Notes From Underground

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?

Tags: Angela Merkel, Bill White, BIS, central banks, Deutsche Bank, Germany

This entry was posted on September 26, 2016 at 7:42 pm and is filed under Banks, Central Banks, Deutsche Bank, Germany. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.