Trades Tied to Inflation Can Be Costly

In Robert Prechter's 2009 edition of Conquer the Crash, he said:

I expect deflation in the U.S., not inflation.

Even though the economy is stronger now than it was during the Great Recession, deflationary forces are still with us.

The high number of retail store closings and declining energy prices are just two occurrences which illustrate the point:

  • 22 Retailers That Are at Serious Risk of Bankruptcy -- (, June 13)
  • Oil tumbles, closes in a bear market, down more than 20 percent from 2017 high -- (CNBC, June 20)

Indeed, trades linked to inflation has cost a major bank tens of millions.

Here are a June 27 Bloomberg headline and subheadline:

Deutsche Bank Faces Possible $60 Million Derivative Loss Firm made bet on U.S. inflation that has gone awry: source

The article says:

Deutsche Bank AG, the German lender seeking to overhaul how it manages risks, made a bet on U.S. inflation that puts the firm on course to lose as much as $60 million, people familiar with the matter said.

The trade used derivative products tied to U.S. inflation, said the people, who requested anonymity because the details aren’t public. The Frankfurt-based lender has been examining whether Deutsche Bank traders breached risk limits on the deal, some of the people said. The case has been escalated to the bank’s supervisory board, one person said.

Chief Executive Officer John Cryan has been trying to improve risk and operational controls that have drawn scorn from regulators around the world. A risk limit violation could indicate a weakness in the bank’s oversight of traders in a business that earned about $270 million in the first quarter. Just two months ago, the Federal Reserve fined Deutsche Bank for failing to ensure that traders abide by the Volcker Rule, a U.S. law that restricts lenders from using their own funds to make speculative trades.

You can read the entire article by following the link below:

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