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After a day of "rock solid" Lehman-isms, emergency bond buyback plans, and a stock price still unable to close green, Deutsche Bank is on the ropes (despite CNBC proclaiming that "it doesn't feel like a Lehman moment.") However, as dawn breaks across the motherland, something more insidious is breaking for Germany's largest bank. Deutsche faces an uphill task rescuing its stock from record lows, especially, as Reuters reports, a top 10 shareholder exclaims "investors have completely lost faith in the bank," and a fast recovery from this crisis was unlikely.

 

Given the way the credit market is trading, perhaps 'the major shareholder' has a point…

 

As Reuters details, Germany's flagship lender has trailed its rivals in bouncing back from the 2008 financial crisis, hamstrung by having to pay out billions of dollars in fines to end a string of legal disputes and ageing technical infrastructure.

It is the last of the major European banks to embark on a painful restructuring of its bloated investment bank, in the face of tougher regulation that reduced profitability, and the cost of that overhaul contributed to it posting its biggest annual loss on record last month.

 

Shareholders are worried about the ability of management to execute a two-year turnaround plan, announced last October, against the backdrop of a deteriorating global economic outlook and negative interest rates.

 

"Investors have completely lost their faith in the bank," a top 10 shareholder told Reuters, adding that a fast recovery in the share price was unlikely given the magnitude of the problems weighing on the company.

 

Several investors told Reuters they feared Deutsche would need to tap markets for more capital – despite raising a total of nearly 20 billion euros (16 billion pounds) from investors in 2010 and 2014 – to deal with regulatory and legal issues.

 

"We believe that Deutsche Bank has a capital shortfall of up to 7 billion euros, depending on the outcome of a range of litigation issues, which could necessitate a highly dilutive capital increase," Citi analysts wrote in a note last week.

Sseveral investors said they felt time was running out for the bank to show successes – such as returning to profit or stabilizing its share price – after other large lenders had moved on and closed the chapter of financial crisis.

"There's no benefit of the doubt," another top 10 investor said, adding currently investors were voting with their feet. "Two years (as planned by Cryan for the revamp) is a long time. There's no margin for error."

 

Questions are also being raised about the quality of the bank's supervisory board.

 

"We miss competence in financials on the supervisory board," said the first top 10 shareholder, adding that support for Chairman Paul Achleitner was also waning and a new face was needed for a fresh start for the bank.

 

"However, at this stage, there's no obvious candidate to succeed him, so he will likely be kept in charge until the end of his mandate in May 2017," the shareholder said.

Of course there is always the "government put" but in this case – with Europe's new bail-in "reforms" DB co-CEO Cryan's hopes that "the government would intervene," could well leave everyone from equity to depositors taking and haircut (to zero in the former case).

*  *  *

So finally, as emergency bond buyback plans are thrown out in desperation.. because that will not be enough to solve this problem, as a Deutsche banker readily admits…

WHAT NEEDS TO BE DONE. Simple?

1. Recognize the problem. It is not oil, it is not in the banks..it is a run on central bank liquidity, especially dollar based and there needs to be much more ($) liquidity. Keynes said to deal with overinvestment boom you cut you don't raise rates. QE is impractical but getting the dollar down would greatly lift dollar based liquidity. So for a starter Fed shd stop raising rates and clearly signal an extended time out.
2. Draghi shd follow up with a one 2 punch, not to get rates down but open the refi spigot to banks and ease liquidity concerns.
3. China needs to come clean. Devalue, stabilize reserves and then allocate 1 tn+ to short up strategically important institutions. Stop intervening in equity markets.
4. And Basel 3 (?4) should be delayed specifically regarding leverage ratios and threat of higher. As a token move there shd be deemphasis of the SSM/bail in rules until there is clarity from the ECB on liquidity sources for stressed banks.
5. how about some fiscal stimulus
6. on negative rates — instead of making them punitive on the banks allow the banks to earn the spread, make them punitive to savers.. Cash shd be charged interest — put the micro chip in large denom notes/tax cash withdrawals.. encourage spending not saving .. mortgage rates can be negative and banks can still earn a spread. The spread is the problem not the rate.

