11/02/2016

Warning Signs - by Jeff Fitchett

There are so many warning signs right now that I liken them to a giant neon sign flashing "Danger", "Danger".  I have been harping on the fact that the trends have been clear for many years now and they have slowly been manifesting to a boiling point.  It is almost as if a person would have to try to willfully ignore the facts given how blatant they are.  I am very concerned with the debt and derivative markets.  After all, money is debt.  Keep that mind because I think it is a very important point to meditate on.  Central banks are pushing hard for negative interest rates.  The media is parroting the central banks wishes by writing articles and having debates about negative interest rates.  In addition, there is more and more talk about banning cash.  Can you imagine having all of your life savings locked into a digital format?  It is absolutely crazy to me why anyone would trust politicians or banks.  


Deutsche Bank is the largest bank in Germany and the 11th largest bank in the world.  They have over 100,000 employees and operate in 70 countries.  They have also been at the heart of many scandals that include covert espionage, US housing credit bubble and collateralized debt obligations, LIBOR rigging, as well as dealing with sanctioned countries.  What concerns me in particular has to do with their derivatives exposure.  Deutsche Bank has over $50 trillion in exposure to derivatives.  The derivatives market is estimated to be $1.5 quadrillion in size and dwarfs the world economy that is estimated to be around $78 trillion.  Examples of derivatives are:

  • Futures Contracts - a contract that allows you to buy or sell a specific asset, at a set price, at a future date and set quantity.
  • Options Contracts - an instrument that conveys the right, but not the obligation, to engage in a future transaction.
  • Credit default swaps - insurance on the debt of a company or country.  For instance, the cost of default insurance goes up when there is a risk of default.  Notice the chart above that shows the cost of insuring a bond that Deutsche Bank must pay back.
  • Interest Rate Derivatives - the underlying asset has the right to pay or receive a notional amount of money at a given interest rate.  
Derivatives are extremely complex to understand and this is not the forum to go into great detail about them, but it is important to understand that one party always loses in a derivatives contract.  Financial experts will argue that the issuers of these contracts have hedged their bets. Back in 2008, AIG Insurance Company insured debt that was associated with the US housing credit market.  They insured more than they could cover and subsequently went bust and had to be bailed out by US taxpayers and the US Federal Reserve.  It pains me that corporations privatize profits, but socialize losses.  

Deutsche Bank is in the same position.  I believe they are on the brink of going bust as the world's largest Ponzi scheme, world debt, is about to pop.  Deutsche Bank will not be the only casualty as I see most major banks going bust because they are larger and more risky now than back in 2008. Deutsche Bank happens to be operating in a region that is burdened with defaulting bonds in countries such as Greece, Spain, Portugal, Italy, etc.  The EU is a basket case of problems most notably dealing with a major recession and refugee/migrant crisis. There are a plethora of problems and the financial markets are zeroing in on Deutsche Bank.  They could very well turn into the next Lehman Brothers that ends up bringing down the global financial markets.  If Deutsche Bank is unable to meet their derivative obligations to other parties this could very well result in a loss of confidence and a cascading effect as the derivatives market breaks apart.  How in the world could governments and central banks deal with a $1.5 quadrillion problem?  

Gold has spiked significantly over the past month because of the increasing volatility in the equity markets, bond markets, currency markets and interest rate markets.  As I stated at the beginning of this article, the signs are everywhere that things are drastically wrong.  World markets are collapsing.  The word collapse is appropriate to use because it illustrates that a structure is giving way or falling down.  Our way of life is going to follow the path of the global economy.  I would much rather own physical objects such as bullion, land, food, tools and anything else that is useful or is a store of value when compared to a digital entry on a computer screen that is tied to a fraudulent system.  


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