Notes From Underground: Merkel’s Boner, Take Two

It seems that 108 years is enough time to pass to relive history. For those who are not sports fans, Merkle’s Boner is a famous mistake made by New York player Fred Merkel, who didn’t touch second base and was called out erasing the “fact” that the New York Giants had beaten the Chicago Cubs. The major GAFFE led to the Cubs beating the Giants and the CUBS moving to the World Series where they defeated the Detroit Tigers for their last World Series championship only 108 years ago.

Today we have the Cubs in first place and another MAJOR BONER, this time by a different Merkel, German Chancellor Angela Merkel. In a Bloomberg article on September 24, reporter Patrick Donahue cited a piece from Focus Magazine that said Chancellor Merkel “ruled out any state assistance for Deutsche Bank.” This is a major “boner” on the part of Frau Merkel for it shows a severe lack of understanding about the financial implications of her false stance on appearing to side against bailing out a financial giant. The Chancellor’s words will ring HOLLOW if in fact Deutsche bank has to come begging for state support to secure its existence.

The systemic importance of Deutsche Banks would render the Lehman debacle a mere accounting error. Deutsche is PROBABLY the most leveraged institution in the world and if it failed the reverberations would rock Tokyo, China, London and Wall Street. Every financial actor has exposure to Deutsche Bank rendering Merkel’s political posturing an act of colossal stupidity, especially as the global economic system is in a highly fragile state. ECB President Draghi must have sighed in disbelief as his “guardian angel” jeopardized the entire ECB effort at creating the backdrop of “whatever it takes.” Time magazine named Chancellor Merkel its person of the year in 2015 but I will nominate her as the FOOL of the decade for failing to understand the global financial system. I GUARANTEE THAT DEUTSCHE WILL BE BAILED OUT BY THE GERMAN POLITICAL SYSTEM.

The DAX was lower by more than 2 percent because of Merkel’s BONER but I would venture that the DAX may be an attractive investments as Merkel backpedals from her attempt to buy populist support by standing against the “financial locusts.” In a hat tip to my friend Kevin Mac, it was really an attempt to find some political support as her CDU suffers one bad election outcome after another. But I caution–and this is a response to reader GREEN AB–You have raised the issue of the rise of the AfD as a response to the Merkel immigration policy, where I have discussed that the ECB’s NIRP policy also had a major impact on Merkel’s falling popularity. It seems that Chancellor Merkel has now brought financial issues to the front of the queue for political issues.

***There was a major op-ed piece in the Financial Times Monday, which serious investors and traders OUGHT to read. In another critical review of the global central banks, William White wrote, “Only Government Action Can Resolve A Global Solvency Crisis.” White, a heavy-weight thinker on the global macro economy, presciently saw the credit crisis that has weighed on the global financial system. As the former chief-economist of the BIS he had a front row seat to view the potential problems piling up on the balance sheets of the major global financial actors. He posed the important question of what a central bank’s role was: “Lean or Clean?”

In Monday’s piece White warned that central banks should stop wandering down the current path of lower rates forever. When looking at the current economic malaise plaguing the global economy White wrote: “Perhaps we need look no further for the cause of the alarming slowdown in global growth than the insidious effects of easy-money policies. Two vicious circles are at work with a wounded financial system, contributing to both. On the demand side, accumulating debt creates headwinds, leading to more monetary expansion and more debt.” Throughout the article White takes up the issue of Keynes’ Paradox of Thrift as, “Consumers have had to save more, not less, to ensure adequate income in retirement.”

The article seems to present the flawed policies of the central banks in a similar situation as the U.S. foreign policy establishment when Secretary of State Colin Powell warned Cheney and Rumsfeld about invading and destabilizing Iraq. Powell called it a Pottery Barn Policy for if you “break it you own it.” White lays the responsibility of low global demand on the “unprecedented monetary experimentation” of the central banks. Now that pension funds, insurance companies and emerging markets are bearing the brunt of monetary experimentation the central banks own the entire financial system. As NOTES FROM UNDERGROUND has warned, macro economics, and thus FED models, are NOT ROCKET SCIENCE.

