I’m afraid I have to humbly admit that I did not sit up half the night in order to listen to and watch Hillary and Donald trade blows on the telly and yet I shall have the audacity to pass comment, most of which is not based on the selective sound bites we have been treated to by the news channels. Let’s face it, the mass media are largely under the control – no value judgment here, just an observation – of people who are politically more sympathetic to the former first Lady.
Also, and again no value judgment but an observation, I would struggle to think of any US presidential campaign in the US within my life-time – I can’t quite remember JFK being elected but I still have very clear memories of the Cuban missile crisis and of where I was when I heard that he had been assassinated - in which Europeans as a collective would have favoured the Republican candidate other than maybe, just maybe, Reagan’s second, successful crack at the White House.
In other words, with Clinton sympathisers very much in control of how the outcome of the debate is presented to us, the general public, I would be very cautious in drawing too many binding conclusions. Seeing as that we are heading towards an election which many voters and other observers seem to wish both sides could lose, we must be careful of not deceiving ourselves. The shock outcomes of both the British general election and the Brexit referendum should warn us not only to treat opinion polls with caution but also the general tone in the media which is, believe it or not, written and presented by members of the intelligentsia who can very easily and innocently blind-side themselves to the groundswell away from their homes and watering holes.
Consensus might be that Clinton won the debate but there is no saying that, despite having been watched by more than 100m people, a single voter will have changed his or her mind or that those who are still undecided have got any closer to climbing down off the fence.
After a horrid Monday in risk markets, Asia is looking a lot more friendly as we Europeans come in this morning and much of it is being put down to the Clinton factor but there is no real evidence to support that view. The only real bit of litmus paper which has changed colour is the Mexican peso which rallied just under 50 points from Ps19.92 to the dollar to Ps19.49 but seeing as that three weeks ago it was still marked at Ps18.25, this bounce back might be treated as nothing other than a small technical recovery. Once again, the pre-Brexit rally in sterling to US$1.50 proves that even deep, widely traded and liquid markets such as the forex space can also paint false pictures and get it horribly wrong.
Next!
Meanwhile the Deutsche Bank story rumbles on, taking down senior executives like a breaking avalanche uproots trees. The big talk is whether Deutsche might be the next Lehman Brothers, not least of all following newspaper reports that Mutti Markel has let it be known that there will be no state aid available.
If we cast our minds back to 2008, we might recall that Bear Stearns was gone long before Lehman but that the wreck was swept up by JP Morgan for US$2.00 per share – only for the price to be later revised to US$10.00 per share – and that Merrill Lynch was just as bust, if not more so, than Lehman Brothers Kuhn Loeb. So why were Merrill Lynch and Bear Sterns rescued and not Lehman Brothers? I believe the answer to be far more simple than most books on the subject are prepared to admit. Bear Stearns had a massive clearing business that serviced thousands of small retail brokers. Take Bear out and large swathes of mid-America ceases to be able to trade. Merrill Lynch was one of America’s largest wealth managers, the failure of which would have locked out millions of small savers. Lehman, on the other hand, had next to no retail business. In other words, the Bear and Merrill’s were systemically relevant, Lehman wasn’t. It was as near as dammit a pure-play wholesaler and therefore the “need” to rescue it was deemed not to be there. The post-Lehman melt-down was not exactly predictable or justified and, as history has proven, within six months offered the buying opportunity of a life time.
Deutsche is totally different. There is absolutely no need to even begin comparing the systemic relevance of Lehman Brothers and Deutsche Bank. It’s not about how the balance sheets compare or how much capital they might have; Deutsche remains one of the central pillars of the German economic edifice and come what may, it will not go under.
Deutsche’s contingent capital notes, or additional tier one capital notes if you prefer, that are supposed to represent the first loss buffer might now be trading in the mid-to-low 70s but they are still at better levels than they were during this year’s February risk swoon. At that same time, in mid-February, the stock was trading 30% higher than it is today. Given what I have been hearing about the mower going through the executive floors, one can only conclude that the rats are being kicked off the sinking ship but that they have not yet taken the plug with them.
The current migrant crisis in Germany was the result of some very loose and undisciplined thinking and anybody who suggests that the Berlin government will not be there to prop up Deutsche, should it ever be needed, can be assumed to be guilty of the same offence.
But how to play Deutsche? Be a bull, be a bear but don’t be a hog. This is now a dynamic situation and seeing as the Europeans have found new ways of disregarding all rules of lending – “bailing-in” flies in the face of a thousand years of axiomatic lending principles - anything is possible. But the fact that AT1 prices have not gone to the dogs seemingly reflects the credit markets’ opinion that not all is lost.
With Deutsche on the ropes and Commerzbank announcing another 9,000 redundancies this morning, the German banking system looks ever more horrid. Who would have believed that, as of this morning, the joint market cap of Deutsche and Commerz is less than that of the already moribund Royal Bank of Scotland? Dresdner no longer exists and neither do Bayerische Hypo or Bayerische Vereinsbank. BfG is gone and so is WGZ. I could go on. Are we quite sure that we want Frankfurt to become the dominant centre of European banking? There must be a temptation to bottom-fish Deutsche; feel free but I would not be sure that this is quite the bottom yet.