It all started in mid/late 2014, when the first whispers of a Fed rate hike emerged, which in turn led to relentless increase in the value of the US dollar and the plunge in the price of oil and all commodities, unleashing the worst commodity bear market in history.
The immediate implication of these two concurrent events was missed by most, although we wrote about it and previewed the implications in November of that year in “How The Petrodollar Quietly Died, And Nobody Noticed.”
The conclusion was simple: Fed tightening and the resulting plunge in commodity prices, would lead (as it did) to the collapse of the great petrodollar cycle which had worked efficiently for 18 years and which led to petrodollar nations serving as a source of demand for $10 trillion in US assets, and when finished, would result in theQuantitative Tightening which has offset all central bank attempts to inject liquidity in the markets, a tightening which has since been unleashed by not only most emerging markets and petro-exporters but most notably China, and whose impact has been to not only pressure stocks lower but bring economic growth across the entire world to a grinding halt.
The second, and just as important development, was observed in early 2015: 11 months ago we wrote that “The Global Dollar Funding Shortage Is Back With A Vengeance And “This Time It’s Different” and followed up on it later in the year in “Global Dollar Funding Shortage Intensifies To Worst Level Since 2012” a problem which has manifested itself most notably in Africa where as we wrote recently, virtually every petroleum exporting nation has run out of actual physical dollars.
The point is, it all started with the rising dollar and the ensuing global dollar shortage, and thus, the Fed embarking on what may be the biggest central bank error of all time. To be sure, the consequences are wide ranging: from the collapse in crude, to the tremors and devaluations in China, to the tightening financial conditions, to the (manufacturing) recession in the U.S., and most recently, to whispers that Deutsche Bank, the bank with $60 trillion in notional derivatives, may be the next Lehman Brothers.
Which, incidentally, brings us to none other than one of Deutsche Bank’s most respected credit analysts, Dominic Konstam, who clearly has an appreciation of the existential risk he finds himself in, not only career-wise, but in terms of the entire financial structure. We know this, because after reading his email blast from this morning we realize just how vast the fear, if not sheer terror, is among those who truly realize just how broken the system currently is.
We have reposted his entire letter below, because it represents the most definitive blueprint of everything that is about to be unleashed – especially since it comes from the perspective of one of the people who is currently deep inside Deutsche Bank and realizes just how close to the edge the German bank is.
What Konstam makes clear, in no uncertain terms, is that the the problem is the one we laid out back in November 2014: “It is not oil, it is not in the banks, it is a run on central bank liquidity, especially dollar based and there needs to be much more ($) liquidity.”
He also makes it quite clear that investor fears about contagion are well-founded: here it is in the words of a Deutsche Banker: