55% Gains From The Scariest Thing a Politician’s Said This Year

Keith Fitz-Gerald Sep 28, 2016

The scariest words uttered by any politician this year didn’t come from either Hillary Clinton or Donald Trump.

Rather, they came from 3,000 miles away and they stopped me in my tracks.


I’d like to tell you why right now.

Madam “No” Has Spoken

The United States Department of Justice announced last week that it’s seeking a record $14 billion penalty against Deutsche Bank related to mortgage securities fraud leading up to the global Financial Crisis that has roiled markets since 2007.

Ordinarily, that’s nothing serious.

Unbeknown to most investors, regulators charge banks and financial institutions with rules and policy violations all the time. Most are quietly settled after a bunch of legal wrangling and never see the light of day.

In this case, though, we’re talking about a $14 billion penalty at a time when the bank has litigation reserves of only €5.5 billion. That means the bank hasn’t got enough money on hand to even pay just the penalties sought by US regulators as they stand today.

According to The Guardian, the bank is actually fighting more than 7,000 legal cases, including a particularly nasty set of “mirror” trades in Russia where it’s alleged that the bank circumvented international sanctions against Russia by simultaneously buying and selling shares inside and outside of that country – a move referred to as “mirroring” because it turns Russian-held rubles into U.S. dollars.

As bad as these things are, they pale in comparison to what actually stopped me cold.

Over the weekend, German Chancellor Angela Merkel told Focus magazine there will be no bailouts if Deutsche Bank goes down.


Deutsche Bank has more than $42 trillion worth of derivatives on its books. With a capital “T.”

To put this into perspective, Germany’s Gross Domestic Product, or GDP for short, is only €3 trillion. The entire EU has a GDP of only €14.6 trillion.

No bailouts means Deutsche Bank hits the skids. It also means Italian, Spanish, and French banks are next. Then the EU, and when that’s run its course, US banks.

My point is that Lehman Brothers was a sideshow compared to what could happen with Deutsche Bank, because it is deemed “systemically” important.

Never mind that that’s a euphemism created by bankers who want you to believe that Deutsche Bank is so essential to the German financial system that it cannot be allowed to fail. What it really means is that regulators have no idea how to quantify the risks.

And that’s what stopped me in my tracks.

I have argued forcefully since the Financial Crisis began that the markets have rallied because of central banking support and NOT on their own merits, as delusional politicians and central bankers around the world would have you believe. I’ve also repeatedly recommended that you avoid the financial sector because they were but “one comment away” from financial oblivion.

I think Merkel’s just made “that comment.”

By saying that she’s not going to bail out Deutsche Bank, she has singlehandedly put the entire global financial system at risk while also demonstrating a complete lack of understanding with regard to how the global financial system actually works.

Again, we are talking about a bank with $42 trillion in derivatives exposure and a bank that is linked to nearly every other bank deemed systemically important, according to the IMF.


Click to View
Source: IMF

Naturally, CEO John Cryan doesn’t see things this way. He’s repeatedly insisted to anybody who would listen that the bank’s balance sheet is “rock solid”.

Yeah… if you consider hiding trillions in counter-party risk acceptable.

German banks do not get to “net” positions like US banks do. This means that their exposure is orders of magnitude higher than other global peers.

Say, for example, a DB trader is long a Euro contract with Citi but another is short the very same trade with JPMorgan. A US bank could net the exposure between the trades under the International Swaps and Derivatives Association agreement which US courts have recognized as being a valid accounting methodology. But a German bank – i.e. Deutsche Bank – would have to mark one side of the trade or the other as “exposure,” but not both.

If you’re on the right side of the trade, this is an asset… but get things wrong and you’re talking about unsecured liabilities that count against you as is the case here.

In fact, I called attention to this very scenario on April 10, 2015, when I put forth a list of top banking stocks to short because of their wildly irresponsible behavior with derivatives. I even went so far as to label Deutsche Bank as my No. 1 “Banking Stock to Drop.”

