Things have not been this bad for the Canadian economy since the last global recession. During the second quarter of 2016, Canada’s GDP contracted at a 1.6 percent annualized rate. That was the worst number in seven years, and it was even worse than most analysts were projecting. This comes at a time when bad news is pouring in from all corners of the global economy. While things in the United States are still relatively stable for the moment, the same cannot be said for much of the rest of the planet. Canada in particular has been hit very hard by the collapse in oil prices, and the massive wildfire in northern Alberta back in May certainly did not help things. The following comes from the BBC…
The recent drop in GDP was larger than analysts had projected, but not far off the predicted 1.5% loss.
“[The figure] could have been worse, given the hit from the wildfire, and clearly confirms the disappointing downward trend in exports over the last few months,” said Sal Guatieri, senior economist at BMO Capital Markets.
In May, wildfires devastated the parts of northern Alberta where much of Canada’s oil and natural gas is produced.
For many years, high oil prices and booming exports enabled the Canadian economy to significantly outperform the U.S. economy. But now conditions have changed dramatically, and all of the economic bubbles up in Canada are starting to burst. This includes the housing bubble, as we have seen home sales in the hottest markets such as Vancouver drop through the floor late in the summer. In fact, it is being reported that home sales during the first two weeks of August in British Columbia were down a whopping 51 percent on a year over year basis.
Do you remember the housing bubble in the U.S. that helped fuel the last financial crisis? Well, a very similar bubble is now bursting up in Canada, and some investors have positioned themselves to make a tremendous amount of money when the whole thing comes violently crashing down. The following comes from Wolf Richter…
This summer, famed short seller Marc Cohodes came out of retirement (he now raises chickens on a farm in Sonoma County, CA, and sells the eggs for a fortune in San Francisco) and jumped into ring with a number of interviews on TV and in the print media, and this too rattled some nerves – largely because it hit home.
“I think it’s a money laundering-induced market,” he said as we reported at the time. “Where the local politicians, or the BC Liberals, are kept or in cahoots with the real estate brokers, developers, lawyers, that angle. And they have sought Chinese money to keep the market propped up and it won’t last,” he said. “China has capital controls on, and Vancouver has become the money laundering mecca of either the world or North America, and something is going to change and change drastically.”
If the price of oil does not rebound in a major way, the Canadian economy is going to continue to deeply struggle.
Meanwhile, one of the biggest economies in Africa is also shrinking. Nigeria is yet another oil-dependent economy that has fallen on really hard times, and during the latest quarter their GDP shrunk by 2.06 percent on an annualized basis…
Nigeria has slipped into recession, with the latest growth figures showing the economy contracted 2.06% between April and June.
The country has now seen two consecutive quarters of declining growth, the usual definition of recession.
Its vital oil industry has been hit by weaker global prices, according to the Nigerian Bureau of Statistics (NBS).
There are so many signs that indicate that the global economy has entered a new major downturn. Yes, the U.S. is doing better than almost everyone else for the moment, but this will not last indefinitely. Our planet is more interconnected than ever before, and just as we saw in 2008, big trouble on one side of the globe quickly affects the other side.
Today we also learned that the 7th largest container shipping company in the entire world has completely imploded. Total global trade has been declining for quite some time now, and it was inevitable that this sort of thing would start happening…
After years of relentless decline in the Baltic Dry index…
… today the largest casualty finally emerged on Wednesday when South Korea’s Hanjin Shipping, the country’s largest shipping firm and the world’s seventh-biggest container carrier, filed for court receivership after losing the support of its banks, leaving its assets frozen as ports from China to Spain denied access to its vessels.
Over in Europe, an emerging banking crisis continues to simmer just under the surface.
Most Americans are completely oblivious to the fact that major global financial problems could be just around the corner, but CNBC is reporting that banks over in Europe are “preparing for an economic nuclear winter situation”…
European banks, in particular, have had a very tough six months as the shock and volatility around Brexit sent banking stocks south. Major European banks like Deutsche Bank and Credit Suisse saw their shares in free-fall after the referendum’s results were announced. In the U.K., RBS was the worst-hit, with its shares plunging by more than 30 percent since June 24.
