The Next Shoe to Drop in Global Banking

Posted On Sep 26, 2016 By Dave Gonigam

  • Banks drag markets down, led by faltering German giant
  • The Italian job: The wild card with Deutsche Bank no one else is talking about
  • Man who coined the term “currency wars” now under arrest
  • Slipping demand for new homes… the case for driverless cars, in brief… the question no one will ask at tonight’s debate… and more!

That sound you hear in the distance is a shudder moving through the globe’s major banks.

The major U.S. stock indexes are slipping as a new week begins. As we write, the Dow is adding to Friday’s losses — down two-thirds of a percent at 18,140. But the KBW Bank Index is down more than 1%… and it’s Deutsche Bank that’s proving the big drag.

We told you about the dire situation at Deutsche a week ago today. Our trend-follower Michael Covel says the German giant has the same potential to tank the economy and the markets that Lehman Bros. did back in 2008.

Over the weekend, a German magazine reported Chancellor Angela Merkel had ruled out any form of state aid for Deutsche. That’s not exactly a revelation — she’s already unpopular and anything that smacks of a bailout would tank her party’s chances in elections next year.

Nonetheless, Deutsche shares slipped as much as 7% during the trading day in Europe. The chill spread to other European banks and ultimately across the Atlantic.

Deutsche Bank now trades at lows last seen in the early 1980s. It’s down 50% just this year.

How can it possibly go any lower? Easily, says Jim Rickards — who last week urged readers of Rickards’ Intelligence Triggers to buy put options on Deutsche, betting the shares will go down. This morning, that recommendation is up more than 20%.

“It is difficult to overstate the importance of Deutsche Bank,” says Jim, “not only to the global economy, but also in terms of its vast web of off-balance-sheet derivatives, guarantees, trade finance and other financial obligations on five continents.

“The problems at Deutsche Bank are well-known. They have suffered through bad debt write-offs and mark-to-market trading losses just like many of their big bank peers. But the problems go deeper. Deutsche Bank’s capital is barely adequate under generous ECB ‘stress tests,’ and is completely inadequate under real-world scenarios involving a global liquidity crisis of the kind we saw in 2008.”

But there’s a risk the market isn’t yet pricing in. You might call it the Italian job.

“While the world is waiting for the denouement of the Deutsche Bank drama,” says Jim, “another bank fiasco is playing out in Italy. This involves the Banca Monte dei Paschi di Siena (BMP), the world’s oldest bank still in operation, founded in 1472.”

Two years ago, we chronicled BMP’s travails. The only thing on its books that you could genuinely call “assets” is its priceless collection of art dating from the 14th through 19th centuries, many of the works commissioned by the bank.

Fast-forward to this summer and BMP was the only top bank to fail the aforementioned ECB stress tests. “It is required to raise capital and has announced plans to do so,” Jim explains. “The capital raise is being led by JP Morgan and a syndicate including Goldman Sachs and some of the largest banks in China.

“The syndicate was formed in July and was supposed to announce results by the end of September. We’re almost there, and the news is not good. Reuters just reported that the capital-raising effort is not going well and the syndicate expects they will delay any announcement until after important Italian elections scheduled for November.”

Because BMP is closer to the brink than Deutsche, it functions as that proverbial canary in the coal mine, Jim tells us.

“Italy wants to bail out BMP with taxpayer money. That’s the standard playbook that governments used in 2008. But the rules have changed. At the G-20 Leaders’ Summit in Brisbane in 2014, it was decided that bailouts would be replaced by ‘bail-ins.’ In a bail-in, taxpayer money is not used to recapitalize the sick bank. Instead, bondholders and depositors take haircuts and are involuntarily converted into equity holders.”

You might recall that’s what happened to large depositors at the two biggest banks in Cyprus in 2013; Cyprus was the test case and the elites pronounced it a success.

“The German government under Angela Merkel is telling Italy that they cannot bail out BMP,” says Jim; “they have to use the new bail-in rules instead. But what’s sauce for the goose is sauce for the gander. If Germany forces Italy to bail in BMP, then Italy will insist that Germany also bail in Deutsche Bank when the time comes. Germany won’t like that, but if they don’t bail in Deutsche Bank, the European Union will come apart because of acrimony between Italy and Germany.

“Compared with this dispute, U.K. Brexit is a sideshow,” Jim adds. “Greece is a sideshow of a sideshow. Italy is the real deal. If Germany and Italy can’t cooperate, then there is no European Union.

“Markets won’t wait while German and Italian politicians tiptoe around the bail-in question. They will draw their own conclusions and start a run on Deutsche Bank. That will take the stock down another 90% on top of the multiple crashes that have already occurred.

“Deutsche Bank won’t fail, and the stock won’t go to zero. But there’s still plenty of room to fall.”

[Ed. note: Another major development on Jim’s radar is a “surprise” currency attack bearing down on the United States. (You can go to this short page to read about it right now.)

He’s called a “Dollar Defense Summit” for this coming Wednesday at 7:00 p.m. EDT. “I’m projecting attendees could not only protect their money — but make as much as 400% in the next few months,” says Jim. It won’t cost you a thing to attend; all we need is your email address and we’ll guarantee you a spot. RSVP at this link.]

As the morning wears on, the selling continues apace — the Dow now off three-quarters of a percent.

Gold isn’t benefiting much from the safety trade, the bid steady from last week at $1,341. But Treasuries are catching a bid, the yield on a 10-year note slipping below 1.6%.

