German banking sector in trouble

Only in the last three months German banking sector lost 21 billion EUR. This hit pushed banks’ stocks down after rally which started in February. Losses in the sector is yesterday’s news but the bigger picture can shed some new light on it. The significant slowdown in international trade shrinked German enterprises’ revenues and this in turn left less taxes for the federal government to collect.

Secondly, Germany has to start worrying about exposure of Deutsche Bank in the derivatives market amounting to 1000% of the EU’s GDP. As long as this position was making money for the biggest bank in Europe no one paid attention. Recently DB has started selling credit default swaps (hedge against bankruptcy of the institution on the contract) to JPMorgan, Citigroup and Goldman worth 1.1 billion USD. Germans do that exactly before another act of the financial crisis is about to begin – this coincided with swaps getting more expensive. Apparently the biggest banks in the US expect liquidity problems and are using the occasion to hedge against it before swaps get pricy. Another part of this puzzle is regulation that made swap trade less profitable.  

Italian job: banks are far from being fine

Bad credits worth 360 billion EUR can be found in accounts of Banco Popolare and Banco Popolare Di Milano. What we mean by ‘bad credit’ is any obligation: written off, restructured, of lower standard or worth more than its securitisation. Both banks require immediate help because of the liquidity problem. Another Italian bank Banca Carige is also in trouble. The ECB promised to help but only when restructuring plans would be agreed upon. There was no agreement and Italians have to look for help in pockets of other banks or individual investors. It is interesting to see this move from the ECB as anyone who supervises banking system knows that finding 360 billion EUR is borderline impossible.

We have a clear evidence that the golden age of financial institutions is over. Central banks know perfectly well that there is not enough money to save everyone. The hunger games of banking sector have begun. Case of Italian banks has high probability to end just like Portugese Espirito Santo. An entity was divided in two – one with the worst assets and the other one with the rest. Shareholders, bondholders (mostly pension funds) and the state (taxpayers) will be left with a hefty bill to pay.

Russia is selling its assets to BRICS

Low price of commodities hit Russia hard. Russian propaganda perfectly masks the true state of the economy but we should look to actions and not words. Three Indian oil companies – Indian Oil, Oil India Ltd and Bharat Petroleum – ended their cooperation with Saudi Arabia and chose Russia instead. Moscow pushed Rosneft to sell its Tass-Yuriakh stake for 1.3 billion USD. It is another episode of the sale of the Tass-Yuriakh oilfield. One year earlier it was BP who bought in for 750 million USD. The rest of this oilfield is still available and definitely will be sold soon.

Apart from resources, the Kremlin gave green light to Chinese to acquire some Russian banks. West can only fantasise about this sort of privilege. Officially it should smooth the trade between those two countries and increase the scale of swap trade. Knowing Putin there is definitely more to it.

Nevertheless, Moscow ranks high when it comes to approach to its currency reserves. After failed attempt of defending ruble they stopped fighting with speculators. History showed that battle against them is very costly and hard to win. Currency has to find its own equilibrium dictated by the market. Cheap ruble will make Russians poorer but after communism their pain threshold is very high. Government still has big currency reserves so it needn’t worry.

Russian rating agency established – Analytical credit Rating Agency (ACRA)

Every issuer of bonds who wants to sell to wide range of clients has to be rated by a rating agency. Rating agency checks basic indicators of given issuer to estimate its probability of going bankrupt. This factor decides what interest will be paid by an issuer on its own bonds. American rating agencies can affect the financial state of key Russian corporations. Russian budget is based on those few giants.

Russian ACRA can break the monopoly. Kremlin now requires every agency operating in Russia to publish rating through ACRA. This resulted in Moody’s resigning from evaluation of Russian companies on 18th March. This is a radical change but still unclear whether for good or bad. In the business of rating agencies trust is everything and this has to be built through time.