The current uncertainty over when the U.K. will start the process of quitting the EU has banks on tenterhooks. But a source told CNBC that banks are “preparing for an economic nuclear winter situation.”
Speaking on the condition of anonymity due to the sensitive nature of the topic, a source from a major investment bank told CNBC that financial services firms have put together a strategy in place that takes into account the worst-case scenario that could happen by the end of this year.
So precisely what would an “economic nuclear winter” look like?
I don’t know, but it certainly does not sound good.
We should be thankful that things have been as calm and stable as they have been so far in 2016, but nobody should be fooled into thinking that our problems have been fixed.
The truth is that the global debt bubble is at an all-time high, the banks are being more reckless and are more vulnerable than ever before, and troubling economic numbers continue to pour in from all over the planet.
The stage is certainly set for the next major global economic crisis, and it isn’t going to take much to push the world over the edge.
In 1960, the city of Detroit was the greatest manufacturing city that the world had ever seen. Nearly two million people lived there, and it had the highest per capita income in the United States. That may be hard to believe, because today it actually has one of the lowest per capita incomes of all of our major cities. Over the decades more than a million people have left the city, and thousands of abandoned homes have been torn down. But there are still tens of thousands of abandoned dwellings that remain standing, and some have sold for as little as one dollar in recent years. Once Detroit was the envy of the entire planet, but now it has become a global joke and in other countries they love to do news stories about “the ruins of Detroit” to show how rapidly America is rotting and decaying. Sadly, Detroit is far from alone, because there are other formerly great manufacturing cities that have declined just as fast as Detroit has.
Earlier today, I came across a video that contains footage that someone recently captured as they drove through the city of Detroit at night. To say that the footage is disturbing would be a tremendous understatement…
It has become known as a mecca of violent crime and poverty, and now a viral video is giving an unpleasant view of Detroit after dark.
The clip, called Driving through Detroit at night, was filmed by a woman who was a passenger in a car going around the Motor City and was posted to Twitter at the weekend.
It shows terrifying scenes of gangs gathered on the sidewalk, prostitutes lifting up their skirts and dancing, and even a man being run over by a car on purpose.
I would have liked to share the video with you all, but it is just way too graphic. There really are prostitutes lifting up their skirts in the video, and a man really is hit by a vehicle. If you want to watch it for yourself, it is very easy to find on YouTube. But please be warned that children should not be watching this.
If you live in a peaceful rural or suburban setting, the kind of behavior displayed in this video may seem very foreign to you. In America today, it is way too easy to allow our televisions to define reality for us. But the warped view of reality that we get through our televisions is nothing like the real world. The real world is cold, cruel and very unforgiving.
If you are in the wrong place at the wrong time, the real world will eat you alive.
In the city of Detroit today, close to half the population is functionally illiterate, and one survey found that 60 percent of all children in the city are living in poverty. It has been reported that 40 percent of the street lights do not work, and as you can see from the video it is a very frightening place to be after dark.
And don’t count on the police to help you. The size of the police force in Detroit has been reduced by about 40 percent over the years, and it has been estimated that it takes the Detroit police an average of 58 minutes to respond to a call.
If it was just one major city where all of these things were happening, that would be bad enough.
Sadly, the truth is that what is happening in Detroit is happening all over the nation. In fact, St. Louis and Memphis now have higher gun crime rates than Detroit does…
The listing places St Louis above the notoriously dangerous Detroit which has topped the list in previous years thanks to the city’s high gun crime rate.
Detroit is now listed as third after Memphis, Tennessee which had 84.2 violent crimes per 10,000 residents.
Birmingham, Alabama comes in fourth place with 82.8 violent crimes per 10,000 residents while Rockford, Illinois was fifth with a rate of 76.3.
Earlier this month, we saw how a major city such as Milwaukee can erupt in flames in just a matter of hours. And in Chicago, some of the major gangs have agreed to use automatic weapons and sniper fire in their battle against the police.
A spirit of chaos and violence has descended on America, and things are going to get much worse during the months and years to come.
