Everything 'really is fine with Deutsche Bank' due to capital levels, strategy says
Rhys Williams, Chief Strategist at Spouting Rock Asset Management, discusses a drop in Deutsche Bank stock after a price spike in credit default swaps.
DAVE BRIGGS: But first, let's get you up to speed on more pressure in the banking sector. Shares of Deutsche Bank trading lower after a price spike in credit default swaps on Thursday night has proven to be a warning sign for wary investors following the recent collapse of Swiss bank Credit Suisse. You can see shares down more than 3.1%. Joining us now to break down the latest with Deutsche Bank and what it could mean for investors here in the US is Rhys Williams, chief strategist at Spouting Rock Asset Management. Good to see you, sir. So here is the word from German Chancellor Olaf Scholz, who said there is no reason whatsoever to be concerned. Is he right?
RHYS WILLIAMS: Well, we can only hope so. Obviously, the last weekend is-- remembering the last weekend when the Credit Suisse CEO said everything was fine, too, and the bankers in Switzerland also thought everything was fine. So I mean, the difference is there is no big brother for Deutsche Bank to go to. And so I do think they will pull out all stops. And really, right now, you have a liquidity issue, not a credit issue yet.
So I think what we need to do is the federal bank of the-- the Federal Reserves of the world, and the ECB in this instance, really needs to protect the banking system is job one and kind of worry about inflation later. And I just think as long as they would have that message each and every hour of each and every day, I think we could probably get through this without the huge kind of hard landing risk that we potentially have for ignoring a banking crisis.
SEANA SMITH: Rhys, you mentioned the need to pull out all stops. You just talked about what the regulators need to do. What does Deutsche Bank, what do we need to hear from some of those executives right now?
RHYS WILLIAMS: Well, I think the problem is, it's hard for the CEO to get on TV and say everything's fine. I really do think everything's fine with Deutsche Bank, though. They do have adequate capital levels. And I do think also that they-- unfortunately, they do have, I think, lots of relationships with other banks.
And so potentially, you could move your money from Deutsche Bank to JP Morgan, just as the same phenomenon that's going on in the regional banking crisis here. So that's why I do think that protecting the system is very important. And I think every regulator needs to think about that. And I think-- say, basically, the Mario Draghi line of, we're going to do what it takes. And I think Deutsche Bank is a systemically important bank and needs to be protected at all costs.
DAVE BRIGGS: Rhys, do you get a sense of who's next in this game of whac-a-mole? And how much of it at this point is purely emotional?
RHYS WILLIAMS: I think it's mostly emotional now. Really, what we have is liquidity problems, not a credit problem yet. But it's one of these things where, at least in the US banking system, with the regional banks all going down dramatically everywhere, there's going to be less loans given. And because of their cost of funds that are actually going up in this period of time, they're going to charge more for those loans, which means customers are going to have to pay more for loans, which is deflationary, not inflationary.
So I really do think the Federal Reserve, all politicians need to think about one thing, and that is let's save the banking system, first and foremost. Let's get calmness there, and then we can worry about inflation a couple of months from now. But I think, really, job one is protecting the system because what's going on right now is the Fed is looking at the rear view mirror and not looking at the windshield whatsoever.
SEANA SMITH: Rhys, all of the concern right now that's playing out within the banking sector, not just the European plays, we've also seen it a bit reflected in some of the larger US banks, specifically also the regionals. That's obviously where we've seen most of the selling here in terms of the US banks. How much of that fear do you think is overblown, if at all?
RHYS WILLIAMS: Well, I think currently, the fear is overblown. But this is all a confidence game. And like I said, I think the health of the economy is pretty good, that the coincident indicators are fine. The question is, if this continues, what happens to the go forward? And I think that's where we need to look firmly in the windshield and say we need to stabilize things now. And I do think, for instance, some sort of discussion about guaranteeing all deposits in the US would go a long way to stemming the crisis.
I think until something along those lines happens-- and I realize it probably needs congressional authority, but these guys can stick around a weekend. You know, let's get this done. There was a lot of tough votes during the 2008 crisis, much tougher votes, actually, than that because protecting depositors is not protecting stockholders. I do think the effect will be, if you protect depositors, you will protect stockholders, but you don't have to make that de facto pledge.
DAVE BRIGGS: And Rhys, if the Fed were looking out the windshield, to your point, what would they be focusing on, and how would they act?
RHYS WILLIAMS: Well, for instance-- and this is just how they calculate CPI. CPI inflation, I think, is actually less in reality than the stated number. And the reason is rents are a quarter of CPI. And rents are actually going up about 2%, not the 8%, because the way they calculate it is sort of a weighted average of the last 12 months. So I think the problem with what they're doing is they're not looking at the kind of what's going on real-time, that things are really starting to slow. And their mission seems to be we've got to be backing very tough on inflation.
And that, to me, is, they've won that battle, more or less. Now what they need to do is put a-- stop putting on the brakes to avoid a hard landing. And I think that's really what they need to have a consistent message of, instead of some people saying something, some people saying the other, Bullard saying that, oh, I think rates are going to go higher. Well, that's just not very helpful right now, and I think that's not what we need.