Since then, the stock is off 55% and any investor following along is laughing all the way to the proverbial bank… just not Deutsche Bank, I trust!

Now let me tell you what’s next.

I brought this trade to your attention at a time when Deutsche Bank and its problems were back page news, and very few people recognized the potential we did.

Now, though, it’s front page news and that means everybody knows about the trade. So there’s no sense in playing it further, nor is there an exploitable advantage even if the stock tanks from here.

Instead, think about establishing a speculative “short” against the United States banking industry, which, unbelievably, most investors believe is immune to any crisis “over there” – as in the Deutsche Bank situation, which they perceive as a largely European and German problem.

There are a couple of easy ways to do this.

Shorting individual banking stocks is the most straightforward. However, that requires gobs of margin, strict risk management discipline, and some real guts. Survival is the most basic of all instincts, and that means the trade could spiral out of control in a real hurry.

I can think of a couple of ways that could happen. For example, Merkel could change her mind or Yellen could counter by saying she’ll back everybody “just in case.” Either way, banking stocks take off like a rocket, causing a “short burn” and a good deal of financial pain for the unprepared.

More sophisticated investors could purchase put options or even sell calls or call spreads that accomplish the same thing. This involves limited margin and, depending on how you do it, somewhat structured returns.

If you’re inclined to paint with a broad brush instead of the two laser-like alternatives I’ve just outlined, consider buying the ProShares Short Financials ETF (SEF), which provides unleveraged exposure to the Dow Jones US Financials Index. It’ll appreciate as financial stocks decline.

I’d stay away, though, from the leveraged alternatives that also short the financial sector because tracking error could really eat into any potential returns while you wait for the stuff to hit the fan.

As always, pay very careful attention to the details on a trade like this. Never ever invest money you can’t afford to lose and don’t bet the ranch on this or any other trade… ever.

Until next time,


16 Responses to 55% Gains From The Scariest Thing a Politician’s Said This Year

  1. Robert in Vancouver says:

    Deutsche Bank going under would sink the economy of the world including the US, so it won’t be allowed to happen. One easy ‘fix’ would be for the US to print $14 billion and lend it to Germany at zero interest and open repayment terms, then Germany lends it to Deutsche Bank at zero interest with open terms and they pay the fine. Problem solved.

    Compared to the massive money printing that the US continues to do, and compared to dealing with a $42 trillion dollar disaster, $14 billion is pocket change. Beside that, the US Dollar has become the most valuable thing on earth, more valuable than gold, oil, food, human life, land, or anything else. So the US can print billions of trillions of phoney baloney and get away with it.

  2. Colleen says:

    Is this truly a case where DB is too big to fail? DB does need structural reforms, but for the DoJ to pursue its claim, it knowingly puts the global financial system at risk.

    In one regard it’s a game of chicken, if the DoJ pursues its penalties to the bitter end, the entire global house of cards comes crashing down (and it is indeed a house of cards) and we get world wide chaos on a scale we can’t imagine. IMO they will have to settle for something else, but exactly what the globalist bankers have in mind is beyond me – some reform, some amount of monetary payment. Maybe world wide financial and societal collapse is the goal and the globalists’ plans are finally coming to fruition.


    • Keith says:

      Hello Colleen.

      Definitely a game of chicken only the chickens are our leaders. They refuse to let the markets solve this problem by getting out of the way despite a mountain of evidence that doing so is what’s needed.

      I think refusing to back any bank trading in derivatives is a good start.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  3. Terry Trivett says:

    Great piece!
    Thanks for everything you do to keep us up to date.

    • Keith says:

      You’re very welcome, Terry!

      I appreciate the kind words, as well.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  4. R. J. says:

    Does anyone remember that in 2012 the Justice Department found that HSBC was laundering money to the tune of billions of dollars?

    Loretta Lynch, appointed by Bill Clinton, as U.S. attorney in New York, arranged the work-out (so-called).

