What Deutsche Bank Left Off Its List of 30 Market Risks

Volatility and risk are of primary concern to advisors and investors in 2019.

Deutsche Bank recently chimed in on these issues, releasing what it sees as the 30 primary risks for the New Year: 

1. Algo-driven, risk parity-driven fire sale in equities and credit continues
2. Slowing growth in China and Europe slowing down the U.S. economy
3. Slowing growth in China and Europe triggering significant U.S. dollar appreciation
4. Tailing U.S. Treasury auctions and/or declining bid-to-cover ratios
5. Increased U.S. T-bill issuance continues to push 3-month Libor-Overnight Index Saw wider
6. Increased U.S. Treasury issuance pulls dollar out of investment-grade credit and equities
7. Higher hedging costs continue to lower European and Japanese appetite for U.S. credit
8. European Central Bank (ECB) quantitative-easing ending means less global demand for fixed income
9. Bank of Japan (BOJ) QE slowing means less global demand for fixed income
10. U.S. 2/10-year Treasury yield curve inversion has negative impact on confidence in credit and equity markets
11. U.S. corporate tax cuts continue to boost buybacks but not capital expenditures
12. Impact of potential U.S. government shutdown on markets
13. No deal Brexit in March could be negative for markets
14. No deal Brexit in March could be negative for U.K. economy and hence also European economy
15. U.S.-China trade war escalates further
16. U.S.-Europe trade war escalates further
17. Fed decides to ignore accelerating trade growth (this could threaten profit margins)
18. Fed decides to ignore accelerating wage growth (this could un-anchor inflation expectations)
19. Escalation of yellow-vest protests in France
20. European Parliament elections
21. Continued inflation of housing bubble in Germany
22. Italian fiscal situation
23. House price crash in Australia and Canada
24. Chinese economy less and less responsive to stimulus
25. China’s current account deficit arrives faster than consensus expects
26. Japanese growth can get hit by China slowdown
27. Potential political changes in India, Argentina, South Africa, and Indonesia
28. Continued increase in global inequality
29. Fed and ECB re-start QE and risky assets don’t rally
30. Monetary and fiscal policy are out of ammunition and the world experiences a Minsky moment

The Deutsche Bank list is pretty comprehensive.

However, after reading through the various scenarios that can potentially trigger a black swan event, I realized that the author of the article — Torsten Slok, the bank’s chief international economist — had neglected to point out the elephant in the room: the possible collapse of Deutsche Bank.

The stock price for Deutsche Bank recently broke the $8 mark and is looking eerily similar to Lehman Brothers. It holds a gargantuan quantity of derivatives, which have multiple layers of derivatives backing primary derivatives, reminiscent of the 2008 derivative debacle.  

In June, the Wall Street Journal published an article, “Deutsche Bank Fails Fed’s Stress Test,” citing “material weakness in capital planning” and the lender falling short in capabilities to forecast revenues and losses in key business lines and was deficient in risk-management controls.  

Derivatives’ Danger

There is another red flag that concerns Deutsche Bank, according to Simon Paige, a writer for The Data Driven Investor who also works for the emerging long/short crypto-currency investing group Bitcoin Enhanced. As a trader Paige works with cautioned (via email): “Be mindful of anything you do that has Deutsche Bank as counterparty — the largest derivative counterparty in the market and not much capital to back it up.”