The Daily Reckoning Presents… January 15, 2015 Archives | Unsubscribe The Swiss Rescind Neutrality Shitzengiggles und... the Swiss National Bank ditches 500 years of national tradition for a seat at the table… A 30% jump in the currency markets? Historic… and how to play it… Then, Addison gives us a tour of the currencies wars of the 20th century… why they matter… and, accordingly, why Jim Rickards is part of the research team… External Advertisement Sick of Wall Street? 5 opportunities to take back control of your finances. Master these and you might never worry about what Wall Street's cronies… Or what they are doing with your money… Ever again. Click here to learn more. Baltimore, Maryland January 15, 2015 Dear Reader, Give a Ph.D. a mask and a gun and he'll rob a bank… Give him a central bank… and he'll rob an entire nation… There to illustrate the point this morning was Thomas Jordan, president of the Swiss National Bank. In a (not so) shocking move, Mr. Jordan threw a schnitzel to big banks and traders -- negative interest rates, or, in frilly financial speak, NIRP (the "P" is for policy). "Swiss Franc Jumps 30%," reports Reuters, "After Swiss National Bank Dumps Euro Ceiling." At first blush -- a currency "jumping" doesn't sound half bad. Strong equals good, you might think. We thought the same thing… though we were skeptical as always. Especially at the thought of a central bank making a hard choice. Scrolling down our list of iPhone contacts, we tried calling our friend Jim Rickards. He answered but was in Mexico, believe it or not. He's speaking at conference in Cancun. He told me he had to turn down interviews with CNBC, Bloomberg and RT, all of whom wanted to get his opinion. Instead, we turned to the man Jim calls his doppelganger -- Dan Amoss. Dan's a master analyst who's been working with your editor on our three new publishing projects with Jim. "Rewind to 2011," says Dan, telling us to mind our history. From here on, we paraphrase... Four years ago, crisis was breaking out across the European continent. You may recall the news. Portugal, Spain, Ireland, Greece and Cyprus learned what most 10-year-olds already knew: You can't get something for nothing. As Europe's most reckless neared debt default, stocks, bonds and the economy crashed. European investors, on the advice of the Steve Miller Band, took their euros and ran to the one trustworthy place they knew -- the Swiss franc. Soon after, the franc spiked in value: Put yourself in the watchmaker's wristband… the chocolatier's apron… or the ski instructor's skis. As the backbone of the Swiss economy, a strong franc means your Victorinox, Lindt chocolates and weekends in Luzern are more expensive and you sell less of them. So the Swiss National Bank did in four years what it hadn't been able to do in 500 -- degrade its financial system with cheap credit. It promised to print as many Swiss francs as it took to make sure its currency stayed weak and the economy's watches, chocolate and ski trips stayed competitive in the world market. Money printing made the situation stable... if you want to call it that: "The way I like to think of it," explains Dan, "is like the Swiss National Bank holds a big beach ball -- the franc -- under the water. As long as it's holding it, the ball will stay there." As you can see above, that's exactly what's happened for the last three years. "But as soon as they let go of the ball," he adds, "it rockets up out of the water." In the franc's case, that looks like this: "Currencies don't normally move that far on a daily basis," adds an article by Buttonwood in The Economist -- "2-3% is a big shift. The exception is when a country on a fixed exchange rate suffers a devaluation; then a 20-30% fall is a possibility. But a 20-30%-plus upward move is almost unprecedented." Or to put the horse in front of the cart, printing hundreds of billions of francs in four years is unprecedented. "The institutional guys want to get in on the game," opined our partner Addison over IM. We were trying to make heads or tails of the move. Why would the Swiss National Bank decide to drop the peg with the euro? Running with safe assumptions, like government's penchant for drinking Keynesian central bank Kool-Aid, we reached the following conclusion: We're witnessing the erosion of 500 years of a sound Swiss financial system. For half a millennium, the Swiss prided themselves on sound finance, prudent savings and investment. They were the stewards of financial assets. A sane man locked up in the looney bin. Now, with negative interest rates, they gave up and grabbed a straight jacket. A Swiss bank, like UBS or Credit Suisse, can borrow money at -0.75%, lend it to hedge funds at 0.50% and make a free 0.25%. Likewise, the hedge fund can take that money at 0.50%, buy a 10-year Treasury for 1.7% and pocket over 1% doing nothing. Heck, the franc may be worthless when all is said and done… but get your hands on some before then -- if you can -- and you'll do just fine. (Our "back office" is still looking into it, but UBS and Credit Suisse might be good plays, too. Stay tuned.) Meanwhile, if you're holding dollars, look out below. Currency wars are a race to the bottom… as Jim Rickards has forecast and Addison explains below. Low rates in 2015 and QE4, here we come. Giddy up! Regards, Pete The Daily Reckoning P.S. 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. To get you prepared, Addison dives into the currency wars of the 20th century and Jim's work, below… P.P.S. 