Deutsche Bank Collapse

The  Impending  ‘Deutsche  Bank’  Collapse

This article is a little long – but it’s a complex and important issue!  Please persist until the end!

The legendary share investor Warren Buffett describes derivatives as ‘weapons of mass destruction.

With this description I can well and truly agree  –  primarily as a result of having been made a ‘victim’ of irresponsible and undisciplined derivatives trading in late 2007 when (lunatic) Leonard Joseph Abrahams in Melbourne ignored and then broke every element of a conservative trading mandate that had been given to him – resulting in the reckless loss of just on $400,000 in two trading days!

Notwithstanding his description of derivatives, ‘The Oracle of Omaha’ says one thing and does another  –  as evidenced by the fact that Berkshire Hathaway has billions of dollars worth of derivatives on its balance sheet.

At some point in the future, these ticking time bonds may well erupt and splatter Berkshire Hathaway with searing and destructive flows of derivatives lava.

When financial markets close (as they did for 5 months during the First World War) or become victims to huge volatility (as they did during the Global Financial Crisis of 2008/09 {even though it really started in late 2007}) huge problems can, and generally do, arise.

At the end of the day the global derivatives ‘game’ is a horrible, ugly, unpredictable game played out  –  almost invariably with other people’s money  –  by immoral and ravenously greedy institutional (though some private) traders, which ‘game’, from a risk perspective, makes Russian roulette with live ammunition seem about as risky as sitting in front of the TV and watching ‘Sesame Street’!

In my respectful opinion, the global derivatives ‘game’ will wreak havoc on the world in the not too distant future.

Fortunately though, there is a way to survive and prosper.

In (almost) the words of Senator elect Pauline Hanson, “Please (let me) explain”.

A European Financial ‘typhoon’ is nearly upon us

With the mainstream media focused on global growth concerns after the sensible and successful ‘leave’ Brexit vote, please, let’s all face reality, even if only for a moment.

I believe that the Brexit vote will, in all likelihood, prove itself to be a major and positive turning point in British history.

Europe is heading towards a major ‘financial contamination’ event.

The European Commission (EC), firmly believing that it’s an elitist hierarchy, has overstepped the line to a considerable and unreasonable degree.

The undemocratic and unelected EC bureaucracy has tried to federalise (and, almost, nationalise) Europe by means of its sheer political (and, largely, hidden) agenda.

For example, roughly two thirds of all the ‘laws’ that apply in ‘the UK’  –  most of them being unfavourable to the UK  –  are linked to the EU.  On the 23rd of January, 2014 the London published “Financial Times” reported, amongst other things:

Britain suffered a serious defeat in its campaign to limit the power of EU financial watchdogs after Europe’s highest court dismissed London’s attempt to prevent Brussels from winning powers to ban short selling.

In a keenly awaited ruling with broad implications for how the EU regulates financial services, the European Court of Justice threw out a legal argument Britain has relied on for decades to prevent Brussels from extending its powers.

The judges rejected all four of Britain’s pleas in a finding that will cast a shadow over the UK Treasury’s recent strategy of asking courts to overturn unwanted rules it failed to block during the EU legislative process.

If the UK had voted to remain in the EU, when the sovereign debt crisis hits, this law would have destroyed London, the city that is considered to be the financial capital of Europe.  Without access to short selling, many institutions, hedge funds, investment banks, corporates and pension funds would have done business elsewhere.

Fortunately for the UK, it voted to remove itself from this EU / EC dictatorship.  Despite the scaremongering by the global elitists in recent months, London should be able to survive and prosper.

However, the EU has neglected the strong will of the European people for far too long and this is why the majority of Europeans have turned against the bureaucrats in Brussels.

By voting itself out of the European Union, Britain regained its sovereignty.

Now, eight more countries that have also had enough want to hold referendums to exit the EU.  France, Holland, Italy, Austria, Finland, Hungary, Portugal and Slovakia might all leave.  This spells disaster with a capital ‘D’ for the European Union.

With the writing on the wall for Europe (and the EU in particular), a huge amount of capital will want to escape its borders.  When this happens, the US dollar  –  the world reserve currency  –  may well (and, should) become a distinct beneficiary and soar way higher.

The European banking collapse is next

The International Monetary Fund (IMF) well knows that a major financial meltdown is looming.  Of course though, it will never admit or tell you that!!

In a report it published last week  –  entitled ‘Financial System Stability Assessment’  –  the IMF wrote, with my emphasis added:

Domestically, the largest German banks and insurance companies are highly interconnected.  The highest degree of interconnectedness can be found between Allianz, Munich Re, Hannover Re, Deutsche Bank, Commerzbank and Aareal bank, with Allianz being the largest contributor to systemic risks among the publicly traded German financials.

Both Deutsche Bank and Commerzbank are the source of outward spill-overs to most other publicly-listed banks and insurers.  Given the likelihood of distress spill-overs between banks and life insurers, close monitoring and continued systemic risk analysis by authorities is warranted.

