Deutsche Bank's CEO says that German banks are in trouble - 22-Aug-07 - Generational Dynamics

Meanwhile, Wall Street breathed a sigh of relief on Tuesday as "nothing happened" for a change, for two days in a row.

It was just two weeks ago that the Europeans were confidently feeling that the U.S. was going to be in trouble because Americans had been so foolish about regulating mortgage-based securities, but not the Europeans.

Macroeconomics

Understanding deflation: Why there's less money in the world today than a month ago.: As the markets continue to fall, the Fed is increasingly in a big bind.... (10-Sep-07)

Alan Greenspan predicts the panic and crash of 2007: He's said this kind of thing before, but this time it's resonating.... (08-Sep-07)

Bernanke's historic experiment takes center stage: An assessment of where we are and where we're going.... (27-Aug-07)

How to compute the "real value" of the stock market. : And some additional speculations about stock market crashes. (20-Aug-2007)

Ben Bernanke's Great Historic Experiment: Bernanke doesn't believe that bubbles exist. His Fed policy will now test his core beliefs.... (18-Aug-07)

Redemptions of money market funds now fully in doubt: Wednesday is the deadline for 3Q redemption of many hedge fund shares.... (15-Aug-07)

Alan Greenspan defends his Fed policies, as people blame him for the subprime crisis: Greenspan never ceases to amaze, and he did so again on Monday.... (8-Aug-07)

Nouriel Roubini says: "Worry about systemic risk." Whoo hoo!: His arguments show what's wrong with mainstream macroeconomics.... (6-Aug-07)

Robert Shiller compares stock market to 1929: He says the recent fall was caused by "market psychology," but is puzzled why.... (20-Mar-07)

A conundrum: How increases in 'risk aversion' lead to higher stock prices: Maybe because the global financial markets are increasingly "accident-prone."... (12-Mar-07)

Pundits are suddenly talking about (gasp!) "risk aversion": Fearing full-scale panic in the mortgage loan marketplace,... (6-Mar-07)

Alan Greenspan blames the housing bubble on the fall of the Berlin Wall: Meanwhile, the stock market keeps skyrocketing and appears unstoppable to many investors.... (25-Oct-06)

System Dynamics and the Failure of Macroeconomics Theory : Mainstream macroeconomic theory, invented by Maynard Keynes in the 1930s, has failed to predict or explain anything that's happened since the bubble started, including the bubble itself. We need a new "Dynamic Macroeconomics" theory. (25-Oct-2006)

Alan Greenspan gives another harsh doom and gloom speech: Saying that "the consequences for the U.S. economy of doing nothing could be severe,"... (4-Dec-05)

Ben S. Bernanke: The man without agony : Bernanke and Greenspan are as different as night and day, despite what the pundits say. (29-Oct-2005)

Fed Chairman Alan Greenspan says that the deficit is out of control: France's Finance Minister Thierry Breton quoted Greenspan... (25-Sep-05)

Fed Governor Ben Bernanke blames America's sky-high public debt on other nations: I'm normally wary of applying specific generational archetypes to individuals, but Bernanke is acting like a Baby Boomer.... (14-Mar-05)

Greenspan's testimony further repudiates his earlier stock bubble reasoning: The Fed Chairman has now completely reversed his previous position on the stock market bubble... (17-Feb-05)

Alan Greenspan warns that global economic dangers are without historical precedent : In a speech on Friday, Greenspan buried a major change of position in a speech admitting that his assumptions about the economy for the last decade were wrong. (6-Feb-2005)

I quoted Neil Munroe of Equifax in Europe in a BBC interview that the Europeans would be OK because European officials exercise "more control" than Americans, and that "there's more prudence here." However, I also noted that Munroe became increasingly nervous and sweaty as the interview went on.

Now we know why he was so nervous. It turns out that European banks weren't so prudent after all.

A few days ago, French firm BNP Paribas Investment Partners suspended client redemptions (translation: You can't take your money out), saying, "The complete evaporation of liquidity in certain market segments of the US securitisation market has made it impossible to value certain assets fairly regardless of their quality or credit rating."

