Black day on the stock market: crazy stressing out or realistic suspicion?

Dear friends, I am going to tell you a little secret.
That secret is that I don’t seem to like the global stock market at all.
Of course, I’ve been making faces over the stock markets and claiming that the current prices of stocks are globally not matching their “inner value”. I’ve been claiming long-term that the fact that central banks especially in the USA, Europe and Japan are pushing cheap money into the economy with bulldozer is not leading towards the growth of consumer’s inflation (which is the growth of the prices of goods and services), but it is leading to somewhat less common inflation of the prices of securities and other financial products. That simply said, the prices of (not only) securities are extremely overvalued. I have also been always claiming that this gigantic price bubble which got blown on stock, bonds and derivatives markets can exist long enough but it is still a barrel of smouldering gunpowder for the future. Nothing new here.
This time, I see it differently. This time, I have no “wisdom” about the inflation of the price of securities, about the ratio of P/E and other cherished analytic silliness. This time, I am thinking about something which is much harder to wrap into terminology which is usually used by the analysts of financial markets. I think of the simple bad feeling in my gut. That strange fluttering sensation in my stomach. Maybe it could be called an intuition.
Wherever I go I hear about complete satisfaction: Economy is growing. Inflation is non-existent but it is not the deflation either. Employment rate is solid. Brexit vote is behind us so let the negotiations about Brexit end with whatever result, it can’t be worse than the initial shock which happened the night after the vote… And so on. That is only one point of view. I see it very different.
Firstly: The European economy is still growing but it is slowing down. It’s in the descending phase of the economic cycle.
Secondly: China is slowing down for a long time. So far nothing is suggesting that this fall would be set back.
Thirdly: The European banks are in sad condition. The German government is doing everything possible so it would appear strong but in reality, it has many problems with Deutsche Bank. The promised lowering of the 14 billion dollar fine (in USD) for Deutsche Bank still hasn’t come yet. I won’t even talk about the Italian banks.
Fourthly: It would be logical if the central banks or the governments didn’t provide any anabolic substances to support the growth during the time of economic growth but supported the economy in time of crisis. The reality is exactly opposite. In the time of growth, for example, in years 2015-16 central banks were pumping money into the economy as much as they could. Today, when the economy starts slowing down they are already out of the ammunition and started talking about the slump of their supportive politics. It has been talked in the USA about the rise of interest rates at the end of the year (I don’t believe that much), in Europe, it is talked about the continual restraining of the bonds buyout program. And that is coming up in the time of obvious upcoming global economic slowdown. Central banks are working the other way around as they should!! (The timing of introducing and then canceling the intervention regime works this opposite way in the Czech Republic.)
Fifthly: The elections in the USA are almost here which could be potentially won (from the finance world’s point of view) by the most controversial person in many decades.
Each of these events wouldn’t be that liquidating on its own but I don’t like their concurrence at all. Usually, I am pretty reserved towards somewhat shady, prophetic, unprofessional opinions when it comes to the questions of the financial market. But this time I am exceptionally letting my little bit intrusive feeling show up and it gives me chills. These feelings are saying: The condition which is the world’s financial market at right now is reminding me summer 2008. Alternatively the year 1987, which I experienced as a child and moreover from the eastern socialistic block. Either way, it is talked about enough in the literature. So in the summer 2008 and in 1987 most people weren’t making a big deal out of pessimistic thoughts either even though there had been subtle warning signs for a while already.
And then in the fall the crash of stock markets came day to day.
If my intuition is right then we can only hope that no sparks will fly on the smouldering barrel.

The banks are little bit breathless

With the upcoming autumn, I’m noticing how are more and more people around me coughing or sniffing. It would be expected that the transition from the temperature around 30 degrees Celsius to the temperature around zero will have consequence. Worse is that I’m starting to worry that the arrival of autumn will have problem to breath out the already breathless bank sector.