Crude has rallied nearly 4%, to $46.16, on yet another rumor of an OPEC production cut. As we said with the previous rumor last week, one of these days, it just might pan out.

The lone economic number of the day is new home sales. They fell 7.6% in August, which wasn’t as bad as expected. New home prices are climbing down, a sign that builders are resorting to discounts to move inventory.

For the record: The man who gave us the term “currency wars” is now under arrest. And no, we don’t mean Jim Rickards.

It was around this time in 2010 that Brazilian finance minister Guido Mantega said the globe’s central banks were engaged in an “international currency war” in which nearly everyone was seeking to devalue against everyone else.

Now he’s been caught up in the exhaustive scandal at the state-owned oil company Petrobras. Prosecutors want to ask him whether he took payments in 2012 from Eike Batista. At that time, Mantega was chairman at Petrobras and Batista was Brazil’s richest man.

Here at The 5, we’re less interested in the allegations themselves than the power plays behind them.

President Dilma Rousseff was impeached a few weeks ago for using budget trickery to cover up a deficit during her re-election campaign in 2014 — small potatoes compared with the outright graft of her successor Michel Temer, who hails from a conservative opposition party.

Rickards’ Strategic Intelligence contributor Nomi Prins has been our eyes and ears on the ground in Brazil this year. Back in the spring, she explained how the political drama there is animated in part by the U.S.-China rivalry. Rousseff did many deals with China; Temer might be more reluctant.

Back to Mantega, who was allied with Rousseff: His currency-wars critique was aimed squarely at the Federal Reserve. He blamed the Fed for causing “hot money” to flood into Brazil in 2011, strengthening the Brazilian real dramatically — tanking Brazilian exports and tourism.

No, there’s no smoking-gun evidence of the Fed’s hand behind Mantega’s new trouble with the law… but we imagine folks at the Eccles Building in Washington are nonetheless smiling…

“The readers who are pouring scorn on driverless cars really don’t seem to understand where the technology is heading,” begins today’s mailbag.

“I would expect a driverless car (i.e., a car driven by a computer) to outperform a human driver in any set of conditions. ‘Dumb’ computers already aid in driving in such conditions, via anti-lock braking and traction control systems. The computers running the driverless cars will be able to sense the car’s performance more quickly and in more detail. They will also be able to more precisely modulate performance systems, to avoid skidding and wheel lock.

“I would trust the driverless car in snow more than a human.”

The 5: That does appear to be the way the technology is moving. Expect to hear much more on the topic this week from Ray Blanco of our science-and-wealth team. It will be an important counterpoint to the driverless-car critiques we’ve had in the mailbag these last few weeks…

“As always, we should take Warren Buffett’s comments with a grain of salt,” a reader writes after Buffett begged off questions about the scandal at Wells Fargo. “The real tell will be whether he starts dumping shares of Wells Fargo stock.

“Apparently, Buffett now owns 500 million shares of WFC (through Berkshire Hathaway). If he begins unloading them, no doubt he would want to do so quietly, in order to perturb the price as little as possible. So he’ll probably be tight-lipped about all of this.

“Still, Buffett can’t be happy with CEO John Stumpf and company, or with the lines they have crossed. The ‘Eight Is Great’ scam wasn’t some shady financial engineering perpetrated by corporate traders. Stumpf used frontline staff at Main Street banks to fleece retail customers and enrich himself. Then he set up a phony whistleblower program — and systematically fired employees who used it.

“So far, thousands of pawns have been sacrificed, but no heads have rolled among senior management. Carrie Tolstedt, who ran the Community Banking division responsible for creating the fake accounts, was even allowed to ‘retire’ with a nine-figure payout.

“The bank has agreed to pay a cost-of-doing-crooked-business fine. But the penalty is smaller than either the fees Wells racked up from phony accounts or the income Stumpf earned in the process.

“You can’t make up this stuff.

“Anyway, if there are two things we have learned about the big banks, it’s that they tend to share common practices (including fraudulent ones); and at the end of the day, none of Wells Fargo’s senior managers will really be held accountable. It’s just business as usual in the finance industry.”

“That the FOOI (‘OOI’ is for Oval Office idiot, you figure out the ‘F’ part) and the U.S. State Department are surprised by Putin’s actions in Syria is truly stupid,” writes one of our regulars after we picked apart the state of play in the Syrian war on Friday.

“Russia has had a long-standing alliance with Syria. Of course, the Russians will go after anti-Assad Syrian rebels who are ‘clients’ of the U.S. These rebels are attacking Russia’s alliance partner.

“Once again, why is the U.S. involved in Syria’s affairs?”

The 5: Great question. And we’re certain no one will ask it at the debate tonight…

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. There’s only one thing your editor will be eyeing in the debate tonight — whether Clinton plays the “Putin card” against Trump.

If so, we’ll have a thing or two to say tomorrow. In the meantime, we direct your attention to something we’re sure won’t come up in the debate — the sneak currency attack Jim Rickards says the Russian president is plotting.

Jim believes it will amount to the third great currency shock of the last two years. And it might well arrive before Election Day. If you’re not up to speed, start here and then sign up for Jim’s exclusive live briefing on Wednesday at 7:00 p.m. EDT. Like the debate tonight, it won’t cost you a thing to watch… but unlike the debate, we promise you’ll actually learn something useful, heh. You can guarantee yourself access at this link.


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