Jon Henschen’s January 3 ThinkAdvisor Article, “What Deutsche Bank Left Off Its List of 30 Market Risks”

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In his most recent ThinkAdvisor article, “What Deutsche Bank Left Off Its List of 30 Market Risks,” independent channel broker-dealer recruiter Jon Henschen discusses the primary concern to advisors and investors in 2019 and reviews Deutsche Bank’s list of the 30 market risks.

The major irony of this global-risks list is that Deutsche Bank should have put itself at the top of the list.

Jon Henschen’s January 3 ThinkAdvisor article, “What Deutsche Bank Left Off Its List of 30 Market Risks,” looks at the primary concerns of advisors and investors in 2019 -- volatility and risk. He then presents the risks published by Deutsche Bank, noting that the greatest risk the bank left off the list is the potential of their own demise due to its derivative holdings.

The Deutsche Bank list of the 30 market risks, published in December, 2018 and compiled by Torsten Slok, the bank’s chief international economist, is as follows:

1.    Algo-driven, risk parity-driven fire sale in equities and credit continues
2.    Slowing growth in China and Europe slowing down the U.S. economy
3.    Slowing growth in China and Europe triggering significant U.S. dollar appreciation
4.    Tailing U.S. Treasury auctions and/or declining bid-to-cover ratios
5.    Increased U.S. T-bill issuance continues to push 3-month Libor-Overnight Index Saw wider
6.    Increased U.S. Treasury issuance pulls dollar out of investment-grade credit and equities
7.    Higher hedging costs continue to lower European and Japanese appetite for U.S. credit
8.    European Central Bank (ECB) quantitative-easing ending means less global demand for fixed income
9.    Bank of Japan (BOJ) QE slowing means less global demand for fixed income
10.    U.S. 2/10-year Treasury yield curve inversion has negative impact on confidence in credit and equity markets
11.    U.S. corporate tax cuts continue to boost buybacks but not capital expenditures
12.    Impact of potential U.S. government shutdown on markets
13.    No deal Brexit in March could be negative for markets
14.    No deal Brexit in March could be negative for U.K. economy and hence also European economy
15.    U.S.-China trade war escalates further
16.    U.S.-Europe trade war escalates further
17.    Fed decides to ignore accelerating trade growth (this could threaten profit margins)
18.    Fed decides to ignore accelerating wage growth (this could un-anchor inflation expectations)
19.    Escalation of yellow-vest protests in France
20.    European Parliament elections
21.    Continued inflation of housing bubble in Germany
22.    Italian fiscal situation
23.    House price crash in Australia and Canada
24.    Chinese economy less and less responsive to stimulus
25.    China’s current account deficit arrives faster than consensus expects
26.    Japanese growth can get hit by China slowdown
27.    Potential political changes in India, Argentina, South Africa, and Indonesia
28.    Continued increase in global inequality
29.    Fed and ECB re-start QE and risky assets don’t rally
30.    Monetary and fiscal policy are out of ammunition and the world experiences a Minsky moment

Henschen acknowledges that the Deutsche Bank list is comprehensive. However, he notes that, “…after reading through the various scenarios that can potentially trigger a black swan event, I realized that the author of the article had neglected to point out the elephant in the room: the possible collapse of Deutsche Bank.” Henschen’s commentary continues by discussing recent red flags for Deutsche Bank.

The stock price for Deutsche Bank recently broke the $8 mark and is looking eerily similar to Lehman Brothers. It holds a gargantuan quantity of derivatives, which have multiple layers of derivatives backing primary derivatives, reminiscent of the 2008 derivative debacle.

In June, the Wall Street Journal published an article, “Deutsche Bank Fails Fed’s Stress Test,” citing “material weakness in capital planning” and the lender falling short in capabilities to forecast revenues and losses in key business lines and was deficient in risk-management controls.

Henschen then cites Simon Paige, a writer for The Data Driven Investor who also works for the emerging long/short crypto-currency investing group Bitcoin Enhanced. As a trader Paige works with cautioned (via email): “Be mindful of anything you do that has Deutsche Bank as counterparty — the largest derivative counterparty in the market and not much capital to back it up.”

As Paige explains, “Because derivatives have spawned a financial system of mutual dependencies between institutions, there is no knowing which part of the system may be the trigger for general collapse (watch the movie 'Margin Call'). If Deutsche Bank goes down, so may the institutions you bought your stocks, mutual funds, tracker funds and property funds from. The assets themselves would also likely lose some or all of their value.”

To further make the point on the danger of derivatives, Henschen’s article notes the size of the derivatives market worldwide, using data for the Bank of International Settlements, which shows that the value of these contracts was close to $595 trillion as of June 30, 2018.

The value of derivative-contract positions held by U.S. commercial banks stood at $207 trillion as of Sept. 30, 2018, according to the Office of the Comptroller of the Currency. (The market value of assets underlying these contracts, though, is $12.7 trillion.)

According to Henschen, we have learned little from the 2007-2008 economic crisis when it comes to derivatives, which Warren Buffet has referred to as Financial Weapons of Mass Destruction. “The major irony of this global-risks list is that Deutsche Bank should have put itself at the top of the list,” says Henschen.

Jon Henschen is President of Henschen & Associates, an independent broker-dealer recruiting firm located in Marine on St. Croix, Minnesota. With more than 20 years of industry experience, Jon is a staunch advocate for independent financial advisors, and is widely sought after by both reps and broker dealers for his expertise and advice on independent broker dealer topics. He is frequently published and quoted in a variety of industry publications, including ThinkAdvisor, Investment Advisor Magazine, Wealth Management Magazine, Financial Advisor IQ, Financial Advisor Magazine, Investment News and others.

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