Inventory-to-sales ratio still climbs in the US

Economic slowdown manifests itself through production companies not being able to sell.  Consumers don’t have enough purchasing power and businesses are stuck with their goods. According to January 2016 data the inventory-to-sales equals now 1.4! This is higher than 1.32 – level when Lehman Brothers went down. Data from developed countries tells us that officially we are not in a recession. Developing countries are more honest and have started raising red flags already.

Apart from bad inventory-to-sales ratio we also see shrinking revenues of companies. On top of that stocks are overpriced but this doesn’t stop companies from binging on their buy-backs (buying their own stocks from investors). This is another example confirming what we talked about for quite some time now. After intervention of central banks world economy is only getting worse.

Subprime 2.0 – Credit madness continues in automotive sector

After the burst of 2008 bubble, standards for auto loans were lowered. Wall Street makes money on this bubble just like it did 8 years ago. Loans are repacked into variety of financially engineered products and sold all over the world.

Right now, 35% of the whole auto loan market is subprime. It is 35% of 1 trillion USD. Similarities to 2008 are evident and an average interest equals 0.45% which tells me that we have another sector of the market which can initiate domino effect and demolish not only itself but also be contagious for financial institutions that hold toxic assets.

World is leaving the dollar behind

China sells dollars in an ever increasing rate. Others follow. Common misconception is that the biggest problem of American currency is getting cheaper. In fact when dollar gained in 2015 the cost of servicing foreign debt for developing countries surged. When the global economy was slowing down not only ratings of developing nations fell but the price of buying dollars to pay the interest on their debt climbed 20%. This led to governments selling their currency reserves in order to close budgets without excessive deficit.

Strengthening of the USD only worsen its status as reserve currency – a true paradox.


When the world is slowly leaving the dollar, the US treasuries are on a sale too. Even though foreign central banks sell Washington’s bonds its price is growing (yield falls). Why? Another big player must have entered the game. One which doesn’t need to confess to the public information about its balance. The ESF was the suspect but assets of the Exchange Stabilization Fund created in 1934 by the United States Treasury Department are confidential. In theory, it could absorb any amount of bonds from the market given that the FED fills its pockets. This mechanism is a wet dream for someone who would like to manipulate the price of the American debt.

Chinese takeover of iron ore transport

Iron ore is oversupplied globally and the Baltic Dry Index records all-time lows but China moves forward. Three corporations: COSCO Shipping, China Merchants Group and ICBC Financial Leasing bought 30 Valemax transport vessels in March. March brought more optimism to maritime transport but it is still far from the norm we saw last year.

Beijin tries to use this crisis and buy when everyone is selling. Now they secured transportation of iron ore from Brazil to China. It seems like top Asian economy not only uses excess of their dollar currency reserves but does so strategically and with a great timing.

German reinsurance company Munich Re hoarding gold

Munich Re makes money on estimating risk and insuring capital. Their clients list is mostly filled with insurance companies. Numbers tells a lot: 150 countries, 45 000 employees. Because of NIRP introduced by the ECB, Munich Re decided to invest in gold in order to safeguard their capital.

This is very important event especially when talking about a change in a sentiment towards gold. Russia, China, India and Kazakhstan are very much interested in gold but price of gold is stable. If more big players like Munich Re start looking at gold situation may change pretty quick. Assuming that German company would like to allocate only 3% of their portfolio in gold they would have to buy 225 tons of gold – the amount of Kazakh reserves.

Problem is that instead of physical gold institutions invest in the GLD fund. In theory the GLD is based on physical metal but in fact it has been drained for years for comex contract settlement. Thanks to that the available level of reserves is overestimated.

First 10 Year Japanese Government Bond with negative rates

For the first time in history interventions of Japanese central bank created a situation when 10Y government bonds have a negative yield. The same central bank already bought 30% of all available bonds totally distorting the market price.

Japan – country where debt is equal to 250% GDP, experiences problems in delivering energy security; terrible demographic on top of many years of economic stagnation. Now, in the same country, money is charged for the privilege of lending cash to the government.


Extra – Short film about silver

Finally, I want you to watch this Mark Dice video. He tries to sell 100oz of silver for… 100 USD. He fails.

Independent Trader Team