Meanwhile, crime continues to rise in our smaller cities and in our suburbs as well. For a moment, I want you to consider a short excerpt from a recent Bloomberg article entitled “Walmart’s Out-of-Control Crime Problem Is Driving Police Crazy“…
The call log on the store stretches 126 pages, documenting more than 5,000 trips over the past five years. Last year police were called to the store and three other Tulsa Walmarts just under 2,000 times. By comparison, they were called to the city’s four Target stores about 300 times. Most of the calls to the northeast Supercenter were for shoplifting, but there’s no shortage of more serious crimes, including five armed robberies so far this year, a murder suspect who killed himself with a gunshot to the head in the parking lot last year, and, in 2014, a group of men who got into a parking lot shootout that killed one and seriously injured two others.
Police reports from dozens of stores suggest the number of petty crimes committed on Walmart properties nationwide this year will be in the hundreds of thousands.
Did you catch that?
This Bloomberg report says that there will be “hundreds of thousands” of crimes just committed at Wal-Mart stores alone this year.
If people are behaving like this while times are still relatively stable and relatively good, what would things look like during a real crisis?
Many people openly wonder what happened to Detroit, but it really isn’t much of a mystery at all.
Over the decades, our politicians have stood idly by as tens of thousands of businesses and millions of good paying jobs have left the country. Our economic infrastructure has been absolutely gutted, and as a result formerly great manufacturing cities have become rotting, decaying hellholes.
And it certainly doesn’t help that voters in many of these cities have willingly chosen to put radical leftists into power time after time.
Unfortunately, it appears that the nation as a whole is about to hand the keys to the White House to a radical leftist that has a violent temper that is absolutely legendary. If she gets into power, that might just be the final nail in our coffin.
What has already happened to Detroit is slowly happening to the entire country, but we never seem to learn from our past mistakes.
So now we will suffer the consequences for our very foolish decisions, and it will not be pretty.
Happy days are here again? On Friday, the mainstream media was buzzing with the news that the U.S. economy had added 255,000 jobs during the month of July. But as you will see below, the U.S. economy did not add 255,000 jobs during the month of July. In fact, without an extremely generous “seasonal adjustment”, the number of jobs added during the month of July would not have even kept up with population growth. But the pretend number sounds so much better than the real number, and so the pretend number is what is being promoted for public consumption.
Why doesn’t the government ever just tell us the plain facts? Unfortunately, we live at a time when “spin” is everything, and just about everyone in the mainstream media seemed quite pleased with the “good jobs report” on Friday. However, as Zero Hedge has pointed out, the truth is that the “unadjusted” numbers tell a very different story…
As Mitsubishi UFJ strategist John Herrmann wrote in a note shortly after the report, the “jobs headline overstates” strength of payrolls. He adds that the unadjusted data show a “middling report” that’s “nowhere as strong as the headline” and adds that private payrolls unadjusted +85k in July vs seasonally adjusted +217k.
In Herrmann’s view, the government applied a “very benign seasonal adjustment factor upon private payrolls to transform a soft private payroll gain into a strong gain.”
He did not provide a reason why the government would do that.
Every month, the U.S. economy must create at least 150,000 new jobs just to keep up with population growth. According to the unadjusted numbers, we did not hit that threshold, and so the employment situation in this country actually got worse last month.
In America today, there are 7.8 million Americans that are considered to be officially unemployed, and another 94.3 million working age Americans that are considered to be “not in the labor force”.
When you add those two numbers together, you get a grand total of 102 million working age Americans that do not have a job right now.
Rather than focusing on the headline “unemployment” figure, we get a much fairer look at the employment crisis in the United States when we examine the employment-population ratio. The following chart comes directly from the Bureau of Labor Statistics, and it shows that the percentage of Americans that are employed has never even come close to getting back to where it was just prior to the last recession…
Over the past couple of years we have seen a slight bump in this number, and that is good, but normally after a recession ends the employment-population ratio goes back to at least as high as it was before. Unfortunately, this has not happened after the last two recessions. The following comes from Wolf Richter…
The ratio always drops during recessions, but before 2001, it always climbed to higher highs during the recoveries. The 2001 recession and subsequent recovery changed this. For the first time, the ratio never fully recovered, never got even close to fully recovering. That was a new phenomenon: employment growth could no longer keep up with population growth.
