Swiss Watch.

Recent weeks have seen the financial landscape continue its sad-eyed slide into the lowlands with most economic data supporting the drop. Friday saw the most recent rain cloud appearing, the monthly jobs number -with expectations north of 100,000- printed at, a surprisingly exact, zero. Certainly a great number for headline writers, and the first time in over fifty years that the monthly roulette wheel landed on the green, but neither will be much consolation to Messrs Bernanke or Obama on whose shoulders this latest shower descends. In our view the number is bad enough to warrant an instigation of QE3 and it is likely to be announced during the September month, the 21st being the next Fed meeting; it will take the shape of "extending the duration of the Fed's balance sheet" which is not a treatment for insomnia, as it may first appear, but rather the "dragging" down of interest rates further out in time with the theory (read: hope) that being able to borrow at low rates but also for a significantly longer period will entice the masses to dive again into the vaunted blue waters of  the Credit pool... Of course most participants are all too aware that their most recent swim in said pool almost resulted in their drowning and/or devouring by shark and it is questionable whether such memories can be dulled by, essentially, increasing the temperature. Nevertheless Bernanke will try, he is but an academic at heart and "theories" are all he has to offer. Obama on the other hand appears to not even be that, The Great Performer languishing in the polls... and theories don't cast votes. There is widespread anticipation of his "jobs speech" this Thursday evening, with the market expecting some serious initiatives beyond the "green jobs" blather; the trump card (not that Trump) would be a nod towards a massive refinancing scheme for US mortgage-holders. Speculation behind such a scheme has gained traction through late August and appears to be a serious possibility; it would, basically, allow some/all/a few households to refinance their mortgage at a significantly reduced (Bernankified) interest rate; currently many mortgage-holders cannot avail of today's lower interest rates because they cannot refinance a property that is in negative equity; a fresh government initiative would waive that requirement in an attempt to stimulate such households with lower monthly mortgage outgoings and stabilise (still dropping) house prices by slowing the relentless tide of foreclosures. Frankly, we see most government housing initiatives as pointless and wrong-headed but this, it must be said, has the rare smell of sense; in the grand scheme of things it may make only a small difference, but it targets a useful area of the economy... and anything is better than "green jobs". Make no mistake though, if the Teleprompter In Chief doesn't deliver the markets something tasty, then it is very difficult to see the Bulls wresting control from the Bears, very difficult indeed.

On the other side of the Atlantic things remain confused, confusing, contradictory and contrary. The ground beneath the Euro is shifting day to day with fault lines appearing weekly, the latest being the apparent acceptance of an IMF official that Greece will "hard default" within six months. Such comments are given weight by the fact that an ECB/IMF party left Greece in a major huff last week accusing the Mediterranean's of failing, again, to effectively invoke the required budgetary measures and also the fact that Greek one year debt is now trading at about a 70% yield. Makes the old savings-account rate look a bit stingy. The chart below shows last Friday's dramatic move in Greek debt, betraying a pretty clear, fresh, breakdown in the situation: 

We have long argued that a collapse of the Euro is a less likely event than many suggest simply because the reality of such a collapse would be bordering on the horrific. When one works through the knock-on effects of losing the € key on your keyboard it is not a pretty situation for anybody, and for some countries it would, genuinely, be a war-like scenario; despite what academic economists seem determined to suggest it is a situation which should be avoided at all costs. Amidst panic though is often opportunity and we suspect that it presents itself in the guise of an apparent safe-haven: the in vogue Swiss Franc. Hot and scared Euros have fled into Switzerland at a pace rarely seen in history bidding the price of the Franc up to exorbitant levels. But what if the scared money is wrong? If the Euro truly crumbles, if a sovereign (Greek or Irish...or Italian!) default is seriously on the cards then how will the large Swiss banks fare? Well they'll be about as screwed as everybody else's - which is to say "very". They are on the hook for over $50bln to the Greeks and Irish and a similarly large amount to the Italians. Perhaps revealingly, such exposure can be seen in the most recent Libor costs for the world's largest banks, seen in the following chart:

In first and third place, when being first is bad, are Credit Suisse and UBS. Last week Credit Suisse were paying 50% more for their funding than HSBC. Now call us cynical, but that does not spell "safe haven" in our world; Switzerland simply could not handle the detonation of either of her banking powerhouses without suffering extreme strain and, in such a scenario, owning a pallet-load of Swiss Francs could be quite an unpleasant experience. Of course selling the Swiss Franc against the Euro is a fools errand if a Greek/Irish/etc default were indeed to emerge, rather the angle is to sell the Franc against a real safe haven. We have a bias towards the  Norwegian Krone, which looks relatively cheap, reasonably immune from Euro-trash and offers a yield to boot. However the stand out trade is presented by the acceptance that there are but two true safe havens in this blue planet: one is shiny, yellow and expensive; the other is cheap, green and much-derided but, if a world were to emerge where the Euro was truly crumbling, it is the venerable US Dollar which would once again rule supreme, and passing parity with the Swiss Franc toward that standing would not only be assured, it would be easy. It is our view that USD/CHF is wildly weak and that, in today's volatile market, where buying insurance is a very expensive option (literally), out-of-the-money Calls on the USD/CHF pair are particularly mispriced and are just about the cheapest "disaster insurance" you can get.

....now don't get us started on toblerones...