German Stocks Crush Dream of Central-Bank Omnipotence

The German DAX stock index plunged 3.1% today. It’s now in a bear market, down 20% from its all-time high of 12,391 in mid-April. It fell from five digits to four digits: 9,916. A level it had first encountered in May 2014.

Germans aren’t exactly big stock-market investors. Only 7% of their wealth is tied up in stocks, globally. And only a portion of that is in German stocks. So the movement of German stocks doesn’t impact Germans much.

Despite zero interest rates at the bank, and in some cases negative interest rates, Germans hang on to their beloved idea of cash-in-bank. They might not make any money, but at least they don’t have to deal with a rigged market, pay unknown amounts in fees out the back of their brokerage accounts and mutual funds, and then get whacked by a 20% loss, watching 10 years’ worth of savings dissolve into the ether in five months. And Germans with more money pour it into real estate.

But foreign investors are on the hook, particularly American investors via hedge funds, stock mutual funds, and ETFs. Over the past couple of years, brokers and financial advisors have been pushing Americans to diversify into European stocks. And some of the biggest European stocks are German stocks.

The German economy wasn’t exactly roaring ahead in the second half of 2014 and in the first half of 2015, with GDP growth bouncing between 1.2% and 1.6% annualized. Even the US did better than that.

But German stocks soared, starting in mid-October, 2014. Well-placed rumors started to circulate that the omnipotent ECB would launch a big round of QE in 2015. These rumors were supported by more rumors and a combination of official non-denials and vague indications that a big round of QE would indeed be forthcoming. Details emerged over time. American investors, having gotten richer and richer with each round of the Fed’s QE, piled into the German miracle market, and it simply soared and soared. Bonds soared too, and yields became more and more negative. Those were amazing times.

Then the omnipotent ECB actually announced QE: it would be huge. More details trickled out later. It would be an even huger €60 billion a month. But it wouldn’t start until March. The buying frenzy kicked off in earnest, and eventually even the German 10-year yield approached zero, and the DAX hit 12,391, having skyrocketed 48% in six months.

It was April 9, and QE was pouring into the markets. Folks were practically praying to the omnipotent ECB. But it was the final paroxysm of a QE front-running frenzy by American hedge funds and everyone else. It was the end of the bull market.

And then came the rout.

The German economy plugged along as before, but people took profits after this sort of China-bubble-like run, and even while China was still soaring, German stocks began to swoon.

In the wake of the Fed’s widely ridiculed “none and done” decision, the DAX plunged 3.1% today and is down 20% from its peak. This daily chart shows the rocket-like 48% 5-month ascent and the vertigo-inducing plunge:

Germany-Dax=2014_2015-09-18

Today, the five biggest sinners of the DAX, which tracks 30 major German companies, were particularly colorful:

RWE plummeted 8.1%. The utility is among the largest electricity and gas producers in Europe with €48 billion in revenues in 2014. It’s also struggling with the EU’s “far-reaching structural changes,” as it calls them. Its shares have plummeted 56.4% since May and are down 88.7% since their peak in early 2008.

E.ON plunged 5.0%. The utility holding-company juggernaut too has been clobbered by these “far-reaching structural changes” in the EU. It’s a global company with €111.6 billion in revenues in 2014. It’s down 46.7% since May, and down 84% from its peak in early 2008.

Deutsche Bank, like banks in the US, plunged 4.4% today. It keeps lumbering from scandal to scandal that are now layered so thickly that most mortals have given up counting them. Its latest involves allegations over bribery in Russia, and it’s now shutting down most of its operations there. Shares are down 21% since early August and 76% off their all-time high in 2007.

Siemens dropped 4.3% today. The industrial giant with big operations in the US, among other countries, had its own share of scandals, including bribery, a new CEO to clean it up, and another new CEO to turn it around, but this time hopefully without bribery. Might be tough. Shares are down 23% since March, and down 32% from their all-time peak before the Financial Crisis.

Daimler also dropped 4.3% today. But its cars, unlike those of its competitors, are once again hot in China despite the turmoil. Nevertheless, it’s down 31.8% from its peak in March.

These are paragons of corporate Germany. They’re not some over-hyped startups without revenues. And yet, they’ve gotten totally crushed. The wealth effect is unwinding: wealth has been transferred effectively to those who got in early and got out in time, from those who didn’t.

But here’s the thing: Draghi’s QE is still cranking relentlessly. The ECB’s deposit rate is still negative -0.2%. Monetary policy at its best. Nothing has changed. Except that the ECB has lost its omnipotence. Turns out, omnipotence only works if people believe in it. And now that people no longer believe in it, more bouts of QE in Europe, Japan (where QE is also failing to prop up stocks), the US, and elsewhere are likely to flop with even more spectacular results.

Bank shares got crushed in the US too. Because not all is well in banking land. Read… Bankers Threaten Fed with Layoffs if it Doesn’t Raise Rates

Share on FacebookTweet about this on TwitterShare on LinkedInShare on RedditPrint this pageEmail this to someone

  13 comments for “German Stocks Crush Dream of Central-Bank Omnipotence

  1. NotSoSure
    Sep 18, 2015 at 10:05 pm

    Game over?

