Morning all you lucky, lucky people. Friday is amongst us and as we stand on the edge of the Christmas period, I hope you have your advent calendars ready for tomorrow morning. If you have, well done. If you haven’t, what are you waiting for? But don’t rush off too hastily; the least you can do is jump into this week’s News, Views and Truths.
‘Headline of the week’ must go to German financial behemoth Deutsche Bank, whose woes only increased after it was made known that their Frankfurt headquarters were being raided by the police in a money laundering investigation.
It has been alleged that two Deutsche Bank employees have been arrested after allegations of assisting criminals launder cash through the bank systems. The raid itself involved over 170 police and officials and was sparked originally from the 2016 “Panama Papers”.
You may remember the Panama Papers, or at least the Panorama investigation broadcast on TV. Information held by Panamanian law firm Mossack Fonseca was leaked, highlighting how their clients were able to launder money, dodge sanctions and avoid paying tax.
The investigation into Deutsche Bank relates specifically to activities between 2013 and 2016, focusing upon bank clients registered in the British Virgin Islands. In 2016 alone, prosecutors allege that transactions amounting to more than €311m took place. Big business.
And naturally Deutsche Bank shares fell, some 3% on the day.
But Deutsche Banks shares have been falling for some time. And by falling, I mean free-falling.
You see, Deutsche Bank is a worry. A major, major worry. So much so, that it is on a list of Macro-Swans. Nerd alert…
As popularised by Nassim Nicholas Taleb in his book, “The Black Swan,” Black Swan events, also known as “tail risks,” are events that are rare and unexpected but carry an extreme impact.
The issue with Deutsche Bank is that it is absolutely integral to the running of the EU and is being used to correct the imbalances in the European banking system. European financial intermediaries rely wholesale upon the bank and therefore effect the entire region’s economic prospects.
To quote one market commentator, “North Korea? A trade war? None of these come close to the financial impact of Deutsche Bank pulling a Lehman Brothers collapse on the economy and financial system. This is a friendly heads up to investors.”
Why is the bank so integral? Well, Deutsche Bank has a huge derivative book; think of these as insurance policies, taken out by investors to protect themselves from market volatility. The bank’s derivatives book is €46 trillion. €46,000,000,000,000. That’s around one third of all derivatives in the world. Bear Sterns exposure was $12.5bn at their collapse…
And as such, investors have avoided DB like the plague. From a market perspective, this is a drop from its 2006 highs of €88.46 to today’s price of €8.10, a 90.84% fall in value.
Again, the likelihood of the wheels coming off is rare. However, this low probability, high impact event is a classic Black Swan. Naturally we will continue to monitor and keep this on our radar.
And also, Santa rally watch starts Monday…
So to finish, this week’s playlist is brought to you by Lisa Godfrey. Yes, THE Lisa Godfrey. If you are putting up your tree this weekend, have a blast. If you aren’t, have a blast anyway. See you all next week.