A Stunning Admission From Deutsche Bank Why A Shock Is Needed To Collapse The Market, And Force A Real Panic

Tyler Durden's picture

In what may be some of the best, and most lucid, writing on everyone's favorite topic, namely "what happens next" in the evolution of the financial system, Deutsche Bank's Dominic Konstam, takes a look at the current dead-end monetary situation, and concludes that in order for the system to transition from the current state of financial repression, which has made a mockery of all asset values due to central bank intervention, to a semi-credible system driven by fiscal stimulus, there will have to be a crash, one which jolts policymakers out of their stupor that all is well simply because stocks are at all time highs.

And since a legitimate fiscal stimulus is what is needed to re-ignite the economy, US and global GDP will continue declining, even as stocks keep rising to new all time highs, not on fundamentals (which are all pointing in the opposite direction), but due to even more central bank intervention and financial repression, thus a Catch 22, which ultimately - according to DB - ends in the only possible way: with a major crash. 

As Konstam puts it, "the status quo could continue for several years yet – if nothing “breaks” in the system" but "without an external economic shock it is hard to see policymakers being prepared to take dramatic, fiscal action to jumpstart the global economy and bounce it out of a financial repression defined by low and falling real yields to one that at least initially is defined by rising nominal yields through higher inflation expectations."

As for the conclusion, or why a financial shock is long overdue, KOnstam says that "ironically the shock that is needed would require a collapse in risk assets for policymakers to then really panic and attempt dramatic fiscal stimulus. "

This is critical - and inevitable - as only a shock can lead to an "unwind of the falling yield/rising equity market where all financial assets trade badly."

In other words the end of financial repression will see price levels fall so that yields once again look attractive, or said otherwise, there will be a demand for Treasuries, even without the perpetual implicit backstop of central bank purchases.

For such a move to be sustainable itself requires the economic fundamentals to shift – inflation needs to be more secure against an underlying backdrop of robust real growth. Most people now understand that this is not a job for monetary policy alone. Yet the current reach for yield simply prolongs the status quo for policy disappointment.

Which brings us full circle: recall that over the past few months virtually every prominent investment bank, from JPMorgan to Goldman Sachs have warned clients that a selloff is coming. Now, Deutsche Bank has taken it to a whole new level, explaining why a financial crash has to happen to purge the system from the toxic aftereffects of 7 years of financial repression, and to kickstart a fiscal stimulus that will not happen unless markets tumble in the first place.

And while Konstam's line of reasoning is absolutely correct, we doubt just how his employer would look upon a market plunge that wipes out 30%, 40%, or even 50% of global equity values: would Deutsche Bank even survive such a crash? As such we doubt that the strategist's analysis and forecast, correct as it may be, will be endorsed by his employer, even if by now it is clear to all that only a major crash, i.e. a global reset, can kick start the world out of its zombie-like, centrally-planned existence, into the long overdue phase of whatever it is that comes next.

* * *

Below is Konstam's full must read analysis:

Stocks must fall for yields to rise – but unlikely to happen anytime soon

It is pretty much understood that we are in full on financial repression mode, as witnessed by super benign core yields lead by lower real yields with more recently the further downward drift in euro peripheral yields, including the UK. The new high in equities is consistent with our view of financial repression that necessarily has yield returns on all assets being incrementally replaced by price returns – stretched relative valuations follow already increasingly stretched absolute valuations. The last round of economic data does little to suggest any change in this dynamic. As we highlighted last week the conundrum for the US is how an overly strong labor market without meaningful wage inflation resolves itself against markedly weak productivity data with a GDP cake that if anything seems to be stagnating.

With the current status quo, it is clear to us that US yields if anything are still too high – we think they are near the upper bound of a range that pivots closer to 1.25 percent with real yields in particular too high. This probably still reflects a reluctance of investors to get meaningfully long the market although much of the short base has been covered and this in turn reflects a still fairly strong consensus on the economics front that the labor market strength can still resolve itself through higher wages and a virtuous circle of rising demand and productivity – a scenario we would not rule out but not our central view.

More importantly however are what prospects there may be to jolt us out of this financial repression and to what extent regardless of proactive policy, is there a natural end to financial repression – at some point does something have to break in the system. On the former the most likely candidate is obviously some form of global fiscal stimulus. Despite optimism around this in early July we have not exactly had the green light on either helicopter money in Japan or Italian bank bailout. It is still too early to call the US election and stimulus prospects here but the general sense is that it is still difficult to sense the urgency when equities make new highs. Policymakers aren’t used to dealing with financial repression and that unfortunately is one of the defining characteristics of stagnation.

