 Okay, hello and welcome to episode 106 of the market maker podcast where I'm joined by co-founder Piers Curran and We were going to talk about the Bank of England the Fed You know, it's a major central bank decisions this week But we're gonna park all of that because Deutsche Bank the German Bank is down as much as 15 percent European banks pretty much across the piece. They're down quite aggressively this morning. So I'm gonna focus on that but just before I clicked the record button Piers said to me Wants a little bit of airtime at the start because yeah, so strap in. I don't know what's coming Well, to be honest, I'm feeling a bit nervous today, you know Talking to you in the presence of of greatness Given your, you know, you're you're a new kind of the BBC's New monetary policy expert Anthony Chung live on the BBC yesterday morning Reporting on the Bank of England Nice nice shirt you had on Yeah, for that fresh Literally fresh from the shop half an hour before I didn't realize it was televised. I thought it was a phone call Radio show So I was dressed you have a great face for radio and for podcasting Indeed Hang on what you turned up at the office like quite casual thinking it's on the radio Yeah, yeah, because I was going out that evening with my brother for my birthday So I thought you know what, you know, I'll dress a bit more casually than normal And then yeah, the guy called up Just before saying oh, you're all you're set. You're good to go. I was like he's like yeah on TV. He's on TV and I was like, uh, okay I literally went to the shop next door and thankfully I can't remember the guy's name But he ironed the shirt for me in the shop What a legend Literally did the Superman costume change and then out I came and yeah, that was it. Well, I thought you nailed it What will drop the link in the show notes? Everyone should have a look. I thought you were very good So, yeah, you're gonna be back on there BBC expert Thank you. And actually just mentioned something else there. Hmm. So 26th of March 2023 two days time Mark's a pretty big milestone in the Anthony Chung Life story big birthday, right? Yeah, you know 21 again. Yeah Well, I've got a quiz for you Okay, but you were born almost 40 years ago, right? Almost 23rd of March, I'm sorry, 26th of March 1983 Here's my quiz question What was the S&P 500 trading? Oh on the day you were born So currently trading for context 3916 Literally no idea, but it's gonna be Not in the thousands so I'm gonna go for 620 No, 100 153. Wow So it's up to an a half thousand percent Oh in your in your life doing dad. Why were you not investing in just the ETF tracker S&P baby all the way just he could have put in 10 pounds from the day I was born every month. Oh If you'd have picked the NASDAQ it would have been even the NASDAQ was trading 110 Now it's a now it's at what 20 12 12,600 that's up 11 1,500 percent if you just stuck your dad had stuck a thousand bucks on Now on the day you were born you'd now be worth 11.5 million That's how old you are great question. Then I Question it's moved an investing question for you then. Yeah You have children and they are gonna live probably for the next 90 years Yeah, so Do you think we're gonna look back in 40 years time and go What was the S&P 500 trading in 2023 and everyone will go always probably something as crazy as 4,000 You know what it's plus a very good point. I would say yeah, I mean I mean long term, right in equities have proven to be You know comfortably the act forming asset class, so Why wouldn't it be the same For the next 40 years although there are certain indexes always go back to the FTSE 100 the kind of Kind of prove people wrong on this point because the FTSE 100 index up Well, actually hang on hasn't really moved for 20 years it was kind of trading not too far off where we are now back in the year 2000 So the FTSE 100 index has gone pretty much nowhere But yeah us tech stocks If you were talking like long term like that 50 years How would you feel then about this just transition that's happening the growth of China and Chinese companies It's gonna be it's gonna accelerate tremendously over that period But how do you feel as a Westerner investing in Chinese oriented equities? Given it's a communist country Uh, yeah, I guess you're asking what what kind of Where I'm where are my morals on the kind of spectrum not even that just how do you how comfortable is that investment given the You know like Alibaba for example and Jack Ma. Yeah. Oh, I see a tremendous Story of success to the point where too successful and then all of a sudden you're like It's changed dramatically, but you would always be Surely you'd always have that risk factor. That's not a Thing in the Western world and that doesn't look like it's going to change anytime soon. Yeah, I think investing in Chinese companies has definitely that that kind of Xi Jinping risk if you want to call it in terms of what the Chinese regime might or might not do at any moment That's definitely gone up quite considerably in the last few years. I don't think it was a thing It was only really when he said right gonna change