Category: Financial Markets Commentary

Monthly financial markets commentary from Sabino Investment Management, LLC

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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

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Basel III and Its Impact on Bullion Pricing

There has been much commentary recently in the precious metals arena about Basel III bank regulations proposed by the Bank of International Settlements (BIS”) that are now in the process of being implemented and their potential impact on the price of gold and silver.

The Bank of International Settlements is a supranational organization based in Basel, Switzerland whose mission is to support central banks’ objective of monetary and financial stability through international cooperation.  It provides a forum for dialogue and cooperation to develop a common understanding and plans for common actions.  The BIS has proposed Basel III rules as a set of voluntary international financial standards agreed upon by BIS members in the aftermath of the 2008 financial crisis.

The Basel III regulations make a distinction between allocated and unallocated bullion accounts.  Allocated bullion accounts represent title and ownership of specific bars, with the dealer acting as custodian on the client’s behalf.  Similar to the contents of deposit boxes, allocated bullion deposits do not appear on a bank’s balance sheet.

Most bullion in London is traded and settled on an unallocated basis, where the customer does not own specific bars but has a paper claim to an amount of metal.  Thus, such contracts are often referred to as “paper gold.”  Unallocated gold obligations appear as a liability on a bank’s balance sheet.  The origin of all unallocated gold accounts is not the depositing of gold, but credit creation by banks.

Basel III regulations will classify banks’ actual physical gold holdings (allocated and held in their own vault) as safe, tier 1 assets along with cash.  Unallocated gold contracts will be classified as tier 3 assets against which greater reserves are required.  The new requirements became effective on June 28 for European banks.  US banks are required to comply effective July 1 and UK banks will begin compliance on January 1, 2022.  UK banks dominate bullion trading at the London Bullion Market Association (LBMA), so much of the impact may be delayed until later this year and early 2022.

The unallocated gold market in London is huge in comparison to the physical gold that is traded.  Approximately 600 metric tonnes of gold derivatives (unallocated gold) are traded daily between LBMA members.  This does not include trading between members and non-members or intraday turnover.

Alisdair Macleod, Head of Research at Goldmoney, and others believe that the introduction of Basel III regulations will have a significant impact on bullion trading by large banks and consequently the price of gold and silver.  Macleod writes:

The LBMA’s problem with Basel III becomes obvious. Unallocated gold liabilities cannot be used for funding the bank’s assets, and unallocated gold assets take a valuation haircut of 15% of market value as well. In the future, the former cannot be simply offset against the latter, but bullion banks in London naturally run unallocated positions on both sides of their balance sheets. Whether the bank owns vaulted allocated gold to offset some of the price risk is immaterial. If this Basel 3 proposal goes through without modification, it will effectively be the end of the LBMA’s forward settlement business, and the end of arbitrage and hedging between LBMA members and the CME’s Comex futures contracts.

Macleod argues that Comex futures for gold and silver will also be impacted.

The Swaps category on Comex (the bullion bank trading desks) is currently net short of about $24bn in the GC gold futures contract and $1.6bn in silver futures. Pressure to pare back ownership of these positions to a few genuine market makers and American bank trading desks is bound to increase, because the short positions held by European bullion banks would have to be covered…  And in London, all LBMA banking members will similarly reduce their unallocated activities because unbalanced books would be heavily penalized by the rule changes when they come in for the UK as well. That would make Comex gold and silver contracts entirely dependent on producer hedging.

Price manipulation in the gold and silver market has been frequent and obvious in the past as banks were able to create more precious metals derivatives out of nowhere.  That will be more difficult in the future as the role of derivatives declines and there is a greater reliance on physical gold and silver.

The likely result of the Basel III regulations is:

  • A reduction in open contracts at the LBMA and Comex for gold and silver bullion.
  • For those investors who want to retain price exposure to gold and silver, a shift from unallocated bullion contracts to physical bullion in a vault.
  • Higher prices for physical gold and silver bullion.

I wish all of you a Happy July 4th weekend.  If you have any questions or comments, please contact me.

Robert G. Kahl
CFA, CPA, MBA