Had to reblog this immediately. Its starting folks, here are the signs….
-Hope
By Pam Martens and Russ Martens: October 8, 2015
Our email inbox yesterday and this morning raised more alarm bells for the mega banks – you know the ones I mean; the ones that should have been broken up before we were on the cusp of the next downturn. Here’s a quick rundown before we get into the details:
- Deutsche Bank announced it will take an approximate $7 billion writedown in the third quarter and potentially eliminate its dividend;
- Charles Schwab is out with a report on the potential for deflation and what it could do to corporate earnings;
- The Treasury’s Office of Financial Research released a report on big bank liquidity concerns;
- Bank of America released a report on the $100 billion exposure that the troubled commodities firm, Glencore, poses to global financial institutions;
- Bloomberg Business is reporting on the anticipated revenues downturn when big U.S. banks begin to report third-quarter earnings next week.
Let’s start off with the Deutsche Bank writedown. That’s a monster amount: $7 billion exceeds JPMorgan’s London Whale fiasco of $6.2 billion. To put things in perspective, as of yesterday’s close, Deutsche Bank has a market cap (value of all of its shares outstanding) of $39.7 billion versus JPMorgan’s market cap of $229.7 billion. That pretty much tells you that Deutsche will, indeed, have no choice but to eliminate its dividend.
Deutsche Bank’s kitchen sink writedown announcement was big on numbers and light on specifics. Here’s how it described the biggest chunk of the writedown:
“An impairment of all goodwill and certain intangibles in Corporate Banking & Securities (CB&S) and Private & Business Clients (PBC) of approximately EUR 5.8 billion. This is largely driven by the impact of expected higher regulatory capital requirements on the measurement of the value of these segments as well as current expectations regarding the disposal of Postbank.”
There are clearly some ugly details in those “securities” and “business clients” that Deutsche would like to gloss over. There also appears to be more fines and settlements over misdeeds coming: Deutsche says it will take “litigation provisions” approximating $1.35 billion and that “final litigation provisions in the quarter may be affected by further events before we finalize and report third quarter results.”The bank makes its formal third quarter earnings announcement on October 29.
Schwab’s epistle on deflation came with the headline: “Deflation: What Investors Need to Know.” After quickly asserting that they think it is “unlikely” to happen here in the U.S., the author, Michelle Gibley, proceeds to list a dozen horrors that would likely accompany deflation – just in case she is wrong and it does happen here. (We believedeflation is imminently possible given the level of wealth inequality in the U.S.) Among the horrors noted by Gibley: “If consumers and businesses believe prices and demand in the future will be lower, they may postpone spending and investment decisions, creating a downward spiral of economic contraction.”
Gibley also notes that “businesses may start to compete on price due to the dual problems of excess capacity and insufficient demand” and that “borrowers also are hurt” because “incomes shrink but debts don’t.” As we have regularly noted, there is also the horror that the U.S. central bank, the Federal Reserve, has no bullets left in its interest rate gun to fight deflation – having been at the zero bound range since December 2008.
The Office of Financial Research released a paper yesterday worrying about whether banks would actually have enough liquidity to meet a run on deposits. Should we still need to be asking that question seven long years after the greatest financial collapse since the Great Depression?
Glencore’s problems strongly suggest that we will be hearing more about bank or hedge fund losses tied to this commodities behemoth before this cycle ends in the same kind of hubris as the last one – with regulators rolling out the same nonsense that no one could have seen it coming.
And, finally, all of this is hitting the fan when corporate earnings and revenues are slumping on the back of a strong dollar that has crimped export profits and a slowdown in investment banking activity on Wall Street. As this Bloomberg Business report notes, revenue gains for the big Wall Street banks in the third quarter were “probably toast.” We’ll hear more details next Tuesday, Wednesday and Thursday when the major banks report their third quarter results. On deck first is JPMorgan Chase next Tuesday.
FAQs
Domino theory presents a metaphor of falling dominoes: that a rise or fall in communist influence in a country will have the same knock-on effect in neighboring countries, and so on. Finally, you have broader considerations that might follow what you would call the "falling domino" principle.
What is the domino effect with money? ›
The moments when a man who resists financial manipulation falls under the dollar bills with the domino effect. The rising cost of foreign exchange in third world countries can have dire consequences and collapse economies. Financial risks sometimes act like a domino effect and follow each other in a chain.
What force makes dominoes fall? ›
“Gravity is the main thing that makes my projects possible,” she says. This force pulls a knocked-over domino toward Earth, sending it crashing into the next domino and setting off a chain reaction. Stephen Morris, a physicist at the University of Toronto, agrees that gravity is key when it comes to dominoes.
What happens to the energy of the first domino when it is toppled? ›
Each upright domino is also full of potential energy. When the first domino falls, the force of gravity turns that potential energy into enough kinetic energy to topple a domino larger than itself.
What is the falling dominoes analogy? ›
The domino effect is a chain reaction that occurs when one event sets off a series of similar, related, or connected events. It is a reference to a series of standing dominoes, each of which topples the next, creating a chain reaction. The domino effect is often used as a metaphor for cause-and-effect relationships.
What did the dominoes falling over symbolize? ›
The domino theory was a Cold War policy that suggested a communist government in one nation would quickly lead to communist takeovers in neighboring states, each falling like a row of dominos.
What is the significance of the domino effect? ›
A domino effect is the cumulative effect produced when one event sets off a series of similar or related events, a form of chain reaction. The term is an analogy to a falling row of dominoes. It typically refers to a linked sequence of events where the time between successive events is relatively short.
What is it called when dominoes fall? ›
Domino toppling is the activity of standing up dominoes in sequence known as a domino run and then knocking down the first one in line to strike the next, which knocks that down to strike the next, and so on, creating a chain reaction also called the domino effect.
What does a domino symbolize? ›
As each domino represents a goal, knocking over each domino provides a sense of accomplishment; a step in the direction of empowerment. If you never reach your final domino, you have still benefited by growing and attaining knowledge that may be used in all sorts of ways in the future along other paths.
What is the expression dominoes falling? ›
The domino theory is the idea that if one thing falls, a lot more things will fall, too, like a line of dominoes. It's also the political idea that if one nation “falls” to communism, neighboring countries will follow.
The rest of the dominos fall to land on the table, but remain in the straight stack. This demonstrates Newton's first law of motion: an object in motion stays in motion and an object at rest stays at rest unless acted upon by an unbalanced force. All of the dominos were at rest while in the stack.
What is the falling domino theory? ›
The “domino effect” appears to mean that when one nation falls to communism the impact is such as to weaken the resistance of other countries and facilitate, if not cause, their fall to communism.
Why do dominoes fall? ›
A line of dominoes standing on end collapses in a chain reaction after the first one is knocked over. Computer simulations reveal that friction plays an important role in determining how fast the toppling cascades.
What factors affected the speed of the falling dominoes? ›
The Physics of Domino Toppling
- 1) the distance or spacing between each domino and its neighbour;
- 2) the friction between the dominoes; and.
- 3) the friction or slipperiness of the surface on which the dominoes rest.
The term is an analogy to a falling row of dominoes. It typically refers to a linked sequence of events where the time between successive events is relatively short.
What is the metaphor about dominoes? ›
The metaphor “the domino effect” comes from the action of lining up a number of dominoes, then knocking over the first domino in the line so consequently the rest of the dominoes will fall one by one as a result of being hit by the previous domino.
Our email inbox yesterday and this morning raised more alarm bells for the mega banks – you know the ones I mean; the ones that should have been broken up before we were on the cusp of the next downturn. Here’s a quick rundown before we get into the details: