Is It Really 2008 Again?

  • And so it begins: Hedge funds bail from Deutsche Bank, just like with Lehman in 2008
  • How the next crisis will be different… and how it won’t be
  • It’s not Deutsche Bank’s rescue that you should fear. It’s what happens before
  • Turning Japanese: The Fed tiptoes toward buying stocks
  • Answering reader inquires about “the new world money”
  • “The government keeps us safe” and other things grade-schoolers learn… cautious consumers… an update on the Fed’s quest for 2% inflation… and more!

With the proviso that we’ve not had time to verify its authenticity… we begin today with an Instagram post from professional rabble-rouser Adam Kokesh: “A friend of mine whose child is in a government school sent me this. Scary indoctrination!”


Apparently, it’s sung to the tune of The Addams Family theme song.
Assuming it’s for real, we merely pass it along as a sign of the times before we move on to more pressing matters…
“This is how it started with Bear Stearns and Lehman Bros. in 2008,” says Dan Amoss of our macro research unit — speaking of the latest drama at Deutsche Bank.
On Monday, we mentioned Deutsche shares tumbled to three-decade lows after the German press reported that Chancellor Angela Merkel had ruled out any state aid for the ailing giant.
Shortly after we went to virtual press yesterday, the next shoe dropped as Bloomberg reported several hedge funds were getting out of Dodge — or Deutsche, as the case may be: “A number of funds that clear derivatives trades with Deutsche Bank AG have withdrawn some excess cash and positions held at the lender, a sign of counterparties’ mounting concerns about doing business with Europe’s largest investment bank.”
Gotta love that ol’ “counterparty risk.”
Meanwhile, Deutsche CEO John Cryan — he’s a Brit, in case you’re wondering about the non-German name — sent an email to his employees trying to assure them everything will be alright. It was an anodyne message, acknowledging “new rumors” were causing the share price to fall even further.

Really? No waste matter, Sherlock!

