Category: Financial Markets Commentary

Monthly financial markets commentary from Sabino Investment Management, LLC

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The New World Dis-Order

The economic sanctions against Russia are likely to have a bigger economic impact on Europe and the United States than Russia.  The potential changes are not yet reflected in the financial markets.

On February 28, the US Treasury Department announced that it would freeze Russian central bank assets that are held in the United States.  The US also imposed sanctions on the Russian Direct Investment Fund, which is a sovereign wealth fund.  European allies and Japan joined the US in implementing similar sanctions on Russian assets.  The scale and scope of the sanctions were unprecedented.  The EU Council’s sanctions included the 351 members of the Russian State Duma and an additional 27 individuals and entities.

On April 6, the US in coordination with G-7 countries and the European Union, announced additional sanctions that will ban all new investment in Russia, increase sanctions on financial institutions and state-owned enterprises in Russia, and sanction Russian government officials and their family members.

Prior to the invasion of Ukraine, on February 4, Russia and China agreed on 30-year natural gas deal via a new pipeline, which is expected to be in operation within 3 years.  The agreement had been in the planning stage for years, but it serves as a reminder that Russia has other markets to serve besides Europe for its natural gas.

It is naïve to think that one country’s actions against another country will not generate responses, including some countries that are not the target of the initial action.  In response to the economic sanctions, Russia has taken the following actions:

  • March 10 – Russia suspends fertilizer exports to “Not Friendly” countries. China warns the US against retaliation.
  • March 31 – Russia issues a decree that payments for natural gas should be in rubles. Kremlin spokesman Dmitry Peskov said that Russia “won’t engage in charity if Europe refuses to pay in the Russian currency.”
  • Pavel Zavalny, Chairman of the Energy Committee of the State Duma in Russia, said that European countries will “pay in hard currency, and this is gold for us” or they can pay in rubles. “Friendly countries” such as China or Turkey can pay with their national currencies or the ruble.
  • The Russian invasion effectively cut off Ukrainian exports of wheat. Russian exports of wheat are expected to decline this year.

The suspension of fertilizer exports to selected countries and limited exports of wheat prompted President Biden to acknowledge at a March 24 press conference in Belgium after NATO and G7 meetings, “Yes, we did talk about food shortages and it’s going to be real.”

According to reports on March 9, the White House requested phone calls with Saudi Crown Prince Mohammed bin Salman and the UAE’s Sheik Mohammed bin Zayed al Nahyan to discuss increasing exports of their oil to the United States.  However, both declined the requests to speak with President Biden.

On March 15, Dow Jones reported that Saudi Arabia is in active talks with China to price some of its oil exports to China in the yuan currency instead of US dollars.

The use of US dollars beyond our borders is enormous in size.  What is often called the “Eurodollar market” encompasses bank deposits, bonds, loans, imports, and derivatives outside of the US that must be settled in US dollars.  Michael Every of Rabobank estimated the size of the Eurodollar market at $57 trillion at the end of 2018.  For his explanation of the Eurodollar market, see The Eurodollar Market Is The Matrix Behind It All – Daniel’s blog (wordpress.com).

Paul Craig Roberts, economist and chairman of the Institute for Political Economy, offered his opinion on the sanctions and its impact on the US economy:

What the sanctions have done is to destroy the dollar-based world that allowed the Americans to impose the financing of their huge trade deficit, due largely to US corporations offshoring their production for the US market, on the rest of the world.  Russia, China, central and east Asia will now create their own methods of payment separate from the West.  This will destroy dollar hegemony and American power.

The obvious question is how far will the US dollar decline if a significant portion of international trade requires payment in currencies other than the US dollar?

If you have any questions or comments, please contact me.

Sincerely,
Robert G. Kahl
CFA, CPA, MBA

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Doubleline Round Table: Market Outlook

On January 10, DoubleLine Capital had a panel of some highly regarded investment strategists discuss their 2022 market outlooks.  56 minutes.  https://www.youtube.com/watch?v=sgvIEPd7M8E

On the panel were:

  • Jeffrey Sherman, Deputy Chief Investment Officer of DoubleLine Capital;
  • James Bianco, President and Macro Strategist at Bianco Research;
  • Danielle DiMartino Booth, CEO and Chief Strategist of Quill Intelligence;
  • Jeffrey Gundlach, Founder and CEO of DoubleLine Capital;
  • Ed Hyman, Chairman and Head of Research of Evercore ISI;
  • David Rosenberg, President, Chief Economist and Strategist of Rosenberg Research & Associates.

During the discussion, there are some references to S&P 500 earnings, Price/Earnings ratios, and 10 year US Treasury rates.  This website has graphs of the historical data.  See the tabs at the top.  https://www.multpl.com/

If you have any questions or comments, please contact me.

Robert G. Kahl
CFA, CPA, MBA

 

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What’s Worse – Omicron or the Fed?

