The Daily Reckoning Presents… January 17, 2015 Archives | Unsubscribe Move over Monopoly The real game of life -- Market Meltdown... Break pegs like it's 1992! The hard English lesson about the pitfalls of currency pegs... Then, we republish Robert Wenzel's "Guide for Dummies" on the this week's Swiss Franc surprise and what it means for the rest of 2015... TRUE STORY: Cocktail Napkin + Pen = Profits? Here's a fun "party trick" you can pull off this year: It involves a cocktail napkin...a pen...and a super-easy way to predict which stocks are about to shoot up like rockets... Check out this "party trick" in action right here. Baltimore, Maryland January 17, 2015 Dear Reader, What's this? Have Jim Rickards and our daily reckonings inspired a board game… in England? Allow us to backup, for just a second. By now, you've seen the image in these reckonings... The warning comes via our own Jim Rickards, who wrote two best selling books on the coming monetary collapse. You can read his entire warning, and his supporting evidence, right here. It seems, in fact, that English board game makers have done much... The game is called Market Meltdown… and apparently it's a hit with an area of England that's home to bankers and hedge fund managers. "[P]layers start rich" explains a game description in the Guardian, "and try to stay solvent in the face of defaults, spiralling debts and bonus caps. "Flying private jets round the board, they bet on the stock market (represented by a roulette wheel), and can "go rogue" by borrowing up to £1bn to cover losses should their trades go awry. Players can be fined for market manipulation or wiped out when the price of oil plummets." Apparently each time you circle the board, the interest rate goes up. Though, you can land on a square and draw a card that triggers quantitative easing from the central bank, making the board awash in cash. "That's a move expected from the European Central Bank in 2015" the article adds as if surprised, saying the "the game has uncanny similarities with the recent travails of real-life investment banks" Yeah. Or… the recent travails of real-life investment banks have uncanny similarities with a board game. A perfect segue to bring us around to this week... "Noisy and sudden". That's how Jim Grant described the surprise Swiss National Bank announcement on Thursday. Or, that's how he described what happens when central bankers stop manipulating markets. Either way we agree. Markets are more powerful than central banks -- even the Fed, as you'll see if you stay tuned to these reckonings long enough. For a currency peg to work, central banks have to keep their promises. But for a central bank to work, central banks need to break their promises. Ergo, currency pegs don't work. England taught this lesson to world in 1992. Maybe that's why they make board games about it. They abandoned their peg under something called the "European Exchange Rate Mechanism". Soon after, the pound sterling went reeling. Investor George Soros made $1 billion shorting it. Not too shabby... If you have no idea what we're talking about, don't worry. But please do pay attention. Robert Wenzel, of the Economy Policy Journal, wrote an informative article about Swiss franc's action this week. He not only explains what happened in Switzerland but leans forward to explain the impact it might have throughout 2015. We've republished it for you below. If you asked us to summarize the whole essay in one word, we'd say: "bloodbath". Or, if you permitted us to use two words, we'd say: "Market Meltdown", if only to share Rickards' letter with you one more time. Check it out if you haven't. And if you have, get your fill of Bill Bonner… Addison Wiggin… Jim Rickards… and Robert Wenzel, in our five must-reads, below... Enjoy your weekend, Pete for The Daily Reckoning P.S. We've started publishing a new alert service called Jim Rickards' Currency Wars Alert. The idea is for Jim to help you turn unprecedented currency moves, like the SNB's, into unprecedented profits. You couldn't ask for a better guide, either (he literally wrote the book on currency wars). We'll have more information about the service in our reckoning on Monday. Tune in for more... Care to accept a "bribe"? I'd like to "bribe" you to get healthier and wealthier by the end of 2015... and I have the perfect little thing to help you get started today. Hint: It's blue, smaller than a book, and weighs less than a coffee mug... it's also something you might use every day to improve your own life. Click here now to find out what it is. This Week's 5 Must-Reads Featured on Dailyreckoning.com… 1) In 2007, the $1 trillion subprime market lost 20% -- $220 billion - and was enough to take down the entire economy. Today, the energy market is five times as large. Similar losses in a collapsing oil market could total in excess of $1trillion. Click here to join our own Jim Rickards on a tour of the mayhem behind the scenes... 2) Bill Bonner was in Paris last weekend and saw the French take the "extremists' bait" firsthand. Click here to see Bill ruminate on the terrorists getting exactly what they want... 3) Addison Wiggin checks in with our own Jim Rickards and do a quick historical overview of the currencies struggles that have brought us up to 2015 and onward. Click here for it. After you read, you won't look at the tolls you have to pay on the highway the same way ever again… 4) Don't believe the price of gold is manipulated? Jim Rickards sat down in our "Studio 808" to convince you otherwise. Click here to hear why the gold fix is a global effort... 5) Last but not least, we publish the Robert Wenzel article referred to above. He calls it a guide for "dummies" but it's better than most of the articles we've seen written for the "experts". Read on... Invest Alongside the Queen Inside of a small, unassuming private office is one of Queen Elizabeth's most valuable investments -- her "Phi Account." Unlike most royal assets, the queen's "Phi Account" is privately held by the queen herself, and it's gone up every year since 1952. Now, you can get your very own "Phi Account" and invest right next to the queen. Here, I'll show you how you could sign up for a "Phi Account" and make 12% every year without touching the stock market. Understanding the Swiss Central Bank Move and Its Implications for the Rest of 2015: A Guide for Dummies by Robert Wenzel As the 2008 financial crises developed, international traders sought the safety of the Swiss franc. This flight to safety intensified as the Greek financial crisis took center stage in 2009. It resulted in the value of the Swiss franc soaring against the euro (and to a lesser degree against other currencies). This franc strength was a great boon to Swiss consumers, as it became cheaper and cheaper to buy products from other European countries. It, however, had