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"Deutsche Bank is too important for the German economy. The banks tussle with the U.S. Department
of Justice over a potential $14 billion legal settlement is a political issue which will get resolved at a
lower price, he said in an interview with Francine Lacqua and Tom Keene on Monday.
The only question is just how will Germany, which has been so staunchly against an Italian bailout of its
own insolvent banks, will i) pass such a deal with popular sentiment strongly against more bank bailouts
and ii) what will a bailout look like: with 162 billion in debt and only 17 billion in equity, the
government check would be substantial. And that, of course, excludes the 42 trillion in gross notional
exposure which few if any have been willing to discuss in recent weeks.
Massive Derivatives Risk Points to the Bail-In Nuclear Button Being Pushed, Maybe.
According to the Bank for International Settlements, the total notional value of world derivatives
contracts outstanding equaled $550 trillion in 2015. Deutsche Bank reported in its April 29, 2016 earnings
announcement that it had notional derivatives exposure of $72.8 trillion, or about 13% of the total global
amount. As of June 15, 2016, the total derivatives exposure equates to about 3,600 times the bank's
market cap of $20.26 billion. (approx.).
Deutsche Bank is unlikely to face losses equal to its notional derivatives exposure set out above, since its
contracts are netted out with different counterparties. However, the last financial crisis showed that
counterparty risks can snowball and create a chain effect. In 2008, failures at Lehman Brothers and
American International Group Inc. led to a run on banks and imperiled the financial system. Similarly, a
failure at Deutsche Bank could have catastrophic consequences for the banking system in 2016. (See IMF
Chart 1 below).
Given the position adopted by the ECB and the German government with regard to bank bail-outs in
Cyprus and Greece, it is impossible for them to support a sovereign resolution to Deutsche Banks
capital shortfall. Under the circumstances it would appear that the words BAIL-IN are probably going
to loom large in the life experience of many German citizens very soon. Potentially hundreds of
thousands of Germanic folk, with balances in excess of 100,00 Euro, are going to have their accounts
frozen, subject to a review of the banks financial state. Under the new rules adopted by Angela Markel et
al, deposit monies belong to banks, not depositors. Thus it would not be unexpected to observe a massive
capital flight from Deutsche Bank once the penny starts to drop. Such an eventuality will only
undermine an already terminally weak Euro, currently so fragile following the recent Brexit vote.
Recently the IMFs June Report (Ref: 16/189) stated that it regarded Deutsche Bank was a systemic
risk to world banking (see IMF charts below). This assessment in itself exposes the critical nature of
Germanys problem but for some reason the report was buried in the British referendum media hype. I
suspect that this report is going to be dug up over the next few days by the few and will then go viral
quickly to the many.
IMF Chart 1: Country Report 16/189 June 2016. (GSIB: Globally Systemically Important Banks).
Technical Summary
Short Term Trend: Bearish
Medium Term Trend: Flat
Long Term Trend: Bullish
Long Stochastics: Oversold
Short Stochastics: Neutral
Vix: Very Low & Rising/Market Risk High
McC. Oscillator: Neutral
A/D Line: Bullish
Trumping the Market
The market has shaken off its FED euphoria. The prospect of a new earnings season is probably
beginning to cast a shadow, as is the possibility of a surge in the polls for Donald Trump, following the
debate tonight on NBC.
For active traders I reckon the upcoming presidential election is going to present the volatility trade of all
time. The polls are so close and the policies of each candidate so divergent, the night of the election
should be amazing. It could be Brexit all over again. Then, following the election, if Janet Yellen has not
yet risen interest rates, imagine the market action around the December and January FED open market
meetings. Oh boy, I cant wait. Thank goodness many European brokers offer 24 hour trading on
derivatives these days.
Dow Theory wise there is now significant divergence between the Dow Industrials and the Dow
Transports. This means market risk is rising and the internal strength of price action is quickly
weakening. Therefore the risk/reward ratio is not sufficient to justify large fund placement. Thus for the
moment, investment wise, I would wait and see how things play out this earnings season. A correction
would be good. However trading wise I will be very much in place, November 8th, with all guns blazing.
Will Donald Trump the market I wonder?
Sources:
Kenny Polcari Morning Thoughts Blog 26th. September 2016.
Zero Hedge, Tyler Durden, 26th. Sept. 2016.
IMF Country Report Ref: 16/189, June 2016.
Investopia, Lawrence Pines, June 29, 2016.
Charts: Courtesy of Worden Bros. & Stock Charts.Com