Forward Observer Newsletter
The following is a newsletter presented by the Forward Observer
It’s impossible for the average person to front-run a financial collapse, so the best we can do is look for specific indicators. This week’s most significant indicator concerns Germany’s largest financial institution, Deutsche Bank.
Bottom Line Up Front: Until the Deutsche Bank fiasco is resolved, we’re in a heightened likelihood for global financial instability.
In mid-September, the US Department of Justice levied a $14 billion fine on Deutsche Bank for mis-selling mortgage securities leading up to the 2008 financial collapse. That’s a big deal because Deutsche Bank may now be looking at bankruptcy — much like the Lehman Brothers collapse that led to global financial contagion in 2008. And the German government has refused to bail them out.
While collapse is not a foregone conclusion, Deutsche still has some options on the table. But Deutsche isn’t the only bank in Europe that’s hurting. Low interest rates and negative returns for German banks has spelled trouble for some time. The German stock market, Deutsche Borse, is down 15% this year. In the 05 August EXSUM, we included that European banks were trading at about a 30% discount to their book values. From that EXSUM, I wrote: “I still think that we’ll see the European economies collapse before our own, so this is an indicator of potentially the next leg down for Europe.”
Shares of Deutsche Bank are down nearly 50% this year, and in June the International Monetary Fund said that Deutsche was the greatest risk to global financial instability. Regulators in Europe are worrying that Deutsche Bank is insolvent, so the risk it poses to Europe is enormous.
Right now, it looks like Deutsche Bank may be able to eek out of a bad situation. China may come to their rescue with a bailout. With about $6 billion in litigation reserves, Deutsche desperately needs to reduce their fine with the US Government. That’s really their best shot right now. But should that not work out, and Europe loses faith in Deutsche and the bank goes under, then Europe could suffer its own Lehman collapse.
And that’s going to affect financial institutions around the globe — which is very, very positive for gold. We could be looking at instability in the markets even if Deutsche is bailed out. So until the Deutsche Bank fiasco is resolved, we’re in a heightened likelihood for global financial instability.