Deadly Parasitic Derivative Collapse Spreading Through Global Markets

Deutsche Bank may be on the verge of collapse. Last week Deutsche Bank reported Q2 2016 earnings of 20 million euros which is a 98% drop in earnings year-over-year.


In 2015, Deutsche Bank announced its first full year of loss since the 2008 recession.

Deutsche Bank’s stock is down -60% over the last year meaning that the bank is close to collapse.


Deutsche Bank’s shares now trade for two-thirds less than their tangible book value, a steeper discount than even during the depths of the financial crisis.


Beyond Germany, few stock traders care if Deutsche Bank collapses. The problem with Deutsche Bank collapsing is its enormous derivatives portfolio valued at 42 trillion euros! To put in perspective, the entire EU (all 28 member states) has an estimated GDP value of 14.3 trillion. Deutsche Bank’s 42 trillion euro derivatives portfolio is about three times the size of the entire EU!

One might think that with such a high exposure to the derivatives market, Deutsche Bank would have already collapsed. The reason Deutsche Bank has not collapsed is because of something called netting. For every derivative position Deutsche Bank holds, they hold another position in the opposite direction, so they roughly cancel each other out. At least that’s what Deutsche Bank is reporting that they are doing. Whether that is true or not remains to be seen. Why would anyone hedge their longs with shorts in a 1:1 ratio? You would never make any money from trading, and you would slowly lose on slippage. The OCC tracks netting on U.S. banks and does, in fact, show that even with netting, net current credit exposure (NCCE) has been rising rapidly since 2014.


When Deutsche Bank collapses, it is going to be the explosion heard around the world, and it will be a disaster many times greater than the collapse of Lehman Brothers in 2008.

US Derivatives Exposure

The big U.S. banks have higher exposures to derivatives than Deutsche Bank. As of June 30, 2016, below are U.S. banks with the largest derivative exposures.


Citigroup has amassed the largest stockpile of interest-rate swaps as they bet on central bank rate changes.

Five U.S. banks hold 93% of all derivatives: Citigroup, JPMorgan Chase, Goldman Sachs, Bank of America, and Morgan Stanley. The total value of these derivatives is $247 trillion (notional).

Morgan Stanley has $31 trillion in derivatives with $1.6 trillion (notional) in credit derivatives. What is scary is that Morgan Stanley is back to speculating in the same credit derivatives market that took down AIG in 2008. I don’t think Morgan Stanley necessarily wants to speculate in credit derivatives but with revenue flat the last few years, they may be getting more desperate to prop up their stock price. Morgan Stanley’s stock is down more than -25% over the last year.


Most traders in the U.S. don’t care about Morgan Stanley’s risky credit derivatives portfolio, but they should. Morgan Stanley has more than 15,770 retail brokers managing $404 billion of other people’s money (mom and pop savings, retirees, pensions, retirement accounts, etc.cause). Morgan Stanley’s risky credit derivatives position poses a huge threat to the investing community in my opinion.

Banks and Financial Firms Will Not Disclose Information Until It’s Too Late

If you are waiting for banks and financial firms to disclose risks and even how much they were bailed out from the last time they made risky credit derivative bets, don’t.

Wall Street On Parade writes

To survive the 2007-2009 Wall Street crash, Morgan Stanley received an injection of $9 billion from the Japanese bank, Mitsubishi UFJ Financial Group; a $10 billion injection from the U.S. government and over $2 trillion in secret, cumulative, below-market-rate loans from the Federal Reserve. According to data obtained by Bloomberg News following a multi-year court battle to obtain the information from the Federal Reserve, Morgan Stanley’s one-day secret outstanding loans from the Fed peaked at $107.3 billion on September 29, 2008.

The public would have never known about these secret loans shoring up Wall Street’s reckless conduct and hubris and obscene bonuses except for the court battle of Bloomberg News and legislation secured by Senator Bernie Sanders of Vermont requiring a Fed accounting.

Credit Derivatives Exposure On the Rise In the US

The Office of the Comptroller of the Currency reports some scary facts in their most recent quarterly OCC report.