the Constitution and I'm gonna have a third term And basically I'm gonna become the permanent leader and I'm gonna start to kind of really Change You know, well really step up and take control of this country in the way I see fit And so that that's really happened in the last few years, right? And so that is definitely a risk now That the investors have got a factor in yeah, but you know, I'm not sure. I know you see you look back right China Rose to become what it is today You know in the sort of 90s and the noughties. Okay, those were the kind of two decades where it really Got a rifle tire and became this huge economic superpower But that's kind of done now, right? It's now a superpower. I mean, there's plenty of arguments as to why China China's rise might stall One of them beings Xi Jinping and how he takes control but the other one and more importantly the demographics of China So but so it's really about right for the next couple of decades, you know, who's gonna be the who's gonna be the next country? That really kind of steps up and becomes a global force So that's kind of what you've got to think about where do you put your money now? Where'd you stick you $100 for the next 40 years? No might be might be countries like Nigeria, for example You know, I think it's probably an African country that will now be the next in this This kind of super cycle chapter where you've had You know big big economies Expand them and come a global player. So yeah, let me like Nigeria. I can okay Well, I know somewhere where you might not want to park your cash for 50 years Go on Deutsche Bank So let's talk to you think What on earth is going on so they're down 15% and we are just talking about One of the biggest banks in Europe the biggest bank in Germany right now. So yeah Yeah, we've been chatting away on slack all morning and like you I think your first message to me was Kind of seen Deutsche Bank's down 9% and I saw that message like five minutes after you sent it And it was already like 10 and a half percent down by the time I saw it And so I replied 10 and a half and then 12 and now it's Yeah, we're clocking in 14.3 percent down on the day Right now and below 8 euros Yeah, Deutsche Bank's in the crosshairs here and is On the slide. There are I've got a I've got a list of banks that I'm watching And that becomes my red hot barometer for general market sentiment right now because obviously this is a banking Well crisis that we can definitely call it that when you get the likes of credit Swiss, you know Going off the edge, you know that that it is a crisis Whether it becomes a systemic broad based banking crisis, obviously still remains to be seen But you know, so the banking sector is leading sentiment here So I've got a list of banks so Deutsche Bank are definitely the ones in the spotlight right now today It's now 14% then it's in the in order in terms of the biggest downside for European banks It's actually Nordia Bank is next. That's 10% down today. That's the Finnish big Finnish bank Finland that is We've then got next up's commerce bank. So that's the other kind of German You know large bank not as big of Deutsche, but comments banks down 8.4 percent. We've got UBS are down in 6 percent Sock Jen are down 7 percent sock Jen Society general the French Bank So look all these banks are down, you know sharply what I'm really looking for for the afternoon his first Republic Bank Which is the U.S Bank that May well be next right after the SVB and the kind of signature bank failures So first Republic Bank could well be next and they closed yesterday's session 6% down Just about held up above the $12 level 12 dollars was last week's low off the SVB Thing and I would say it's looking like first Republic Bank's share price will open below that $12 level Making new lows and you really want to monitor how quickly that gets going on the downside this afternoon To really kind of shape just how big a kind of risk-off day we might have today But yeah, Deutsche Bank, I mean We were talking about Deutsche Bank last week. So in the in the credit Swiss turmoil, you know it was like right who are the who are the other weak banks who are the other vulnerable banks and Deutsche Bank right up towards the top of that list. Yeah, so that let's talk about Deutsche Bank because there hasn't been one specific headline that's triggered this move and There are some quite clear parallels almost with the journey between Deutsche and Credit Suisse in terms of recent scandals, fines of Very large magnitude over the years. So perhaps give us a bit of a history lesson of Deutsche Bank and why it is kind of seen as a vulnerable banking name Yeah, all right quick. I'll make this quick In 1989 Pivotal moment for Deutsche Bank. That's the banks over 150 years old Right, but in 1989 they made a really key pivot on strategy And they thought right Let's really go after this big investment banking thing because at that point they were Germany's biggest like retail bank Okay, so they said right let's go out. You know, we got we can see these American banks are starting to kind of Form investment arms and