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. Double the Profit of Stocks -- Without the Headaches Are you fed up with the stock market? Tired of taking big risks for small profits? I recently discovered a unique investment strategy that went up at least 5% every year between 1950 and 2010. And since 1991, "Phi Accounts" have made an average of 12% a year. That's double what the S&P 500 did over the same period. Even better, this investment strategy has nothing to do with the stock market. Click here to find out more... The Daily Reckoning Presents... We check in with Jim Rickards and do a quick historical overview of the currencies struggles that have brought us up to 2015 and onward. After you read, you won't look at the tolls you have to pay on the highway the same way ever again… ****************************** The Currency Wars of the 20th Century by Addison Wiggin Jim Rickards is no ordinary hedge fund manager. Lots of guys can boast 35-year careers on Wall Street. Only Rickards is also a lawyer who was the chief negotiator during the 1998 rescue of Long-Term Capital Management -- in which 14 of the world's biggest banks ponied up $3.6 billion to prevent a global financial meltdown. And only Rickards is a consultant to the Pentagon who walked senior military planners through their first-ever "financial war game." His best-selling book Currency Wars opens with a two-chapter account of this war game -- held at the Warfare Analysis Laboratory in Laurel, Maryland -- a strategy room whose website boasts "14 plasma displays for defense exercises" and "3-D scenario modeling and visualization." The financial war game was made more intense by the fact it took place amid the market panic in late 2008 and early '09. We won't give too much away here; suffice it to say Team Russia announced it would accept only gold in exchange for its oil and gas -- no dollars. Then Team China made its own move to "tighten the noose around the U.S. dollar's neck." As it happened, on the second and final day of the war game, Russia's Vladimir Putin declared of the dollar, "The one reserve currency has become a danger to the world economy: that is now obvious to everybody." Rickards believes the real currency war presaged by Putin began in early 2010. He labels it Currency War III. "Currency wars," Rickards writes, "are fought globally in all major financial centers at once, 24 hours per day, by bankers, traders, politicians and automated systems -- and the fate of economies and their affected citizens hang in the balance." "Currency wars are fought globally in all major financial centers at once, 24 hours per day" Both previous currency wars both took place within the last century. Currency War I erupted from the ashes of World War I in 1921 when Germany began its epic devaluation of the mark -- the one memorialized in pictures of wheelbarrows full of paper money that weren't enough to buy a loaf of bread. Thus did the rest of the world race to devalue their own currencies to remain "competitive." France leaped first in 1925, devaluing the franc. Britain abandoned the gold standard in 1931. The United States infamously devalued the dollar against gold in 1933 -- from $20.67 an ounce to $35. France and England devalued again. "In round after round of devaluation and default," Rickards writes, "the major economies of the world raced to the bottom, causing massive trade disruption, lost output and wealth destruction along the way." Currency War I ended in a whimper in 1936 with a three-way deal between the United States, Britain and France. Germany by that time was goose-stepping to its own drummer, and a shooting war followed three years later. Currency War II blew up in 1967 when Great Britain devalued the pound against the dollar. Soon the dollar itself was under pressure -- a matter complicated by the fact the dollar was still tied to gold in international trade. The rest is monetary history: France turned in scads of dollars for America's gold, nor were the French alone. The Treasury's gold supply dwindled from 20,000 metric tons in 1950 to barely 9,000 when President Nixon "closed the gold window" in 1971. The entire world was now on a floating fiat currency standard. On Jan. 27, 2010, President Obama fired the first volley of Currency War III in his State of the Union speech. The dollar sank throughout the '70s, but soared in the early '80s under Federal Reserve Chairman Paul Volcker. The world's other principal currencies, the Japanese yen and West German mark, went on a roller-coast ride the whole way. Exhaustion set in. The Plaza Accord of 1985 set the dollar on another downward trajectory, and the Louvre Accord of 1987 resulted in equilibrium -- more or less. "There was relative peace in international monetary matters," Rickards writes, "yet this peace rested on nothing more substantial than faith in the dollar as a store of value based on a growing U.S. economy and stable monetary policy by the Fed." That faith finally broke in early 2010. On Jan. 27, 2010, President Obama fired the first volley of Currency War III in his State of the Union speech. He announced the National Export Initiative. Its aim -- to double U.S. exports in five years. "The traditional and fastest way to increase exports had always been to cheapen the currency," Rickards writes in Currency Wars. And everyone around the world knew it. Later in 2010, the Federal Reserve stepped in with a second round of "QE," or money printing. "By using quantitative easing to generate inflation