David R. Kotok
January 15, 2015



Switzerland’s abrupt removal of the cap on the Swiss franc’s value against the euro does nothing to alter our outlook for both US interest rates and US stock markets. Subsequent commentaries will discuss the international aspects and those portfolios. Emails this morning from clients and consultants have been focused on the US market.

Simply put, the interest rates on Swiss riskless government debt are now near zero, whether it is a one-day or ten-year instrument. Until the policy change, Switzerland was pegging the franc at 1.2 to the euro. Now it is at parity. Overnight the Swiss currency gained approximately 17% against the euro.

If you are going to Switzerland for the Davos meeting, everything will cost you more. If you are Swiss and leaving Switzerland to avoid the Davos meeting, everything will cost you less.

There is not a lot of trade impact on the US from the Swiss policy change. Swiss watches will be more expensive. Some very specialized medical devices will, too.

But Switzerland immediate neighbors are countries in the Eurozone. The franc’s contiguous boundaries are with the euro. Switzerland’s central bank worried about inflows of hot money from Russia, either directly or via the euro. Think of it this way: yesterday a Moscow-based oligarch could move money from ruble to euro. Then he could move it from euro to Swiss franc, and the Swiss government and Swiss National Bank would maintain a 1.2 currency peg.

That is now over. The game has changed.

For the US to have another major, reliable, sovereign nation trading near zero on its 10-year government bond only puts more downward pressure on global interest rates. Switzerland joins the ranks of Japan, Germany, and others where a riskless 10-year bond is below 1% and close to zero.

Translate all of that into the valuation of financial assets, particularly those in the US, and there is only one outcome. The general trend remains toward higher asset prices while US interest rates remain very low.


David R. Kotok, Chairman and Chief Investment Officer


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  1. 4whatitsworth commented on Jan 15

    A higher price for assets that have a positive return seems in order. This return would need to be adjusted for inflation and purchasing parity of course :-) This appears to be “reality check” round one :-)

    I can’t see much wrong with having a nice percentage of US cash in your portfolio at this point and watching all the fun..

  2. RW commented on Jan 15

    The Swiss move is frankly incomprehensible given the facts available so I have to assume that the Swiss central bank is either run by madmen or there is an (now unavailable) fact that explains a move for which there is no obvious national upside at all.

    • ZenRazor commented on Jan 17

      The Swiss move in entirely comprehensible. The Swiss National Bank was accumulating huge foreign currency reserves to defend the peg–reserves are now something like 80% of Swiss GDP. If the ECB is aggressive on QE and the euro continues to weaken, the SNB would need to buy even more foreign currency and they’ve been absorbing substantial losses on their holdings.

      The SNB move can be viewed as their forecast of ECB QE and more euro weakness. This presented a large and growing risk for them. They could have certainly taken off the peg in a more thoughtful way over a period of time, but their analysis and decision to kill the peg are entirely rational.

  3. guadas commented on Jan 15

    Two words, maybe three in Kotok’s note explain it all….”hot money” and “Russia”.

    My bet is the Swiss decided to send a signal….we are not your “hot money” playground…..go somewhere else. End of story.

  4. kaleberg commented on Jan 16

    The Swiss just got tired of subsidizing the financial sector. A fixed currency provides all sorts of opportunities for making money without actually producing anything. They decided they had enough and let down the wall.

    Their new interest rates are quite sensible. We have a HUGE world wide savings glut. Right now, all that money is being used to create asset bubbles in real estate, financial instruments, art and just about anything but investment. They are hoping a negative return will encourage spending. Who knows? It might?

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