The existential fear in Deutsche Bank's analyst is tangible, as is the implied threat: "don't do these things, and if Deutsche Bank and its $60 trillion in derivatives blow up, it will be on you."

And so, we leave you with the question we asked just last year – "Is Deutsche Bank The Next Lehman?"

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Submitted by Tom Chatham via ProjectChesapeake.com,

The American dream is not a thing in physical terms but an idea that lives or dies with certain beliefs in society. Can it die? Yes it can if those beliefs are purged from the conscience of society. This is what Jefferson meant by watering the tree of liberty with the blood of patriots from time to time.

Many people bemoan the loss of the high paying jobs and the mansions and swimming pools we all want to have. They look around them and see their dreams of easy living collapsing and the debt piling up about to drown them. They see life becoming harder every day and society becoming more dangerous.

The American dream is not about houses, swimming pools, expensive vacations or fancy cars. These are all benefits of that dream. They are the icing on the cake, not the cake itself. The American dream is about the freedom to earn those things if you are smart enough and work hard enough.

The American dream is about freedom. The ability to live the way you desire and to be all you can be in society. It is the freedom to build and accumulate and make something of yourself. It is the freedom to go from rags to riches in one generation because of your will and abilities. It is the freedom to own your own property and use it to better your position in society.

The American dream is about the freedom to walk into a clearing with a hoe and shovel and build a farm. It is about the freedom to walk into a stand of timber with nothing but an axe and an idea and build a town. It is about the freedom to design a new machine from your imagination and build a factory to use it.

For the dream to die freedom must also die. As long as you have the freedom to do your best the dream is always possible. The slow loss of personal freedom over the past century has led to the diminishing of the possible. We no longer see the possibilities because that ability is being taken away from us. Tyranny is the lack of possibilities forced on the population. You can no longer be all you can be because you are constrained by others that want to limit those possibilities.

When your freedom is constrained by those that are willing to use force to limit those possibilities, you must defend that freedom with force to preserve it. That is when the tree of liberty gets watered. That is when the dream is reborn to flourish once again.

The American dream can die but only when we fail to water it and let it die. If Americans want to eat cake then they first must bake it. Only then will they be able to treat themselves to the icing on it that we all love so much.

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Following The BoJ's utter collapse from omnipotence to impotence, it seems the rest of the world is losing faith in Central Banks "control," as nothing says The Fed knows nothing like the collapse of Fed credibility to… nothing…

 

The market now sees ZERO probability of a rate-hike in March…

Source: @Not_Jim_Cramer

And if we need confirmation of the "error"…

 

We are sure Janet will clear up all the confusion tomorrow.

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With stock markets from every continent plunging (Japan most recently), it should be no surprise that MSCI's world index has entered a bear market – dropping over 20% from its April 2015 record highs. However, as Gavekal notes, while much of the drag on global stocks is from collapsing emerging markets, the average developed market stock is down 23% in the past year.

The World enters a bear market… at a crucial level…

 

 

But as Gavekal Capital's Eric Bush notes, the average stock in the developed world is off 23% from its 1-year high…

And is down 8% over the past year.

52% of all developed world stocks are in a bear market over the past 200-days (i.e. down 20% from the 200-day high). During the worst of the 2011 drawdown, 65% of stocks were in a bear market.

Not a single sector has avoided falling into a correction over the past year. The classic defensive sectors have once again performed better on a relative basis. The average consumer staples company is 12% off its 1-year high, the average utility company is 13% off its 1-year high, and the average telcom company is 18% of its 1-year high. 

Energy stocks continue to be the dog in the market as the average energy company is down an astounding 40% of its 1-year high. Materials (down 28%), financials (down 24%) and tech (down 24%) are following energy lower.

From a regional perspective, the drawdown has been pretty uniform. The average stock in DM Americas is off 24% from its 1-year high, the average stock in DM Asia is off 21% and the average stock in DM Europe is off 23%.

However, if one looks at the average performance over the past year, DM Asia is outshining the other region. The average stock in DM Asia is only down 1% while the average stock in DM Europe is down 9% and the average stock is down 14%. The average stock in DM Americas is down over the past year than it has been at any time since September 2009.

