Tags: Swiss | euro | central bank | weekend

Get Ready for More Central Bank Surprises

By    |   Wednesday, 21 January 2015 08:41 AM

This year is starting to feel like 2008, when the whole world could change during a weekend. Last week's Swiss National Bank (SNB) decision to cut the franc's tie to the euro was a big surprise. Only days earlier, SNB officials had denied any such plans.

Was the SNB lying, or did they get some new information? We don't know yet, but the sharp, near-instant adjustment was a fatal or near-fatal blow to several large brokers and hedge funds.

I recall several such shockers in 2008. We would go home on Friday and return on Monday to an entirely different market. Each new week would confirm our fears, prove them groundless, or bring forth some new crisis.

The AIG, Bear Stearns and Lehman Brothers stories are all very clear now. We forget how confusing they were back then. I worked on an exchange-traded fund (ETF) trading desk at the time and it was brutal. My company made a huge bet one Friday and found out Monday we were very, very wrong.

The pattern I noticed was that bankers, regulators and politicians used weekends to coordinate — or try to coordinate — capital flows, monetary policy changes and bailouts. They raced to make decisions before Asian markets opened on Sunday evenings, U.S. time.

The SNB didn't make its latest move over a weekend, perhaps because it didn't coordinate with anyone else. International Monetary Fund (IMF) head Christine Lagarde told CNBC that the SNB didn't give the IMF any advance notice, and that she was as surprised as anyone was.

This is stunning information. The SNB knew that cutting the euro tie would cause enormous market disruptions. Central bankers normally bend over backwards to avoid such fireworks. This time they didn't. Why not?

I don't have a good answer. All I know is that central banks seem to be making unusual moves with greater frequency in the last few months. The Bank of Japan's enormous stimulus program, announced in November, is another good example. Last weekend central banks in Turkey hiked rates and Denmark cut them, while reaffirming its own euro tie.

Thursday the European Central Bank will likely announce a quantitative easing program. I doubt we will have fireworks since traders presume it is coming. The only mystery is in the size and details . . . but I might be wrong. As I said, strange things are happening.

What can investors do in this environment? My first suggestion is to make a risk-control plan. Every share you own should be tagged as either long-term hold or short-term trade. Keep them straight in your mind so you can think clearly when the markets turn ugly.

Second, reduce your leverage factor. Now is no time to be a hero. The reason the SNB move wiped out entire firms is that they used astonishing leverage — up to 50x in some cases. Right now even 3x is too much. Get out of leveraged ETFs, whether they are bullish or inverse. I promise, you will not like the way they behave in a crisis.

Third, pay attention to who holds your money. In the business, we call this "counterparty risk." Even stable assets can disappear quickly if you leave them in the wrong bank.

Fourth, do not hold risky positions over a weekend, especially a long holiday weekend. Just as we saw in 2008, the world can change radically in those few days. Try to do your selling on Fridays and your buying on Mondays.

No one, least of all me, knows exactly how 2015 will unfold, but the signs point to a year we will all remember. Act now to make sure they aren't bad memories.

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This year is starting to feel like 2008, when the whole world could change during a weekend. Last week's Swiss National Bank (SNB) decision to cut the franc's tie to the euro was a big surprise. Only days earlier, SNB officials had denied any such plans.
Swiss, euro, central bank, weekend
610
2015-41-21
Wednesday, 21 January 2015 08:41 AM
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