When the Great Recession hit, the ratio plunged from its lower starting point at the fastest pace on record (going back to 1948). The Fed’s efforts were all focused exclusively on bailing out bondholders, re-inflating the stock market, re-inflating the housing market, and generally creating what had become the official Fed policy at the time, the Wealth Effect (here’s Bernanke himself explaining it). This has re-inflated asset prices – many of them way beyond their prior bubble peaks.
But the Fed’s astounding focus on capital accelerated the already changing dynamics of the economy, at the expense of labor.
Even the Wall Street Journal admits that we are in the weakest “economic recovery” since 1949, and now there are lots of signs that we have entered a brand new economic downturn. Here are just a few examples from Chad Shoop…
- Ford, GM and Chrysler — three of the U.S.’ largest auto companies — reported sales for July that missed estimates: down 3%, 1.9% and up 0.3%, respectively.
- Delta Airlines, one of the largest airlines in the world, said revenue fell 7% in July as part of its monthly performance update.
- Macy’s, the biggest department store company, reported a decline in sales for July, leading to more aggressive markdowns and an industry-wide sell-off.
And lots of ominous signs continue to pop up on Wall Street as well. For one thing, the Libor rate has surged to the highest level since the last financial crisis. If you are not familiar with Libor, here is a pretty good explanation of it from Business Insider…
The Libor, or London Interbank Offered Rate, measures the interest rate at which banks lend to each other at different durations, and its sharp jump was a harbinger of the financial crisis.
And according to that same article, the Libor rate is now the highest that we have seen since early 2009…
In the past month, the Libor rate has spiked to rates not seen since the first quarter of 2009, the heart of the banking meltdown.
Not to mention, the spread between the Libor and the Overnight Index Swap rate, which tracks the lending rate from the Federal Reserve, has widened, another potentially worrying sign.
But of course I have been quoting facts and figures like this for months, and yet U.S. financial markets continue to hold it together.
There are literally dozens of parallels between the global financial crisis of 2008 and what is happening in 2016, but Wall Street continues to defy the laws of economics.
Of course it won’t last forever, but it certainly has been a sight to behold.
And I am certainly not alone in my analysis. As I noted the other day, DoubleLine Capital CEO Jeffrey Gundlach is entirely convinced that stocks “should be down massively”…
“The artist Christopher Wool has a word painting, ‘Sell the house, sell the car, sell the kids.’ That’s exactly how I feel – sell everything. Nothing here looks good,” Gundlach said in a telephone interview. “The stock markets should be down massively but investors seem to have been hypnotized that nothing can go wrong.”
For the moment, investors continue to pay extremely irrational prices for stocks, and the mainstream media is just giddy about the state of the economy.
So let us enjoy this very strange period of stability for however much longer it lasts, but let us also protect ourselves from the horrible crash that will inevitably follow.
This wasn’t supposed to happen. The price of oil was supposed to start going back up, and this would have brought much needed relief to economically-depressed areas of North America that are heavily dependent on the energy industry. Instead, the price of oil is crashing again, and that is really bad news for a U.S. economy that is already mired in the worst “recovery” since 1949. On Monday, U.S. oil was down almost four percent, and for a brief time it actually fell below 40 dollars a barrel. Overall, the price of oil has fallen a staggering 21 percent since June 8th. In less than two months, the “oil rally” that so many were pinning their hopes on has been totally wiped out, and if the price of oil continues to stay this low it is going to have very seriously implications for our economy moving forward.
One of the big reasons why the price of oil has been declining is because the OPEC nations continue to pump oil at very high levels. The following comes from CNBC…
Production in July by the Organization of the Petroleum Exporting Countries likely rose to its highest in recent history, a Reuters survey found on Friday, as Iraq pumped more and Nigeria squeezed out additional crude exports despite militant attacks on oil installations.
Top OPEC exporter Saudi Arabia also kept output close to a record high, the survey found, as it met seasonally higher domestic demand and focused on maintaining market share instead of trimming supply to boost prices.