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While the markets have been generally lacklustre in the past two days, much of the enthusiasm associated with the last hour spike on both Monday and Tuesday had to do with optimism involving a significant relent by Janet Yellen during her semi-annual 2-day testimony in Congress starting tomorrow at 8:30 am.

And while Yellen will certainly have a tough time reconciling the worst start for the S&P since 2008, or the accelerating slowdown across the global economy with the Fed’s dot plot which still forecasts 4 rate hikes in 2016, some such as Citi’s Steven Englander believe that Yellen will not only not relent as much as consensus believes she will (negative rate odds are well over 10% by the end of 2017), but will “deflate some of the recent enthusiasm” and “unwind some of the panic buying” of US fixed income.

While Englander admits that while the prevailing sentiment will be one of more of the same by Yellen, and will likely be accompanied by selling of rallies by traders, there is an odd chance that Yellen will try to break out of the trap the Fed has put itself in, and capitulate with a dovish relent, unleashing a major stock surge.

This is how she would do it:

The dovish surprise is if she explicitly removes March from the hiking calendar (which would be Draghi-esque in front running the FOMC), broadly hints at a delay or expresses concern on downside risk to long term inflation or structural stagnation. The intention would be to show US households, business and investors that the Fed has their back.

The Citi strategist notes that there is a major problem with this admission of policy error: “investors would likely interpret removing March from the calendar as a prelude to endorsing the much bigger unwind of policy rate hike expectations that is now priced into asset markets.”

Moreover, it is unclear whether the dovishness would be viewed as asset market friendly or as affirming the economic and asset market slump without really offering any policy alternative that would be considered effective. She may even be pressed on what policies the Fed would put in place if these downside risks manifested themselves. So there is a risk that a soothing message will end up as being viewed as an opportunity to sell from better levels.

And then this:

It is unlikely, however, that pointing to negative rates or QE4 would work, as investors are increasingly skeptical that more of the same policy mix would be effective in hitting final goals.

In other words, after massive policy errors by Draghi in December and Kuroda in January, Yellen may complete the trifecta by panering to a petulant stock market, and in the process not only not send it higher, but destroy the last shred of cred the Fed may have had, leaving the central bank cabal with just one option, the final one: money paradrops, the kind many serious economists have already called for.

Englander sums up his analysis with a baker’s dozen of questions which Yellen will provide hour-long, single sentence, coma-inducing answers to.

From Citi’s Steven Englander

Yellen testimony meets policy ineffectiveness meets ‘sell everything’ mood
 
Fed Chair Yellen will confront political, asset market and Fed demons at her testimony this week. The narrative that she faces is that the US economy and asset markets are being sucked into the downdraft caused by oil, China, EM, reserve manager and SWF asset selling, commodities, currency war, the strong USD, weak European banks, weak Japanese banks, weak US banks and policy ineffectiveness & to name a few.
 
My expectation is that she will deflate some of the enthusiasm for negative rates, arguing that the Fed is far from seeing the necessity, even if that is a policy option that remains open in extremis. This could unwind some of the panic buying of US fixed income and provide some support for USD if she is convincing enough. However,  the impact may not be long lasting. I have detected very little enthusiasm among clients for positioning going into the Yellen testimony.
 
Her baseline intention is to convey optimism on the US economic recovery and the ultimate attainment of inflation goals, and awareness watchfulness on risks that asset market disruptions and foreign economic weakness could spill over into the US economy, but no presumption that such shocks will derail the expansion in either the short or long term. On rates she is unlikely to go beyond the January Statement, which retained data dependence, did not write off hikes on any time horizon, but acknowledged greater risk. Yellen s sweet spot is to express strong confidence in recovery, tempered by awareness that domestic and international financial market strains could spill over into the domestic economy. However, what is crucial is that she also convey that Fed watchfulness does not mean that they will give financial markets a veto on continued Fed hiking.
 