We suspect the fall will be defined by markets looking for dramatic policy news that somehow “responds” to super low bond yields and underwrites rising risk asset prices but only to be disappointed precisely because policymakers don’t bide the urgency. The result is that yields can fall still further even with risk assets still trading well – hanging onto their relative valuation rationale.

The failure of a policy response allows for more financial repression. We are anyway already beyond the point of preemptive policy since preemption is supposed to recognize and avoid looming problems beforehand. It is clear that the nature of those problems are already material including squeezed interest margins for banks, insurance solvency issues etc. But to be fair, the lack of a fiscal response itself bears witness to the perceived fiscal stress during the 2008 crisis and the need to insulate taxpayers. Additional fiscal burdens can be thought of as a variant of financial repression where future inflation and negative real rates do the redistribution as opposed to the structure of the fiscal regime. Helicopter money fuses financial repression from the money side with the fiscal response in a potentially dramatic way whereby the would be spenders get to spend a lot more directly at the expense of the ongoing savers. And while it may have its own political hurdles that ultimately are insurmountable, it offers a perfectly reasonable alternative equilibrium option where the goal is to raise the price level as well as improve the real growth outlook by overcoming excess savings. The fusion of fiscal with monetary policy can also be appreciated in the context of the fiscal theory of price where monetary policy can offer infinite paths for money growth and potential nominal growth but fiscal policy effectively selects which path is realized based on an equilibrium condition that the NPV of all future budget deficits needs to sum to zero.

* * *

The status quo could continue for several years yet – if nothing “breaks” in the system. There are ways of course for either avoiding breaks or at least patching them – mitigating the impact of negative rates on banks is now in vogue with subsidized bank loans for on lending. And we may yet see soft forms of bank bailout still being allowed. This is similar to the use of alternative yield curves for discounting insurance liabilities.

The conclusion is that without an external economic shock it is hard to see policymakers being prepared to take dramatic, fiscal action to jumpstart the global economy and bounce it out of a financial repression defined by low and falling real yields to one that at least initially is defined by rising nominal yields through higher inflation expectations. Ironically the shock that is needed would require a collapse in risk assets for policymakers to then really panic and attempt dramatic fiscal stimulus.

The logic would also fit with the same correlation structure for financial assets - an unwind of the falling yield/rising equity market where all financial assets trade badly. In other words the end of financial repression will see price levels fall so that yields once again look attractive. For such a move to be sustainable itself requires the economic fundamentals to shift – inflation needs to be more secure against an underlying backdrop of robust real growth. Most people now understand that this is not a job for monetary policy alone. Yet the current reach for yield simply prolongs the status quo for policy disappointment.

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Stackers's picture

Well thats about the worst thing that could happen. Is Konstam unware of the trillions in debt already accumilated ? Is he unaware that a normilization of rates at current borrowing requirements would bankrupt every western nation ? Is he unware of the amount of short term low interest debt that would have to rolled over at much higher rates ?

 

Something BIG is going to break when things try to "normalize"

SHEEPFUKKER's picture

Every western nation is already bankrupt. The question is when/if becoming more bankrupt matters in a fiat world.

knukles's picture

When are these Stupid Fucks going to Realize that we're in a Liquidity Trap in the midst of the greatest fiscal stimuli Ever.
The Global Economies are Collapsing because of greed, mismanagement, theft, fraud, inequities, too high taxation and regulation... whatever.

 

A Return to Health has ZIPOLA to do with Additional Fiscal Stimulus.
Assholes
Keep up the illusions

Here2Go's picture
Here2Go (not verified) knukles Aug 13, 2016 2:23 PM

 

<--- Short DB & profit along with Georgy Schwartz

<--- keep the charade alive

 

CONUNDRUM of the year (& yes, the 2016 POTUS election is NOT a conundrum ~ GIANT METEOR 2016)

