The rope in the global financial tug-of-war is unraveling.
Not long ago, one of the most important members of the European Union just voted to leave the Union.
The aftermath of that departure is still boiling.
Yet, that is just the beginning.
Deutsche Bank, Germany’s largest bank, has now lost nearly 50% of its value this year.
That’s a dagger in the world’s financial system because not only is Deutsche Bank Germany’s largest bank, it’s Europe’s largest investment bank, and one of the world’s largest lenders.
Coincidentally, it also happens to be the biggest lender to Donald Trump’s real estate business – we’ll have to save the conspiracy theories for another time.
By now I am sure you’ve heard, watched, and read numerous explanations for why Germany’s largest bank is in trouble.
Yes, we’re in a period of low-interest rates, making it even harder for banks to make money.
Yes, it took on a lot of risk as a result.
And yes, the recent fine imposed on the German bank by the US Department of Justice is the straw that broke the camel’s back.
But that’s not the whole story – not even close.
There is much more than meets the eye. In fact, it is global political warfare at its finest.
Germany vs. the United States
Germany and the United States aren’t friends.
Beneath the façade of friendly meetings and media gatherings, the two countries have been fighting against each other for some time.
So where do we begin?
Back in October 2012, I wrote a story on how Germany – the world’s second largest gold holder – wanted its gold back from abroad.
This was during a time when gold was climbing to new highs.
Then, just a few months later in January 2013, Germany announced to the world that it would repatriate its gold that was held abroad in “safe-keeping”.
Only, most of Germany’s gold were in the hands of the United States.
Perhaps the Germans no longer felt that its gold was safe in the hands of the Americans.
And perhaps they were right because, for unexplained reasons, the United States wouldn’t give it back.
Over the next two years, between 2013-2014, not one ounce of German gold was transferred back from the US and very little came back from France.
This forced Germany to issue a media friendly statement.
Via my Letter, “Where Gold is Really Going,” 2014:
“… As Bloomberg kindly put it:
“Germany has decided its gold is safe in American hands.
Surging mistrust of the euro during Europe’s debt crisis fed a campaign to bring Germany’s entire $141 billion gold reserve home from New York and London.
Now, after politics shifted in Chancellor Angela Merkel’s coalition, the government has concluded that stashing half its bullion abroad is prudent after all.
“The Americans are taking good care of our gold,” Norbert Barthle, the budget spokesman for Merkel’s Christian Democratic bloc in parliament, said in an interview. “Objectively, there’s absolutely no reason for mistrust.”
Now get this.
In 2015, Germany finally ended up getting 100 tonnes of gold back from New York…after it said it would leave the gold in American hands.
Germany also received 110 tonnes back from Paris.
If Germany’s gold were “safe in American hands,” and that there was “absolutely no reason for mistrust,” why bring any back at all?
Take a look at this chart:
As you can see in 2012, gold was trading near its all-time high.
If conspiracies theorists are right, and the US doesn’t have the gold it claims it has (which is possible considering how much gold left the United States during the Bretton Woods system), could it be that the US gave away all of Germany’s gold, and had to buy it back in order to pay Germany back?
Perhaps – especially considering that right after Germany said it wanted its gold back, the price of gold appeared to have been manipulated down on numerous occasions, leading to the possible theory that it was done to allow the US, and other US banks, to buy it back at a cheaper price.
Regardless, how do you think Germany felt when it told its people it would get it’s gold back, only to tell them a year later that it couldn’t?
It doesn’t take a genius to know the Germans aren’t happy.
But the gold repatriation mistrust is just one of many things.
Via my Letter, “Nations Unite”, in 2014:
“Over the past year, the United States has increasingly aggravated its allies…
…The U.S. just pissed off France but now it’s picking on one of the world’s largest economies and head of the Eurozone, Germany.
Over the past year, the U.S. has increasingly pushed the wrong German buttons.
First, as I mentioned last week, it seems that the U.S. won’t be returning Germany’s gold back to its rightful owner.
But then there’s also spying scandal after spying scandal by the U.S. on Germany’s top officials, and recently a CIA was caught directly soliciting a German double agent.
But now, the U.S. has just pushed Germany closer to the edge by punishing one of Germany’s largest banks for the same kind of money laundering that BNP was allegedly engaged in.
…The recent actions by the U.S. on Germany is much more serious than it appears.
Underneath the distraction of the World Cup, Germany has asked the top US intelligence official to leave country – a signal that the Germans have had enough.
So while things appear rosy on the big screen under the guise of Germany’s World Cup victory, things have actually gotten so bad between the two nations that Germany may potentially block American tech companies from implementing equipment in Germany.
To sum it up, Germany just told the world that it might sanction American companies from procuring contracts in Germany…without using the word sanction.”
And my prediction was right: Things are much more serious than they appeared.
In 2015, less than a year after the above incidents, the United States goes after one of Germany’s largest companies, and the world’s largest automaker, Volkswagen.
