As Good As Gold? To Buy Or Sell Swiss National Bank

Swiss National Bank (the central bank of Switzerland) is a publicly traded institution, and its shares have been soaring.

The market cap is a tiny fraction of its asset and liability base, so it is a highly leveraged entity. Its profits were huge in 2017, as markets "went its way".

As a central bank, and one that has accumulated the largest balance sheet relative to GDP, SWZNF has been able to 'create money out of thin air' and buy equities.

An upcoming referendum in Switzerland, though unlikely to succeed, would radically change the way monetary policy and banking are conducted there.

It is hard to value SWZNF; it seems a highly leveraged pro-cyclical play, but shorting it seems very risky too.

The central bank of Switzerland (known in English as Swiss National Bank) is actually a publicly traded institution, whose stock can be purchased even in the US (OTCPK:SWZNF). In Switzerland, the stock trades under the symbol SNBN. I stumbled upon it as part of my recent research into monetary economics, particularly as I try to better understand currencies, including gold, and the growing number crypto versions.

The central bank has only 100,000 shares outstanding, which gives it a market cap not much larger then half a billion US dollars! It is obviously not your typical stock, and there is no research coverage to speak of. There are a few reports on Seeking Alpha, and notes from outfits such as ZeroHedge, and they tend to be quite negative on the prospects for the shares.

So is it a buy or a sell? This article is not an investment recommendation, but rather an invitation for others to contribute their knowledge and opinions - though I must admit that I do not tend to respond to most questions, let alone comments. I, for one, do not yet know how to try to value it properly. A recent note here by John Mauldin refers to it Switzerland's largest hedge fund.

As part of the proliferation of "unconventional" monetary policy practices around the world, the Swiss National Bank (SNB) has dramatically expanded its balance sheet (to a much larger extent than the European Central Bank, the US's Fed and even Japan's BoJ, relative to respective GDP numbers). It has been buying all sorts of assets, amassing what is now a large portfolio of US equities, including as of the last report stocks that made my 2018 top picks, such as Apple (AAPL), Amazon (AMZN), AT&T (T) and General Electric (GE).

The institution obviously, also owns a lot of fixed instruments, including many international bonds, as well as a large amount of gold. The Swiss National Bank is targeting a negative interest rate, so it effectively collects payments on deposits banks make at the central bank. It is, arguably, one of the global major central banks most focused on keeping currency moves in check. At some point earlier this decade it temporarily (from September 2011 to January 2015) specifically targeting a maximum level for the Swiss Franc (CHF) at 1.20 to the euro ceiling.

Shares of Swiss National Bank have traded since as far back as 1907, according to Wikipedia. Since May 2004, when Article 99 of the Swiss constitution went into effect, the central bank gained formal independence. The Swiss national government owns no shares in SNB, but 45% is held by the Swiss cantons and 15% by their banks, with the remaining 40% floating in the market. Voting power is limited to the first 100 shares, so no private shareholder can exercise undue influence.

According to an October 2016 report on Seeking Alpha, at points in the past there was a speculative surge in the shares, under the false assumption that gold would be sold by the central bank. Since the yellow metal in reserves belongs to Switzerland, and the central bank holds it on behalf of the state, this obviously was a wrong reason to speculate on the stock.

More recent speculation has been that the shares may be repurchased (thus closing the capital), though that also seems like the wrong reason to buy it. The central bank's portfolio is highly leveraged, resulting in astronomical profits last year, as the markets effectively went "its way".

At some point this year, there will be a referendum on the "sovereign money initiative." In a recent speech, Swiss National Bank chairman Thomas J. Jordan said, "In Switzerland, the sovereign money initiative attracted enough signatures to ensure a popular vote. The initiative demands that the creation of money and the granting of loans be separated by barring commercial banks from creating deposits through lending. The Federal Council, parliament and the SNB have all come out in opposition, but the final decision rests with Swiss electorate, who will vote in a referendum on the matter later this year."

I am not a fan of referenda, to say the least. Switzerland has a direct democracy, which essentially means that if a sufficient number of validated signatures is collected, anybody can call for a referendum, though the process is somewhat more complicated than that. The exact date for the sovereign money referendum (likely still this year) has not yet been determined.

The Swiss have quite a bit of experience with referenda, and Switzerland is a unique country with some very specific traits. I guess that if the citizens of any country can be trusted to decide wisely on a referendum regarding a complex subject, it must be them. If I had to bet, I would say the referendum will not succeed in its aim of essentially separating money from credit. According to Mr. Jordan of the SNB, "the Federal Council and parliament have recommended the electorate reject the initiative, and have not offered a counterproposal. The SNB shares the Federal Council's view."

The referendum passing would bring Swiss monetary policy into a very difficult position. The fractional reserve banking system would be essentially eliminated, and the central bank would have to take on many new responsibilities. Is speculation that the referendum might pass part of the reason SNBN has been soaring? Hard to know! In his speech, Mr. Jordan clearly explains why commercial banks do not in practice "create money out of thin air." He goes on to say:

"The idea of 'creating money out of thin air' is more applicable to central banks. Since the demise of the gold standard, central bank money can no longer be exchanged for gold. This means that central banks really are in a position to simply 'print money', as the expression goes, which enables them to meet their obligations in their own currency anywhere and at any time. But even central banks face certain restrictions. Their tasks are defined by law, which in most countries requires them to ensure price stability. The instruments that allow them to create money thus serve the sole purpose of fulfilling a central bank's legal mandate."

To some extent, it does seem to me as if the Swiss National Bank has come as close as anybody ever has to alchemy...or to having the proverbial "Midas touch." It has the ability to essentially "create money out of thin air" and buy the stock of great companies, such as Apple (AAPL)! As for the currency itself, the Swiss franc has a very long trading history, and some have called it a play on gold. The yellow metal has indeed been more stable in CHF than it has been in USD, particularly of late.

Still, as long as Swiss monetary policy remains on its current course, SNB will continue to accumulate foreign assets and 'print francs'. Recent strength in the euro has resulted in the CHF not being too far from the 'magical' 1.20 level to the euro. If at some point the franc were to depreciate meaningfully (it is, after all 'overvalued' from a purchasing power parity - PPP perspective), the process could go into reverse, and SNB could become a large seller of foreign assets.

The bank is arguably one of the most leveraged, pro-cyclical plays on the "bull market in everything" to which I have been referring (although really more in the context of the US dollar falling against most everything). I am a bull and an optimist by nature, so if anything, I would be inclined to own (not to short) the Swiss National Bank. How about you?

Disclosure: I am/we are long SWZNF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.