Swiss National Bank (SNB) President Philipp Hildebrand finds himself in the hot seat. SNB rules prohibit his family from trading based on non-public monetary and foreign exchange intentions of the SNB (c.f. §4). His wife netted a 60,000 Swiss franc profit buying, then selling U.S. dollars, all within a month; her husband’s intervention in the currency market was mostly responsible for the gain. Arguably, she traded to make a profit, publicly explaining, “what motivated me to buy dollars was the fact that it was at a record low and was almost ridiculously cheap”. In instructing her account manager, however, she emailed that her motivation was to manage the share of US dollars in their asset mix as part of a long-term investment allocation (c.f. Hildebrand statement).
The court of public opinion might be more damaging than the legal process in a country with a tightly knit elite that favors consensus over controversy. Relevant for policy makers and investors alike is that this episode highlights the vulnerability of what we call celebrity central banking. That is, central banking that heavily relies on the persona rather than underlying policy. In Switzerland, the 2009 attempt to peg the Swiss franc to the Euro was mostly driven by Hildebrand; similarly, last year’s introduction of a ceiling for the Swiss franc versus the euro is again mostly attributed to Hildebrand. The 2009 peg was given up after it proved too expensive. The 2010 intervention has, so far, held. But it is entirely dependent on the market believing that the SNB will do “whatever it takes” to keep the Swiss franc from rising.
If the Swiss were asked whether they would like to adopt the euro, the popular vote would almost certainly be an overwhelming “NO”. Despite this, an unelected official seemingly single-handedly moves the currency at his whim. Arguments about deflation and competitiveness are given; with an unemployment rate of only 3.1%, the argument might have as many holes as Swiss cheese. Importantly, should the market doubt Hildebrand’s conviction, the peg-rate policy may turn out to be amazingly expensive – in 2010, the last time the SNB had aborted its intervention and all those euros purchased had fallen in value, the central bank reported tens of billions in losses. The Swiss public may sympathize with the buzzword “competitiveness”, but understands losses of that magnitude for tiny Switzerland is a lot of money.
In the U.S., we face similar challenges. Federal Reserve (Fed) policy appears all too dependent on Fed Chair Bernanke rather than what central banking should be about: the preservation of purchasing power. We hear the latest whim on what trick might work to boost the economy, disguised in the name of transparency.
What the Fed and the SNB have in common is that they are both run by celebrities. Bernanke has appeared on “60 Minutes”; Hildebrand is also learning what it means to be in the media limelight. Policy makers only have themselves to blame with the market’s obsession with their personas. If they pursued sound monetary policy rather than try to micro-manage their respective economies, market forces could play out. Instead, we may have capital chase the next perceived move of policy makers, leading to capital misallocation, greater volatility, and ultimately more intervention; a self-reinforcing cycle. The public has a high price to pay for modern celebrity central banking.
We would not be surprised to see the Swiss franc rise against the euro as Hildebrand’s position may be weakened. Similarly, in the U.S., should credibility in Bernanke’s policy erode, it may have negative implications for the U.S. dollar.
Axel Merk President and Chief Investment Officer, Merk Investments Merk Investments, Manager of the Merk Funds
This report was prepared by Merk Investments LLC, and reflects the current opinion of the author. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any investment security, nor provide investment advice.
The Merk Hard Currency Fund is a no-load mutual fund that invests in a basket of hard currencies from countries with strong monetary policies assembled to protect against the depreciation of the U.S. dollar relative to other currencies. The Fund may serve as a valuable diversification component as it seeks to protect against a decline in the dollar while potentially mitigating stock market, credit and interest risks—with the ease of investing in a mutual fund.
The Fund may be appropriate for you if you are pursuing a long-term goal with a hard currency component to your portfolio; are willing to tolerate the risks associated with investments in foreign currencies; or are looking for a way to potentially mitigate downside risk in or profit from a secular bear market. For more information on the Fund and to download a prospectus, please visit www.merkfund.com.
Investors should consider the investment objectives, risks and charges and expenses of the Merk Hard Currency Fund carefully before investing. This and other information is in the prospectus, a copy of which may be obtained by visiting the Fund's website at www.merkfund.com or calling 866-MERK FUND. Please read the prospectus carefully before you invest.
The Fund primarily invests in foreign currencies and as such, changes in currency exchange rates will affect the value of what the Fund owns and the price of the Fund’s shares. Investing in foreign instruments bears a greater risk than investing in domestic instruments for reasons such as volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. The Fund is subject to interest rate risk which is the risk that debt securities in the Fund’s portfolio will decline in value because of increases in market interest rates. As a non-diversified fund, the Fund will be subject to more investment risk and potential for volatility than a diversified fund because its portfolio may, at times, focus on a limited number of issuers. The Fund may also invest in derivative securities which can be volatile and involve various types and degrees of risk. For a more complete discussion of these and other Fund risks please refer to the Fund’s prospectus. Foreside Fund Services, LLC, distributor.
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