the opposite effect for Swiss manufacturers that exported their products. The products became much more expensive for consumers in other countries that used the euro (and to a lesser degree other non-Swiss currencies). In 2011, as the franc continued to soar, Swiss exporters continued to put pressure on the Swiss government and the Swiss National Bank. Eventually, the SNB announced that it would set a minimum value for the euro — 1.2 Swiss francs — and that to enforce this minimum it was "prepared to buy foreign currency in unlimited quantities." This caused the Swiss franc to fall back from its highs and remain in a trading range. In order for the SNB to maintain this trading range it had to sop up billions in euros and other currencies that international investors were willing to exchange for francs. And I do mean billions. By the end of 2014, the SNB holdings of foreign exchange reserves amounted to more than 500 billion (in terms of Swiss francs) up from under 50 billion in 2009. In order for the SNB to purchase this huge amount of reserves, it had to print a massive amount of new Swiss francs. This was not winning fans in Switzerland among the prudent crowd that correctly considered this money printing irresponsible. But here's the kicker. It is widely believed that next week Thursday, after a meeting on the European Central Bank monetary policy committee, the ECB will announce an expanded money printing program. With the SNB propping up activity in place, this would most assuredly have resulted in even more euros flowing into the Swiss franc. In other words, if the SNB continued to prop up the euro after such an ECB announcement. it would have to absorb even more foreign exchange by printing even more francs. Rather than doing this, the SNB announced yesterday that it would no longer prop up the euro and, instead, would allow it to trade freely. And thus,without the SNB prop, the euro, yesterday. collapsed against the franc. At one point, the euro was down more than 40% against the franc. So why are some financial firms taking huge losses because of this move? Because of something known as the "carry trade." With the SNB printing so many francs, interest rates based in francs were very low. Thus, it made sense, if you thought this policy was to continue, to borrow low interest rate Swiss francs (that is, short francs) and buy (go long)currencies where interest rates were higher. Bloomberg explained in early 2014 the perspective of those that made this trade: The Swiss franc is offering carry traders some of the best returns in developed markets... Switzerland's zero-to-0.25 percent target rate makes the franc a natural funder of carry trades. Its credentials may be further burnished by the 1.20-per-euro cap the Swiss National Bank imposed in 2011. --- "If you were to fund a carry trade in the Swiss franc, the funding side would work out pretty well for you because it won't get stronger," Steve Barrow, the London-based head of Group-of-10 research at Standard Bank Plc, said by phone on Jan. 15, 2014. Barrow recommends selling the franc against the dollar, euro and British pound. This trade worked well until yesterday. Then it went very, very bad. Think about it. In order to make decent money on this trade, you need to be highly leveraged. On top of this, you were short, Swiss francs, which climbed yesterday by as much as 40%. That is, in order to pay off your Swiss franc obligation, yesterday it cost you as much as 40% more than the rate at the time you borrowed the francs. And because traders employing this method are highly leveraged, they were likely getting margin calls, yesterday, to put up more money immediately or face immediate liquidation. The liquidations were likely massive with traders suffering losses so huge that some will be forced to shut down . That's why we are already seeing foreign exchange brokers reporting massive hits. You can be sure that these brokers have underlying clients that also have huge losses. Here is a statement released by one foreign exchange broker, most are in pretty much the same condition: The recent move on the Swiss franc caused by the Swiss National Bank's unexpected policy reversal of capping the Swiss franc against the euro has resulted in exceptional volatility and extreme lack of liquidity. This has resulted in the majority of clients sustaining losses which has exceeded their account equity. Where a client cannot cover this loss, it is passed on to us. This has forced Alpari (UK) Limited to confirm today, 16/01/15, that it has entered into insolvency. Bottom line: What is seen regularly in markets is that traders instead of understanding the fundamentals of a situation, trade as though current trends will continue forever. When those trends reverse, the losses are enormous. Because most markets are rigged by central bank manipulations. the potential for all kinds of reversals in trends is possible. Almost no trader believes these trends can be reversed quickly, but when everyone believes they can't and the trend does reverse, and the shift is recognized, it happens very quickly and the losses are massive. Currently very few (I am in a very small minority who does) believe that the fundamentals will ultimately result in very rapid price inflation (5% plus) and much faster hikes in interest rates than almost all expect, sometime by the end of 2015. Because no one is expecting these things to occur, the bloodbaths will be as bad as the Swiss franc carry trade bloodbath we saw yesterday, if not much worse. The year 2015 will be the year of bloodbaths, The Fed and other central banks have simply pushed their manipulations to the edge and they will be forced to reverse direction because of market pressures in the same way that the SNB was forced to give up its propping up of the euro. When this occurs, and traders trading based on current trends have to unwind their positions, financial markets will be rocked to the core. Regards, Robert Wenzel for The Daily Reckoning Peter's Note: It's because of the monetary "race to the bottom" that we've launched a new project with Jim Rickards. It's called Jim Rickards' Currency Wars Alert. It's a premium advisory that helps you profit from the global currency war. We're still in beta-testing mode… ironing out the kinks before we release it to the general public. You can get in next week, though, through a special offer we'll be revealing. In the meantime, if you haven't read Jim's latest letter -- explaining where the road the Swiss National Bank's on ends, click here. Robert Wenzel is Editor & Publisher at EconomicPolicyJournal.com and at Target Liberty. He is also author of The Fed Flunks. 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. For any further comments or concerns please email us at dr@dailyreckoning.com. 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