Article / 19 January 2015 at 13:39 GMT

Macro Digest: Endgame for central bankers

Chief Economist & CIO / Saxo Bank
  • Why oh why do we trust central banks?
  • Central bankers are politicians' puppets
  • This is endgame for the central banks

By Steen Jakobsen

The Swiss National Bank's removal of the franc's peg to the euro last week had far-reaching consequences because we were all taken by surprise. The fact that it would (and should) happen eventually was not lost on the market, but the SNB was as late as last week end talking tough and telling the market that the floor was an integral part of Swiss monetary policy – until it suddenly wasn't any more.

I fully understand the rationale for the move (Jakobsen: SNB move is rationality itself) but like most of the market I'm extremely disappointed in the SNB’s communication and handling of the issue, but that’s the bigger lesson: Why is it most people trust or bother to listen to central banks?

Major central banks claim to be independent, but they are totally under the control of politicians. Many developed countries have tried to anchor an independent central bank to offset pressure from politicians and that’s all well and good in principle until the economy spins out of control – at zero-bound growth and rates central banks and politicians becomes one in a survival mode where rules are broken and bent to fit an agenda of buying more time.

Just looks to the Eurozone crisis over the past eight years – if not in the letter of law, then in spirit, every single criterion of the EU treaty has been violated by the need to “keep the show on the road”. No, the conclusion has to that there are no independent central banks anywhere! There are some who pretend to be, but not a single one operates in true independence.

cb hands tied
 Let's get real — central bankers aren't autonomous. Pic: Jakob Ammentorp Lund

That’s the reality of the moment. I would not be surprised to find that the Swiss Government overruled the SNB last week and the interesting question for this week is of course if the German government will overrule the Bundesbank on quantitative easing to save face for the Eurozone? Probably….

The new dimension of central banking is the “communications policy” which is not only the poorest policy but also only really a front for “talking the market into believing our dream” without any further action.

Look at the Federal Reserve forward-looking guidance: They are constantly over-optimistic on growth and inflation. Constantly. The joke doing the rounds is that to get the proper GDP and inflation forecast you merely take the Fed's own forecasts and deduct 100-150 bps from both growth and inflation targets and voila! You have best track record over time.

Studies shows that the business cycle was less volatile before the Federal Reserves was born. The birth of the Fed meant leverage (gearing) which of course has resulted in bigger and bigger collapses of the economy, but with a trend of major crashes increasing in frequency: 1987 stock crash, 1992 ERM crisis, 1993 Mexico “Tequila crisis”, 1998 Asian crisis and the Russian default, 2000 NASDAQ bubble, 2008 stock market crash, and now 2015 SNB, ECB QE, Russia and China and what's the next crisis?

I don’t know, but clearly the world of finance and the flow of money is increasing its velocity meaning considerably more “volatility”. By the way, the only guarantee I issued at the end of 2014 looking into 2015 was:

main themes
 Where does this all bring me? The SNB's action was really the culmination of bigger and bigger moves at the end of a low volatility paradigm. I have been trading currencies for more than 30 years, Thursday’s move was single biggest move I have experienced in one market. But let’s look at other remarkable moves this year:

Oil has dropped more than 50%
 Source: Bloomberg

Russian ruble falls off a USD cliff
 Source: Bloomberg

EURNOK had it biggest move in many, many years (15% in space of a few days)
  Source: Bloomberg

EURCHF move in comparison:
  Source: Bloomberg

Even overnight, the Shanghai index dropped more than 7%
– the biggest move in years on margin calls:
 Source: Bloomberg

The lesson is clearly that the market has been trying to tell us for a long time that volatility was a function of an economic model of suspending the business cycle. When you suspend an economic system such as the world markets for an extended period you ultimately release more energy when the business cycle starts anew.

We started the year with Maximum Dislocation of the market in a model of planned economies. We have bond and credit spreads at historic lows, currencies at extremes, equities and real estate in bubble-like valuations, and a geopolitical risk which keeps rising as seen this year in Paris, last year in Ukraine and also the rise of ISIS.

