It is now widely accepted that Deutsche Bank (DB) is in serious trouble. The stock price is down almost 50% year to date.
Hedge fund manager Jeff Gundlach had these inspiring words to say about DB:
“Banks are dying and policymakers don’t know what to do. Watch Deutsche Bank shares go to single digits and people will start to panic… you’ll see someone say, ‘Someone is going to have to do something’.” [ZH]
DB will not be allowed to fail. When the dust settles, depositors and counterparties to DB’s 52 trillion Euro derivatives book will be backstopped.
Yesterday Deutsche Bank’s chief Economist called for a European bank bailout.
“In Europe, the bailout does not need to be so large. A €150 billion program should be enough to help European banks recapitalize,” said David Folkerts-Landau. He adds that the decline in bank stocks is only the symptom of a much larger problem, namely a fatal combination of low growth, high debt and a “dangerous” deflation. [ZH]
The Lehman Brother’s bankruptcy and ensuing global financial crisis showed that policy makers have no stomach for the creative destruction forces of capitalism. Bank losses globally are socialised by inflating the domestic currency money supply.
We know that DB will eventually be bailed out by Germany and the ECB; however, the plebes aren’t as stupid as in 2008. There is growing discontent with the rampant inflation in housing and food, and deflation in semi-skilled and low-skilled wages resulting from a global bout of money printing.
Frau Merkel and Super Mario will decree that some members of the DB capital structure receive Krispy Kreme doughnuts. The politics demand it. A doughnut has a hole in the middle resembling a 0: that is what some investors’ DB equity or bond positions will be worth.
Once DB’s stock price slides below €10, panicked investors will accelerate the de-risking of any DB positions. Some BSD traders will attempt to bottom-pick certain bonds.
If you can accurately predict which levels of the capital structure will be disadvantaged over others, buying certain issues of DB debt can lead to outsized gains. The downside is that if you are wrong, you lose 100% of your invested capital. In a year when most hedge fund managers are seriously underperforming, many portfolio managers are very gun-shy.
DB is not the only European banking cockroach. In Super Mario’s home country of Italy, almost every large bank is bust. Prime Minister Renzi is busy fluffing Draghi in hopes he opens the ECB’s checkbook and bails his country’s banking system out.
The ECB will have to print billions more Euros to bail out the entirety of Europe’s banking system. The beneficiaries of further largesse will be Gold and alternative assets such as Bitcoin.
The more Euros, Yen, Yuan, and Dollars that chase a smaller set of positive yielding assets increases the desperation of savers and professional money managers.
Most investors buy more of what has already gone up. Past results are not indicative of future returns, but most humans are terrible traders. Bitcoin is up 55% year to date. Bitcoin is one of the best performing currencies this year. The financial media is taking note. Not only did Bitcoin not die after the Mike Hernia rage-quit earlier this year, but the currency / commodity has flourished on the back of global macroeconomic uncertainty.
The political and monetary calculus surrounding which European banks to save, and how to do it will create much more uncertainty and volatility. Bitcoin on the margin will benefit.