Episode 70 – Glencore Risk: Credit Crunch Crisis Crash

The Episode:

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The Story:

How do bubbles blow up, and how do they pop? Why do booms boom and eventually go bust? There are many reasons behind this. One is the oligopoly that many banks enjoy in many countries, meaning they don’t necessarily have to stay competitive to maintain their market share. Another reason is the fact that many banks’ deposits are guaranteed by law, such as in the USA and in Australia – reducing the incentive for depositors to be careful about where they put their money. A third reason is bail-outs by central banks, in what was once known as a “Greenspan put”, where bankers can take profit for themselves, but if they lose, they can rely on Federal Reserve to get them out of a jam.

All of this irresponsible money floating around can mean that sometimes banks get involved in assets which perhaps they shouldn’t. The story of the investment bank Lehman Brothers holding sub-prime mortgages, leading to the GFC in 2008, is one of the best examples. Today we have another example, where banks around the world, including Deutschebank, are holding extremely risky assets issued or derived from the Swiss multinational mining giant Glencore. As faith in these banks drop, we may see Glencore, Deutschebank and other institutions throwing in the “kitchen sink” – that is, releasing all of their bad news at a time when investor expectations are already at a tremendous low.

In this episode, we discuss the financial state of Glencore, and how it might have a role in the next “seven year cycle” financial crisis. Join us in a boom-bust rollercoaster on the next episode of … The Paradise Paradox!