It now turns out that several German banks are in the same boat. SachsenLB is out $23.2 billion, and IKB Deutsche Industriebank has a similar problem. In both cases, it's because of investments that were "not prudent."

Both firms issued short-term commercial paper ("You can get your money out any time you want,") but reinvested the proceeds in CDOs and other mortgage-based securities that supposedly provide higher yields over long periods of time. Now investors want their money bank, and the two firms no longer have the funds.

It also turns out that Germany's largest bank, Deutsche Bank, actually went to Ben Bernanke's Fed Discount Window to borrow money at the new improved 5.75% rate. I didn't think that Bernanke's deal was open to foreign banks, but I guess it is.

It seems that these three German banks have the same problem that BNP Paribas has, according to the CEO of Deutsche Bank:

"We sense reluctance on the part of foreign partners to extend credit to German banks. If we have a banking crisis in Germany with other countries cutting us off, then other banks will also face difficulties."

In other words, they would have liked to borrow money at the Fed Funds Rate (5.25%), but nobody's willing to lend them money any more, so they went for the Fed discount rate (5.75%) because he was desperate.

And these German banks are not private banks. They're backed by the German government, and are considered to be part of the government.

However, none of this was enough to stir much passion on Wall Street, as the markets were fairly steady all day.

The reporters and pundits at CNBC seemed visibly relieved on Tuesday, as the second relatively tame day passed. The Dow peaked at 14,000 on July 19, a day that I've heard CNBC pundits call "an almost perfect day." And several pundits said that now the worst was over. He said that July 23 was the start of the recent volatility, and that such volatility normally lasts only 4-5 weeks, and that volatility is still above normal, but was lower than the peak.

Still, there was one thing that has been causing a great deal of surprise: The collapse in yields on short-term Treasury bills. Three-month Treasury bill were paying 4.82% a month ago, 4.48% a week ago, but were paying only 2.46% on Monday, though they were back up to 3.31% on Tuesday.

This huge volatility is extremely rare. Recall that the U.S. Treasury sells 3-month Treasury bills to be redeemable for a fixed amount of money in 3 months. Different parties bid on them, for investment purposes. If many parties are bidding, it means that the prices of the Treasury bills are auctioned at higher prices, which means that the net interest rate for 3-months goes down. The higher the price, the lower the yield (and vice-versa).

So this enormous drop in yields means that a lot of people are investing in them. This is what some people call a "flight to safety," meaning that investors are putting their money into safe Treasury bonds, rather than into the stock market.

Well, volatility is not necessarily the equivalent of anxiety and panic, which is what we're watching for, but it's a sign of increasing anxiety. Still, if the pundit mentioned above is right, and everything settles down, then the real time experiment that I described in the analysis I just wrote ("How to compute the 'real value' of the stock market.") would have failed.

Just to recap: Generational Dynamics does not chart events unless they're tied to attitudes and behaviors of large masses of people, entire generations of people. What has become apparent since July 19 is a huge change in behaviors and attitudes of large masses of investors and even ordinary people, who are mobbing banks to withdraw their money.

If this anxiety continues to grow, which is what we expect, then comparisons with previous generational panics indicate that a new generational panic and stock market crash will occur in a few weeks, most likely in the period September 10-21.

This is something that you can monitor for yourself. Make your own judgment as to whether this generational anxiety and panic is increasing. If the pundit mentioned above is right, then a panic and stock market crash must still occur, but will occur later. But if the anxiety level increases, then the stock market crash should come at roughly the expected time. (22-Aug-07) Permanent Link
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Generational Dynamics Web Log for 22-Aug-07
Deutsche Bank's CEO says that German banks are in trouble

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Generational Dynamics Web Log for 22-Aug-07 Deutsche Bank's CEO says that German banks are in trouble

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Generational Dynamics Web Log for 22-Aug-07
Deutsche Bank's CEO says that German banks are in trouble