– Insured U.S. commercial banks and savings associations reported trading revenue of $5.8 billion in the first quarter of 2016… $1.9 billion lower (24.9 percent) than a year earlier. [In my opinion, when trading revenues are down, trading divisions take on more risks in a desperate attempt to meet quotas like buying riskier credit derivatives as the data points below confirm].

– Credit exposure from derivatives increased in the first quarter of 2016. Net current credit exposure (NCCE) increased $65.1 billion, or 16.5 percent, to $460.1 billion.

– Notional derivatives increased $12.0 trillion, or 6.6 percent, to $192.9 trillion.

– Derivative contracts remained concentrated in interest rate products, which represented 76.3 percent of total derivative notional amounts.

Using Derivatives To Bet On Interest Rate Changes

The OCC reports

Measuring credit exposure in derivative contracts involves identifying those contracts where a bank would lose value if the counterparty to a contract defaulted. The total of all contracts with positive value (i.e., derivative receivables) to the bank is the gross positive fair value (GPFV) and represents an initial measurement of credit exposure. The total of all contracts with negative value (i.e., derivative payables) to the bank is the gross negative fair value (GNFV) and represents a measurement of the exposure the bank poses to its counterparties.

GPFV increased by $0.8 trillion (26.6 percent) in the first quarter of 2016 to $3.8 trillion, driven by a 29.9 percent increase in receivables from interest rate and FX contracts. Because interest rate contracts make up 76.2 percent of total notional derivative contracts, changes in interest rates drive credit exposure in derivative portfolios. Declines in interest rates tend to increase exposure. This effect has increased in recent years, as the maturity profile of interest rate derivatives has increased, making credit exposure more sensitive to changes in longer-term rates.

Credit risk exposure increased a whopping 26.6% in Q1 2016. Much of that increased credit risk exposure is coming from bets on Federal Reserve rate hikes. If interest rates go up, credit risk exposure in derivative positions goes down. If interest rates go down, credit risk exposure goes up. In other words, most of the bets in the derivatives market are on interest rates rising. Better hope Janet Yellen doesn’t have to lower interest rates!

Credit Default Swaps Dwarf All Other Forms of Derivatives

Credit default swaps dwarf any other form of credit derivative trading.


The OCC reports

The notional amount for the 54 insured U.S. commercial banks and savings associations that sold credit protection (i.e., assumed credit risk) was $3.6 trillion, up $206.4 billion (6.0 percent) from the fourth quarter of 2015. The notional amount for the 50 banks that purchased credit protection (i.e., hedged credit risk) was $3.8 trillion, $224.9 billion higher (6.3 percent) than in
the fourth quarter of 2015.

It is interesting that many people are reporting having received a letter from their credit card company informing them that their interest rate is going up from 19.9% to 25% in August 2016. Some people have even reported receiving credit limit increase letters too. How kind of these bankers to go long credit default swaps while raising your credit limit and interest rate to insane levels at the same time.

Folks derivatives are dark financial products that cause excessive risk taking that ultimately leads to disaster. I have little doubt that the next global financial crisis will, at its core, once again involve speculative derivatives betting.

Market Shocker: US GDP Biggest Miss In 15 Years

US GDP was a colossal disaster in Q2, coming in at a seasonally adjusted annual rate of 1.2%. Analysts forecasts were more than double that at 2.6%. The miss on GDP was the largest since Q2 2001.


The Wall Street Journal writes

The economy has grown at less than a 2% pace for three straight quarters. Since the recession ended seven years ago, the expansion has failed to achieve the breakout growth seen in past recoveries. The average annual growth rate during the current business cycle remains the weakest of any expansion since at least 1949.

The S&P is severely overbought as it hits all-time highs.

The interactive chart from GraphIQ shows that this is the first time since the recession ended in 2009 that we have had three consecutive quarters of below 2%.

