Deutsche Bank management spent Tuesday and Wednesday trying to make the case that it had plenty of liquidity and a gameplan to address structural issues. They threw the hail Mary yesterday when they announced the possibility of using available “liquidity” to repurchase a few billion euros worth of senior bonds. I have quotes around “liquidity” because, as I outlined in my blog post about this yesterday, DB is technically insolvent.
What has unfolded this week at the zombie bank is almost exactly the path to collapse taken by Bear Stearns. In fact, just like he did with Bear Stearns when he issued a table-pouding, booyah screaming buy on Bear Stearns about two weeks before it collapsed, Jim Cramer was out earlier this week telling investors not to worry about Deutsche Bank and that, “the European banks have a plan. The government has a plan…This is not 2008, because they learned from 2008.”
Cramer has proved to be a remarkably accurate contrarian indicator on stocks just ahead of a collapse in price. DB stock has already partially collapsed since August, falling more than 50% since then.
If you want to dismiss my view, that’s fine. But ignoring the action in the credit default swaps is a big mistake. The CDS on DB’s subordinated debt have gone parabolic, jumping to a spread over Treasuries of well over 500 basis points today. Over the past week, the CDS spread on both the senior and subordinated debt of DB has gone parabolic. This is the clearest possible signal, other than the truth from upper management, that DB is on the ropes.
CDS investors are among the smartest in the market because they tend to be closest to the real inside information at banks. I know this because when I traded junk bonds which, prior to the proliferation of CDS, were the “smartest” eyes in the market, our desk was right next to the bank debt trading desk. The bank debt crew always had access to internal numbers on the companies they traded. We were very tight with the bank debt traders, if you know what I mean.
This leads me to silver. I’l be going on record tomorrow in a podcast with Silver Doctors that silver is the trade of the decade. Also, the LBMA silver fraud fix was the cartel’s last gasp effort to grab as much physical silver as cheaply as possible. That silver fix event was outright theft of silver from the sellers of physical silver on the LBMA that day.
I believe, just an educated guess, that the accumulation of silver was out the necessity to make deliveries under paper obligations – LBMA contracts, Comex futures, OTC derivatives. I believe the looming shortage in physical silver is worse than in physical gold and last summer was an omen of what’s coming.
The ratio of price appreciation in today’s trading for gold:silver is 95:1. A normalized GSR is 16 or lower. The GSR hit 32 when silver was approaching its top in 2011. My point here is that they are throwing the kitchen sink at silver right now to keep the price down as much as possible in order to limit the potential damage that is going to occur to the banking entities that are perilously short paper silver, while their counterparties are starting to pound on “the door” looking for deliveries.
We are likely transitioning into the third and final leg of the precious metals bull market. I believe that the smart money will eschew all fiat currencies and move their capital into the best possible contra-fiat currency asset: gold and silver. Today, for instance, the dollar is down on a day when typically the dollar is used as a flight to safety. Gold is up $60. The smart money will get the train wheels rolling and the retail crowd will pile on about 2/3 of the way through the ride, paying extraordinary premiums to get physical gold and silver in their hands.
All fiat currencies are backed by nothing but promises from Governments that are leveraged up to their eyeballs. Physical gold and silver do not have any counterparty risks as long as you do not buy them on margin and keep them in a custodial account. The margin risk is obvious, for most people the custodial risk is non-obvious but very real. Just ask the traders who owned physical silver in MF Global’s Comex warehouse account…
Dave, I wouldn’t be surprised if half of the JPM silver “horde” doesn’t exist and that they’ve screwed clients ala Morgan Stanley (the only mega investment bank to have been officially busted in the last 50+ years for not having customer precious metal in allocated and segregated accounts). Ted Butler et al. have this wrong too. It’s not clear how much fraud we’re talking about, but hey, we’re talking JPM. – a well known market analyst and blog host and silver market expert