Stock Market Crash Ahead? (5/16)

Leading investors including Carl Icahn, George Soros, Jim Rogers, Stan Druckenmiller, and Mark Spitznagel are all predicting a stock market crash ahead. Global equities (VT) are already down -6% over the past year, while long-term treasuries (TLT) are up 9%.

Only time will tell, but it seems prudent to be defensive given the chorus of dire concerns regarding a crisis on the scale of the 2008 Lehman shock. Also, note that Credit Suisse (CS) and Deutsche Bank (DB) are both currently trading at levels well below their 2008 lows.

Deutsche Bank Scares You?!? OMG, You MUST Reat This!!!

Antonia Oprita, 5/26/16

OK, I admit the headline is a bit of a con. I don’t have any earth-shattering revelations about Deutsche Bank (DB), so if that’s what you’re after, close your browser window now.

What I am looking at in this article is the reason why Deutsche Bank sometimes is, for a trading room, the equivalent of shouting “fire” in a crowded theatre. Is it because of its derivatives exposure? Is it because of its debt? Is it because of its stock performance? Let’s see…

The derivatives issue seems to be the one that sparks the worst fears, so let’s focus on that for now. Back in February of this year, Zero Hedge ran a story helpfully headlined: “Is It Time to Panic About Deutsche Bank?”. It basically quoted another article by the same blog, from April 2013, which said Deutsche Bank’s exposure to derivatives was the largest in the world, at $72.8 billion. The problem is that that’s gross exposure, not net, and therefore it is not really that scary.

The article does explain about netting lower down — offsetting positive and negative exposures against each other — but does it in quite a dismissive way, saying that netting works in theory, but in practice it might not. That may be so, but in that case this is a problem for all banks. JPMorgan (JPM), for instance, was at the time the second-largest holder of derivatives in the world, not far behind Deutsche, with $69.5 trillion worth of the stuff in gross exposure.

To put things in perspective, total outstanding derivatives contracts in the world were $700 trillion at their peak in 2012 and are worth more than $500 trillion currently. That’s according to Bank for International Settlements (BIS) figures quoted by John Kay in a Financial Times article debunking the myth of gross exposure to derivatives.

Click here for the full article.



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