Unlike NASA, the FED has no idea where this lands. I wonder if Lester Holt will cite this article to the participants in tonight’s Presidential debate. This is not wonkish policy but an article in a popular financial newspaper. Did Merkel’s Boner increase the fallout for another Pottery Barn financial crisis moment?

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10 Responses to “Notes From Underground: Merkel’s Boner, Take Two”

  1. Chicken Says:

    “Unlike NASA, the FED has no idea where this lands.”

    The similarity though, is 100% probability it blows up.

    • Chicken Says:

      That is, due to the probability resolves to a complex exponential in the denominator of causal relationships. Therefore it might conceivably become a black hole.

  2. majorkong Says:

    trotsky

    excellent spot and discussion. Merkle knows DB is a source of pride to krauts, not just a bank. She is in severe shit right, the numbers show it. Believe it or not I think this benefits the CME, Mr Shepard should get a tiger team working on what business they can take from the euros. With DB on it’s knees now would be an excellent time to start making the case for CME 2.0.

    http://www.zerohedge.com/news/2016-09-27/deutsche-bank-stock-crashes-near-single-digits-cds-spike-record-highs

    hugs

    the american limey

  3. The Bigman Says:

    Let us remember a mere 35 years ago Volcker raised the funds rate to 20% and the economy not only recovered but thrived. Now Yellen suffers great angst over 0.25% raise as she fears she will bring Humpty Dumpty down. You are right it is not rocket science but Yra I am afraid we are not in Kansas anymore. We are going through the Looking Glass. I will leave it to the readers to identify who the Walrus and Carpenter are.

    • yra Says:

      Bigman–why the Walrus was Paul –oh you were studying to long for MCAT s to enjoy the gange and the Beatles–ha–but your points are spot on

  4. Frank C. Says:

    I agree with you that Deutsche Bank will be bailed out by Germany.

    Merkel did not want to say she will support a bailout when the US is demanding $14 billion to settle the United States DOJ fines related to mortgage backed securities. The Germans don’t want to fund the settlement, but do want to stabilize DB. The fine will be negotiated down before any capital in put in. Otherwise the DOJ will get zero.

    In addition Merkel cannot go on the record of saving DB and ignore the bailouts in Italy. The argument she used to not fund the Italian bailouts is the same argument Draghi will use against her. The Italians will also get more capital.

    It is not just a DB problem though. Commerzbank Germany’s 2nd largest bank stock has been halved this year. They announced today they are laying off over 5,000 employees. Throwing capital at the problem is only a temporary fix.

    The problem is Germany’s negative interest rates. All banks cannot generate enough NIM (Net Interest Margins) to create any earnings to earn their way out.

    This is why BOJ talked about increasing the slope of the yield curve.

    Long rates must rise for banks to borrow short and lend long. William White and others are advocating fiscal stimulus to inflate the economy. This will increase the long end of the curve.

    The Afd is not only Merkel’s problem but the ECB and Draghi as well.

    I certainly hope for all of us that Merkel was only posturing. If not we are all at risk.

    • yra Says:

      frank c.–good solid comments and enlightening–thanks and it is now being reported that Germany is planning a DB rescue plan—will provide more tonight but the debate did not distract us from the real economy and more importantly Merkel has no understanding of the box that Draghi is placing her in—president Draghi has made a coup and in like Lenin–ALL POWER TO THE SOVIET ECB

  5. Bojo Says:

    They were putting bail-in rules together for years, and now all EU politicians will go local. The EU might not even fall apart, it will simply be ignored and sidestepped. And yes, Draghi (and Bernanke/Obama) carried out a financial coup d’etat, and almost nobody even noticed.

  6. Notes From Underground: The Importance of Deutsche Bank for the Global Financial System | Notes From Underground Says:

    […] Where 2+2=5 is also a beautiful thing « Notes From Underground: Merkel’s Boner, Take Two […]

  7. Mark Says:

    Its one thing knowing whats going to happen, but its another knowing the implications of the event. What will happen when DB is bailed out and why? Any insights?

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