusted as a base for solid financial planning. Further, their manipulations of the currencies and markets in general led to the widespread volatility we are experiencing." Swiss bank shares plunged, with UBS and Credit Suisse both down by close to 10% by midafternoon on Jan. 15, 2015. "The fundamental story here is one of competitive currency devaluations," explained GoldCore's Mark O'Bryne, a friend of ours from Google+, on Bloomberg. "Increasing deflationary pressures around the world are leading to currency wars." That makes Thomas Jordan, the Swiss National Bank's chief, "an astute lieutenant in the currency wars." It's "one step backward for the Swiss. They will look to devalue their currency again because they can't allow their currency to appreciate too much against the euro and the dollar." The Swiss will also, ironically, have to buy euros to stabilize their own currency. Mark and I will be chatting about the impact of the SNB's move on your portfolio next week. In the meantime, he emailed me a cliffhanger: "Gold is going a lot higher, or more accurately, all fiat currencies are going a lot lower…" Regards, Addison Wiggin The Daily Reckoning External Advertisement [ATTENTION] Seniors – this could change your life: Options master Lee Lowell has agreed to give you one year of his most successful research (worth $3,000) – free. Doing so could flood your bank account with cash payouts of as much as $10,000 per month. The catch: You must act now. Immediate details here. The Daily Reckoning Presents... David Stockman sees only positive developments from the Swiss National Bank move yesterday… ****************************** In Praise of Price Discovery by David Stockman This morning's market is more erratic than Claire Danes off her lithium. Gold is soaring, the euro's plunging, US treasury yields are in free fall, junk bonds are faltering, copper is bouncing, oil has rolled over, the Russell 2000 momos are getting mauled, the swissie has shot the moon, the Dow is knee-jerking down, correlations are failing……and the robo traders are flat-out lost. All praise the god of price discovery! For six years financial markets have been drugged into zombiedom by maniacal central bankers who have violated every known rule of sound money and financial market honesty. In expanding their collective balance sheets from $5 trillion to $16 trillion over the past decade, for instance, they have midwifed a planet-wide fiscal fraud. Politicians have been enabled to spend and borrow like never before because central banks have swapped trillions of public debt for electronic cash confected from nothing. Likewise, never have carry traders and gamblers been so egregiously pleasured by the state. After 73 straight months of ZIRP they are still pinching themselves, wondering if such stupendous largesse is real. They have bought anything with a yield and everything with prospect of gain, financed it for nothing and collected the arb -- while being swaddled in the Fed's guarantee that it would never surprise them or perturb their trades with unannounced money market rate changes. Never have carry traders and gamblers been so egregiously pleasured by the state. And so they wallowed in their windfalls, proclaiming their own genius. Does a pompous dandy like Bill Ackman end up purchasing an absurdly priced $90 million Manhattan condo just "for fun" because markets operate on the level? Do his petulant brawls with other grand "activist" speculators like Carl Icahn mark investment genius or the machinery of honest capitalism at work? No they don't. There is absolutely nothing honest, productive or fair about the central bank dominated casinos which have morphed out of what used to be legitimate money and capital markets. Indeed, all the requisites of stability, efficiency and honest price discovery have been destroyed by the monetary central planners. The short sellers have been eradicated. Downside insurance against a broad market swoon has become dirt cheap. Momo traders have thereby been enabled to earn unconscionable returns because their carry costs have been negligible and their hedging expenses nearly nothing. Accordingly, the chart below of the S&P 500 since the March 2009 bottom does not represent a market at all; it traces the central bank enabled casino in full bloom, the buy-the-dips mania in overdrive. Behind this vast deformation was, ultimately, a simple proposition. Namely, that central banks were omnipotent, efficacious, purposive and reliable; that everywhere and always they had the "backs" of the gamblers and speculators; and that, above all, the central bank "put" was money good. Yesterday all that changed. In a word, the Swiss Central Bank was on the verge of printing itself into oblivion. It had to stop pegging the CHF at 120 before the madman Draghi turned on the ECB printing presses and submerged the SNB's vaults in a deluge of wasting euros that would have soon reached the tops of the Alps. Here's what it had come to. In about 84 