She is likely to emphasize the improvement in income distribution and some tentative indications that wages are beginning to respond to the tighter labor market. Part of the message is that the rapid increase in real labor compensation will support consumption and housing (A Working class hero is something to be) and be enough to carry the economy even if business investment is subdued. She will convey satisfaction at signs that wages are rising but try and diffuse any expectation that this means a faster Fed tightening cycle. The weakness in headline inflation will be blamed almost entirely on commodities, the USD and weak emerging economies.
 
Her hope would be to unwind some of the bearishness that has engulfed asset markets, and this would be supportive for USD, rates and equities. However, market pessimism may be so deep seated that good news is viewed only as an opportunity to sell at better levels.
 
The dovish surprise is if she explicitly removes March from the hiking calendar (which would be Draghi-esque in front running the FOMC), broadly hints at a delay or expresses concern on downside risk to long term inflation or structural stagnation. The intention would be to show US households, business and investors that the Fed has their back. The problem is that investors would likely interpret removing March from the calendar as a prelude to endorsing the much bigger unwind of policy rate hike expectations that is now priced into asset markets. Moreover, it is unclear whether the dovishness would be viewed as asset market friendly or as affirming the economic and asset market slump without really offering any policy alternative that would be considered effective. She may even be pressed on what policies the Fed would put in place if these downside risks manifested themselves. So there is a risk that a soothing message will end up as being viewed as an opportunity to sell from better levels.
 
The hawkish risk is harder to define. Market pricing is dovish, bordering on depressed, so anything upbeat should be viewed as hawkish. However, client conversations suggest that investors expect this kind of upbeat message and the key will be she can go beyond a pro-forma expression of confidence and convince investors that 7 bps is on the low side for 2016 Fed hiking expectations.  Maybe a repetition of Fischer’s But we have seen similar periods of volatility in recent years that have left little permanent imprint on the economy with great emphasis would succeed.
 
A strong assertion that the Fed expects the US economy to rebound would be viewed as hawkish and USD positive, but in current circumstances it may not be bullish for asset markets if investors see it as misguided.
 
Paradoxically, a convincing affirmation that the Fed has tools that would be effective in stimulating the economy would support the USD and asset prices. This is not hawkish in the normal sense but would suggest that the despair on long term outcomes is misplaced. It is unlikely, however, that pointing to negative rates or QE4 would work, as investors are increasingly skeptical that more of the same policy mix would be effective in hitting final goals.
 
Given that it is an election year there will likely be more circus in the air than normal. A selection of questions she is could face:
 
1)      How much has the US economy slowed?
2)      Is the slowdown a blip or a more prolonged slump?
3)      What are the risks of recession in coming months?
4)      Is fiscal policy the right tool to stimulate the US economy? Would the Fed adjust its balance sheet higher to facilitate fiscal stimulus?
5)      To what extent did Fed lift-off contribute to these economic risks?
6)      How does she assess the contribution of lower oil to the US economic and financial outlook? Is there a point at which it shifts from being a plus to a minus?
7)      How material are the problems in China, EM and global banks to the US economy?
8)      What tools does the Fed have to deal with a future slowdown?
9)      How keen are they on negative rates, are negative rates permitted under US law and, if they are not keen, what else is there?
10)  Will she rule out March?
11)  Does the Fed think other central banks are engaging in currency wars and what is the appropriate response?
12)  Does she expect CNY to go up or down and what effect should it have on the US economy?
13)  How automatic are Fed hikes if wages and inflation edge up and asset markets remain uncertain

via Zero Hedge http://ift.tt/1PBeZYD Tyler Durden

We’ve spilled quite a bit of digital ink documenting the trials and travails of Alberta, the heart of Canada’s dying oil patch and ground zero for the pain inflicted by 14 months of crude carnage.

At the risk of beating a dead (or at least a “dying”) horse, you’re reminded that violent crime is soaring in the province, suicide rates are up by a third as is food bank usage, and as for unemployment, well, Alberta lost 19,600 jobs last year – the most in 34 years.

While it’s not entirely clear where things go from here, it’s a good bet that the situation will deteriorate further given that, at last check, WCS was trading just CAD1 above the marginal cost of production. In other words: Canada’s producers aren’t profitable and thanks to the plunging loonie, the BoC doesn’t look particularly likely to help them.