[graphiq id=”9hBS3zl8Ep7″ title=”Quarterly US GDP Growth Rate” width=”440″ height=”551″ url=”″ link=”″ link_text=”Quarterly US GDP Growth Rate | Graphiq” ]

GDP Q2 Forecast Plunges

The Q2 GDP forecast was just released a few hours ago. The forecast plunged -25% from 2.4% to 1.8%.


What caused the fall in the GDP forecast? The international trade deficit. June had a trade deficit of $63.3 billion. The consensus range was between $-60.2 billion and $-62.7 billion. Remember, a trade deficit subtracts from the I component of the GDP formula. I explain how the trade deficit negatively impacts GDP here

The trading partner the U.S. has the largest deficit with is China. No big surprise.

[graphiq id=”81xJ3FlviyF” title=”Largest Trade Deficits Incurred by United States” width=”440″ height=”533″ url=”” link=”” link_text=”Largest Trade Deficits Incurred by United States | FindTheData” ]


Powerful Economics Case For Trumponomics

One of the reasons I began supporting Donald Trump and declared GuerillaStockTrading as an official supporter of the Trump candidacy had to do with economics and ultimately the stock market.

The majority of people who are against Trump are not very smart when it comes to understanding international trade and macroeconomics.

Donald Trump has nothing to do with supporting isolationism, protectionism, or racism.
Continue reading “Powerful Economics Case For Trumponomics”

Alex Jones Attacked Outside RNC, Fights Back!

Alex Jones was outside the RNC in Cleveland exercising his right to free speech when he was attacked by a communist left group.

Alex Jones knows what he’s doing. Notice when the communists started yelling and pushing against Alex, he ducked down and rammed the guy with his body and I wouldn’t be surprised if Alex through an elbow down low out of sight. Then as the police grabbed Alex, Alex said, “He attacked me, officer. He attacked me.” Alex knows how to handle himself in a situation like that.

Police quickly moved in to break up the scuffle.

Notice that the communists chanted, “Off our streets, Nazi scum!”

Here is another angle of what happened and listen to the radical leftist say, “All cops are dead”:

Whether you agree with everything Alex Jones says or not, you have to give the guy props for having the guts to take a bullhorn and walk into a crowd of radical left groups protesting outside the RNC.

Folks, these violent left groups represent a serious threat to our economy which will impact our ability to make money at stock trading. Consider that a Socialist almost was the pick of the Democrat party for president! Young people have been brainwashed into thinking that Socialists and Communists would actually be good at running the country. There’s a reason that no successful Socialist or Communist country exists today. All Socialist and Communist countries have failed. Moving from Capitalism and Democracy to Socialism or Communism would only hasten the demise of America. This indisputable truth is not taught to young people in the University system.

[graphiq id=”lRO4G8c4mDX” title=”Alex Jones” width=”440″ height=”748″ url=”” link=”” link_text=”Visualization by Graphiq” ]

For more details about what happened outside the RNC with the communist party, go to:

Cleveland Outside RNC Citizens Give Police Standing Ovation

While police across this country have been under siege, they are still stepping into harms way by providing security at the RNC this week.

Police are defending Americans right to assemble as part of our democracy. Whether you are a Republican or not, you have to applaud these heroes, and that’s what a lot of people in Cleveland did.

In a show of support for police officers, people lined the streets and gave officers a standing ovation.

The touching act of kindness towards police officers who are putting their lives on the line by protecting our democratic election process goes a long way. Way to go Cleveland.

The 2016 Republican National Convention is underway in Cleveland, Ohio. This year marks the third time in the history of the Republican Party that the Convention has been held in Cleveland.

[graphiq id=”l2WNerxWRil” title=”Republican National Convention Host Cities” width=”440″ height=”532″ url=”” link=”” link_text=”Republican National Convention Host Cities | InsideGov” ]

The US Descends Into Terror As Violence Explodes Higher

Beyond any doubt, we have a horrific trend of rising armed violence across the US. I warned about this rising destabilizing violence here. At some point, something colossal and dangerous is going to happen, and it’s going to crash US markets. We could be looking at our next Black Swan event.

Below is an interactive graph that shows police being attacked across the country. The graph below proves this is a major uprising across the country. Hover over each dot to see more details about the event.