look this could generate huge amounts of return So they went ahead and they bought a bank a British merchant bank called Morgan Grenfell. They bought that for 950 million pounds Back in 1989. Okay, and that was that right. Let's go. Let's add an investment banking arm to our business Okay, so that then kind of paved the way for what was then a decade of quite aggressive Expansion on the investment banking side culminating in their big big big play Which was a move into the US and they bought a bank called bankers trust in 1999 They paid six point one billion pounds for that. Okay, and that was like we've arrived in the US We're going to take on the US big boys and actually at one moment in time there in the early noughties They were the biggest bank in the world But the point being is that they were Really aggressive in their expansion into the investment banking side taking lots of risk as all the banks were Pre-financial crisis and it just meant that when the financial crisis hit they were aggressively, you know, really exposed Because of the aggressive nature of their expansion into that more risky investment banking side. Okay Those who have watched the movie the big short Which if you haven't I mean what the hell have you been doing? It's the greatest Finance related movie of all time bar none But anyway in that movie there was a guy called Greg Lipman who was a trader People were better known as Ryan Gosling So the guy Ryan Gosling was playing was it was this big trader Deutsche Bank trader And he very famously went against Deutsche banks. So basically Deutsche Bank were in the business like they were fully wedged into this CDO craze collateralized debt obligations, which was essentially the derivative product that Enabled investors and banks to get very leveraged Exposure so the US mortgage market and These collateral Clatterized debt obligations were basically these derivative products that packaged up lots of mortgage loans And there were different tranches and basically there were cleverly like hiding away the super, you know subprime Super high-risk Mortgage loans in and amongst loads of other loans and no one really knew what they were buying And actually Deutsche will talk about some of the scandals they've had down the years But one of them was miss selling These CDO products not telling people what's in them and what was in them was a Bag of poo basically and as the US housing market began to collapse Well, then it kind of all unraveled right and Deutsche Bank were big in this Field Ryan Gosling his character was actually telling his clients that this is crazy What my bank is doing? This is all gonna implode you should take the opposite side of this trade Oh, yeah, this is when he goes. It's my Kwan. That's right. It's the Chinese gay There's me So anyway, right so this all culminated in the financial crisis and they got absolutely clobbered because they were so kind of Leveraged up now. They just about avoided a government bailout. Okay, so they did not they just about avoided it And then in 2011 we had the eurozone debt crisis, which for European banks was like a double whammy Okay, you're the financial crisis away. Oh nine then the European debt crisis in 20 and 2010 2011 And again Deutsche just about avoided a full-on bailout Okay, but were like properly on their knees then what followed was a series of scandals and backdated fines for shenanigans and so they stuck around Russian money laundering they got done for there was I don't know if people remember But there was this thing around the LIBOR rigging scandal. They got fined. I think it was two and a half billion dollars For their part in that There was stuff around violating us sanctions because they were I know they had a number of clients in Iran and Syria that they shouldn't have been servicing there was Yeah, the miss selling of toxic debt in the crisis and also lots of scandals, right? and they went through this period I'd say between 2007 to 2015 was a sort of eight-year period of decline and You know trying to recover from the crisis getting slapped by these ever bigger fines and then in in 2015 they had a change of leadership this guy John Crian came in to start what was a new direction and a new kind of restructuring plan He didn't get on very well and then in 2018 Christian sewing came in as the boss and he was previously, you know, like a lifetime employee at Deutsche But on the private and the commercial banking side and it was his job to go, right? Let's Let's properly unwind and exit all that investment banking strategy that we tried to do that almost killed us Unless pivot back to what we're good at let's pivot back to our roots in Germany Retail and our commercial banking and then also they've got a big wealth management and asset management division And it's like let's try and restructure back to that. Let's cut a huge amount of costs They were looking to try and cut 6 billion euros of costs per year You know reducing the workforce or the rest of it and really Before all this has kicked off like SVB you would say they were back on the up Hmm, they had been through this multi