That means more job losses are in the cards and the prospects for the increasingly profitable repo business look better than ever. We’ve also documented the soaring cost of homes in Canada, on the way to noting that just about the last thing you want to have is a collapsing economy, a propery bubble, and record high household debt. 

That’s a recipe for disaster and sure enough, we’re starting to see the first signs that the market is beginning to crack as Albertans begin mailing the keys to their underwater homes back to the bank. “A combination of high debt and lost jobs make [jingle mail attractive] in a province going through a significant economic reckoning,” CBC writes. “It’s enough of a concern that the federal government is watching the Alberta market closely.” 

As they should be. The wave of job losses occasioned by the rout in oil markets has put already leveraged households in a tough spot. Now, the pressure is apparently more than many homeowners can bear. 

“People [are] saying that we can’t make a go of it and mail the keys to the bank,” Don Campbell, senior analyst with the Real Estate Investment Network told CBC. “In the big cities, not so much because the average sale prices haven’t really dropped much, we haven’t seen the pain yet. But Calgary is getting pretty tight.”

Yes, it’s “getting pretty tight” in Alberta and that’s problem for banks. Here’s why (again from CBC): 

Alberta is the only Canadian province to broadly offer non-recourse residential mortgages. Those are loans with at least a 20 per cent down payment and thus are not insured by the Canada Mortgage and Housing Corporation (CMHC).

 

If you walk away, you lose your home, but otherwise have no personal liability. Elsewhere in Canada, your lender can take you to court and seize other assets, such as RRSPs, vehicles, and even garnishee your wages.

 

Jingle mail was an enormous problem in Alberta in the 1980s, when mortgage rates were hovering around 20 per cent and people began leaving the province to find work elsewhere. It made a rough housing market even worse when banks were forced to sell off abandoned homes at a discount. It also played a role in the U.S. housing crash.

 

In the mid-eighties, around a half million people left Alberta to find work in other parts of the country and were able to walk away from their mortgages with virtually no personal consequences, not even to their credit rating.

 

That’s the scenario that the Finance Department is worried about now.

 

“These non-recourse mortgages could create incentives for some homeowners facing an income shock to pursue a strategic default and thus place further downward pressure on prices,” read one of the reports obtained by CBC News.

In other words, if you’re an Albertan O&G worker who was just laid off thanks to Saudi Arabia’s war of attrition with the US shale complex, you can simply walk away from your mortgage with no consequences. 

Obviously, that’s bad news for Canada’s banks and underscores the following assessment we presented just three weeks ago: “…as Canada’s depression worsens, expect overburdened households to simply fold up under the pressure. That’s when the dominos start to fall in earnest as a cascade of foreclosures bursts the nation’s housing bubble once and for all and as the world discovers how exposed Canada’s banks are to the country’s levered up families.”

“I had four higher end sales last month, all four transactions, the values were off 20% to get a buyer to the table, in order to get a deal to stick,” Joel Semmens, a realtor in Calgary with Re/Max said. 

Expect that negative sentiment to spread quickly in a market that is clearly showing signs of froth. We close with still more commentary from a CBC Op-Ed regarding Calgary’s “hollowed out” downtown:

The heart of our city is hollowing out.

 

Gone are thousands of downtown white collar office jobs, as oil and gas companies cut employees and slash entire departments.

 

To a Calgary eye, cranes symbolize good times. A darkened office floor is an economic black eye.

 

I think it’s tough for people to come to work every day and see empty office space. For a lot of people, particularly young people, they haven’t been through such a dramatic recession before. 

 

I would say the more seasoned people have probably a little bit more tolerance for it, because they have seen it before. Calgary had significant growth in the late 70’s, from a downtown office space perspective. In some ways, it was almost harder in the 80’s, because all of a sudden you have extra capacity added on in a rapid rate and then contracted very quickly. This is definitely different than 2009 where office space was threatening to be as high as it was today. 

 

The big buzz word these days is “diversification.” Do you think we’re capable of diversifying to the point of making up for the jobs lost, if not short term, then in the long term? If so, in what sectors?

 

In terms of occupancy of these buildings, do you think they may sit for vacant for years on end?