 

~~~

@knuck

 

"A Return to Health has ZIPOLA to do with Additional Fiscal Stimulus.
Assholes
Keep up the illusions"

 

Yeah but, (twin sons), Joshua & Solomon's bar mitzvah's are next week & I've already hired the most expensive clown 4 the party... Can't this all just wait until after the RH~YK break?

 

 

The Merovingian's picture

So let me get this straight .... we need a major collapse so that we can let these same shitheads stay in charge do do the same shit all over again. Hmmm .... call me crazy, but I think his guy's plan has problem. As in Houston we have a problem, kind of problem.

Fuck, any plan that does NOT involve guillotines with a complete eradication of the existing elitist backed financial and political leadership is NOT a plan.

I admit, I have had a couple Jameson's ...... Fucking sue me ..

Keyser's picture

Funny how there is no mention of DB's $75+ trillion derivatives book... Of course we want more liquidity to fund our fraudulent bullshit, let's point the finger elsewhere... This will all end in tears as the DB top brass scurries away with their ill gotten gains... Time to take a chapter out of the ISIS playbook, start lopping off the heads of bankers, then we will see real change... 

DavidC's picture

knukles,
100% spot on.

NONE of these academic fuckwits (for that's what they are, NOTHING other than academic 'experience' and 'models') understand biological or natural systems which ALL go though cycles. Exponential growth NEVER carries on indefinitely.

Instead of MANAGING the cyclical downturn and cleaning out the system all that's happened is a doubling down. The ultimate crash is now going to be one to behold.

DavidC

GreatUncle's picture

7 years to climb a mountain ...

You get to the top and now have to come down.

Do you walk down for 7 years or jump.

Then as you hit what was thought to be ground zero a fucking great hole appears the Lehman kind and now you fall again.

wildbad's picture

right.."policy"....maybe if the policy had been sound money which was not confined to the mega-players and banksters.  maybe if the debt bomb had not been inflating over our grandchildrens' heads for the past X years.

 

aint no 'policy' gonna fix dead broke and over the horizon debt.  only a 'reset' cna fix that.

 

reset means war because no one ( country or its politician and controllers) will want to be on the hook for this one.  the banksters and elites have been converting you children's legacy into private property for themselves in the hopes that WHEN not IF the 'reset' happens they can remain offshore somewhere and wait till the smoke clears and the guilotins are stashed back in the closets.  won't happen.

 

the post 'reset' job boom will be in revenge tribunals.  they know this and this is why I am tipping that the big event will include EMP weapons to destroy electonic lists.  keep some hard drives with the traitors data in a faraday cage next to your compass and bullets

delacroix's picture

isn't fiscal stimulus a form of intervention ?

omniversling's picture

"without an external economic shock it is hard to see policymakers being prepared to take dramatic, fiscal action to jumpstart the global economy"

"Further, the process of transformation, even if it brings revolutionary change, is likely to be a long one, absent some catastrophic and catalyzing event – like a new Pearl Harbor". PNAC

Or is it just me?

Chimp with AK-47 https://www.youtube.com/watch?v=6Vpuh6q2O_c
Kagemusho's picture

Good thing I checked the comments before I said the exact same thing. The Elites always telegraph their ploys, if only to tweak the noses of those who are awake and aware of them.

Mustafa Kemal's picture

Well, its a good thing we dont have to worry about any shocks!

mvsjcl's picture

That infamous "Pearl Harbor" quote came to my mind, too.

pliny the longer's picture

r u sir speaking of bankrupter-er? 

Dirtnapper's picture

Less he is calling for the Great Reset.

 

GUS100CORRINA's picture

As many have noted, the western nations are bankrupt. Everyone is in denial.

See following website: http://demonocracy.info/

I have to agree with this article ... we need a crisis to wake-up and have a revolution for righteousness and truth in our streets again.

A lot to clean-up ... but by GOD's grace He will lend us a hand and provide some much needed wisdom.

The coming months are going to be a challenge for all.

Manipulism's picture

This shit is not Gods fucking business.

GUS100CORRINA's picture

Manipulism ... Sorry to break the bad news to you ... Everything is the God of the Bible's business including your next breath.

So be thankful for a GOD who loves you and sent his only son on the Cross to die for you. His name is Jesus Christ.

So be of good cheer ... better days are coming.

Reverend Galileo's picture

God works through people. It's up to us to become the wisdom we need to be. There is no magic "God" out there to help us. It has to come from within, from the gifts that God gave us to work with. It's up to each one of us indiviudually, to choose to use the gifts wisely, to act with integrity, respect, in good conscience. God, creation, gave us all we need, plus the free will to choose to be creative or destructive. We are at a point, I think, where we must choose wisely or we will destroy humanity and possibly the planet. Or, we need a thing known as a miracle.