These countries don’t know if or when the price of oil will eventually rebound, but what they do know is that they desperately need cash in order to keep their sputtering economies going. Many of these nations are already experiencing significant economic downturns, and substantially reducing oil revenues at this time would definitely not help things.
Here in North America, oil production costs tend to be higher, and so when the price of oil crashes we tend to see companies shut down rigs. But when rigs get shut down, that means that good paying jobs are lost.
During the first four months of 2016, approximately 35,000 jobs were lost at Texas energy companies. Globally, more than 290,000 energy jobs have been lost since the price of oil started falling back in 2014.
And even though there was hope that energy companies would add jobs as the price of oil started rebounding during the second quarter, it turned out that the job losses just kept on coming…
Energy companies continued to cut thousands of jobs during the second quarter, even though many chief executives are now voicing optimism that the oil market crash is ending and a rebound in drilling is afoot.
Although the heads of Halliburton Co. , Schlumberger Ltd. and other major firms forecast higher crude prices and a return to U.S. shale fields when discussing earnings this week, those companies and others disclosed another 15,000 industry layoffs.
Personally, I have quite a few members of my own extended family that live in areas that are heavily dependent on the energy industry, and three of them have lost their jobs so far this year.
And these are precisely the sort of good paying middle class jobs that we cannot afford to lose. In order to having a thriving middle class, you need lots of middle class jobs. Unfortunately, those kinds of jobs are going away, and the middle class in the United States is systematically dying.
If the price of oil keeps going lower, that will mean even more jobs losses for the energy industry, and that will be very bad news for the U.S. economy.
In addition, many of these energy companies are getting into very serious debt problems. Delinquency rates on corporate debt are already the highest that they have been since the last recession as firms struggle to pay their bills. Of course some of them have already gone belly up, and this has pushed default rates on corporate debt to the highest level since the last financial crisis.
At a price of 40 dollars a barrel, most oil companies in the United States are not profitable in the long-term. The longer the price of oil stays down in this neighborhood, the more energy companies we will see go bankrupt. At this point it is just a waiting game.
Also, it is important to keep in mind that Wall Street is very heavily exposed to the energy industry. Just as subprime mortgages brought down quite a few financial institutions back in 2008, so this time around it is inevitable that the oil crash will claim a fair number of victims as well.
As the global economy has slowed down, the demand for oil has decreased. And at this point, even the U.S. economy appears to be seriously slowing down. U.S. GDP only grew at about a one percent rate for the first half of 2016, and the rate of homeownership in this country just hit the lowest level ever recorded.
In the mainstream financial media, there is a lot of hopeful talk about a potential turnaround for the energy industry, but most of that talk appears to be just wishful thinking.
To me, about the only thing that could push the price of oil back to where U.S. oil companies need it to be in the short-term would be a major war in the Middle East. And of course that is definitely always a possibility considering who is running things in Washington. But absent that, it is hard to see the price of oil getting back to 70 or 80 dollars a barrel any time soon.
So that means that we are likely to see more job losses, more debt delinquencies and debt defaults, and more financial institutions getting into trouble due to their reckless exposure to the energy industry.
We just got another extremely disappointing GDP number. It was being projected that U.S. GDP would grow by 2.5 percent during the second quarter of 2016, but instead it only grew by just 1.2 percent. In addition, the Census Bureau announced that GDP growth for the first quarter of 2016 had been revised down from 1.1 percent to 0.8 percent. What this means is that the U.S. economy is just barely hanging on by its fingernails from falling into a recession. As Zero Hedge has pointed out, the “average annual growth rate during the current business cycle remains the weakest of any expansion since at least 1949″. This is not what a recovery looks like.
In addition, Barack Obama remains solidly on track to be the only president in all of U.S. history to never have a single year when the economy grew by at least 3 percent. Every other president in American history, even the really bad ones, had at least one year when U.S. GDP grew by at least 3 percent. But this has not happened under Obama even though he has had two terms in the White House.