The US dollar is putting pressure not only on US itself but also the world. A journalist asked me last week: Who benefits from a stronger US dollar?  I still owe him an answer because very few benefit. In fact the world has two growth engines: The US and emerging markets. Both are pretty much US dollar economies. Debt (US dollar funding) in EM has exploded to an extent that many including the World Bank now call a for risk of “Perfect Storm in EM”. Both US and EM became credit junkies over the QE-to-infinity era in the US. The law of unintended consequences.

Another unintended consequence was that energy was the trigger for the crisis in 2008 as rising energy prices took five trillion US dollars out of the economy – which became the catalyst for the Eurozone crisis and US banking bailout. Now eight year later the drop in energy has broad spillover effects as the wealth is transferred from sovereign wealth funds in resource countries to consumers. 

That’s good for Main Street and bad for Wall Street as the “bid” in the assets disappear as these sovereign buyers needs to draw down on their wealth instead of buying overseas assets. Similarly, will a direct impact from SNB not having a floor be less NASDAQ buying which famously SNB had in its portfolio?

Meanwhile the fact that volatility is rising, the fact that we see early signs of the business cycle being activated, is good for the real economy. It’s a sign of money flowing from the 20% QE induced overvalued listed companies to the 80% SMEs (the real economy) as increase in volatility will make expected return less in “paper money” and more attractive in tangible assets and good business.

The world should be concerned when volatility is too low, it’s a sign of the market not allocating money correctly. The one lesson everyone needs to learn is that for a market based economy to function you need to allocate capital to the highest marginal real return of capital. Not to the most politically connected.

When history of 2015 is written I have no doubt that the Paris terror act and SNB's removal of the floor will stand out – both happened less than two weeks into 2015, although that is random, what is not random is that market volatility has been rising directly and indirectly through a misallocation of capital directed by the central bank system.

 Endgame for central banks – no more tools, no more options. Pic: iStock

Many central banks will envy the SNB for its move last week, as it at least tries to regain some control of its future, but the conclusion remains: central banks have as a group lost credibility and when the ECB starts QE this week the beginning of the end for central banks is completed. They are running out of time – that’s the real real bottom line: the SNB ran out of time, the ECB will runout of time this week, and the Fed, Bank of Japan and the Bank of England ran out of time in 2014.

What comes now is a new reality – the SNB move was a true paradigm shift – we can no longer look at central banks, the markets and extend-and-pretend in the same light as we did last Wednesday (the day before the SNB pounced).

The king is dead, long live the King.