It is very well known that the zero interest rates of some central banks are long time suffocating the most important revenues of the majority of banks – interest revenues which are the income from loans. Many banks are trying to keep their profit so they started operations that they might regret in the future. We already know about the roasted Deutsche Bank, which overdid it with selling the mortgage-backed securities, with derivatives, manipulation with the LIBOR rate or with keeping the losses secret. Bank is threatened by fines from every side. The manager of the bank John Cryan still hasn’t come to the agreement with the American administration about lowering the 14 billion dollar fine, even though only a few days ago the financial world took the lower fine almost for granted.

Other big players in the bank world have problems as well. The American mortgage giant Wells Fargo is facing a lawsuit for 2.6 billion dollars. Their clients are demanding this sum because the employees were creating unauthorized accounts. Another problem is concerning American bank Morgan Stanley. It was accused of unethical sales contests and insufficient providing of the information. When we look at it from every angle, every single flagship of bank world is in trouble. Even if the bank houses manage to pay the fines the trust in banks in the USA and in Europe will be more and more shaken to its foundation.

We can see in Central Europe that the banks can bankrupt even in present time: Russian ERB bank is unable to meet its obligations and this news was confirmed by Czech national bank. Another bank is going bankrupt in the Czech Republic after 13 years…

Deutsche Bank is only the tip of an iceberg

Maybe you have already noticed that the information around the biggest German bank, which was discussed at the end of last week but the professional circles were talking about it for a couple of months now was just a storm in a glass of water. Many things would suggest that. The European stock indexes were still mostly dropping on Thursday but we can’t compare it to the panic from last week. Moreover, there’s not as many news about Deutsche Bank on the news servers anymore. Like the topic got old.

Just like my colleague Pikora won’t get bored of post-pubertal jokes about sex, even though his peers have already grown from them at least twenty years ago, just like that can the public always lusting for new media drama, get bored of the Deutsche Bank but the community of investors surely won’t drop it.

I can assure you that the latest news is very substantial. If we had to tersely sum it up: The situation of Deutsche Bank continues to be pitiful and the German government knows it. It doesn’t suit them at all since everything is happening just before the elections that should be held in 2017. So they decided to go for the tactic most logical from their point of view: Hush it up as much as they can.

Does it sound far-fetched? You decide: The German financial supervisory authority over banks (so-called Bafin), which was checking the information that Deutsche Bank was knowingly allowing by conniving with Russian oligarchs who were under the international sanctions laundering their money, is supposedly not finding any signs that something like that has happened. So it won’t demand a fine. Yes, that would sound nice except the problem is that Deutsche Bank is being investigated for the same thing in the USA and in Britain as well. Neither American nor Britain authorities seem like they want to let the suspicion go. We can’t avoid the questions if the German supervisory authority doesn’t protect Deutsche Bank only for political reasons.

The suspicion is even stronger in the light of another discovery. It is known that the finance market likes gossip more than old lady landlord living above you. So nothing can’t be hushed up. So the information leaked from the circles around the German government saying that the German government is supposedly secretly negotiating with the American department of justice (DOJ) about postponing or lowering the fine in the sum of 14 billion dollars for the deceptive businesses with toxic packages of mortgage-backed securities. (Are you wondering why I was talking about the Russian oligarchs and not mortgages before? Yes, I am not saying it’s the same case. In reality, the bank is tangled in several parallel problems.) So far the German government has been very obviously showing the public that it is not intending to save Deutsche Bank. Well, it is obviously not planning to save it financially right before the elections. Nobody said that it won’t speak on its behalf in the diplomatic route.

Statements of several professional German organizations (like the German chamber of industry for example and others) don’t seem trustworthy when they are publically claiming that they “know nothing about the crisis in Deutsche Bank”. With all due respect – what can chamber of commerce and industry know about the market value of derivative contracts well hidden in the Deutsche Bank’s balance? The announcement seems more like a way to calm down the public at all costs. The official German authorities simply can’t allow – especially right before the elections – to have a panic sprouting about the bank which employs 100 thousand people.

