Gyroscopic Investing

These are strange and unnerving times in global financial markets, and if Thursday’s jaw-dropping move in the Swiss currency didn’t prove it, nothing will.

It is not every day that the currency of an advanced, economically important country rises by double-digit percentages against the currencies of other such countries within mere hours. But that is what happened to the Swiss franc on Thursday. It is up 18 percent against the euro as of Thursday morning, and at one point was up 39 percent. Currency strategists were searching for any analogue in modern history for a similarly abrupt move in major Western currency and coming up empty.

Read the rest here.
http://www.nytimes.com/2015/01/16/upsho ... 0002&abg=1

I am feeling somewhat vindicated today, having taken the somewhat lonely position in the past that the Franc remained one of the better currencies out there, despite being pegged to the Euro. One can set all the artificial currency pegs you want to, but real economic conditions eventually determine the value of a currency. And Switzerland is cursed with a sound economy, a stable and competent government, and negligible debt. The only way you can really weaken a currency in that situation, is the old fashioned way, with very aggressive money printing.

On a side note, though I am not a big fan of PRPFX (too much inflation bias), holders of that fund must be smiling today.

More analysis from Ambrose Evans-Pritchard here...
http://www.telegraph.co.uk/finance/comm ... ences.html

The executive summary: Deflationary pressure is overwhelming central banks.

There was a similar move with the Yen in 1998. The Yen strengthened against the Dollar (and all other major currencies) by 15% in just two days. Here are some links:
http://www.wsj.com/articles/SB100014241 ... 0218189706
http://papers.ssrn.com/sol3/papers.cfm? ... _id=201029

IMO, the Yen and the Swiss Franc share a lot of characteristics.

Take a look at the Swiss yield curve right now:


Negative yields up to 9 year maturity and 0.069% yield on 10 year bonds.

Lang wrote: There was a similar move with the Yen in 1998. The Yen strengthened against the Dollar (and all other major currencies) by 15% in just two days. Here are some links:
http://www.wsj.com/articles/SB100014241 ... 0218189706
http://papers.ssrn.com/sol3/papers.cfm? ... _id=201029

IMO, the Yen and the Swiss Franc share a lot of characteristics.

Take a look at the Swiss yield curve right now:


Negative yields up to 9 year maturity and 0.069% yield on 10 year bonds.

I don't see any significant resemblance in the characteristics of the Yen and Swiss franc, if you are referring to fundamentals. The Japanese central bank has been aggressively easing for at least a decade, IIRC, whereas the SNB has only recently tried the same nonsense. Also, Switzerland is the destination for a lot of the world's (rightfully) scared money, whereas Japan is not.

What are the resemblances that you see?

Libertarian666 wrote: What are the resemblances that you see?

A deflationary depression?

Ad Orientem wrote:

Libertarian666 wrote:

Lang wrote:
What are the resemblances that you see?

A deflationary depression?

I don't think there is any depression in Switzerland, deflationary or otherwise.

Libertarian666 wrote: I don't see any significant resemblance in the characteristics of the Yen and Swiss franc, if you are referring to fundamentals. The Japanese central bank has been aggressively easing for at least a decade, IIRC, whereas the SNB has only recently tried the same nonsense. Also, Switzerland is the destination for a lot of the world's (rightfully) scared money, whereas Japan is not.

What are the resemblances that you see?

The SNB has been an easing bank for a long, long time. In 2003 it lowered interest rates to 0.25% which was the lowest in the world except for Japan. And while other central banks hiked their rates to 5-6% in 2008, the SNB only went as far as 2.75%. Both Switzerland and Japan have had very low inflationary pressures in the last two decades (but probably for different reasons).