Cryan evidently knows better than to follow the path of Lehman CEO Dick Fuld. In April 2008, Fuld infamously said of the people betting his company’s stock would go down, “I will hurt the shorts, and that is my goal.”
Less than six months later, Lehman was no more. And in the interim, the aforementioned Dan Amoss led readers to 462% gains on Lehman put options.
So… what’s the “next Lehman” potential with Deutsche Bank, really?
We’ve previously pointed out DB’s balance sheet is even more leveraged than Lehman’s was in 2008. And it might well be the single biggest risk to the global financial system at this time.
These facts have prompted certain experts to step forward and say DB is not Lehman. “Any failure of Deutsche Bank would not result in the complete freezing up of the financial system that we observed eight years ago,” says an anonymous blogger called “Macro Man.” His musings are getting mainstream attention this morning at MarketWatch.
“There is a veritable ocean of liquidity available today through various programs (LTROs, etc.) that were not in place during 2008. It is therefore difficult to see DB running out of money as swiftly as Lehman did.”
That’s true, says Dan Amoss… as far as it goes: “Of course it’s not Lehman! And of course central bank liquidity is much more abundant than it was in the Panic of 2008!”
But here’s what else has changed since 2008: The world is awash in ZIRP, or zero interest rate policy.
ZIRP was implemented eight years ago, in large part to help shore up the banks’ balance sheets. But now it’s hurting the banks’ “net interest margins” — the difference between the interest they collect from loans and the interest they pay on deposits.
“As people realize that Deutsche Bank has no real prospect of returning to a position of constant profitability,” says Dan, “DB can be effectively shut off from important sources of liquidity — including derivative counterparties.”
The more that goes on, the more Deutsche will have to turn to the European Central Bank for liquidity. “But the ECB doesn’t want to face the embarrassment or the political risk involved with lending to a marginally solvent or insolvent bank.”
That too is different from 2008: Eight years on, the masses are much more skeptical about anything that smacks of a bailout.
“So the ECB may ultimately force Angela Merkel’s hand on the issue of restructuring and recapitalizing Deutsche Bank,” Dan concludes.
Merkel has already committed herself to defending Europe’s rules for rescuing insolvent banks. That means no bailouts for shareholders… and “bail-ins” for depositors; that is, large depositors might see their money converted into stock of the bank.
Result, says Dan: “The main party at risk of getting thrown under the bus is DB’s shareholders and junior creditors.”
As we write this morning, DB is rallying 13% on rumors it’s about to reach a settlement with the Justice Department for its mortgage shenanigans in the run-up to 2008. The AFP newswire says the bank will fork over $5.4 billion — an amount that “will significantly impair an already weak capital base,” says Jim Rickards.
Ten days ago, Jim and Dan urged readers of Rickards’ Intelligence Triggers to buy put options on DB. The tangle with the feds had nothing to do with their thesis: Rather, it will be a downward spiral of Deutsche shares falling, prompting Deutsche’s counterparties to bail, prompting liquidity to tighten, prompting Deutsche’s shares to fall further… and so on. The recommendation is already up 32%.
A new Rickards’ Intelligence Triggers trade will be issued next Tuesday. If you want to be on board, here’s where to go.
A brief postscript: It’s what happens before DB’s shareholders and junior creditors get thrown under the bus that might set off a market panic.
“It is difficult to overstate the importance of Deutsche Bank not only to the global economy,” Dan says, “but also in terms of its vast web of off-balance sheet derivatives, guarantees, trade finance and other financial obligations on five continents.”
It’s the “contagion” that made 2008 so awful — everything connected to everything else. That much hasn’t changed at all in the last eight years.
The momentary glow from Deutsche is spreading to the banking sector and stocks in general as Wall Street stages an end-of-week and end-of-quarter rally.
At last check, the Dow is up nearly 1%, at 18,318 — not quite enough to erase yesterday’s losses, but close. Gold is holding steady at $1,318. Bonds are selling off, the 10-year Treasury note now yielding 1.59%.
Americans continued their generally tightfisted ways last month, judging by the latest “income-and-spend” numbers from the Commerce Department.
Personal incomes grew 0.2% in August. But consumer spending was flat. That’s two months in a row incomes have grown faster than spending. And the savings rate inched up once again to 5.7%.
Meanwhile, “core PCE” — the Federal Reserve’s preferred measure of inflation — inched up to 1.7%, the highest level in two years and a touch closer to the Fed’s 2% target. That just might be enough to give the Fed room to raise interest rates at its next meeting. But many other things can and will happen over the next 45 days, including the election…
For the record: Federal Reserve Chair Janet Yellen has opened the door to the Fed buying stocks.
She was asked about it yesterday during congressional testimony. Rather than artfully deflecting the question, she said this instead: “Well, the Federal Reserve is not permitted to purchase equities. We can only purchase U.S. Treasuries and agency securities.
“I did mention in a speech in Jackson Hole, though, where I discussed longer-term issues and difficulties we could have in providing adequate monetary policy. Accommodation may be somewhere in the future, down the line that this is the kind of thing that Congress might consider, but if you were to do so, it’s not something that the Federal Reserve is asking for.”
There you go. Congress would have to allow the Fed to buy stocks, but in the midst of a crisis — either real or perceived — that’s just a formality.
There’s precedent in Japan: As we mentioned three months ago, the central bank is now a top 10 shareholder in 90% of the companies making up the Nikkei 225 stock average.
To the mailbag, where the big topic is the big shift in the “world money” due to take place after the market closes today.
The special drawing rights issued by the International Monetary Fund — a special type of currency circulated among governments and central banks — will now incorporate the Chinese yuan in addition to the dollar, euro, yen and pound.
“I am trying to figure out if you made your second pie chart deceptive on purpose,” writes a reader taking a close eye to our before-and-after charts of the SDR’s composition. “My take is that you are showing the U.S. dollar’s share of the total pie smaller than it really is, considering the tiny decrease that is occurring.”
Another reader noticed the same discrepancy: “Perhaps due to bias (heh)?”
No deception intended on our part. The numbers are accurate, and the dollar’s share is barely changed; the euro takes far and away the biggest hit.
“The prediction of the death of the U.S. dollar due to the revision to the SDR seems a little overblown,” our second reader continuesalso noticing that the dollar’s share of the SDR is little different once the yuan is included.
“It appears as though the U.S. dollar should be significantly less impacted than all the other currencies, does it not? Yet Rickards says it is the end of the dollar!?”
“I very much enjoy reading The 5. I do need to point out that you shamelessly push Jim Rickards like MSM does Hillary!”
At the risk of repeating ourselves, this one move isn’t a dollar deathblow. In the decades-long beating the dollar’s been subjected to… the SDR shift is like a punch to a vital organ, the effects of which won’t become evident for a while.
“The dollar replaced the British pound sterling as the world’s dominant currency last century,” Jim reminds us. “But it was a gradual process that took place between 1914 and 1944. It didn’t happen overnight, nor will SDRs replace the dollar overnight.”
And remember the purpose of SDRs: to rescue governments and central banks during a crisis. Each of the three times they’ve been issued over the last 50 years, it was in response to a crisis. The next crisis will be different in that there’s nothing other than SDRs to prop up the system.
“I like to explain it like this,” says Jim: “In 1998, when Long Term Capital Management collapsed, Wall Street bailed out the hedge fund. In 2008, when the financial system collapsed, central banks and government bailed out Wall Street. Now when the central banks and government collapse, who will bail them out? And with what? The answers are: the International Monetary Fund… and SDRs.”
That’s when central bankers will finally get the inflation they all crave.
Will you be ready for the crisis… and the aftermath? Follow this link and Jim shows you exactly what’s at stake.
To the reader’s other point: We realize Jim has had an outsized presence in The 5 this year, relative to our other editors.
But that’s because we’re in a particularly dicey time for the economy and the markets. Jim joined us in the fall of 2014 — not long after the dollar began a run-up for the record books and corporate profits peaked, at least for this post-2008 economic cycle. The stock market has done a lot of up and down since then, but essentially has gone nowhere.
Gone are the days when you could throw darts to pick names in energy and biotech and all but be guaranteed you’d make money. Gold began staging comeback last winter — at a time even many gold bugs had left it for dead. All in all, Jim’s heavy-duty “macro” outlook is well-suited for times like these. We couldn’t be more proud to have him on board and regularly contributing his insights to The 5.
Have a good weekend,
Dave Gonigam
The 5 Min. Forecast
P.S. Whether you read today’s episode of The 5 before 4:00 p.m. EDT or after… Jim Rickards has an urgent message about the new “world money” and how it will change your financial world forever — even if you don’t feel the effects right away. .

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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