doctor10's picture

the "problem" is the policymakers themselves. Too few of them relative to population.

Were the EU broken apart and the 27 member nations each trying different solutions-well we'd at least be a lot farther down the road to a potential solution than merely sitting around waiting for Brussels and the Moar Woar nation to find their asses with both hands...

Killdo's picture

psychopathic kleptocrats like very centralized structures because they are easier to control/bribe

TRN's picture

The World faces the dilemma of the Greeks: take the debt medicine all at once or drag it out for an indeterminate amount of time and hope for the best. We can see from the developments in Greece how the second option is working out.

Arnold's picture

Not that I'm asking for fair.....

But that punishes we oldsters that took servicible debt and faithfully repaid .

Reward the criminals?

Fuzzy logic at best.

Unservicable debt should be your millstone, not mine.

sun tzu's picture

The central banks are stock market driven.

Arnold's picture

'The (shareholders and COO s of) central banks are stock market driven.'

 

Tightened it up for you.

I know, same old same old.

When did you want the bill?

adonisdemilo's picture

There is most certainly a shock coming, and you, Duchebank could well be the insolvent numpties that sets it off.

Duc888's picture

 

 

Dooshbank is so fucking insolvent they can't even splinter apart and "save" a few sections.  They're the fucking poster boi of Euro-peon insolvency, much like the Fed is here...

Dick Buttkiss's picture

"Euro-peon": good one.

The equivalent would be Amero-peon, of which there are at least as many.

In any case, peeon the global money and banking cabal, and shiton the elites behind it all.

Dragon HAwk's picture

Debt is money, you ever hear of drowning in money? Well that's what is going to happen we are going to drown in debt.

  Gold Doesn't float but it will be your Life preserver,  cold is hot so to speak

 

 

ebworthen's picture

Time for a debt jubilee for the People!

Rhal's picture

A debt jubilee is the biggest solution. It's inevitable, but I don't see them doing that yet. They'll wait until its all broken.

I think they'll try basic income first; quantatative easing, but from the bottom up. That would fix the system for a while, but break the family values that built our culture originally. The final winners will be families who still work while taking that free basic money and invest.

 

ElectroGravitic's picture

Re: "they'll try basic income first"

 

The stolen wealth must be returned. All of it; returned to the individuals whose labor produced the wealth. $2,000 Trillion total, or about $285K for each person on the planet. If you're in the top 1%, this won't amount to a hill of beans; if you're poor, this will change your life. Feed it in at the bottom and let it trickle up. If it migrates up to the top again; circulate it back in at the bottom. To have an economy, a good portion of this wealth must circulate.  Right now, 99% of it is hidden at the top, causing stagnation.

https://www.youtube.com/watch?v=9TH6Wh3z9uw

Secret Weapon's picture

Sorry. To paraphrase Mr. Carlin: It is a big club and you and I are not in it.  The "jubilee will be for the banks and corps - not for the 99%.

knukles's picture

How's that whole EU thing workin' out for you guys?
Miss UK, yet?

RawPawg's picture

to fix the problem

first,one must admit there's a problem

i learnt that from my yrs an an alcoholic..now 8 yrs sober(new addiction..Silver) 

knukles's picture

Congrats.  Keep trudging the road of happy destiny.

Dirtnapper's picture

But his solution will pop the Derivative Market and that is something I doubt he wants to happen.

 

kenny500c's picture

If stocks were to crash Treasury yields would head down to record levels.

Of course, sometime in the future hyperinflation will quickly erode the value of the dollar and nobody will want to own bonds.

But not now.

nmb's picture
nmb (not verified) Aug 13, 2016 2:15 PM

Get ready, they know that their time has come and they can do nothing about it. Deutsche Bank collapse is close and will make the Lehman collapse look like a walk in the park on a shiny day.

Consuelo's picture

 

 

 Stunning how these banking types are completely wrapped around the axle of their precious markets, when the 'shock that refreshes' is right at their doorstep in Ukraine and the South China Sea.  Deutche Bank or not, War is coming first.

 

 

 

omniversling's picture

And even if that's avoided, the TechnoGULAGracy that's approaching is hardcore. Excellent interview with Patrick Wood by Richard Grove. Patrick Wood: Technocracy Rising Interview (Part 1 of 3) https://www.youtube.com/watch?v=wNkDiBOO4H0

Grove's work is very steady, well researched, and logical. Great resource: https://tragedyandhope.com/contact/biography-and-resume/

Also check www.level9news.com for updates on the AI net encircling us. Minority report is now.

silverer's picture

"...attempt dramatic fiscal stimulus." I thought they already did that with QE? Or an "external economic shock"? Nuclear war might fit the bill. So then vote for Hillary? Things are getting damned murky out there.