There is a note by John Namond of JPMorgan Chase that sums up a lot of what I think about the Swiss Franc and the Yen:

Many bristle at the idea of increasing yen exposure in an environment of rising sovereign risk. Indeed, Japan’s government debt load (and low yield) is the original reason many reserve managers have underweighted the yen relative to the currency and the bond market’s liquidity. This argument misses the point. The yen doesn’t rally during periods of market stress due to its intrinsic safety. It rallies because its zero cash rates encourage its persistent use as a funding currency during global expansions, thus obliging investors to repurchase it during deleveraging. The same argument applies to the Swiss franc and the US dollar. The differentiator amongst these three currencies, however, is Japan/Switzerland’s trade surpluses/net international creditor positions which also support these currencies during global expansions. Even if reserve managers increased their yen exposure, the yen could not transform from a structural funding currency into a structural investment currency over any reasonable investment horizon.

Lang wrote:

Libertarian666 wrote: I don't see any significant resemblance in the characteristics of the Yen and Swiss franc, if you are referring to fundamentals. The Japanese central bank has been aggressively easing for at least a decade, IIRC, whereas the SNB has only recently tried the same nonsense. Also, Switzerland is the destination for a lot of the world's (rightfully) scared money, whereas Japan is not.

What are the resemblances that you see?

The SNB has been an easing bank for a long, long time. In 2003 it lowered interest rates to 0.25% which was the lowest in the world except for Japan. And while other central banks hiked their rates to 5-6% in 2008, the SNB only went as far as 2.75%. Both Switzerland and Japan have had very low inflationary pressures in the last two decades (but probably for different reasons).

There is a note by John Namond of JPMorgan Chase that sums up a lot of what I think about the Swiss Franc and the Yen:

Many bristle at the idea of increasing yen exposure in an environment of rising sovereign risk. Indeed, Japan’s government debt load (and low yield) is the original reason many reserve managers have underweighted the yen relative to the currency and the bond market’s liquidity. This argument misses the point. The yen doesn’t rally during periods of market stress due to its intrinsic safety. It rallies because its zero cash rates encourage its persistent use as a funding currency during global expansions, thus obliging investors to repurchase it during deleveraging. The same argument applies to the Swiss franc and the US dollar. The differentiator amongst these three currencies, however, is Japan/Switzerland’s trade surpluses/net international creditor positions which also support these currencies during global expansions. Even if reserve managers increased their yen exposure, the yen could not transform from a structural funding currency into a structural investment currency over any reasonable investment horizon.

But the "neutral" interest rate is going to be very low in Switzerland because their citizens are net savers rather than net borrowers, and there is a lot of "cool money" investing from others that stays there for decades. The CHF was also linked to gold for a long time, which of course would lead to low interest rates due to a low risk of over-expansion.

Not that I'm a big fan of any central bank, the SNB definitely included, but they have had an easier job because of the nature of their citizens and investors.

Fair enough. I'm just trying to say that if PRPFX held Yen instead of Swiss francs then its performance would probably be more or less the same.

Lang wrote: Fair enough. I'm just trying to say that if PRPFX held Yen instead of Swiss francs then its performance would probably be more or less the same.

Very possibly, but that can be said about a lot of things in retrospect. The important question, to me anyway, is what evidence we have to suggest good performance in the future.

Well, Japan has been posting huge current account surpluses and trade surpluses for decades now, but recently something's changed. The current account surplus has fallen dramatically and the trade balance has gone into a significant deficit. All this despite the Yen weakening 30% or so against Japan's import destinations. If trade deficits and current account deficits persist and increase in 2015 then I will certainly have to rethink my thoughts on the Yen.

Also: All Swiss bond yields with 10 maturity or lower are now trading at a negative yield. A 50 year bond is trading at a 0.5% yield.

Its capital flight fleeing the impending destruction of the Euro as well as the SNB crying mea culpa in pissing away billions every day to hold their currency down for their exporters.  So the trick now will be to see if higher negative rates deter the inflows.  Doubtful, but they did pull that off in the 80's.

Japan is in the process of bottoming over the next year or two, but I don't know what has changed fundamentally other than their deficit is decreasing (sales tax).  It's interesting that its being reflected in the current account already.  Maybe people believe Abenomics is going to work.