[graphiq id=”lXhLEV22QbX” title=”Police Officers Killed in 2016″ width=”440″ height=”450″ url=”” link=”” link_text=”Visualization by Graphiq” ]

Just in the last month, we have seen the worst mass shooting in U.S. history in Orlando. Shortly after we had the massacre of five police officers in Dallas. Next, we had the horrifying terror rampage in Nice, France. Now we have the brutal murder of three police officers in Baton Rouge in a military style ambush. Was the terrible murder of three police officers just an isolated incident of a crazed gunman? No. The Daily Caller writes

A Youtube account operated by Gavin Eugene Long and discovered by The Daily Caller reveals key insight into what might have motivated the 29-year-old black man who killed three Baton Rouge police officers Sunday morning.

Videos on Long’s account show that he was a former Nation of Islam member. He also ranted against “crackers” and made references to Alton Sterling, the black man killed by police in Baton Rouge on July 5.

Islam is the connection between ISIS and the rising armed violence across the US. How terrifying folks!

The SITE Intel Group, which monitors ISIS activity, writes…

Reacting to #BatonRouge shootings, a jihadi Telegram channel urged supporters invite “black community” to Islam and help it fight U.S. govt

I argued here that Black Lives Matter is a lot more terrifying group than most people realize. Folks, you should be terrified of Black Lives Matter. Black Lives Matter supporters and Islamists celebrated the murder of the police officers in Baton Rouge. PrisonPlanet writes

‘Black Lives Matter’ supporters and Islamists are already celebrating the murder of at least three police officers in Baton Rouge, Louisiana.

Twitter user ‘Marland X’ – whose profile suggests he is a member or supporter of the New Black Panther Party – tweeted his glee at the deaths within an hour of the news breaking.

The Republican National Convention is this week, and it is a huge target for Islamic terrorists and police haters. If Islamic terrorists or violent radical left groups strike at the Republican National Convention, it will descend this country further into chaos and fear, and that could crash markets.

Positive Surprise Economic Data Raises Rate Hike Outlook By Year End

Last week was a big week for trader psychology with multiple economic reports showing the US economy was not in free fall. The Fed Funds Futures market is pricing in a 43.3% probability of a rate hike by December 14, 2016.

Below is a quick breakdown of the better than expected economic reports last week.

US retail sales jumped more than expected.


I was not included in the Reuters polling, but I would have estimated 0.1 too.

What this means is that many traders realized they were a little too bearish after the crash of the May jobs report to 11K.

Retail sales including food services, excluding motor vehicle and parts, also crushed expectations to the upside.


Once again polling data showed that traders were a lot more bearish than was warranted.

Just when you think we have a pattern of good numbers, a big negative number messes with the pattern and keeps us all on our toes. Check out how weak the clothing and apparel component of the retail sales report is.


The CPI is finally moving higher, and it looks like we have a confirmed uptrend.


Core CPI rose perfectly in line with expectations, coming in above the Fed’s target of 2%. The Fed Funds Futures market immediately jumped from a 37% to 43.3% probability of a rate hike by December 14, 2016.

The only reason why the core CPI was not up more was that energy services pulled the number down. If we remove energy from the equation, the CPI would be up nearly 3.2%.


The CPI less energy services chart above suggests that once energy services deflation eases, we could see a rapid surge in the core CPI number. How much should the Fed let the Saudi Arabia attack against US oil producers impact their rate hike schedule? The Federal Reserve doesn’t want to wait too long to increase rates thinking that inflation is lower than what it is.

The Atlanta Fed’s Wage Growth Tracker shows wages rising +3.6% year over year. That’s a nice improvement in pay. The Fed watches this indicator very closely.


In light of last week’s economic reports, I think we can’t be so bearish on the economy. We are still in the worst six months of the year, and the stock market could crash anytime between now and the end of October. However, we are not as close to the edge of the recession cliff as we seemed to be on June 3, 2016, when the horrible May jobs report was released.

A big part of profitable trading is psychology and shifting with the economic data when it surprises to either the upside or the downside.

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