A crisis is not limited to a stock market decline because in such a case, an evaluation of the absorption capacity can be made and a return to normalcy is possible. It is also caused by a major default of an entity with no hope for recovery that may trigger a destructive domino effect. In short, a crisis is born with the passage from a financial crash to the real economy, with its lot of hardship implied.
In 2015 markets are hesitant and some are even declining, especially in commodities. Since the end of 2014, the 22 commodities included in the Bloomberg index have gone from 120 to 85. On an even shorter period the DAX, the German stock index, has lost 20% since its April, 2015, peak. We have observed a return of volatility on the markets this summer, and there are even a few liquidity problems here and there, of which a very serious one spotted by Investment Research Dynamics in September, that “something happened in the banking system in September that necessitated the biggest Treasury reverse repurchase.”
The question thus becomes, who will be the next Lehman Brothers? Who will be the trigger? Who will tear apart the veil of optimism of the media, the central banks and the politicians? Presently two names are making the rounds: Glencore and Deutsche Bank.
The trading giant Glencore is suffering directly from the declining commodity prices and it supports $30 billion in debt since it bought its rival Xstrata, in 2012. According to Bank of America, the global financial system has about a $100 billion exposure on Glencore; the failure of the number one global commodity trader would qualify as a major event. The Investment Research Dynamics article mentioned above also links the September liquidity problem with the Zurich-based company that experienced a mini-crash of its stock price at the same time (September 28). And behind Glencore, we can catch a glimpse of its main bank, Crédit Suisse...
The other candidate is Deutsche Bank, plagued by more and more bad news: its stock is declining, it has multiple fines to pay, which is characteristic of corrupt management (9 billion euro total), its two heads resigned (June 7, 2015), its credit rating was lowered by Standard & Poor’s to BBB+, only three notches above junk bond status (June 9), and it announced in September the layoff of 23 000 employees, a quarter of its entire workforce. This is typical of a crumbling company. To that we must add $75 trillion of exposure to derivatives (20 times Germany’s GDP), which would make Deutsche Bank’s failure cataclysmic.
Will it be Glencore or will it be Deutsche Bank that triggers the next crisis? Or another entity no one thought about... But, in any case, markets are becoming the more and more unpredictable, volatility is on the rise, temporary liquidity crises are multiplying: something’s going to give.
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Philippe Herlin Finance Researcher / Doctor in Economics
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.