It will be interesting to see how the Swiss PP performs this year. Year to date we have:

- The SPI (Broad Swiss stock market index) is down 10.42%.
- The longest government bond, which matures in 2064, is up 12.2%.
- A UBS ETF invested in physical gold is down 6.8%.
- Cash is obviously 0%.

If my calculations are right, a 4x25 portfolio would therefore yield a 1.25% loss year to date. Not bad, if you ask me.

Swiss PP update:

- The SPI is up 3.39% year to date.
- The longest Swiss government bond is up 12.54%.
- A UBS ETF invested in physical gold is down 1.63%.
- Cash is 0%.

A 4x25 portfolio would yield a 3.575% profit year to date. The annualized YTD profit is 15.09%.

The yield to maturity on a Swiss government bond maturing in 2064 fell today to 0.434%. Maximum upside left (until yield reaches zero) is just 17 percent.

0% does not seem to be the lower bound of gov't debt....http://www.zerohedge.com/news/2015-04-0 ... tive-yield

That's technically true but we are talking about a 50 year bond here. If you buy it for a negative yield then basically you are predicting that the Swiss central bank will keep rates negative for the next 50 years. If that's the case then this means that the Swiss economy is going to be in stagnation/recession/deflation for the next 50 years. Seems a bit unlikely. Even the great depression, which is far worse than the current crisis, only lasted for 10 years.

Lang wrote: That's technically true but we are talking about a 50 year bond here. If you buy it for a negative yield then basically you are predicting that the Swiss central bank will keep rates negative for the next 50 years. If that's the case then this means that the Swiss economy is going to be in stagnation/recession/deflation for the next 50 years. Seems a bit unlikely. Even the great depression, which is far worse than the current crisis has appeared to be so far, only lasted for 10 years.

Fixed it for you.

We'll have to wait and see, I guess.

By the way, the 50 Year Swiss bond is up again today. Now its yield to maturity is just 0.413%. Also, the Swiss yield curve is now negative up to 12 year maturities.

We are halfway into the year, so here is another Swiss PP update for you:

- The SPI is up 0.96% year to date.
- The longest Swiss government bond is down 2.97%.
- A UBS ETF invested in physical gold is down 6.82%.
- Cash is 0%.

A 4x25 portfolio would yield a 2.2% loss year to date. The annualized YTD loss is 4.36%.

Lang,

Very interesting Swiss PP data.

Thank you for posting.

MangoMan wrote: Can someone who understands code better please explain to me why this occurs, and how to fix it? So annoying...

I don't know how to fix it for sure, but it seems to be related to using a font on your PC or Mac or whatever to post on this thread that is not in the gyroscopic investment system database of fonts.  You might try using a font that is common to all platforms (Windows, Apple, Linux, etc.)  I'm not positive, but I think New Courier, Verdana, and a few others are OK.  I think you can find the common platform fonts with a Google search.  I ran into this on another forum a while back and using the common platform font seemed to fix it.  Good luck.

This might be a start:  http://www.ampsoft.net/webdesign-l/WindowsMacFonts.html

... Mountaineer

It's a character encoding issue.  There are many different ways to encode (by which I mean, come up with a string of bits to represent a character) characters, particularly when you get outside the 7-bit ASCII basics.  In this case, it's a fancy left-apostrohe (as opposed to the basic typewriter apostrophe).

This can be troublesome, because in order to render the fancy characters properly, everything has to line up: they must be stored correctly, they must be pulled from the database correctly, they must be output over the network correctly, and they must be declared correctly via HTTP or HTML headers.  It's easy to have any one of those go wrong.

It's particularly difficult when a conversion, say from one database system to another, has gone on, such that new fancy characters are fine, but ones that were entered before the conversion got mangled.  In that case, it's really hard to go back and fix, because what's to say that you meant ’ rather than ’?  You'd have to have strong AI, or manually go through everything, to know.

I made some changes to the font recognition settings to help make the forum run better and apparently it no longer understands that type of quotation mark.