By David Treece
Some of our readers are asking how long the “dead cat bounce” is going to last. After the Brexit vote in which UK voters voted to leave the European Union, world markets rapidly plummeted for several days, but now the US stock market is seeing record highs. What we are watching is Deutsche Bank, a German bank that will be the Lehman Brothers of the next stock market crash. Lehman Brothers was the largest financial institution to file for bankruptcy in history.
If you don’t have time to read the history of the situation skip down to the punch line.
The failure of Lehman mainly came as a result of the subprime mortgage fiasco that sent monetary shrapnel to all parts of the globe. Subprime lending refers to practices of extending credit or loans to people with questionable credit histories. This practice was rampant and ultimately caused the real estate market to collapse along with the stock market. This impacted many people, and those with the largest debt loads were the most severely impacted.
But why did the 2008 crisis even happen? Bill Clinton.
During the lead-up to the Great Depression, banks were loaning stock market speculators money to invest in the market. The caveat was the banks could call these loans at any time, and if they did, they had to be paid back within 24 hours. Banks were loaning money that did not exist or leveraging their deposits in the hope that everyone would not want their money at the same time. It was as though it was planned when banks suddenly and randomly called the 24-hour broker loans. This created a run on the banks. The Great Depression ensued in haste.
In 1933 Congress passed the Glass-Steagall legislation. The formal name for the bill is the Banking Act of 1933, and it prohibited banks from engaging in the investment business. This provided a much-needed distinction for consumers between banks and brokerage houses. However, we see today that banks have their own brokerage arms, and bank tellers easily refer people to the “investment advisor” who has an office in the bank. Can you see how this could be confusing for the average person? You go to the bank to make a deposit and the sophisticated investment [read: risk] advisor sells the depositor on the ability to make large returns by speculating.
In 1999 Alan Greenspan, then chairman of the Federal Reserve, lobbied Bill Clinton to sign the repeal of Glass-Steagall. It took less than a decade of banks operating in the investment business for the subprime mortgage securities business to implode and create financial disaster. Clinton gets little to no blame for the financial wreckage. Of course the Clinton Foundation receives generous contributions from the banking and brokerage houses that created the mess.
Fast forward to 2010, and Congress passed The Dodd–Frank Wall Street Reform and Consumer Protection Act. The legislation was supposed to clean up banking practices but it did not. Not only that, it made matters worse. Buried deep inside the bill, it mandated that bank depositors would be unsecured lenders to banks when people deposit money. Basically, think of it like this: when we have a credit card, we are extended unsecured credit from the credit card company. The only thing saying we will pay them back is our promise of repayment. Generally this creates the need for a higher interest rate since there is no collateral. Today we are lucky to get a half-percent interest rate from a bank deposit.
Further, Dodd-Frank mandates that bank depositors will be last in line to receive their money in the event that the bank becomes insolvent and collapses. So who get the money first? Derivatives holders will receive payment first. By definition, the outcome of a derivative depends on something else. That “something else” is typically outside the control of the derivative holder. In short, it’s a fancy financial bet. A gamble. Does this sound good to you? Click here to read a further explanation of what derivatives are.
Start reading here for the punch line.
Derivatives matter. CNBC reports, “Deutsche Bank’s global derivatives risk in the range of $75 trillion which is 20 times greater than the German gross domestic product (GDP).”
The title of the article is the Deutsche Bank A Ticking Time Bomb and that is what we are warning our readers, clients, and friends about, because when the bank goes under, world stock markets will close. Today, world markets are incestuously combined due to supposed free trade deals amongst other culprits.
It’s being heavily rumored in the mainstream media that the US government will begin quantitative easing (electronic money printing) to the tune of $100 trillion dollars and negative interest rates will ensue. Remember, the same brokerage houses that are connected to banks operating in the investment business received bail-out money in the 2008 crisis. If you have your money at one of these institutions you will be sorely disappointed in the next crisis, because these banks are no better off than they were in 2008. They have all been incentivized to take on derivative exposure.
So why is the housing market on fire now? We believe financial institutions are loaning their holdings out as quickly as possible to prevent being exposed to negative interest rates. Debt is more valuable than cash when markets are upside down. Easy credit is back and the snowball is gaining momentum.
We also believe the President’s Working Group on Markets or the Plunge Protection Team is infusing the market with liquidity to draw in as many people as possible. Just like in 1929, the bankers will enjoy buying stocks for a song in the next collapse because they will be able to hold them for the 25 plus years it will take for them to recover. Most people will not be able to hold stocks long enough and generate a savings plan to fund their retirement. Only the international banking cartels and their families will be able to take advantage of the next crash.
With all of these details exposed we ask is the return of your principal more important to you than the return on your principal? If it is, you will be a good fit for our strategies of saving. If speculating is your game, carry on with your reckless disregard.