The Black Swan Matters
$DB, $GLD, $SLV
Almost 10 years in the making the fate of one of Europe’s most important financial institutions may be sealed.
After a sequence of scandals, poor decisions, and unfortunate events, Frankfurt-based Deutsche Bank (NYSE:DB) shares are now down -48% on the year to 12.60, which is a record-setting low.
Even more stunning is the long-term view of the German institution’s downward spiral.
Now the Key Q: What happens to Deutsche Bank’s derivative book, which has a notional value of Euro 52-T (US$58.24-T) , if the bank is insolvent?
The Big Q: Is Deutsche Bank (NYSE:DB) a Black Swan for global markets?
A Black Swan: A black swan is an event or occurrence that deviates beyond what is normally expected of a situation and is extremely difficult to predict.
Black swan events are typically random and are unexpected.
The idea of a black swan event was pioneered by the financial professional turned writer Nassim Nicholas Taleb after the results of the Y 2008 financial crisis.
Professor Taleb argued that black swan events are impossible to predict yet have catastrophic ramifications. Therefore, it is important for people to always assume a black swan event is a possibility, whatever it may be, and to plan accordingly. He also used the Y 2008 financial crisis and the idea of black swan events to point out if a broken system is allowed to fail, it actually strengthens it against the catastrophe of future black swan events.
Prof. Taleb spent 21 years on Wall Street as a quant trader, developing the computer models for financial institutions.
Since that time, he has written a long-form essay broken into three books: “The Black Swan: The Impact of the Highly Improbable,” “Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets” and “Antifragile: Things That Gain from Disorder.” He has been a distinguished professor of risk engineering at NYU’s School of Engineering and written over 45 peer-reviewed papers.
Some examples of past Black Swan events
The financial crash of the US housing market during the Y 2008 crisis is one of the most recent and well-known black swan events as of Y 2016. The effect of the crash was catastrophic and global, and only a few outliers were able to predict it happening.
Also, in Y 2008, Zimbabwe had the worst case of hyperinflation in the 21st Century with a peak inflation rate of more than 79.6-B%. An inflation level of that amount is nearly impossible to predict and can easily ruin a country financially.
The dot-com bubble of Y 2001 is another black swan event that has similarities to the Y 2008 financial crisis.
America was enjoying rapid economic growth and increases in private wealth before the economy catastrophically collapsed. Since the Internet was at its infancy in terms of commercial use, various investment funds were investing in technology companies with inflated valuations and no market traction. When these companies folded, the funds were hit hard, and the downside risk was passed onto the investors. The digital frontier was new, and therefore it was nearly impossible to predict the collapse.
As another example, the previously successful hedge fund Long Term Capital Management (LTCM) was driven to ground in Y 1998 as a result of the ripple effect caused by the Russian government’s debt default, something the company’s computer models could not have predicted.
Notably Deutsche Bank (NYSE:DB) owns $25-T in OTC swaps with the Central banks and other major banks, so expect a chain of derivative failures for the $1.6-Q derivative market if it were to fail.
Deutsche Bank cannot break down by itself. It would result in the complete breakdown of the European Monetary Union
In the past and perhaps today as well. when a big bank fails, they are merged them with another big bank.
With the major uncertainty in focus, see massive amounts of money moving into Gold and Gold miners.A big bank failure and fear of contagion is what will drive Gold towards and past its all time high and in to the 2,000+ zone..
Long term, Silver to $100 and Gold to $5,000 +
Latest posts by Paul Ebeling (see all)
- Wall Street’s Top Analysts Upgrades, Downgrades & Initiations - December 6, 2016
- Gold Futures Saw 10-month Lows and Bounced - December 5, 2016
- Ferrari’s (NYSE:RACE) F12-based Supercar, the SP275 RW Competizione - December 5, 2016