Best Weekend Ever

In Friday’s Markets and Money, I asked whether you have to win one to lose one. After witnessing two momentous grand finals on the weekend, the answer to that is an emphatic ‘no’.

Saturday’s AFL grand final was an amazing spectacle. There is no better sporting stadium in the world than the MCG when it is full. On Saturday, it was full of screaming Bulldogs fans, and they got their team home.

The parallels between Saturday’s game and Sunday’s NRL Grand Final were amazing. Two teams — the Bulldogs and the Sharks — were underdogs. The other two — the Swans and the Storm — were strong favourites. The Bulldogs hadn’t won a premiership in over 60 years. The Sharks had never won one. The Swans and the Storm, on the other hand, are always around in September, and both won their respective competitions in 2012.

Both the Bulldogs and the Sharks fielded young sides with relatively inexperienced coaches. But it’s amazing what belief and desire can do for you in big games. The Dogs hardly missed an opportunity, and just outran the Swans towards the end of the game. It was one of the best grand final wins I have ever seen.

The Sharks, too, hardly made a mistake. Their completion rate was probably the best it has been all year. But the Storm were heroic. They nearly snatched the game in the dying seconds.

My guess is that their respective communities got them over the line. There was a lot of love and emotion coming from the western suburbs of Melbourne, as well as the Shire in southern Sydney. When the final combatants are so evenly matched, this groundswell of support turns into a winning advantage.

And so that capped off one of Australia’s great sporting weekends. My apologies if you’re not into either code. But as someone who has lived in both Sydney and Melbourne and loves both games…well, it just doesn’t get any better.

But let’s get back to our beat — money and finance — as soulless as it may feel in comparison.

Don’t expect a 2008-style meltdown anytime soon

Markets recovered on Friday thanks to a timely rumour that the troubled Deutsche Bank will settle with the US Department of Justice (DoJ) for a more favourable penalty. The DoJ originally fined Deutsche US$14 billion for dodginess over the selling of mortgage backed securities, but the final figure could be as low as US$5.4 billion.

This takes a bit of pressure off the bank in the short term, but, beyond a few days, questions are likely to linger over the bank’s liquidity and solvency.

As an aside, don’t you think it’s funny that banks are about the only business that pay multi-billion dollar fines without a single criminal prosecution? That is, ‘the bank’ has clearly done wrong and must pay a massive fee to stay in business, but no one in the bank is responsible for the wrongdoing.

Seriously, what a business model!

Anyway, the lower than anticipated fine for Deutsche saw the shares stage a big rally on Friday. Global markets all turned positive on the news. That sets the stage for a decent rally for the Aussie market today. But with NSW and QLD enjoying a public holiday, volumes will be light. It will be interesting to see whether the rally extends into afternoon trading.

Because, as I said, there will still be question marks over Deutsche. The shares have been under pressure for some time; it’s not just about the DoJ fine.

You can always tell when a company is in real trouble, especially a bank. Management comes out making statements about how strong the capital position is, and how it’s the fault of speculators that the share price is so low, not the company itself.

This irony wasn’t lost on one German politician over the weekend. As the Financial Times reports:

Sigmar Gabriel, leader of the centre-left social democrats and Germany’s economics minister, took aim at a memo Mr Cryan sent to Deutsche staff last week after its shares plunged to 30-year lows. In it, he blamed “forces in the market” that were trying to destabilise the bank.

“I didn’t know whether I should laugh or be furious that a bank which turned speculation into a business model now declares itself the victim of speculators,” Mr Gabriel told reporters. “I’m really worried about the people employed at Deutsche Bank.”

When you start blaming ‘speculators’, you know you’re in a spot of bother.

Will Deutsche go down, will it survive, or will the German government rescue it?

No one knows the answer to that. But I’ll take a stab and say that, if it was to face bankruptcy, the German government, together with the European Central Bank, would backstop it and ensure there wasn’t a destabilising run on the bank.

The issue with bank runs is that as soon as the market feels that Deutsche is a goner, it will turn its attention to other banks or financial players that are exposed to it. In Deutsche’s case, it has trillions of dollars of exposure in the derivatives market.

This means it helps other financial institutions manage risk by managing their derivatives exposure. This can be interest rate risk, currency risk, or whatever.

If Deutsche ‘collapsed’ all of a sudden, there would be outright panic because of the uncertainty about all this risk exposure.

For this reason, the authorities will not let it happen. Deutsche really is too big to fail. And if we’ve learned anything in the post-2008 period, it’s that the authorities have a very low tolerance for letting market forces play out.

We’re in the age of intervention, the age of repression. However much you think market forces should be left to work it all out, it’s just not going to happen. There are way too many vested interests involved.

That doesn’t mean you won’t see short and sharp panic selling from time to time. But if you’re waiting for another 2008-style meltdown, you’ll be waiting for a long time to come.


Greg Canavan,
For Markets and Money

Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:


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