Stocks are a hate-love relationship.
Most people are scared to buy. But they do it anyway — no one wants to miss out on making money!
The Dow Jones Industrials Index is trading at near all-time highs, and has enjoyed its longest monthly run since June 2014. The Aussie stock market, though plenty volatile, has been in an uptrend all year.
Will the stock surge continue?
Only time will tell…
In my view, however, the stock market is due for a solid correction. It may not come tomorrow, or next week. But it’s overdue. That means, you should be prepared.
The big picture story matters
Spooking the markets, Deutsche Bank [DE:DBKGn] has raised plenty of headlines recently. I analysed most of the issues last week, and warned the bank probably won’t survive.
I stand by that prediction. So why is this important to you?
Remember, everything is connected. We live in a globalised economy. Our largest trade partner is China. China’s largest trade partner is the European Union. I think you get the point.
Similar to individual economies, the global banks are also connected because they lend to and do business with each other. When one bank goes under, it’s likely to bring down others. That’s what nearly happened in 2008, before the financial system was bailed out by governments and central banks.
Unfortunately, this time is different.
Central banks and governments won’t be able to save the system. For starters, they can’t afford it. And second, they don’t have any plans to ‘bail out’ the banks. Instead, they have arranged ‘bail in’ laws, putting bank deposit holders on the hook. If your bank goes under, you will have bail out the bank with your deposits.
When it comes to Deutsche Bank, deposit holders won’t be able to save it either. The bank has about US$50 billion in deposits. A ‘bail in’ would merely scratch the surface of its liquidity problems.
Deutsche bank is in trouble. It’s Europe’s largest bank, and the continent’s derivatives clearing house. Market Watch reported on 30 September:
‘“What must be understood here is that Deutsche Bank is the main clearing house for trades in Europe,” David Buik, market commentator at Panmure Gordon & Co., said in a note to clients Friday. “With over $60 trillion derivative book at the Deutsche Bank, the government is totally incapable of even understanding how to deal with this crisis.”
‘Additionally, Eurogroup chief Jeroen Dijsselbloem warned the bank would, in any case, have to survive without state aid.’
Indeed, the German government and Eurogroup are stumped.
Deutsche Bank is linked to nearly every important player across Europe. When it goes under, the rest will follow. For this reason, the next financial crisis will be far worse than 2008.
It could become the worst financial meltdown in history…
It may not be too far away. Deutsche Bank is running out of time and money.
Is this rumour for real?
Reuters reported yesterday:
‘Deutsche Bank is throwing its energies into reaching a settlement before next month’s presidential election with U.S. authorities demanding a fine of up to $14 billion for mis-selling mortgage-backed securities.
‘The threat of such a large fine has pushed Deutsche shares to record lows, and a cut-price settlement is urgently needed to reverse the trend and help to restore confidence in Germany’s largest lender.
‘A media report late on Friday that Deutsche and the U.S. Department of Justice were close to agreeing on a settlement of $5.4 billion lifted the stock 6 percent higher, but that report has not been confirmed.
‘The Wall Street Journal reported on Sunday that the bank’s talks with the DOJ were continuing. Details are in flux, with no deal yet presented to senior decision makers for approval on either side, the paper said, citing people familiar with the matter.’
It won’t make much of a difference if Deutsche Bank renegotiates its fine to US$5.4 billion. The company made its first loss since 2008 last year. It’s on track to make another loss this year.
Plus, this is merely one of many fines that the bank faces.
Deutsche Bank’s days are numbered. The company is looking to shed thousands of employees across the world to save money. That’s not a great look.
We could see assets, like gold and stocks, take a plunge during the initial stages of the crisis. For this reason, I suspect the majority of investors will remain cashed up until they have no choice. I then suspect the majority will move everything they own into stocks. After all, when the banking system goes under, and deposits evaporate into thin air, stocks will look pretty good. That could cause the biggest stock bull market in history.
Of course — gasp — I could be wrong.
My colleague Vern Gowdie has dedicated much of his life to this topic. You can check out his work here. Vern believes that the stock market is due for a historic crash that could see markets tumble by 80%.
That sounds like a lot to me. But, as Vern asked me in person, what do you expect to happen to the share market when the banking system goes under?
He has a good point.
To find out how you can protect your money from a full on market crash, go here.
Publisher’s note: Jason’s views aren’t for the fainthearted. While his broader macro analysis is quite bearish, he’s made some huge profits for his readers. Jason tells me that there’s always a stock that will go up on the ASX, no matter what happens next. To find out what stocks he’s looking at now, click here.
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