months, the SNB's balance sheet had expanded by 5 times. It now stands at nearly 100% of GDP, towering far above even the lunatic monetary emissions of the BOJ. Why Is the Government Preparing for Catastrophe? We've just been handed a previously unseen dossier, produced from intelligence gathered by one man deep inside the halls of the Pentagon. The pages inside that document now make one thing urgent, and crystal clear... Our government has begun emergency preparations for a disastrous event that could take place as early as March. What do authorities know that we don't? And why aren't they alerting everyday Americans like you and me? Click here and see all the details for yourself. Had the SNB not finally blinked, the Swiss economy would have been obliterated in a orgy of export sector malinvestment, virulent domestic speculation and incendiary asset-inflation. At length, even Swiss mountainside real estate would have become too expensive for cows and ski lodges alike. What happened yesterday is that the SNB confessed it was lying, faking, making it up by the seat of its pants. So doing, it unleashed financial hell. Scroll down the Swiss stock exchange lists and find exporters, miners, industrials and techs down by 10-20% in a single day. Is it possible that some of these "names" had been in the portfolios of leveraged momo traders who are now getting heavy margin calls? The Lonza Group life science company, for example, had been up 4 times from its 2012 low and traded at 30 times. So when it lost 18% of its CHF value in a heartbeat yesterday, it was not just widows and orphans funds which were licking their wounds. So too the army of carry traders who funded their speculations with zero cost CHF. They were ionized in a nanosecond because they were effectively "short" the swissie. But why not? They believed SNB Chairman Thomas Jordan's incessantly repeated promise that the 120 peg would never, ever be removed -- and most especially not in the dead of night, without warning. And at least the professional speculators in the CHF should have known better. Now comes the millions of everyday central and eastern European householders who took out ultra-low interest mortgages denominated in CHF. They too should have read the fine print, but why bother in a world of central bank omnipotence? Needless to say, Thomas Jordan is not the last central banker who has turned out to be a liar. He's merely the first -- with Mario Draghi already on deck. When he fails to deliver on "whatever it takes", and that is a near certainty now, they will not even want him back in Italy to assume the ceremonial post of President. Can it be that dozens of Italian banks, which loaded up on Italian government debt when ECB front-running speculators drove yields into the sub-basement, will now be reawakened to the process of price discovery? Most assuredly they will. It was only Draghi's seat of the pants lying that made the following picture possible. In an honest financial world, the debt of a ungovernable country on a fast track to bankruptcy could not possibly have experienced the stupendous rally of the last 30 months shown below. So let the price discovery begin. The global petroleum complex is already there. So is iron ore, copper and the most of the central bank bloated world of industrial commodities. The EM currencies are not far behind. Nor is the $9 trillion of vastly over-valued off-shore debt that was denominated in dollars and sold to yield hungry speculators. Take a trip to Istanbul. Ask how the skyline of construction cranes will find the dollars to pay off the debt they have poured into still empty towers. For that matter, can the Japanese monetary madhouse be far behind? Have not even the Shanghai market punters figured out that China's $26 trillion tower of debt is already swaying precariously in the global financial winds? Yes, the Swiss National Bank did ring the bell. Slowly at first, and then with a rush, the casino players will learn that the central banks have been lying all along. Then the lost art of "price discovery" will have its way. Regards, David Stockman for The Daily Reckoning David Stockman was a two-term Congressman from Michigan. He was also the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street. He's the author of two books, The Triumph of Politics and The Great Deformation. He also is founder of David Stockman's Contra Corner. BE SURE TO ADD dr@dailyreckoning.com to your address book. Additional Articles & Commentary: Join the conversation! Follow us on social media: The Daily Reckoning is committed to protecting and respecting your privacy. We do not rent or share your email address. By submitting your email address, you consent to Agora Financial delivering daily email issues and advertisements. To end your Daily Reckoning e-mail subscription and associated external offers sent from Daily Reckoning, feel free to click here. Please read our Privacy Statement. 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