A year later after that, the US is now going after Bosch, Germany’s largest auto supplier.
Of course, it’s not to say that the Germans, or Europeans, haven’t been fighting back.
The EU just imposed a €13 billion fine on Apple for back taxes over a deal with the Irish government.
In fact, Apple CEO Tim Cook called it, “total political crap.”
And yes, that’s precisely what it was.
Shortly after, Germany and France told the world that they have virtually ended negotiations over the US push to establish a Transatlantic Trade and Investment Partnership (TTIP).
Via the Telegraph:
“The Transatlantic pact intended to unite Europe and North America in a vast free trade zone is close to collapse after France called for a complete suspension of talks, accusing the US of blocking any workable compromise.”Political support in France for these negotiations no longer exists,” said Matthias Fekl, the French commerce secretary.
“The Americans are offering nothing, or just crumbs. That is not how allies should negotiate. There must be a clear and definite halt to these talks, to restart them later on a proper basis,” he said.
Sigmar Gabriel, the German economy minister, said over the weekend that talks were going nowhere. “The negotiations with the US have de facto failed because the Europeans would naturally not submit to American demands…”
As you can see, tensions between Germany have been brewing for quite some time…
Back to Deutsche Bank
After all of that, are you surprised that the US Department of Justice is now penalizing Germany’s Deutsche bank more than 10 times the amount they asked for from any of its US peers – or other peers for that matter?
“The DoJ is asking for 10-times more from Deutsche than they asked for from any of its US peers, with no disclosure – it is extortion,” said Davide Serra, founder of Algebris, which invests in the junior debt of European banks.”
First, it’s an attack on Germany’s gold; then, it’s an attack on its largest bank; then an attack on its largest company; then an attack on its largest auto supplier; and now an all-out attack on its bank once again.
Are these simply coincidences, or is there something much more brewing underneath the surface?
The Battle for the World
In order of magnitude, China, United States and Germany are the world’s largest exporters.
But there’s a big difference between one of them.
The United States is the only one with a growing trade deficit.
Conversely, China and Germany’s trade surpluses continue to swell, year after year.
In 2010, China dethroned the United States as the world’s number one manufacturer.
So far this year, Germany has once again become the world’s largest automaker. It’s also home to the biggest manufacturing company in the world, Volkswagen.
Everything that the United States built its economic foundation on is not only being challenged by China and Germany, but it’s being cannibalized.
But why attack Germany? Why not China?
There are many reasons – China’s military and nuclear power, China’s large holdings of US debt, China’s power in Asia – but simply put, Germany is a much easier target.
Now recall my Letter from last week where I explained what happens when a country’s (Japan in this case) surplus swells.
Via How Money Works:
“All of the dollars going into Japanese banks caused rapid deposit growth.
When banks hold deposits, they have to lend it out or be forced to pay interest on those deposits.
So in order to make money, the banks have to lend those deposits out – otherwise, they would lose money.
This is precisely what is happening with Germany and its Deutsche bank.
In fact, Germany may even overtake China as the country with largest trade imbalance in the world.
“(Germany) is likely to register the world’s largest trade surplus this year, according to the Organisation for Economic Co-operation and Development, at $324 billion (against China’s $314 billion), and will amass a record current-account surplus of 9.2% of gross domestic product.”
In other words, all of the issues stemming from Deutsche Bank taking on too much risk and making too many loans, are the result of Germany’s record-setting trade surplus.
Give Back, Or Else We’ll Take it Back
When you sell more to the rest of the world but don’t contribute back by spending more, people get angry.
“The German surplus is often viewed by New Keynesian economists such as Paul Krugman and Ben Bernanke as a detriment to aggregate demand in the rest of the world. This is increasingly difficult to eradicate through lower interest rates, which are already at the zero lower bound, or ZLB.
Put simply, Germany’s net exports add to German GDP, while subtracting from GDP elsewhere.
In a world characterised by secular stagnation, this can contribute to low global growth rates.”
But to make matters worse, Germany and its Chancellor Angela Merkel believe that the current situation is one of economic success and not failure, so they have been reluctant to address the issue.
Again via FT, July 2016:
“There is growing pressure from the IMF and the European Commission to take steps to reduce (Germany’s) surplus but, in the main, this has fallen on deaf ears in Berlin. The consequences of ignoring this quandary could be profound.”
So if Germany won’t listen, then the only solution is to put them in a place where they have to.
In my view, that is precisely why Germany and its largest bank are being attacked.
Now get this, via Marketwatch:
“The Bundesbank’s (Germany’s central bank) balance sheet rose to €1.2 trillion in July from €222 billion when monetary union started in January 1999.
…the German central bank’s balance sheet has expanded faster than that of the Eurosystem (the ECB and the constituent national central banks) as a whole.
The Bundesbank’s balance sheet now encompasses around 37% of Eurosystem assets of €3.3 trillion (computed on a net basis that strips out individual central banks’ claims and liabilities against each other under the Target-2 payments system), against 32% at the inception of EMU.