In other words, if Deutsche Bank  –  currently Europe’s largest bank  –  becomes bankrupt, it would trigger a very ugly ‘infection event’ across all of the world’s banks and life insurers.  Needless to say, this isn’t great news  –  in particular considering that Deutsche Bank failed a US ‘banking stress’ test as recently as Thursday of last week, the 30th of June.  The BBC bluntly and objectively reported this disturbing event as follows:

While all 31 large US banks passed the (banking stress) test, Morgan Stanley only got conditional approval and has to submit a new capital plan by the end of the year.

For Germany’s Deutsche Bank it was the second year that the subsidiary of the German lender failed the test while for Spain’s Santander it was the third time.

While the Fed noted improvements for the two banks, the regulator said there were continued substantial weaknesses.

Hmmmmmmmmmm  –  “continued substantial weaknesses”  –  and they’re the words of the US Federal Reserve, not me!

However, this shouldn’t really come as a shock.  Again, please let me further explain.

In its 2015 annual report Deutsche Bank boasted a notional derivatives exposure of €41.9 trillion, yes, trillion, NOT billion (which is approximately US$46.5 trillion and approximately A$62 trillion).  This comprises about 10% of the total global derivatives market which currently stands at approximately US$493 trillion.

In comparison, the current market capitalisation of Deutsche Bank is only approximately €17.46 billion  –  yes, billion, NOT trillion.  In other words, Deutsche Bank is leveraged around 2,399 times.

Imagine promising to buy a house for $239,900 but with assets behind you of only $100!  Yes, it’s laughable  –  but this is the degree to which Deutsche Bank is exposed to the derivatives market.

Admittedly, a reasonable percentage of these derivatives are hedged (ie: there’s a buyer and seller for each contract) but what happens if one side can’t pay up during the almost inevitable times of chaos that are in front of us?

This is exactly what happened during the US sub-prime crisis of 2008.

For this reason, the IMF notes that Deutsche Bank “………………………  appears to be the most important net contributor to systemic risks.

Indeed, Deutsche Bank is connected to just about everything.  Will it be the first domino to fall?

The end of Deutsche Bank is near

When Deutsche Bank goes under  –  which is likely to happen once the European financial septicity takes off  –  I believe that there will be massive bloodshed across world financial markets, and  FAR  more so than when Lehmann Brothers (a relative ‘minnow’ when compared to the {current} size of Deutsche Bank) collapsed in September of 2008.

Looking at the globally connected game of counter-party derivative contracts, if Deutsche Bank fails, I believe that everyone else will follow suit.  The IMF reported (again, my emphasis added):

Notwithstanding moderate cross-border exposures on aggregate, the banking sector is a potential source of outward spill overs.  Network analysis suggests a higher degree of outward spill overs from the German banking sector than inward spill overs.

In particular, Germany, France, the U.K. and the U.S. have the highest degree of outward spill overs as measured by the average percentage of capital loss of other banking systems due to banking sector shock in the source country.

Check out the IMF prepared chart below.  It shows clearly the key linkages of the world’s riskiest bank:











I believe that when the European banking crisis hits, it will unleash a fiscal tidal wave of terror across the entire financial world.  Unlike as was the case at the time of the onset of the 2008/09 GFC, global central banks are ‘out of ammunition’ (ie: financial reserves).  In this case, we should expect a global infection event to unfold.

On this note, check out the IMF chart below showing the riskiest banks in the world:



On the basis of this chart, if Deutsche Bank goes under, HSBC should be next.

The Source of this Graph?  Once again, none other than the IMF itself!





Unfortunately, the next financial meltdown will tear the financial world apart.  If history is a good road map, the banking crisis may well transition into a global sovereign debt meltdown.

A possible solution?

When resource stocks crash (together with, I suspect, bonds, stocks and, possibly, real estate / property) you should, in my opinion, have access to ‘real’ cash and precious metals  –  and then wait to pick up the best resource stocks for mere cents in the dollar, your best option being to stick with speculative stocks.

Remember that, researched properly, speculative resource stocks can make you huge gains, despite market conditions, because the world will always need resources  ………………………  and in particular food!

Even though, in my humble opinion, the next financial meltdown will tear the financial world apart, at the end of the day (or, more to the point, at the end of the month or the year) the sun will continue to shine and the world and its 7 billion+ population will go on!

Hopefully though, once the extent of the next financial meltdown has been manifested, there will have been a massive clean-out of the immoral and inequitable banking and investment practices of the last 25 to 30 years.

Hopefully all of the financial ‘weapons of mass destruction’ will have been detonated or, more to the point, imploded given their complete lack of real-world reality.

Hopefully then, what is left of the financial markets can return to some realm of reality, respectability and decency  –  until, that is:

  • the generation after next fails to heed or, more importantly, learn from the mistakes of the turn of the 21st century; and
  • the next generation or two of greedy, self-indulgent and narcissistic ‘slick-suited’ Wall Street executives agree amongst themselves to ‘give derivatives trading ago ………………………  just for a little while!

Right now, my best advice is that if you, your friends, your family or your business have anything to do with  –  and in particular any exposure to  –  Deutsche Bank, eliminate that exposure NOW.

Also, even if you and your business don’t bank with or have any apparent direct exposure to Deutsche Bank, ask your bank what exposure it (and its financial reserves) have to Deutsche Bank.

Peter Kerin

Peter Kerin

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