Maybe it could seem like at the moment when the German government started helping Deutsche Bank full force (even though it acts like it’s not included at aaaaaaaaaall on the outside), it would be useless to talk about Deutsche Bank since it got a powerful saviour. I don’t see it that way. Last week I asked a rhetorical and little bit over the top question, when will the case “explode”. It exploded on Thursday in its own way. So far there was at least on the outside a hypothetic chance for the public to think that the entire affair is only blown up media bubble and the bank doesn’t have such serious problems. When the frenetic effort of the German administration started coming up to the surface the entire thing seems different in the light of these actions: The seriousness of the cause is underrated by media.

It is obvious that it’s not only about Deutsche Bank – that’s only the tip of an iceberg. This case is in reality just a display of an entire European banking industry. Let’s not forget that Deutsche Bank ended up between ten weakest banks in last stress tests. In other words – there are at least nine other banks that are in same miserable condition. And then many and many others, which are doing badly as well but not as badly as Deutsche Bank. The persistent effort of the German government to sweep any suspicion of bank’s problems under the rug is symbolic for the Eurozone’s approach to the entire banking sector. We are getting into the core of things. European banks as a whole are probably not healthier than they were before the crisis broke out in 2008 – on the contrary. It’s only not visible on the first sight. And everybody who had the silly idea to invest in European banking stocks should remember that. Or those, who had equally silly idea to save their savings into one of the funds which are not subject to banking insurance of investments.

The main question is NOT how far will stocks grow

Speculators are changing their opinions faster than a cheetah running a hundred meters. On Wednesday were the stocks markets ruled by scepticism again for a change. Why?

Because one new nightmare of investors is putting its hand up. Information spread across the news servers that the European central bank (ECB) will be gradually limiting the extent of bonds buyout before it ends the Quantitative easing (QE).

It was clear that ECB can’t stop buying bonds for 80 bn. EUR from day to day. So far we knew that the QE should go on until the March 2017. The volume of bought bonds from ECB could be later on lowered in steps of ten billion euros per month. Nothing new. However, the average speculator stayed underwhelmed for a long time about something that should happen in six months.

And now it seems that it’s time to sober up. Suddenly, everybody understands that the flow of cheap money won’t be here forever. The main question is not how far will the stock markets grow. We should better ask how long will the stock markets stay close to the historic maximums.

When we look at the problems of Deutsche Bank, upcoming presidential elections in the USA, possible growth of the American interest rates and gradual tone down of QE in the Eurozone we are betting on the stock markets being lower than they are today at the end of the year...

The first wave of panic around Deutsche Bank is over. But just the FIRST wave...

The first wave of panic around Deutsche Bank lasted barely few days... News about Deutsche Bank being on the right track to significantly lower the 14 billion dollar fine from the American administration for the mortgage papers manipulation, was enough for the investors to calm down. Like this news was any guarantee that Deutsche Bank is already out of the problems!

 
In fact, the flow of cheap money from the central banks is still so strong that nobody on the Wall Streets manages to frown for too long. Let’s not forget, that the American Fed is not buying out the state bonds anymore but the money on the American market stays very cheap. The Fed’s interest rates are close to zero – in the range of 0.25 – 0.50 %. For example, the European central bank is pushing cheap money into the markets too and buys bonds for 80 bn. EUR monthly. Japanese central bank is buying anything and thanks to that it will soon be able to pull the strings in many Japanese companies. Thanks to the never-ending help from the central banks and quick return of optimism to the markets, the bets on safe havens are not lasting long.
 
However, I think that more stable demand for safety will come. The problems of Deutsche Bank won’t be solved even if the American administration lowers the fine. Moreover, the American presidential election will happen next month. And if both of these events managed to happen calmly (which I don’t expect) then the Fed would stir up trouble on markets by possible raising the interest rates before the end of the year.
 
Thus, the volatility on the markets would rise at the end of the year and the gold should thrive in the environment like this. It could be interesting to bet on the virtual currency bitcoin at this time, don´t you think?

