The Zero Economy nailed its first big victim. Deutsche Bank stock fell to record lows below 10 euros on Friday.
It’s no surprise. To expect any bank to be in good health when its business model has been turned inside out by negative interest rates would be ludicrous.
Germany’s big bank ran into big trouble last weeks as one investor after another yanked their money and took their risk elsewhere. It’s reported that 10 or more hedge funds pulled at least some of their funds from the bank.
Plenty of credible pundits fear it’s the start of a bank run... one of the most destructive forces in the economy.
All the wagging fingers point to the central banksters who have created this zero-growth, zero-interest-rate economy. It’s not Deutsche Bank’s fault, they contend. It’s the ECB’s loose monetary policy.
The truth, though, is there’s lots of blame to go around.
The bank has done plenty wrong. Let’s not forget that the Germans are still feeling the nasty hangover from the 2008 mortgage debacle.
In fact, the nearly decade-old rout is at the root of last week’s turmoil. As Washington finally realizes it picked up the check for a mess created by banks across the globe, it’s penalizing the guilty parties.
The Justice Department just asked Deutsche Bank to pay a huge $14 billion fine... a penalty for its role in the mortgage crisis.
As we saw last week, investors think the fine may just be the straw that broke this fat camel’s back.
But investors must worry about much more than just the fine.
After all, the $14 billion figure was merely Washington’s opening offer. As with all things related to white-collar crime, the fine will be negotiated and the penalty whittled away until it’s barely felt.
In fact, Washington outright asked Deutsche Bank for a counter offer.
The fine is not what has my attention.
What has my attention is the fact that the market is finally taking notice of an idea we’ve been shouting about for more than 18 months... that negative rates threaten Europe’s financial sector.
And it’s not just the big banks.
In an internal email with the Club’s research team in early 2015, I questioned the ongoing health of life insurers. These are the firms that are most at risk as rates go negative.
Here’s a chart I sent the team on May 20 of last year.
The chart shows the oh-so-tight correlation between the dividends that insurers like Northwestern Mutual pay their policy holders and the bond market.
When the chart was created early last year, Northwestern Mutual paid a 5.6% rate to its policy holders. But the downward trend that’s so clear on the chart has continued. In fact, the last payout (announced in October of last year) fell to 5.45%. And I expect it to fall drastically this year as the bank deals with the interest rate plunge of 2016.
Don’t forget... our chart above ends in early 2015. If we continue the trend, it looks quite like the action of the 10-year Treasury.
Here’s what the benchmark bond has done in the months after our chart stops...
I expect Northwestern Mutual to reveal its latest payout in late October. It’s our canary in the coalmine. Expect a big reaction from the market if it slips below 4.75%.
And where will the market react most? Simple... the fixed-income sector.
Around 80% of insurer assets are held in fixed-income securities... some $21 trillion worth.
As soon as the income from those assets doesn’t match the weighty guarantees most insurers made, we’ll see trouble.
The action last week proves we’re already seeing it. The nervousness that struck Deutsche Bank and its banking brethren last week is undoubtedly fallout from worries throughout in the Zero Economy.
We saw record lows from the German bank last week. No doubt others in the sector will soon have the same woes.
Unless you’re a skilled bargain hunter, stay away from financials. There are better opportunities outside the big banks.
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