Hilliard’s Weekend Notebook


Thoughts, views and opinions as current events unfold: With topics taken from current market events and my latest book — When the Bubble Bursts: Surviving the Canadian Real Estate Crash (Dundurn: March 2015)  and my first book Investment Traps and How to Avoid Them (1999) — this short piece will give you unique and valuable insights filtered by my thirty-six years’ experience as an investment professional.


 

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What are Swiss central bankers thinking?

Yesterday the Swiss National Bank (SNB) shocked the markets. They decided to end their practice that goes back several years of capping the Swiss franc exchange rate against the Euro. The SNB had been buying Euros and selling francs to stop the franc from rising and to fight deflation. Yesterday the SNB also announced a policy of negative interest rates, meaning that anyone holding deposit in Swiss francs would have to pay for that privilege. Only people with really large deposits would pay that price (0.75% annually) since the rest of us can just take our money in currency and put it in a safety deposit box or under the mattress.

Courtesy of The Daily Shot here is a graph that shows the challenge the SNB faces – Switzerland is back in deflation and they’ve decided to give up the fight!

As Paul Krugman writes in today’s op-ed piece in the New York Times;

“What this says is that you really, really shouldn’t let yourself get too close to deflation — you might fall in, and then it’s extremely hard to get out.” Krugman writes that the SNB has made a serious mistake by giving up on their plan to fight Swiss franc strength.  The demand for the franc as a safe haven was just too strong to resist and the central bankers decided to give up.

And that forces investors to consider another question: Are there more unexpected policy changes coming from other central bankers?

So the fallout from the global financial crisis of 2008-09 is far from over, a viewpoint that is not fully appreciated by all investors.