The following are the yearly GDP growth numbers under Obama. They come directly from the official website of the World Bank…
2009: -2.8 percent
2010: 2.5 percent
2011: 1.6 percent
2012: 2.2 percent
2013: 1.5 percent
2014: 2.4 percent
2015: 2.4 percent
Does that look like a “recovery” to you?
Of course not.
And many are anticipating that this latest extremely disappointing GDP number will discourage the Federal Reserve from raising interest rates any time in the near future…
The disappointing report could keep the Federal Reserve on hold longer as it considers another interest rate hike. The Fed lifted its key rate in December for the first time in nine years but has held it steady since.
According to the pundits in the mainstream media, this was supposed to be the year when the U.S. economy finally returned to “normal”, but that has not happened at all. In fact, in recent days we have gotten a spate of bad news about the economy. We just learned that the homeownership rate in the United States has hit the lowest level ever, and Gallup’s U.S. economic confidence index has fallen to the lowest level so far this year.
With the election coming up rapidly, this is the kind of news that Hillary Clinton definitely does not need. She needs to be able to sell the American people on the idea that the Obama years have been very good for the U.S. economy. If things take a sharp turn down in the coming months, that may be enough to cost her the election.
So far, Hillary Clinton’s economic agenda has not received that much scrutiny, but the truth is that she hopes to increase taxes in a whole bunch of ways which would be very harmful for the economy. The following comes from an excellent piece by John Kartch and Alexander Hendrie…
Hillary has endorsed several tax increases on middle income Americans, despite her pledge not to raise taxes on any American making less than $250,000. She has said she would be fine with a payroll tax hike on all Americans, she has endorsed a steep soda tax, endorsed a 25% national gun tax, and most recently, her campaign manager John Podesta said she would be open to a carbon tax. It’s no wonder that when asked by ABC’s George Stephanopoulos if her pledge was a “rock-solid” promise, she slipped and said the pledge was merely a “goal.” In other words, she’s going to raise taxes on middle income Americans.
Hillary’s formally proposed $1 trillion net tax increase consists of the following:
Income Tax Increase – $350 Billion: Clinton has proposed a $350 billion income tax hike in the form of a 28 percent cap on itemized deductions.
Business Tax Increase — $275 Billion: Clinton has called for a tax hike of at least $275 billion through undefined business tax reform, as described in a Clinton campaign document.
“Fairness” Tax Increase — $400 Billion: According to her published plan, Clinton has called for a tax increase of “between $400 and $500 billion” by “restoring basic fairness to our tax code.” These proposals include a “fair share surcharge,” the taxing of carried interest capital gains as ordinary income, and a hike in the Death Tax.
Taxes tend to be a pet peeve of mine, so looking at that list of proposed taxes definitely makes me cringe.
If Donald Trump wants to hit the Democrats really hard on the economy, all he has to do is point out the fact that Barack Obama is going to be the only president in American history to never see 3 percent economic growth for an entire year, and he had two entire terms in which to try to turn things in a positive direction.
Sadly, things are very likely going to be worse for the economy no matter who wins the election. Under Obama, our national debt, our trade deficit, and most of our other long-term economic problems have gotten much, much worse, and so the table is set for a major economic disaster during the next presidential administration.
And if what I have to share about the future of America in my new book is correct, we are definitely moving into a “perfect storm” that will not just be economic in nature. The things that are coming are going to shake this nation to the very core, and I believe that we will soon face the consequences for decades of exceedingly foolish decisions.
So in the end, we may look back and long for the days of 1.2 percent economic growth, because what is on the horizon is going to make that look like a Sunday picnic.
The biggest and most important bank in the biggest and most important country in Europe continues to implode right in front of our eyes. If you follow my work regularly, you probably already know that I issued a major alarm about Deutsche Bank last September. Subsequently, Deutsche Bank stock hit an all-time low. Then I sounded the alarm about Deutsche Bank again back in May, and once again that was followed by another all-time low for Deutsche Bank. And then I warned about Deutsche Bank again in early June, and you can probably imagine what happened after that. Over the past year, this German banking giant has literally been coming apart at the seams, and in so many ways it is paralleling exactly what happened to Lehman Brothers back in 2008.
