Brian Whitmer, Elliott Wave International's European markets expert and contributor to Global Market Perspective, explains why it's "too late" for Deutsche Bank and how this has now evolved into problem across the EU.

Running length 00:04:39

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[Editor's note: A text version of the interview is below.]

Alexandra Lienhard: Today on ElliottWaveTV I'm joined by Brian Whitmer, Brian provides European coverage for Elliott Wave International's monthly Global Market Perspective. Now Brian, to start off with, I feel like some questions don't need much; I can just offer one word: Deutsche Bank – go!

Brian Whitmer: Yeah, Deutsche Bank is just a fascinating problem. It's a slow-motion train wreck. We've been writing about it for months and months, years even. And you know only now, only when a bailout looks to be inevitable has it really entered the mainstream conversation. That's really unfortunate because it's really too late. It's too late for equity investors. The stock has lost half its value this year. It's too late for lots of bondholders. I talked about coco bonds last month where those have been cut in half and the mainstream explanation, I think the lazy explanation, is that this massive fine from the Department of Justice is causing these problems. It is a massive fine, but that doesn't explain why the stock topped years ago. It doesn't explain the trends in the credit markets. What does explain that is deflation. And Deutsche Bank is desperate for cash right now. It's part of this deflationary process where cash and liquidity are becoming very highly sought after, very important. As we're seeing this is no longer just a problem in the periphery. It's not just a problem for Italian banks, Spanish banks. This is Germany's largest lender. This is the largest economy in Europe and deflation is now a problem here too.

Alexandra: Now Brian, with German and French elections looming next year, what's the mood like in Europe? What are you seeing in the DAX, the Eurostoxx 50 for example?

Brian: I'd say mood, it's kind of a mixed bag. There is a lot of optimistic sentiment extremes and we typically see those at the end of a long bull market, but it's really becoming hard to ignore some of the signs of economic weakness.

We've got French unemployment now that just pushed to a 12-month high. We've got global growth that is really just stagnating. So, you know, I think these countervailing forces really have investors kind of in limbo. What's going to be interesting moving into the fall and winter is where that push comes from that could send them over the edge. Maybe it's Deutsche Bank, maybe it's Wells Fargo in the U.S., which is having its own problems. Maybe it's a crisis that we don't even know about yet. But I think we're on a very slippery slope here in terms of sentiment. I think it's a small push that can kind of nudge investors over the edge where they just give up, run out of risk assets all together and move into the safety of cash and cash equivalents.

Alexandra: Now Brian, looking at the UK, are stocks in the UK really as cheap as the media is implying? I know that's something you took issue with recently, can you talk a little bit about that?

Brian: Well here's the thing, by some measures, yes. You can look at the FTSE all shares, for example, and by some measures they're cheap compared to Europe, say the EuroStoxx 50. The stat that I see thrown around is using forward PE ratios and earnings estimates, and by those measures you can compare Europe and the UK and argue that stocks are cheap, but that's kind of the point. Earnings estimates always become inflated, optimistic at highs in the stock market. Right, in 2007, profits looked great for companies. Contrast that with 2009 when profits looked horrible. So that's a problem with using earnings estimates. That's a measure of mood, not a measure of real world activity. The other problem, and I think more important, relative value between two indexes really means nothing if both indexes are overvalued to begin with. I think that's definitely the case in the UK. If you look at price to sales ratio, if you look at enterprise value to sales or earnings, you know stocks aren't cheap. By some measures they're even more expensive than they were in 2000. So these are the usual ways I think economists and analysts already have a preconceived bias.

Alexandra: So if stocks are so overvalued why is everyone so bullish?

Brian: Well this is the usual problem at the tail end of a long bull market. I think what's going on is analysts are really just trying to confirm, or just trying to rationalize a continued bullish opinion against the evidence and against historical precedent.

Alexandra: Well there's certainly a lot to pay attention to over in Europe. Thanks for talking today Brian.

Brian: Thanks, Alex. I'll talk to you again soon.

Brian Whitmer edits the European section of Global Market Perspective – the monthly 50-page publication that gives you in-depth, longer-term views of European, U.S., and Asia-Pacific stock indexes. Now is the time to learn about worldwide investment opportunities. Visit the link below to learn how you can subscribe to EWI's Global Market Perspective.