  2. Paulo
    Sep 18, 2015 at 10:51 pm

    re: “Germans hang on to their beloved idea of cash-in-bank. They might not make any money, but at least they don’t have to deal with a rigged market, pay unknown amounts in fees out the back of their brokerage accounts and mutual funds, and then get whacked by a 20% loss, watching 10 years’ worth of savings dissolve into the ether in five months. And Germans with more money pour it into real estate.”

    It must work better than being in debt up the ying yang like so many are these days. They save because they remember what it was like to have nothing after the War.

  3. ML
    Sep 19, 2015 at 12:44 am

    I am a fan of cash on deposit. Despite being an upward- only investment, holding and saving cash is rarely viewed as a positive investment. So rather than be safe, investors pile into risky alternatives and when the other markets crumble under the weight of debt and they don’t get out in time end up feeling sorry for themselves.

  4. rich black
    Sep 19, 2015 at 5:08 am

    Not a lot of financial press coverage, lately, on this not so timely call (note the date):

    “Buy Europe, dump US stocks: Goldman”
    Ansuya Harjani
    Monday, 20 Jul 2015

    “Pile into European equities and scale back exposure to U.S. stocks, Goldman Sachs recommends in the wake of progress in Greece’s dealings with creditors.

    The bank upgraded its three-month view on European equities to “overweight” on Monday, while downgrading U.S. stocks to “underweight,” warning that they have historically underperformed in the 12 months after the Federal Reserve’s first rate hike.

    “European equities have been one of the key asset classes to benefit from a fading of Greek risks following their drawdown,” Goldman Sachs wrote in its Global Opportunity Asset Locator report published on Monday.

    Within Europe, the bank is overweight on Italy’s FTSE MIB index, Spain’s IBEX 35 index, Germany’s DAX index and the U.K.’s mid-cap focused FTSE 250 index and underweight on Switzerland’s SMI indexand the British blue-chip FTSE 100 index.

    Goldman isn’t alone in its bullish outlook for European equities.

    Bank of America (BofA) Merrill Lynch’s July Fund Manager Survey published last week found rising appetite to overweight European stocks. “Despite the Greek news flow, intention to own European assets is high and rising, though global growth remains vitally important for European stocks,” said Manish Kabra, European equity strategist at BofA Merrill Lynch Fund Manager Survey.”

    • Sep 19, 2015 at 9:22 am

      Great detail. Thanks for digging it up and sharing.

  5. Markar
    Sep 19, 2015 at 9:12 am

    Cash in the bank? The bankers will have none of it! Bleatings from all corners of the financial world getting louder for negative interest rates and cash bans. No where to run-no where to hide coming to a neighborhood near you.

    • Robert
      Sep 20, 2015 at 3:26 pm

      Well, you could at least tell your friendly banker, “The lack of interest is mutual- I’m moving my money to a credit union.” (They may not pay any interest to speak of, either, but at least they are not into “bail-ins” The GD bankers need you more than you need them

  6. Paulo
    Sep 19, 2015 at 9:27 am

    Just before the 07-08 recession started my wife and I would receive credit card offerings in the mail several times per week. We were constantly urged to switch to this or that card which would carry a better set of terms for maintaining a balance, or instructions on how we could use the card as a chequing account and/or loan vehicle for vacations, renos, whatever.

    I noticed a little while ago those envelopes have started to arrive again.

  7. Tim
    Sep 19, 2015 at 11:34 am

    Take a look at the ETF with ticker HEDJ. Long a basket of Euroland exporters and hedge the exposure back into USD. Works when the Euro weakens. Works less well when the Euro not going down vs. USD. Last time I looked, that one ETF was a $20bn strategy. Having been rather larger in April. And it probably was not alone in using that gameplan…

  8. Ben
    Sep 19, 2015 at 10:21 pm

    Interesting article thanks for posting.

  9. Jonathan
    Sep 19, 2015 at 10:33 pm

    I can’t be the only one who see how terribly similar our lives are since the 90s.

    The generation of my parents came from saw computers, mobile phones and Internet emerged out from nothing. My generation only saw refinements to the same, cars now are nowhere even close to what is depicted in Back to the Future 2’s version of 2015 and any increases to real world utility by these refinements are hit so hard by ever diminishing returns that I surmise this is the true killer of demand all over the globe. (e.g a 2015 smartphone is EXACTLY the same as the 2012 one except only slightly faster to the end user point of view. No amount of marketing can change this sad reality)

    Only fundamental shifts with innovation can save the global economy like the advent of the electrical generator and internal combustion energy, not rigging it heavier and heavier with ponzi monetary schemes.

  10. ben
    Sep 19, 2015 at 11:36 pm

    I wonder if Europe being invaded by refugees has contributed to this?

  11. Julian the Apostate
    Sep 20, 2015 at 10:10 am

    The refugee problem is an echo from the past. Back then it was people fleeing the Nazi advance, and they were called DPs (displaced persons). The reaction to this was much as it is now, i.e. “Its not our problem.” History is rhyming again.
    The innovation required for the next big prime mover is a result of the Crony Capitalists who are invested in the Status Quo shouting “we’ve go to make those bastards stop!” The process is covered brilliantly by Ayn Rand in her novel Atlas Shrugged, which I heartily recommend. It certainly kicked the stool out from under my brain when I first read it in 1985.

Comments are closed.