by Doug Casey, Casey Research:
Investors are having flashbacks of 2008.
If you’ve been following the markets, you’ve probably noticed something disturbing.
Deutsche Bank (DB), Germany’s biggest bank, is in free fall. Its stock has plummeted 53% over the past year. Last Thursday, it hit a new all-time low.
Deutsche Bank’s downward spiral has captured the world’s attention. After all, it’s a pillar of Europe’s banking system. If it collapses, the rest of Europe’s banking system could too.
That would be a serious problem for everyday Europeans and European investors. But as you’ll see today, it’s still a major threat to your wealth even if you live far outside Europe…
• Deutsche Bank could spark the next global financial crisis…
That’s because Deutsche Bank is leveraged to the gills.
According to a recent study by the U.S. Federal Deposit Insurance Corporation (FDIC), the German lender has a leverage ratio of 2.68%. This key metric measures a bank’s financial strength. The lower the ratio, the stronger the bank.
By this measure, Deutsche Bank is in far worse shape than any major U.S. bank was before the 2008–2009 financial crisis. Business Insider reported two weeks ago:
Deutsche Bank has a lower capital ratio than the US banks before the 2008 financial crisis, according to Hoenig [FDIC Vice Chairman].
“In 2008, the 10 largest US banks held on average 3.1% tangible equity capital-to-assets. When the financial crisis hit, these institutions experienced significant losses and required extraordinary government support,” he said.
According to the FDIC, the failure of a giant bank like Deutsche Bank “would threaten a financial crisis and economic collapse.” This makes it the most dangerous bank in the world right now.
• Raoul Pal also thinks Deutsche Bank has serious problems…
Pal is one of the world’s top “big picture” investors. He used to run a big hedge fund, but he made so much money that he retired from money managing at the age of 36.
Today, Pal publishes The Global Macro Investor, a research letter read by some of the world’s top hedge funds.
According to Pal, negative interest rates are killing Deutsche Bank.
Negative rates are the latest government “stimulus” measure. The European Central Bank (ECB) introduced them in 2014 to jumpstart its stagnant economy.
But that hasn’t happened. Europe’s economy is growing at the slowest rate in decades.
Negative rates are also starving European banks of income.
You see, banks make money by charging interest on loans. But global interest rates are near record lows today, thanks to idiotic central bankers. That’s made it very difficult for European banks to make money.
Second-quarter profits at HSBC, Europe’s biggest lender, fell 45% from a year ago. Spanish banking giant Banco Santander’s second-quarter profits fell 50%. And Deutsche Bank’s profits plunged 98%.
• According to Pal, Deutsche Bank also has “an enormous derivatives book”…
A derivative is a security that derives its value from another security, such as a stock, bond, currency, or interest rate.
During the last housing bubble, many derivatives were tied to mortgages. When housing prices crashed, people stopped paying their mortgages. The derivatives tied to those mortgages blew up. This is a big reason why the U.S. housing crisis turned into a full-blown global financial crisis.
In other words, derivatives can turn a bad crisis into a catastrophic one. That’s one reason why Warren Buffett famously called them “financial weapons of mass destruction.”
On Monday, Pal told CNBC that the size of Deutsche Bank’s derivative book is so big that “it’s very difficult to unwind. It’s difficult to get rid of. People don’t understand what the risk is with that.”
Deutsche Bank isn’t the only European bank with serious problems either.
• Pal sees “clouds everywhere” in Europe’s banking system…
Pal explained last week in an interview with Yahoo! Finance:
“Deutsche Bank was just one of the warning signs out there for the banks. It just looks the worst based on the shear size,” Pal told Yahoo Finance in an interview. “It’s one of the canaries in the coal mine telling something really bad is going on in the European banks overall.”
Pal doubled down on this warning on Monday:
“It’s all from the same issues. Basically, a lot of the bad loans in Europe, whether it’s Italy, whether it’s Spain, didn’t go away.”
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