multi-year Restructuring plan and it was working. Yeah, some of their earnings reports recently have been solid Yeah, sure really back like really turned the corner and had come out the other side But You know people don't forget right people have Memories of the crisis and so when you have a new crisis, it's like right. Well, who do I not trust? Well, I don't trust Those guys that were naughty in the past. Yeah, so that I mean is that all this literally comes down to then It's like we talked about before it's just this invisible thing of trust and when trust is lost And everyone heads for the door and they people see that so what's happened this week, right? I think You know you cuz you could argue well Why didn't Deutsche get hammered on their share price off the back of the SVB saga and the credit Swiss cycle? Well, they did I mean the share price has been hammered, but not like it today It's like right Deutsche Bank and now the one that everyone's looking at so why has that happened? I'd say in a way Janet Yellen is maybe a little bit responsible for this I mean you were watching Well, I guess this was on Wednesday night. It might have got lost a bit in the kind of Fed Meeting yeah, so yeah, the I shared a post if you want to have a look just go on my LinkedIn account It's one of the recent posts. I did there was this great chart of the US equity market the S&P it rallied So you had this kind of dovish hikes scenario from Powell markets were like, whoo the relief up we go And then Janet comes out speaking At the same time. Yeah, and just absolutely crushed the regional banks. They were down like 15 to 20% of the close Yeah, so what she said was She basically so in the US you've got this deposit insurance up to 250 thousand dollars, right and there's been this flambor of Noise about right we really you know you should increase the ceiling on that and on Wednesday She said at the moment we have no plans to increase the ceiling on that deposit insurance Okay, so then yeah kickstart another big wave of selling for these regional US banks That's because people are going to pull their money out right if you've got more than 250 $1000 in your bank account then you're right you're going to pull it out. Why would you not so? So this is kind of triggered another little bit of a wave of deposit withdrawal And you know in the end it's the deposits are getting withdrawn faster from the banks that are vulnerable So what's happened this week last couple of days Deutsche Bank deposit withdrawals, right? And that credit the credit default swap on Deutsche Bank So that's the derivative product that essentially buys you insurance against that company Defaulting and going bankrupt and that's kind of spiked aggressively And that's kind of kickstarted then this big move to the downside on their share price The thing is it's like a big boulder right and if you just Tip it off the top of the mountain and it just starts to roll It is very very very very hard to stop that boulder. Go and ask credit Swiss Yeah, I was just having a quick look at the S&P right now as we're talking the I mean the futures is It's low So it's going to be such an interesting day and how we finish here and we've already gone through yesterday's low so technically it's Kind of ripe for some downside and I just think North America is going to come in and they're already dealing with that regional spillover You've just talked about and now you throw in this European drama That's all they need Yeah, I guess the next thing to say is I mean who's gonna Obviously credit Swiss right you you had UBS another monster giant Swiss bank and fine that deal Well, I've been agreed in principle. I guess the deal won't get done until later in the year. These things take a lot of time, but um Unfortunately, Deutsche do not have the same Potential rescuer right there isn't there isn't a second monster giant German bank similar size to Deutsche so We're in a slightly different situation here, I think and I would say that if this did Get out of control and I'm not quite sure yet can't make my mind up with credit Swiss I think it was pretty easy to predict What was gonna happen? I that the dead right they're gonna have to get taken over here I think with Deutsche. It's just a little bit hard. I'm not a certain about that But as I said the boulder is rolling So I think the only kind of obvious option here would be the German government Basically steps in bails them out by zequity a little bit like the UK government did with Royal Bank of Scotland and Lloyd's Bank back in the crisis in 08 So it that's anything I can really think of I can't see the Germans Allowing a foreign bank to come in and be a rescuer So that would be my sense here, but yeah, we'll see yeah on that point I was just having a quick look so it was back in 2016 Germany was drawing up plans to rescue Deutsche Bank and that was at the time you mentioned about this two and a half billion fine that started At to the tune of 14 billion, right? I remember this quite clearly now. It's coming back to me. What happened was They wanted to the US government wanted to use them