Swiss Investments in Inflation

by | Jul 7, 2004 | Archives

Economic trends that create inflation are upon us. The last time this economic phenomenon was bad, I made a fortune because of international investing. I am trying to figure out how to react this time.

In the last inflationary round, protection seemed easier because other major governments were not involved in excessive government spending. I recommended (and invested myself) investing in Australia, Germany, Japan, Switzerland and gold. Sure enough those currencies skyrocketed versus the greenback.

This tactic no longer works…I don’t think. Of course the German mark is gone, so we have to buy euro to get a German investment. Perhaps not a great idea to depend to heavily on euro. See why at Monday’s message here

This message looks at the Swiss franc. Also not a great currency for protection because it is so linked to the euro.

If we look at economic statistics in Switzerland and compare them to other major economies, the numbers suggest some strength. Inflation looks like it will grow faster in the U.S. and elsewhere.

Let’s review some economic and financial fundamentals.

Remember inflation destroys the value of a currency versus other currencies with lower inflation. For example if the U.S. has inflation at 10% and Switzerland at 3%, then the dollar is likely to fall 7% versus the franc. This is not an exact science. Historical differences in economic and social fundamentals and perceptions of risk have an impact as well. As a general rule if there is inflation in one country and not in another, expect the inflationary currency to fall versus the currency where there is not inflation. If this is not clear you may want to take the free course at this website International Currencies Made EZ. Go to

Take for example the Swiss gross domestic product. This has grown 1.5% in the last year compared to 5.5% in the U.S., 1.3% in the euro area, 3% in Britain and 5.6% on Japan. I suspect this is where the Swiss economic authorities would like to be, with a gain similar to Europe. The suggestion here is that inflation will remain low. A fast rising GDP is usually inflationary.

GDP can also affect unemployment which is currently high by Swiss standards at 3.8%. But this is low compared to the U.S. at 5.6%, Britain at 4.8% and Japan at 4.7% (very high for Japan).

Here is a concern. Unemployment in the euro area is 9%! Traditionally high unemployment means that prices will remain low, so Switzerland theoretically would have an inflationary trend with its low unemployment. However since this is traditionally low, this is not such a concern except the unemployment is so much lower than in Europe. Switzerland’s bigger concern here is to keep its currency pegged to the euro. Europe’s very high unemployment should in theory put upwards pressure on the franc.

Finally if we look at inflation itself, consumer price rises in Switzerland are 0.9% and producer prices just 0.7% compared to 3.1% and 4.9% in the U.S., 2.0%, 3.6% in Germany and –0.4% and 1.1% in Japan and 1.5% and 2.5% in Britain.

These economic factors suggest some strength in the franc, but the franc’s link to the euro has to make the currency suspect.

Some investors make the mistake of looking at the Swiss franc as it was decades ago. I have warned against this for more than half a decade.

Years ago in a different world Switzerland was isolated and fiercely independent. Its mountainous terrain and well-organized citizen's army gave strength to claim and enforce neutrality.

The small population (about 6 million) believed in personal and hence banking privacy. The people were incredibly conservative and highly efficient. They did not believe in government debt and demanded that their national bank keep a large amount of gold as a reserve for their currency. This made Switzerland an ideal banking center in those days plus made Switzerland a refuge in times of turmoil. Swiss francs in a Swiss bank account were considered one of the ultimate forms of financial safety.

This all changed. The computer, new tactics in war and the global economic community turned everything upside down. The computer was like the Colt .45, a great equalizer, making bankers in England, Italy or Spain etc. as efficient as the Swiss. New instruments of war, intercontinental and cruise missiles, nuclear weapons, etc. dramatically reduced Switzerland's natural defenses.

Most of all, the global economic community forced Swiss banks to deal in US dollars, British pounds, Japanese yen and German marks. Swiss banks had to open centers abroad and hence became vulnerable to other country's law. They lost much of their independence!

Today Swiss banks such as Credit Suisse are affected by what happens in the US and other countries (they have a huge investment in their subsidiary Credit Suisse First Boston). More importantly the Swiss franc can no longer be allowed to be the reserve currency of last resort. Switzerland is a poor country in terms of natural resources lacking oil, minerals and the ability to feed itself. Switzerland is a trading nation and must have its currency at parity with other nations' which allows them to export goods. It must export to survive. Half of its exports go to Germany. When the Swiss franc becomes too strong, especially against the euro the Swiss react quickly to force its parity down. The last time the Swiss franc was really strong, the Swiss imposed a 12% per quarter negative tax on Swiss franc accounts held by overseas investors.

Switzerland is a good banking center, yes. The Swiss franc may be a strong, stable currency, yes. Yet the Swiss cannot afford to let the franc rise too high and the interest rate earned on francs is quite frankly (excuse the pun) rotten.

Why choose a currency that is not likely to go anywhere when you are not getting paid a handsome income return?

I have shared this information for at least seven or eight years warning not to invest too much in Swiss francs when it is strong, so what I am writing here is not something new. However much of the investing world always runs five to ten years behind!

There are good reports by UBS here has an article asking has Switzerland sold out to Washington.

However there is a good article by P. Zihlman here.

This article suggest that the franc is at an all time high since 1996 versus the U.S. dollar.

What do you know about Switzerland that might help us decide whether this is a good currency and country for inflation protection? I would like to hear and until next message wish you good investing.