Europe looses, USA keeps

The main news of the weekend was that Yuan was added to the basket of world’s currencies from which the IMF derives the value of its unit of account and sort of currency SDR. For many people, it is the most boring news. It is as entertaining as some difficult to understand news about some new quantum particle that was caught in CERN. But for many people, it is a ground-breaking news...

Truthfully, it is not as ground-breaking for me. Firstly, everything was announced a long time in advance and secondly, it basically changes nothing. SDR is currency only on paper. It was supposed to initially substitute dollar in the global trade but that somewhat – as we can see today – didn’t happen. I think that it is currency only for the clerks. When the IMF gets cancelled (and I wouldn’t feel sorry about it because just like the OSN it’s not working anymore and is therefore useful), this currency will end as well. The background of this situation is more interesting.

There is politics behind adding Yuan to the basket of currencies. According to the definition, the reserve currency is supposed to be calculated based on the condition of the market and should be used during the financial transactions. Juan doesn’t meet these criteria. China is still very strictly changing the exchange rate of its currency. China shocked financial world last year with devaluation of its currency and since then allowed Yuan to depreciate to almost six-year minimum. The exchange rate is not being controlled by an institution similar to western central banks; several institutions take part in this process (besides the central bank it is National development and reform commission, Ministry of commerce, Banking regulatory commission, the State administration of foreign exchange). To us, it is something impossible to understand. The rating agency Fitch claimed that they don’t expect a change of demand for Yuan and won’t be changing its rating either.

In any case, it is a success for China, even when it’s only on paper and political. China is once again showing off its muscles in the global economy. It has already opened its market with long-term bonds to speculators this year. That sounds very appealing together with the label of reserve currency. Long-term it is opening space for appreciation of Yuan. It is important to put emphasis on the word “long-term” because it doesn’t look the best with China short-term. In reality, China one of the main global risks.

Interesting is that: Yuan will have 10.92 % share in the basket of currencies forming SDR. As a result of adding another currency to the basket the share of the euro will get to 30.93 % from previous 37.4 %. The share of the dollar almost won’t change. What is that saying to us? IMF is suggesting that in their eyes Europe reduced its influence because of the competition with China but the USA is still holding on.

Deutsche Bank is losing its trust every hour

One time our kindergarten teacher told us not to fight. That it would be better if we stayed friends. We took it to our hearts. It lasted about a week. Then we couldn’t see each other for a couple of weeks, because in our friendly mood we infected each other with smallpox.

So all of us in Europe stood by one another’s side, we planned the bank union in which the banks will be helping one another and they will be even more entwined than they were before, so from all this friendliness and capital cohesion German Deutsche Bank started to spread the infection on stock markets.

Its stocks briefly peeked under the level of 10 EUR on Friday before the weekend’s trade interruption. First time in history was the stocks’ value in single figures. Investors are one after the other realizing that the biggest German bank won’t be able to pay the fine to American authorities for the manipulations with mortgage papers amounting to 14 bn. dollars. The market capitalization, which could be simply translated as the “value of bank”, is only 3 bn. dollars higher then said fine.

Deutsche Bank is losing its trust every hour. Moreover, some hedge funds are starting to take their hands off the bank and starting to move the capital. Loss of trust is for bank house worse than fire, flood, and hurricane together. Deutsche Bank can soon suffer the same fate as Lehman Brothers bank. The fall of Lehman Brothers was what started the crisis. The analogy is more than obvious. Even other macroeconomic indicators are showing that European economy is slowing down and it’s evolving same as it did back then.

The German government loudly refused again to financially help the bank in case it will be needed. It doesn’t want to get tangled in the mess which Deutsche Bank got into on the derivatives market. Watch out – this message has to be read accordingly. “Helping the bank” is not the same as “protection of deposits”. The German government can decide to let the bank fall but I can hardly imagine that it wouldn’t find enough money to save the deposits in case they would be missing in the deposits insurance fund. This rhetorical exercise can be difficult to read for depositors. It is possible that the clients of the bank might not stay calm. Well, diplomatically said.