 

I think is going to be slower absorption that it has been, in the last five years, but I think there’s no need to panic at the stage. 

Right. There’s no need to panic.

Yet.

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Another night, another utter bloodbath in AsiaPac. Japanese markets are plunging (NKY down 600 from US session close) along with USDJPY as Kuroda readies himself to face parliament (and Abe says he "trusts Governor Kuroda.") Once again banks leading the pain. Australia is also in trouble, after admissions of cooked data sent stocks lower pushing the ASX 200 into bear market territory.

Kuroda has utterly failed to inspire the non-deflation that they believe threatens the world…

 

And markets know it… NKY is down 2200 points from post-NIRP highs

 

Japan is unable to hold any gains…

 

Then there was this…

• *ABE: TRUSTS BOJ GOVERNOR KURODA

Which sounds like it is begging for a big "but…"

And Australia enters bear market (down 20%) territory…

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Then we must be "peddling fiction…"

 

The market sees it coming…

The yield curve is collapsing…

 

And High yield bond risk knows its coming…

 

And the fundamentals are catching up…

Fed-driven mal-investment and over-production has once again led us to this cliff…

 

The overall earnings growth trend continues in its downtrend…

 

And despite all the balther about BLS-manufactured job "creation" – the fact is that the US labor force is weak and getting weaker…

 

Does it look like we ever "recovered" from the last recession?

 

Finally, to dismiss the "decoupling" meme, macro-economic data across the entire G10 is collapsing…

 

So – if it smells like a recession, sounds like a recession, feels like a recession, and looks like a recession… what else can it be? Apart from pure "fiction."

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When last we checked in on the “most hated man in America”, Martin Shkreli had just taken a $40 million hit on his E*Trade account.

That’s a problem for two reasons. For one thing, the account only had $45 million in it in the first place. For another, it was used to secure a $5 million bail bond after federal agents arrested everyone’s favorite pharma “bro” in December.

As it turns out, most of the account was apparently dedicated to shares of KaloBios, the tiny biotech Shkreli saved from bankruptcy in November when he acquired something like 70% of the float and promptly pulled the borrow, driving the price into the stratosphere.

His arrest drove the shares back into the dirt and the company filed Chapter 11 just over a month after Shkreli got involved. With KBIO now delisted and trading at at ~$2.20 a share, Shkreli’s account balance has plummeted.

He now faces the prospect of having to post new assets to secure his bond.

“Assets” like $2 million Wu-Tang Clan albums including “Once Upon A Time In Shaolin,” a one-of-a-kind double disk the only copy of which resides with Shkreli.

Now, even the Wu-Tang Clan has become a liability for Shkreli. “In a complaint filed on Tuesday in Manhattan federal court, Jason Koza said he never allowed his fan art depicting Wu-Tang members to be used in packaging for the hip-hop group’s ‘Once Upon a Time in Shaolin,’ the sole copy of which Shkreli bought,” Reuters reports. “Koza, 34, of Copiague, New York, said he thought his nine works would appear only on the website WuDisciples.blogspot.com.”

But they didn’t appear “only” on WuDisciples.blogspot.com, they turned up in the artwork for “Once Upon A Time In Shaolin” and Shkreli allowed drawings of Inspectah Deck, Ol’ Dirty Bastard and Raekwon to appear in an article on Vice.com.

Now, Koza wants some money.

“Mr. Koza was happy when his work appeared on the website,” a complaint filed in New York says. “Mr. Koza never granted a license for his works to be copied or displayed anywhere (else).”

“The Fashion Institute of Technology graduate now blames Wu-Tang leader Robert ‘RZA’ Diggs for including them in the ‘Shaolin’ album, and Shkreli for allowing three works to accompany a Jan. 29 article at Vice.com,” Reuters reports. Koza is seeking unspecified damages plus profits stemming from copyright infringement.

“He didn’t need to know the drawings were protected to be liable,” Koza’s lawyer told Reuters, referring to Shkreli.

Right.

Kind of like how he “didn’t need to know” that hiking the price of an AIDS drug by 5,000% would lead the public to brand him an “Ol’ Dirty Bastard” to understand he was making a morally objectionable decision.

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