…The Bundesbank has always been skeptical about risks from undue holdings of dollars. It has now, on the external portion of its balance sheet, replaced dollar risk by assets of much greater potential concern – multiple claims on partner central banks standing behind an array of highly indebted euro zone countries.
This is because of the reemergence…of large persistent claims under the Target-2 system, now back to €660 billion at the end of July, not far from the euro-crisis peak level of €751 billion in August 2012.
The re-appearance of large Target-2 imbalances…points to strains caused by the reluctance of German creditor banks to channel funds back to peripheral euro countries, which have transferred euros to Germany to purchase goods and services or buy assets.”
In other words, Germany has benefited from the Euro, but has been reluctant to “share the wealth.”
Which is why, in my opinion, Germany – along with its banks and corporations – are now being aggressively attacked.
Or you could simply say that Germany is being attacked because they’re resisting the emerging new world order.
Regardless, I suspect that one way to transfer and relinquish some of Germany’s massive asset holdings is to force Germany into a bailout scenario – especially considering that the Bundesbank is building its assets (i.e. lending money) in direct competition with the ECB, while the central banks in countries such as Italy and Spain are building liabilities to the ECB.
We’re already witnessing massive capital outflows from Deutsche Bank and if something isn’t done soon, we could see the potential collapse of one of the world’s largest lenders.
This will no doubt trigger a massive domino effect of financial contagion on a global scale.
Deutsche Bank is so deeply connected with other banks and financial institutions around the world that the effects of its failure would send shockwaves across the entire European financial system and abroad.
Some are even calling Deutsche Bank the next Lehman Brothers.
Of course, I don’t think that Germany or the US – or anyone for that matter – will allow that to happen.
What I do foresee is that Germany’s central bank will either be forced to step in, or a behind-the-scenes political negotiation will take place which will lead to the fine from the DOJ to be dropped significantly- with conditions of course.
All of which leads to yet another rush to safe haven assets, such as gold.
Whip Out the Foam
If the culmination of these events hasn’t opened your eyes to everything that I have been warning you about over the past years, then I am not sure what will.
Things are frothy all around the world.
Chinese billionaire Wang Jianlin – who made his fortune in the country’s real estate market – is now warning that the Chinese Real Estate market is spiraling out of control.
In fact, he told CNNMoney in an exclusive interview Wednesday that, “It’s the “biggest bubble in history.”
And if you read my Letter from last week, you’ll know just how that bubble became so big.
Meanwhile, Joe Baratta, the top dealmaker at Steve Schwarzmann’s $356 billion Blackstone Group issued a stark warning.
“Speaking at the WSJ Pro Private Equity Analyst Conference in New York, Baratta said that “for any professional investor, this is the most difficult period we’ve ever experienced”, adding that “You have historically high multiples of cash flows, low yields. I’ve never seen it in my career.
It’s the most treacherous moment.”
Barratta wasn’t the only one. Tad Rivelle, a fund manager at the $195 billion TCW Group, also issued a warning through his newsletter that, “the time has come to leave the dance floor.”
Again, where do people go when they can no longer make money from the stock market or bonds?
Last week, I said:
“I expect that while the US dollar has been strong in anticipation of a Fed hike, the US Dollar will likely fall against the Yen, Euro, Canadian, and Aussie dollar, going into the New Year and maybe even before.
So don’t be surprised to see gold climb higher as the US dollar drops in value.”
But many of you asked how this would play out once the US election is over.
So here are my thoughts.
If Trump wins, we’re going to see a massive rise in fiscal spending and government deficit, leading to more money printing, thus digging the US into an even bigger debt hole.
Furthermore, if he imposes tariffs on China and Mexico, and does indeed bring more jobs back to the US, we’re going to see inflation because it will cost more to produce goods, and those costs will be passed onto the consumer.
Perhaps that is Trump’s plan in negotiating with the Fed: Indulge the Fed by borrowing more money from them through a massive onslaught of fiscal spending, while giving the Fed the ability to reach the inflation target through the higher cost of goods.
If Hilary wins, we’ll still see a rise in fiscal spending, but we’re also going to see a lot of free gifts for society – gifts that will cost a lot more than she proposes.
Furthermore, she’ll likely force a national minimum wage target, which will also add to the costs of producing goods in the US, which will also be passed onto the consumer, leading to inflation.
However, as we have already witnessed, the wage hikes in other States have already led to a loss of jobs. Without a Trump-like regulation on imports, it would most certainly cause corporations to look elsewhere for cheaper labor.
In other words, it doesn’t matter who really wins at this point because we’re going to see more spending and more debt either way.
Governments are no longer looking at how much debt and money has ballooned over the last decade – they’re simply looking at how much its growing relative to the year prior.
This new normal has consequences, and almost all of them lead to the devaluation of our money.
No wonder the smart money continues to pour into gold…
Next week, I going to tell you why contrary to what you’re being told, we may be on the verge of a commodities bull market.