Economics: Dohmen Report, the Latest

Submitted by Sean M.

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Now let me address the question posed in the headline. Contrary to some, we believe the ending will be different than that with Lehman. The ECB (European Central Bank) and German government will not let DB go bankrupt. They will act to bail out DB. There are many methods at their disposal. But it will produce some interesting and exciting moments. Bureaucrats may be too slow with a plan.

If the ECB lends money to DB, with negative interest rates, DB might even receive interest from the ECB for borrowing the money. Yes, the world is upside down. There is also the possibility of a ‘bail in’ where the money of depositors is used to rescue the bank, of course without asking depositors for permission. And a big factor will be Washington. The $14 billion penalty imposed by the DOJ is a part of the immediate problem. The White House will not want to be blamed for a European crisis that will swamp the global markets. The ‘agenda’ is to have a good, calm environment going into the election. Therefore, we expect the US Justice Department to announce that an agreement has been reached, and the penalty will be lowered substantially, perhaps to $7 billion. That will calm the markets. That announcement will be coordinated with Germany’s Prime Minister Angela Merkel that the government will provide any assistance that is required. The ECB will make a similar announcement that it is ready to provide short-term liquidity, as much as is necessary.

And thus, the “crisis” would temporarily be resolved. Of course, the real problems won’t be. The chart of the European Bank Index is very negative. It is still down 89% from the 2007 peak. A break to new bear market lows is likely. That suggests worse is ahead over the next year.

Short-sellers, not only those of DB, must beware of a potential rescue action, which we consider much more likely than a meltdown. The resulting short squeeze should be exciting, providing new opportunities for subscribers to our trading services. We always contemplate, “what could go wrong” with our scenario. Well, in today’s interconnected world, together with the algo-trading outfits where computers make the decisions, there is the small chance that we could see a rapid unraveling before the authorities working on a bailout can act. On August 24 last year, a selling avalanche based on bad news out of China started in Europe. Sellers couldn’t unload all they wanted to in the illiquid European markets. So they waited for the opening of the New York Stock Exchange and started dumping there. In less than 30 minutes, the DJIA was down an incredible 1089 points. But this time, it could be worse, because the problem is more specific. However, we consider the positive outcome more likely right now because it is easy to do.

BREAKING NEWS: After finishing the bulletin, this news item came out: "Deutsche Bank Jumps on Report of $5.4 Billion DOJ Settlement."

Apparently, the situation was considered so serious that Washington decided they had to act before the weekend. That already fulfills one of our forecasts.