The Swiss may be about to start a revolution in money markets. And no, it’s nothing to do with crypto currencies.
This coming Sunday, June 10, Swiss voters will have a chance to detonate a proverbial nuclear bomb in the world of finance, by voting to abolish fractional reserve banking. The Vollgeld, or sovereign money, initiative would, if passed, mean that banks can no longer create money via their lending activities. Currently, when a commercial bank creates a loan to a customer, it credits money to that account - hey presto, creating money out of thin air. Under the Swiss proposal, the ability to create money in an economy would lie solely with the central bank (curiously, shares of the Swiss central bank are up over 500% in the last three years). However, the SNB is, publicly at least, opposed to the plan, as they say it is untried and untested. Fractional reserve banking has been the basis of the debt-fueled boom in the developed world over, at least, the last 30 years. Abolishing it would, especially in finance heavy Switzerland, be devastating for the economy and lead to deflation of credit. In fact, according to a Financial Times article, Sergio Ermotti, CEO of UBS recently told journalists, “I don’t expect the Swiss people to be suicidal and approve it.”
As socionomists, we believe that social mood influences events, not the other way around as most people do. We measure social mood by, amongst other things, the price action of the stock market. Stock prices generally move first and “events” subsequently catch up. So we find it extremely interesting that, at this juncture, not only is the overall Swiss stock market signaling that a new bear cycle has begun (reflecting a negative trend in social mood) but the share price of UBS, undoubtedly a bank that would suffer if Vollgeld passes, is also showing a distinctly bearish pattern.
The chart shows that, after the 88% crash in UBS shares between 2007 and 2009, the stock moved sideways until 2015. We think that constitutes waves a and b of a three-wave movement down (a-b-c). Wave c should subdivide into a five-wave movement, and there has been a clear down-up movement from 2015 into the January 2018 high. The third wave of c looks like it is just starting. Third waves in bear markets tend to be devastating and are generally accompanied by extremely bearish news flow. So we ask ourselves the question - “Is the share price action of UBS predicting that the Swiss will vote to abolish fractional reserve banking this Sunday?” The opinion polls point to a rejection of Vollgeld. But, hey, let’s face it, given the voting surprises over the last few years, anything can happen. Whatever you’re doing this Sunday, keep half an eye on Switzerland.