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Global Macro Investor's Raoul Pal: 5 Storm Clouds to Fear in Banking

Global Macro Investor's Raoul Pal: 5 Storm Clouds to Fear in Banking

(Dollar Photo Club)

By    |   Tuesday, 04 October 2016 09:49 AM

 

Raoul Pal, a former hedge-fund manager and founder of the Global Macro Investor, a macroeconomic research service, warns that the savvy investor will keep a sharp eye on the global banking industry, which he sees sailing directly into catastrophe.

“Deutsche Bank was just one of the warning signs out there for the banks. It just looks the worst based on the sheer size,” Pal told Yahoo Finance. “It’s one of the canaries in the coal mine telling something really bad is going on in the European banks overall.”

 

“It’s not yet a big storm, but the clouds are everywhere,” Pal told Yahoo Finance.

He targeted five key issues:

  • Global banks are, essentially, still a wreck. Germany. Greece. Cyprus. Italy. “The banking system is still not functioning properly. There are still a ton of bad loans. There’s also concern that the banks don’t have enough capital.”
  • The yield curve has been getting flatter and yields have been turning negative. “This is bad for the banking business since banks borrow at the short end and lend at the long end. When the yield curve is steep they can make money from the difference in the spread. Right now, spreads are very little and banks can’t make money.” (A yield curve is defined by Investopedia as a line that plots the interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates.)
  • Regulations have been getting tighter. “In addition to massive new collateral needs driven by the Basel III agreement, the European Union established rules designed to prevent taxpayer bailouts.”
  • LIBOR (the London interbank offered rate) has become a worrying story for the banking system. “Libor, a measure of banks’ borrowing costs, has continued to climb higher, making it more difficult to manage all that borrowing.”
  • A lot of foreign companies and banks have, since the crisis, been borrowing in US dollars to invest in projects outside of the US. “As the US dollar moves higher this situation could get really ugly as it becomes more challenging to pay back those loans. The rise in Libor makes it even more concerning.”
     

But the Wall Street Journal explains there is much more behind Deutsche Bank's woes.

"What lies at the heart of Deutsche’s troubles is the market’s loss of confidence in its business model: Investors doubt whether the bank can ever earn an economic return on its equity, particularly when the amount of equity it is required to hold is proving a moving target as regulatory demands rise ever higher," the Journal explained.

 

"These aren’t symptoms of European malaise but a wider crisis of globalization, which has hit international banks particularly hard. The lesson of the global financial crisis was that hyperglobalized finance hadn’t so much spread risk as created new channels for contagion, leaving taxpayers on the hook for bank failures and economies vulnerable to sudden stops in funding."

In fact, LiveMint reported that we really shouldn't be so shocked about Deutsche's woes since the "IMF had forewarned that Deutsche Bank presents ‘the world’s most important net contributor to systemic risk in the global banking system’ in 2016."

(Newsmax wire services contributed to this report).

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Raoul Pal, a former hedge-fund manager and founder of the Global Macro Investor, a macroeconomic research service, warns that the savvy investor will keep a sharp eye on the global banking industry, which he sees sailing directly into catastrophe.
raoul pal, banking, storm, clouds
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2016-49-04
Tuesday, 04 October 2016 09:49 AM
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