as the kind of Hazard of what would you know the poster child of everything that's wrong in finance? We're gonna put this whopping fine on you and it was enough to basically do serious damage to them so that actually This is a really interesting thing about actually a lot of these financial penalties that happen because the politicians do that because it's in their agenda To make those sorts of noises So that satisfies Public opinion particularly in the aftermath quite raw of a financial crisis But in the end when these things get paid, which is often several years later the feet if the finest Tiny comparative to where it started but by then the political narrative has moved on It served its purpose for the politician and the bank just goes on its merry old way until really kind of what's happening now But the second part of this is at the time then There's already been plans being made in 2016 about a year German government intervention So just having a look here on this old Reuters article talking from the disite German weekly at the time And they were drawing up these plans if the bank was unable to raise capital itself to pay for costly litigation And the draft plan would be that Deutsche Bank would be enabled to sell assets to other lenders at prices That would ease the strain on the lender and not put an additional burden on the bank and in an extreme in emergency The German government would even offer to take a direct stake of 25% Right is what they were saying at the time. So yeah, exactly as you you were alluding to with the UK example Yeah, time to dust off back 2016 action plan I guess the one thing is is that You know UBS is transaction with credit Suisse wasn't Out of the blue, right? Because the demise had been for some time. Yeah, so The ability to be able to just turn around and have this deal in principle by our weekend was because all of that work kind of a lot of it had been done so be interesting because Like you said the the playbooks probably already largely there with Deutsche if the government do need to do something so with that being said then if You know, this isn't rocket science. We're talking about if then you know that well, then Deutsche is too big to fail Yeah, what's the problem? What you mean? What's the problem? Why why are people selling Deutsche Bank shares? So it's surely like let's just ride the wave down in this current hysteria But Deutsche is not going anywhere. So Do it wasn't this the 2016 conversation we were having in the office at the time when they were dropping 10 euros yeah Yeah, I mean I guess I Don't know we you know in theory what we said is correct, right the government will step in and fail the main but I mean, yeah, I was gonna say there's always a risk that they don't but but actually I'm not really sure there is a risk that they would as you say, they're Systemically important. So yeah, it's just that I guess Thinking about like Lloyds and RBS, you know, yes, the government stepped in I mean the government bought 80% of RBS and I think 40% of Lloyds I think it was an equity point of view, but then it took I Mean it took I mean even like a decade For the government to actually break even on that trade Okay So the point is that yes, the government might come in and halt the slide That doesn't mean then there's gonna be a rebound right and where and where's the slide gonna stop? You know, where does the share price go to? I mean, it's trading right now at 80 euros, right? So you could say right. I'm gonna buy Deutsche Bank shares because the government's gonna come in and rescue it But the share price could be two euros by the end of the day And you've lost 75% of your money and then the government comes in and fine It stays at two euros and is it two euros for the next few years, right? I mean Yeah, okay, you'd be sniffing around at two euros. I know your game You'll see but look we've got what are we now 12 10 past 12, right? So the US the New York Stock Exchange is going to open at 130 Okay, so we've got one hour and 20 minutes and that first Republic Bank share price Telling you that is the key here. What happens to that share price in this session? We'll tell you or point towards whether Deutsche Bank is going to hit a low here at eight euros and Stabilize or whether there's another Another wave down and I think there might be another wave down. Yeah this afternoon Okay Well on that somber note We'll we'll look to wrap and one thing I'm gonna ask for everyone who's listening is if you aren't already a subscriber To this podcast then please do hit that subscribe button or follow button depending on your platform There's normally a bell icon that you can hit which means you'll get a notification every time a new episode comes out every week I'm working on a current series a three-part series with a former MD from JP Morgan at the moment Which I'm gonna have running in parallel with our weekly chats as well So make sure you don't miss out on those but with that Pierce. Thanks very much Cheers have a good weekend and happy birthday the big four zero All right Seriously old Anyway, enjoy take care everyone