It’s Like Deja Vu Four Years Ago

Think fast …

I’m about to throw a lot at you in a little space.

We might be staring into a buying opportunity that would make Alan Greenspan blush.

[The implication there is that Alan Greenspan never blushes. So the buying opportunity has to be pretty risqué, right? Got it? Good.]

And it has a little something to do with what’s happening across the Pond.

All right …

From Blushing to Another B-Word


I’ll try not to use that word too much because, frankly, I’m tired of it.

But the referendum is still sending shockwaves through Europe. As many as seven British property funds have frozen assets to prevent what could essentially become a “bank run.” Investors have been looking to cash out of these funds over worries that the B-word will wreck the UK commercial property market.

That amounts to $23 billion worth of funds that are locked up in hopes of avoiding a feedback loop of panic in the financial system.

This comes on the heels of the immediate fallout that’s killing European banks.

Share prices cratered after the UK vote, and the pressure continues. Italian banks, already a sore spot before Britain opted out of the EU, are suffering mightily.

Is it Time to Come to the Rescue?

After all, it isn’t just Italian banks. At least one commentator or analyst (I’ve seen the story a few times) has suggested the worst big bank in Europe is Deutsche Bank (DB).

Deutsche’s shares are suffering along with the rest of the banking system, yes. But check out its 5-year credit-default swap (CDS) flashing “Danger, Will Robinson!”

The takeaway?

Investors are freaking out, especially those with exposure to the banking system.

But honestly, what investors aren’t exposed to the banking system, right?

Answer: none.

Stability of the financial system, however artificial, is the single pillar upon which asset markets rest.

Our natural reaction, then, is to fear contagion from European banks. After all …

Was it not credit freezing up that begat the great financial crisis that eventually spawned Europe’s sovereign debt crisis?

Answer: It was.

But let me ask you to let go of your inhibitions for a moment.

Take another glance at that chart of Deutsche Bank CDS … and focus in on the dates. (The chart covers the 2002-’16 period.)

Now, as you’ll come to find out (if you haven’t already), I’ve got an innate hankering for contrarianism. With that, I’ve been able to cultivate a pretty decent feel for what drives the market: human nature.

Clearly, with hindsight, those peaks on the CDS chart represent points at which the crowd of traders became extremely scared. Their risk aversion was effectively maxed out.

Guess what happened?

The market dropped the hammer on them.

When Deutsche Bank’s CDS peaked, pessimism had run its course. The market rallied … convincingly.

Let me backtrack a bit …

I got to chasing this rabbit this morning because of this chart of the ECB’s balance sheet:

I see the current peak.

I saw the previous peak in mid-2012 and wondered if it corresponded to any meaningfully trends or inflection points.

Answer: yes.

I first looked at the euro. It reversed its near-term trend and proceeded higher for five or six months.

Then I Googled Eurozone economic news for the month of July 2012. Suffice it to say, those who don’t know history are doomed to repeat it.

Here’s a refresher …

In the summer of 2012, the European Central Bank launched its European Stability Mechanism (ESM) at European banks. This was done mostly to save Spanish banks in need of further bailout money, as spiking sovereign debt spreads were making it hard for banks to sustain themselves.

Déjà vu?


Except now it’s British property funds and Italian banks.

There’s no talk of ESM 2.0 or 3.0 or whatever point-0 the ECB is on now.

But as the chart above indicates, the ECB balance sheet has reached a new record north of 3.2 trillion euros.

And to the degree the ECB can actually hope to impact funding markets, the balance sheet growth is working …

Loan rates across the Eurozone continue to drop. Credit is much more “affordable.”

Of course, as the saying goes, you can lead a horse to water but you can’t make him take out a second mortgage to finance his organic produce start-up.

But shoot — as if that even matters.

This whole era of central bank accommodation has been characterized by bloated balance sheets and a sheer absence of monetary velocity. (The flow of that money through the economy.)

All that matters is that investors believe the European Central Bank and its global counterparts will exercise their stimulus muscles regularly.

It’s a psychological well-being thing, I guess.

And despite the recent tone of risk aversion in markets, investors do seem to believe in global central banks’ workout routine.

As proof, I turn you to the yield curve and term premium on U.S. Treasuries …

Yes, U.S. Treasuries are a historic safe-haven investment. And they’ve been the recipient of capital flight in the wake of B … Buh … Breh … Brexit.

The iShares Barclays 7-10 Year Treasury ETF (orange line) and the 10-Year Treasury rate % change (orange line) since June 23.

and the 10-Year Treasury rate % change (orange line) since June 23.

But the flattening yield curve (the difference in yield between short-dated and long-dated Treasuries) and the negative term premium (the amount of additional yield investors expect when lending further out the curve) on 10-year notes reveal — SPOILER ALERT — investors’ assurance that rates will remain low for longer.

In other words: We believe in central banks.

So, when the laughable concoction of the ESM went to save Spanish banks in 2012, the markets responded with enthusiasm.

Check out what the iShares Europe ETF (IEV) did starting in July 2012:

To be clear, this is 22 months that amounted to a 60% rally in European shares.


Yeah, and it all began when investors were freaking out.

Am I telling you to go out and buy the euro or the IEV?



After all, the pattern in that chart above suggests the downtrend that began in 2014 is about done. And 30% of IEV holdings represent exposure to the United Kingdom.

Indeed — remember, this all began with the B-word.

And in one arena — currencies — it is Britain that’s taking the brunt of this development.

 The British pound is down considerably vs. the U.S. dollar and the euro.

 The ratings agencies have all downgraded the UK.

 The financial system worries are festering.

 Shares of companies in Britain with domestic economy exposure have taken it on the chin compared to counterparts that do business primarily outside the UK.

How much worse can it get?

Answer: worse.

But the Bank of England already withdrew the capital requirements it put on British banks before the referendum. It already injected liquidity into the British banking system.

Is the worst now behind them?

Is this the moment to go against the crowd and buy into Great Britain and Europe … despite yet because of the uneasy feeling in our stomachs at the thought of it?

Answer: Skive the collywobbles. Have a butchers of your risk. And Bob’s your uncle!

Translation: Yeah, I think so.

Do right,


“JR” specializes in trading commodities, currencies and options. He has spent nearly 10 years analyzing financial markets and writing about global economics. JR honed his trading techniques and global-macro worldview alongside his father, Jack Crooks, at Black Swan Capital. JR also…