    After a pittance of a fine paid by HSBC, no charges were ever brought against the bank, no one was fired, and no one did jail time.

    Even with total global derivative risk far outstripping total GDP, does anyone truly think that anything will change?

    More fake money, backed by nothing except confidence in the USD as the best looking ugly house on the block means that the entire neighborhood is a tinder box set to blow.

    • Keith says:

      Hi RJ.

      There’s always hope that nobody has matches.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  5. Ruth. says:


    Thanks so much for your advice and instructions and education, much needed by many of us.

    Please could you let those of us who have funds like CPFXX (American Century…) know if there’s anything we need to consider because of changes in government regulations beginning on October 4th – (a few days’ time!) . Should we copnsider switching to something else?
    Appreciate your advice on this matter. Ruth

    • Keith says:

      Hello Ruth.

      Excellent question. I don’t see any reason to shift away from holdings like the CPFXX generally speaking just yet. As always, though, the operative word is “yet”. I’ll let you know if and when that changes.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  6. Houyhnhnm says:

    The potential fallout from a major collapse in the derivatives market is very scary to me. A fine, or many fines, not so much. The DOJ and any rational entity trying to impose fines would set up a payment plan to avoid putting the bank in jeopardy. If the burden of paying fines really threatened the bank, it would be allowed to dissolve and disburse its assets. The shock of DB dissolving would crush financial stocks, but it wouldn’t be the end of the global financial system.

    Congratulations on the good short call.


    • Keith says:

      Hello Houyhnhnm.

      As always, a very important point you raise and one, incidentally, I agree with. The markets would force banks to realign and that would put pressure on the entire financial sector. But the sector would survive.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  7. Ken says:

    It seems to me that it is unwise to bet against the central banks, because there is no telling what they will do. Recently I read Resolving Globally Active, Systemically Important, Financial Institutions. In paragraph 11, it mentions “unseured creditors.” Could that be code for depositors?
    I very much enjoy all of your publications. There is so much great info and perspective there.

    • Keith says:

      Hello Ken and thank you for the kind words.

      To your question…yes and no.

      The real spanner in all this is the impact of credit risk from banking operations on unsecured creditors/depositors because that’s what drives deposit insurance and any sort of bailout/guarantee scheme.

      When a big bank trades derivatives they have to pledge collateral to cover the exposure. So that collateral is encumbered – meaning accounted for. However, unsecured creditors don’t have a claim on those same assets if the bank goes belly up.

      Depositors come into play because the more deposits there are on record, the more a bank can leverage/fund other parts of its business. And that, in turn, means that regulators are more likely to view the bank favorably when the next crisis rolls around. It’s why, for example, Goldman Sachs suddenly wants into retail banking.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  8. Sean P. says:

    Hi Keith,
    If I want to purchase SEF, meaning I want to bet banking industry will go down, do I buy call or put option?

  9. Leland Waterman says:

    Hi Keith: It seems that no one has revealed just why DB is being fined 14-billion USD. If the Federal Reserve System allowed US banks to sell defective derivatives from the 2008 mortgage crisis overseas, it seems to me that they attempted to transfer the risks of default outside the United States. I think in this case that DB would have a good case that the unknown risks of default at the time of these purchases would only be known inside the Federal Reserve System itself which would be much harder for DB to determine all by itself since US regulators would be the most informed about the derivative risks. However, very poor management by Federal regulators was the ultimate cause of the 2008 financial crisis. One important consideration for US voters to decide in the upcoming 2016 Election is the fact that Bill Clinton was the originator of the law that required banks and mortgage creators to supply at least 50% of mortgages purchased by Freddy Mac and Sally Mae to be SUBPRIME MORTGAGES. I wish someone would inform Donald Trump and all Republican Congressmen and Senators of this FACT before they cast their votes on November 7th. But finally, DB would have no chance in winning the case in the United States with Loretta Lynch as Chief Justice considering the facts of recent decisions made at the high court.

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