At the end of last week and early this week, we had two news developments that had a negative impact on the financial markets.

Omicron

If you are worried about the latest COVID variant, get used to it.  As Johnny Carson playing his Carnac the Magnificent fortune-telling character, who had a knack for stating the obvious, would say, “There will be more variants in your future.”

Dr. Dave Rasnick, PhD spoke at a conference organized by Robert F. Kennedy Jr. in February of this year.  Dr. Rasnick was hired by Abbott Laboratories in 1978 to set up a chemistry group in their diagnostics division.  He has about two decades of experience in clinical diagnostics.  Dr. Rasnick was critical of the computer algorithmic process that Fan Wu and colleagues in China used to define the SARS-CoV-2 from the “millions of RNA fragments from a sample taken from the lungs” of a single pneumonia patient in China.  His conclusion: “Nowadays, it’s all technology and no biology.”

Dr. Rasnick was also critical of the use of the PCR process for diagnostic tests.  In 1997, he met Kary Mullis, who invented the PCR process and received a Nobel prize for it in 1993.  The purpose of the PCR process was to create billions of copies of a single fragment of DNA.  Mullis died in 2019, so he is not available to offer his thoughts about the PCR “test.”  Dr. Rasnick knew Kary Mullis well and had this to say:

It turns out that the most stable sequences of RNA viruses are approximately the same in all members of the viral family, including the family of coronaviruses.  The 1% or less of the viral RNA that is amplified by the PCR test is chosen from these relatively stable samples.  So, at best, the PCR test is targeting a family of RNA viruses and not a specific virus.  Before PCR can be done on the RNA of a coronavirus, a process that is error prone must first convert the RNA into DNA.  By their very nature, the short synthetic sequences of DNA used to initiate each cycle of the PCR test cannot be guaranteed to distinguish between virus and non-virus.  This alone makes PCR test highly suspect.  However, these technical limitations were not the reason Kary opposed the PCR test.  He simply could not accept equating a string of RNA or DNA with actual virus.  Kary was not alone.

As for the number of potential variants, Dr. Rasnick had this to say: “An international database consortium in Munich has already catalogued over 400,000 different sequences of SARS-CoV-2.”  If you wish to watch Dr. Rasnick’s presentation, here is a link to the conference presentations: https://childrenshealthdefense.org/webinar/the-covid-vaccine-on-trial-if-you-only-knew-watch-now/   He starts at 1 hour+20 minutes of the video.  There is also a link to a transcript a few lines below the video frame.

Despite all the COVID variants, you can rest assured because Pfizer CEO Albert Bourla recently said on CNBC, “I’m very confident that this drug (Pfizer’s new COVID treatment pill) works for all known mutations, including omicron.  But we are working on other drugs for the eventual case that maybe a resistance is developed.”

Assuming the virus theory is true and tests are accurate, the omicron variant is reported to be weak in nature.  According to Angelique Coetzee, Chairwoman of the South Africa Medical Association who first raised the alarm of the latest new COVID variant known as Omicron, it causes “unusual but mild symptoms.”  In Botswana, Assistant Minister Sethomo Lelatisitswe reported that they had 19 cases of the omicron variant, including 4 foreign diplomats who left the country.  Of the 15 remaining cases in Botswana, 11 were vaccinated, while 4 who were unvaccinated did not show any symptoms at all.  3 of the patients showed mild symptoms, while the rest had no symptoms.

Despite the mild nature of omicron, it has prompted a variety of new travel restrictions and other actions by governments around the world.  So far, it is government actions rather than the virus itself that has created negative economic implications.

The Fed

President Biden reappointed Jerome Powell as Chairman of the Federal Reserve on November 22.  Perhaps Chairman Powell considered his reappointment as an opportunity to be more hawkish in his public pronouncements.  On Tuesday of this week, at a Senate Banking Committee hearing, Chairman Powell said that “clearly the risk of more persistent inflation has risen” and “it’s probably a good time to retire” the word transitory.

It was already obvious that our current bout of inflation was not transitory, but it was contrary to the favorite meme of the media that inflation was temporary in nature.  It also suggested that the Federal Reserve might take action to reduce the rate of inflation sooner than previously expected.  Economists are no longer asking if the Fed will raise interest rates but are now tasked with predicting how many times the Fed will raise rates and at what pace.

The Bottom Line

When the stock market is at high valuation levels (high price/earnings ratios, low dividend yields) supported by accommodative Federal Reserve policies and excessive margin debt for an extended period, there are likely to be some sharp declines.  These declines can be set off by almost any news developments that are offered to justify the declines.  Conversely, when the stock market is at low valuation levels (low price/earnings ratio, high dividend yields), favorable news can result in sharp increases.

If you have any questions or comments, please contact me.

Sincerely,
Robert G. Kahl
CFA, CPA, MBA