abroad, the United States was increasing the cost structure of almost every major exporting nation and fast-growing emerging economy in the world all at once." And so began another race to the bottom, a new round of competitive devaluations. "We're in the midst of an international currency war," declared Brazil's finance minister Guido Mantega in September of 2010, "a general weakening of currency." Shocking New Study: NEVER Buy This One Weird Food Have you heard about the No. 1 weird food that's so dangerous eating it is like smoking four packs of cigarettes? It's true! I bet not one in 1,000 people knows about it. There's a good chance it's sitting in your fridge right now. Why is it allowed on the market? You'll never believe the shocking story. The reporters who first uncovered it were fired and their work banned from the news. See this BANNED story now. No one will be left untouched by Currency War III, but Rickards says it will take place in three major theaters. In two of the theaters, the combatants have mutual aims. The third is the most likely source of outright conflict. The Atlantic theater is the balance between the United States and the eurozone. "The euro and dollar," writes Rickards," are best understood as two passengers on the same ship... moving at the same speed, heading for the same destination." The euro topped at $1.59 in July 2008 and bottomed at $1.10 in June 2010. As we go to press, it's at $1.29 -- essentially where it was in early 2007, and again in early 2011. That relative stability is no accident: Washington aims to prop up the euro to the point of the Fed engineering a secret bailout of European banks in 2008 -- $3.08 trillion in loans that became public only in 2011. The Eurasian theater of the war, meanwhile, is the balance between Europe and China. "China has a vital interest in a strong euro," Rickards writes -- not least because the European Union is China's largest trading partner, larger even than the U.S. Bottom line: "Europe, China and the United States are united in their efforts to avoid a euro collapse despite their mixed motives and adversarial postures in other arenas." Which brings us to the Pacific Theater -- the big show. The U.S. trade deficit with China was less than $50 billion in 1997. By 2006, it swelled to $234 billion. Politicians grandstanded about American jobs "lost forever to China" and Chinese leaders "manipulating" their currency. The U.S. trade deficit with China was less than $50 billion in 1997. By 2006, it swelled to $234 billion. Never mind that the evidence linking currency value to jobs is, er, slim at best. Even if the yuan doubled in value, Rickards points out a Chinese furniture maker would be making $236 a month -- and a furniture maker in North Carolina still wouldn't be competitive. If we still had a gold standard -- or even the Bretton Woods system in place between 1944-71, such yawning trade gaps would be impossible. The flows of gold between creditor and debtor nations -- consider our example at the start of the issue -- would, naturally, maintain an equilibrium. Meanwhile, manipulation is a two-way street: "China's policy of pegging the yuan to the dollar," Rickards writes, "was based on the mistaken belief and misplaced hope that the Fed would not abuse its money printing privileges." Fool me once... "Given the choice," Rickards writes, "between uncontrolled inflation with unforeseen consequences and a controlled revaluation of the yuan, the Chinese moved steadily in the direction of revaluation beginning in June 2010, increasing dramatically by mid-2011." You can see the result in the chart nearby. Through mid-2010, it took 6.8 yuan to equal one U.S. dollar. But with the conscious decision to strengthen the Chinese currency, it now takes barely 6.1 yuan to equal a dollar. Thus, "the United States had won round one of the currency wars." There will be more to come. "Everything's a cross rate," Jim says. "There's a dollar euro cross rate. There's a dollar yen cross rate. There's a dollar Chinese yuan cross rate, Swiss francs and so on. And it's dynamic. The dollar could be going up against the Euro, which it has been lately but going down against the Chinese yuan. "Is the dollar going up or down? Well, the answer is compared to what? And this is what we do in currency wars. We look at this. We understand these dynamics. We understand that any two currencies are a zero sum game." Regards, Addison Wiggin for The Daily Reckoning P.S. We cheated a bit today. Here, exclusive for Daily Reckoning readers, you can catch a sneak peek of Jim's welcome video for his new Currency Wars Alert. While Jim gets into a groove, it's only for Agora Financial Reserve members. You'll have a special opportunity to join their ranks Monday. In the meantime, enjoy: Jim gives you a sneak peek on how currency war trades are conducted. Addison Wiggin is a three-time New York Times bestselling author and the cofounder of the Daily Reckoning. 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. If you are you having trouble receiving your Daily Reckoning subscription, you can ensure its arrival in your mailbox by whitelisting the Daily Reckoning. © 2015 Agora Financial, LLC. 808 Saint Paul Street, Baltimore MD 21202. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security they personally recommend to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of a printed-only publication prior to following an initial recommendation. Any investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.