– Edited by Clare MacCarthy

Steen Jakobsen is chief economist and CIO of Saxo Bank

Winfield Tuck Winfield Tuck
Well nice all professionals like steen Jakobsen talks about what other proffessionals like central bankers should be or should do.I have lost 25000 Sfr on the saxo- bank trading floor platform. Only with this nice crash last thursday . Not anyone did talk bevore about the possible
Forex-break down . Why did nobody warn amateurs like me not to get long on euro in forex trading.?
Gord Vancouver Gord Vancouver
Honestly Tuck. Would you (and others) be saying the same "amateurs" description of yourselves if you had GAINED on the Sf?? There is no easy path or guarantee in life, including finance. Take your lumps, LEARN FROM IT, and then only put down $ that is DISCRETIONARY. The SNB is one thing no one (other than Jordan) could have planned for. As for the settlement prices that Saxo has to decide it will do with its clients, that is a decision as to how they wish to be viewed by the trading marketplace in the future.
buelte buelte
Steen, your take on SNB makes perfect sense to me. You are barking up the same tree as Prof. Sinn of IFO Institute re. ECB's possible QE program. (Not sure if the DLF translates his interview (
The schedule for banks to 'play' the window of opportunity looks to me like another spike of market stress in making. Let alone SYRIZA seen to maintain the advance in polls into the election? Who are they kidding??? - looks like the Greek drama isn't all academic, we will get some live acts soon. Watch the tape!
Winfield Tuck Winfield Tuck
Well thanks i know .i am trading sinc 2008. Just for over two years consecutive i have been very sucessful with trading increasing my account money by 40 % without big risk and going out of a trade whenever i felt beeing on the wrong side. But this time not only did jordan let us down. I assume thinking of possible worst case scenario broken down to the trading platform how it may play out nobody considered.
I have to bring my account back to zero( now - 10000.- ) and additonally up to plus 15000 .- where i finished before the forex- flashcrash. I just wish saxo bank would more consider about hedging advice in case of a crash.. And moreover square my position later or sooner and not at worst moment. I would be better of if they had done nothing. Because i can pay now the trade. But saxo worried the have to pay.
Jim Earls Jim Earls
Tuck, all of us are losing from the Swiss debacle, because margin requirements are now going up all over the place as a result of this fiasco.
Tonny Holdorf Tonny Holdorf
Being stopped out by your own stop loss order sucks, being stopped out by margin requirements sucks even more. Nothing new about that. It is the name of the trading game
Tonny Holdorf Tonny Holdorf
And belive it or not. This is a professional game. There is no game for amateurs only
Winfield Tuck Winfield Tuck
Thanks 4 paying attention to my problem. I know there is only one liga to play. I just think the traders like me would like to see some advice beyound macro analytics.
Don Armando Don Armando
The swiss parliament did not have influence on the SNB decision to unpeg the CHF from the Euro. The move came as a surprise for the politicians and was in no way what they expected to happen. Most of the swiss politicians have defeated the Gold Initiative in order not to endanger the Euro peg. Now as the unpeg suddenly became reality even without the Gold Initiative, they are disappointed same as you are, because they couldn't avoid the inevitable. Now they are forced to find other solutions on how to support the Swiss economy, mainly the export and tourism industry and this job is much harder than to defeat the Gold Initiative.
Steen Thaulow Olsen Steen Thaulow Olsen
Central bankers under political control.. or is it the other way around? That is my bet.. great article though.
doskuanov doskuanov
Tuck, you have to become a pro. This guy will coach you. Chris Lori. Find him.
veggio veggio
Trading long options rather than spot would not have wiped out account holders, there is an effective risk management tool that Saxo through their marketing encourage traders to use
Peter Varcoe Peter Varcoe
Tuck, you are an amateur, going onto this conversation complaining about how big your losses are and then blaming Saxo for not providing you with advice. Trading is a not a game, it is a serious profession - grow up!!!!!!
Peter Varcoe Peter Varcoe
I have been trading since 1999 in equities, since 2004 in CFD's since 2010 in Futures, markets turn - good trailing stops are essential. However the CHF fiasco on Thursday was exceptional, however there was a great shorting opportunity on Wednesday from a spike reversal on Monday - not everyone lost on the transaction several traders I know and myself made around 8% on the account balance off that trade with 0.75 - 1% trade risk. I suggest that people learn how to rades and stop blaming the rest of the World for their mistakes
Peter Varcoe Peter Varcoe
Central Banks are not Government Instruments - they are private cartels and they control the politicians - "The Creature From Jekyll Island" and "Secrets of the Federal Reserve" are both very good reads on the subject, in fact the 2nd book gives a list of the shareholders of the Federal Reserve.
Mark12 Mark12
I can understand that market pros' are "disappointed" by the communication of the SNB - they didn't get the heads-up they got used to receive from their Pals - for the rest of us this means - it was done the right way! As for succumbing to politicians - Switzerland is in an election year in 2015 (Oct) - which now may well happen in a recession. No politician in power in in his right mind would "overrule" his central bank to create this scenario - on the contrary they would try to avoid it at all costs. The SNB proved its independence - it will hurt Switzerlands' economy - but only in the short term. With full employment currently and labor having to be imported at a rate beyond the peoples comfort - the country may even be able to afford that.
Steen Thaulow Olsen Steen Thaulow Olsen
Peter Varcoe; I agree about who controls monetary policy. And thank you for reminding me I still haven´t ordred The Creature From Jekyll Island from Griffin.. getting a bad conscience here for not enlightening myself further on this subject, in fact.
V for Vendetta V for Vendetta
This comment has been redacted


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