Swiss National Hedge Fund

Focusing on resiliency in the face of what shouldn't be.

In the aftermath of the financial crisis, various central banks have taken heavier hands in capital markets, ostensibly to achieve some end that suits the interests of their economies/currencies/whatever else that would be in their purview. The Fed in the US along with the ECB have taken similar paths to debt purchases in hopes of keeping interest rates low which hopefully would be stimulative in creating the good kind of inflation and bolstering economic activity. The Fed has started to reverse this of course and the ECB is also in the process of ratcheting down its bond purchases. Along these lines there is currently about $10 trillion in negative yielding debt outstanding.

The Swiss National Bank (SNB), in addition to being in the negative yield arena is also debasing its currency by using francs to buy US equities, has been doing so for a while and is likely to keep buying. Barron's had a mid-week article about this that noted the SNB's total portfolio is $776 billion with $87 billion of that in US equities. The total investment gains last year were $55 billion which belies that most of the portfolio is in fixed income.

The US equity holdings look to be mostly if not entirely large and mega cap stocks excluding the banks interestingly enough. Apple (AAPL) is the largest position, worth $2.9 billion followed by $2.0 billion in Microsoft (MSFT) and so on.

A pivotal event in this story came three years ago, the SNB was attempting to peg to the euro for trade reasons, Switzerland of course is a big exporter and a strong franc is bad for business. So in January of 2015 the SNB chose a different approach, printing money so to speak and buying fixed income and equities.

This sort of thing fascinates me. The Bank of Japan is doing something similar, it buys domestic ETFs and I believe it is the largest user of ETFs in Japan.

What is most fascinating is the extent to which this turns just about everything we were taught about economics upside down. A little more broadly speaking, printing money is supposed to be very bad in terms of inflationary outcomes and the bigger threat thus far, by far, has been a deflationary outcome. There is a quote out there from someone, don't remember who, that inflation is the easiest thing in the world to create except for when you need it.

I use the phrase deflationary outcome as opposed to something like deflationary debt spiral because I never thought a true debt spiral was a realistically probable. Possible, not probable. A deflationary outcome seems less and less likely in terms of holding back the economy at the headline data level for GDP and job growth. Wages however are somewhat deflationary, more like they aren't growing the way they hopefully would be but data goes back long before the crisis showing stagnating wages.

There are a couple of macro ideas that have a seat at this table that are at the very least, (deflationary) drags on the US. I don't think the US labor force actually ever recovered from the tech wreck. That event created a massive wave of perpetual under-employment that many never recovered from. Then the financial crisis delivered a similar blow (I do think the tech wreck was worse in this regard) and it seems like there is an acceleration in the number of jobs that are being replaced by automation in one way or another, this is only logical, but the bigger point is that workers are not adapting to the manner in which available jobs are evolving. Not enough of us have STEM backgrounds that correspond with where workers are needed.

The other macro idea that contributes to a deflationary malaise (maybe that is a better word than outcome) is a derivation of Moore's Law. Derivation because maybe it is moving faster than Moore's Law as Gordon Moore expressed it. Technology is often called disruptive, I use that word frequently and the extent to which technology is disruptive is increasing and maybe doing so at a faster rate with more adverse outcomes like an ill-prepared work force.

If any of that holds water then building blocks of economic study probably can't account for what has happened in the last 15 years and what has not happened (consequences). Or, maybe what hasn't happened yet...

Taking a page from Nassim Taleb, I would want to think about how to make myself antifragile against being replaced by a robot at work or having something bad in the economy overly effect me at home. Instead of antifragile, we could use the word resilient, I would hope to be resilient in the face of these risks. I mentioned a couple of weeks ago that a threat to advisors is robo-advisors. We are not there yet, we may never get there or if we do, maybe the robos are different than what we know them to be now. What threatens your industry?

The two simplest ways to increase resiliency is to save a lot of money and figure out how to create one or more income streams should you be displaced at work. They are simple ideas but not easy ideas in terms of actually doing them. Reducing your financial footprint if that is what is needed to save money would be very difficult and learning to do something that is new, well enough to derive an income is very difficult in terms of both execution and finding the time.

There is no one to bail you out, making yourself more resilient starts internally.