Shock, horror and what, what, what, what?
As the resulting carnage in the FX markets was still taking hold, pundits were coming out of the woodwork pontificating about how this was bound to happen and the SNB must’ve known what the results of its actions would be.
Let’s be very clear. First, you! Yes, you, the reader! If you believe the rubbish these pundits are spouting you can go right off to that corner over there and stand there for a bit and ponder upon your own gullibility.
As for the pundits. Come hither, I’m about to give you all a proper slap around the ears. How dare you talk such rubbish, you complete and utter numpties! Now go over there and stand in the corner with that gullible fellow. On second thoughts, come back, I’m not done, I want to smack you again.
Let’s be very clear about this: No one knew this shock was coming, no one expected this shock was coming, no one foresaw this shock coming. It wouldn't have been a shock otherwise, would it?
From a purely technical perspective the market reaction to the SNB qualifies as a Black Swan event. It was a standard deviation move of the magnitude that come about every few billion years or so. This of course is an absurd statement (as this article correctly states). When you are using data going back a few years, about a currency that has been around for over a hundred years, to make statements predicting probabilities over billions of years, everyone, except a Microsoft Excel jockey financial analyst, should be belly laughing with gusto.
Predictions of billion year event anomalies are a waste of time. The fact is that market shocks come at us from unexpected angles and then the dominoes begin to fall. Simple. These shocks are regular, they happen in about every decade or so.
To put it in American English: S#*t happen regularly. Deal with it.
Point here is that there’s nothing unusual happening now. Just as in every other financial shock, an unexpected event kicks off an expected set of repercussions. Something tips over the first domino and then the all too familiar rat-tat-tat-tat sound of dominoes falling begins. In other words: A lot of major players end up losing their shirts.
We are now seeing those expected repercussions work themselves through the markets. Whether the events kicked off by the SNB end up as a ripple or a tsunami remains to be seen.
What are the ramifications?
- CHF denominated loans across the globe. As an example, Poland has an estimated 46% of total home loans denominated in CHF. Lovely. When the mortgage borrowers of a nation (the middle class) see their overall debt jump, it can’t but have an effect on the national economy. What will the knock on effect be? (Here's a differing opinion on the subject from FT Alphaville)
- Currency trading has grown in popularity in the last years, just look at the amount of web advertising from firms offering FX transaction services. The business model run by many of these companies are based on leverage taken by the firm and leverage taken by the clients. We are already seeing the effects of this with the insolvency of the West Ham sponsors Alpari and Global Brokers from New Zealand. Banks are also declaring large losses. What will the knock on effect be?
- Hedge funds, those investment vehicles loved by the rich, which so often and inevitably end up being shown for what they are: Overly leveraged, gambling ideas, based on an Excel whim of some young chap with an oversized ego. The main hedge fund of Everest Capital Global was wiped out. Their bet on a weakening Swiss Franc had made the fund a 0.6% profit last month. Last week, the $830 million fund, was wiped out in one day. Sounds like they had it all under control. What will the knock on effect be?
- The Chinese stock market plunged 8% on Monday after curbs where placed on margin trading after brokers had broken the rules in regards to leveraged accounts. Sounds like a trustworthy bunch. What will the knock on effect be?
The point in all the above is that the events mentioned are all linked. One is not enough to destroy the global economy, but they are all knock on effects that may well have other knock on effects. Rat-tat-tat-tat
None of these events are happening in a vacuum. The global market is interconnected in a way that no risk manager can possibly calculate and the global market is immensely fragile, much more so than we would like to admit to ourselves.
Strap yourselves in folks, because this could get a worse, a lot worse.
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