Today, we got some more bad news from Deutsche Bank. Compared to the exact same period last year, profits were down 98 percent. A nearly 100 percent drop in net income spooked a lot of investors, and Deutsche Bank shares got hit hard on Wednesday. Of course Deutsche Bank shares are already down by more than half over the past 12 months, and the financial sharks can smell blood in the water.
Just like Lehman Brothers in 2008, Deutsche Bank is essentially in panic mode at this point. They recently announced that they will be closing 188 branches and that 3,000 workers will be losing their jobs. But this could just be the beginning of the layoffs at the bank. According to some reports, the bank could cut up to 35,000 jobs by the year 2020, and CEO John Cryan recently admitted that they “may have to accelerate cost-cutting measures“.
What makes all of this even more alarming is that Deutsche Bank is widely considered to be “the most dangerous bank” on the entire planet. The following comes from a CNN article posted just today entitled “The world’s riskiest bank is in trouble“…
What is going on with Deutsche Bank?
Germany’s biggest lender was dubbed the world’s riskiest bank by the International Monetary Fund last month, just as one of its U.S. businesses failed a Federal Reserve stress test.
Its shares are down 45% this year, and on Wednesday it said second quarter profits were wiped out by a 98% slump in earnings. The stock fell 2.5% in Frankfurt.
The primary reason why Deutsche Bank is “the world’s riskiest bank” is because of the mammoth derivatives portfolio that is possesses. It currently has 42 trillion euros of exposure to derivatives, which is an amount of money about 13 times the size of the entire German economy.
When Deutsche Bank finally goes down for good, it is going to be “the shot heard around the financial world”, and it will be a disaster many times greater than the collapse of Lehman Brothers in 2008. Just consider what Jeff Gundlach had to say about the bank earlier this year…
“Banks are dying and policymakers don’t know what to do,” Gundlach said. “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.'”
As I write this, shares of Deutsche Bank are sitting at just $13.63, and many experts are having a very difficult time finding any reason for optimism. In fact, Edward Misrahi has stated that the bank is his number one short trade, and Jim Collins says that “it is just impossible” to recommend buying shares of Deutsche Bank even at this depressed level…
As an equity analyst, it is just impossible to recommend shares of a bank that is not growing revenue. So really, Deutsche is an untouchable, and the stock market is trying — to the tune of a 58% decline in DB’s market value in 12 months — to recalibrate Deutsche’s market capitalization to the true value of its assets net of liabilities. That’s a painful journey.
I don’t mean to just pick on Deutsche Bank. Certainly there are a lot of other major banks around the globe that are also teetering on the brink right now. Just take a look at Italy. Basically their entire banking system is in the process of melting down.
But the utter collapse of Italy’s banking system won’t have the same kind of worldwide impact that the collapse of Deutsche Bank will.
Unlike some of his predecessors, CEO John Cryan is being honest about some of the struggles that Deutsche Bank is going through right now, and he admits that they may need to be “more ambitious in our restructuring”. The following comes from Business Insider…
Cryan said in a statement (emphasis ours):
“We have continued to de-risk our balance sheet, to invest in our processes and to modernize our infrastructure. However, if the current weak economic environment persists, we will need to be yet more ambitious in the timing and intensity of our restructuring.”
He said something similar in a note to employees (emphasis again ours):
“Here I would like to speak plainly. If this weak economic environment persists, we will need to be still more ambitious in our restructuring. We will do everything in our power to accelerate the measures we have already planned.”
Yes, I know that the stock market in the United States has been setting all sorts of all-time record highs lately.
But that doesn’t change what is going on in the rest of the world one bit.
The financial crisis that has been gripping Europe, Asia, South America and most of the rest of the planet since the second half of last year is accelerating.
And it is inevitable that the U.S. is going to be experiencing some very real pain in the not too distant future as well.
So even though things may seem a bit quiet this summer in the financial world, the truth is that there is a whole lot going on under the surface.
Deutsche Bank is one glaringly obvious example of this, but there are many others all over the globe. And not too long from now, the dominoes will begin to fall very rapidly.