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Please note: The Frank Talk articles listed below contain historical material. The data provided was current at the time of publication. For current information regarding any of the funds mentioned in these presentations, please visit the appropriate fund performance page.

Freezing Temperatures Could Heat Up Natural Gas Prices
November 19, 2018

Midterm Elections Gridlock Was the Best Possible Outcome

Here in San Antonio, the temperature hit a bone-chilling low of 27 degrees last Wednesday, breaking a 102-year-old record for mid-November. An out-of-state visitor, Cornerstone Macro’s Head of Portfolio Insights Stephen Gregory, speculated that the Central Texas temperature, ordinarily mild this time of year, was down more than three standard deviations. I didn’t make the calculation, but my guess would be about the same.

With temperatures so low, it’s perhaps no surprise that natural gas had one of its best days in years. Its price popped almost 18 percent last Wednesday—before falling nearly as much on Thursday. The Energy Information Administration (EIA) reported that natural gas storage in the lower 48 states was below the five-year average as of October 31. This, combined with a stronger-than-expected start to winter, prompted traders to push prices to a four-year high of $4.84 per million British thermal units (MBtu). Meanwhile, natural gas futures trading hit an all-time daily volume record of 1.2 million contracts, according to CME Group.

Natural gas prices exploded
click to enlarge

Freezing temperatures increase demand for heating, much of which is provided by natural gas. In January of this year, when temperatures fell below the average in many parts of the U.S., demand reached a single-day record of 150.7 billion cubic feet, according to the EIA. I can’t say we’ll beat this record again in the coming months, but forecasts for more freezing weather this Thanksgiving week and beyond should support additional moves to the upside.

What kind of moves? Says Jacob Meisel, chief weather analyst at Bespoke Weather Services, the price could get to $7 or $8 per MBtus, levels we haven’t seen since 2008. “This looks like a capitulation move today, but if cold weather really takes off, the sky is the limit,” Meisel told CNBC.

Oil Selloff Steepest in Three Years, “Overdone”

Natural gas wasn’t the only commodity that broke records last week. On Tuesday, West Texas Intermediate (WTI) crude oil ended an extraordinary 12 straight days of losses, settling at a 2018 low of $55.69 per barrel, down more than 27 percent from its 2018 high in early October. Triggered by concerns of a global demand slowdown, the plunge is oil’s steepest in three years, and a stunning reversal from last month’s calls for $100-per-barrel crude.

The bears appear to have overreacted, though. “Crude-oil-position liquidations have never been this extreme, indicating the purge in WTI futures is overdone,” writes Business Intelligence strategist Mike McGlone, adding that petroleum markets have “never experienced a comparable decline over a similar period.” 

World Needs the Equivalent of Another Russia’s Worth of Crude

Again, the oil selloff halted last Tuesday, the same day the International Energy Agency (IEA) announced its estimate that U.S. shale will need to add the equivalent of Russia’s entire oil production by 2025 to prevent a global shortage. In its flagship “World Energy Outlook 2018,” the Paris-based group says that world oil consumption will increase significantly in the coming decades due to “rising petrochemicals, trucking and aviation demand.”

“U.S. shale production, which has already been expanding at record pace, would have to add more than 10 million barrels a day from today to 2025, the equivalent of adding another Russia to global supply in seven years—which would be an historically unprecedented feat,” according to the IEA.

Jets fyling high

The U.S. produced 11.7 million barrels of crude per day in the week ended November 9. That means shale producers would need to ramp up output to at least 21 million barrels in seven years, if the IEA’s estimates are accurate.

I think this would be a challenge, but a real possibility. The reason I think this is because the U.S. fracking industry continues to prove it can produce more with less. According to a recent report by the EIA, U.S. crude oil and natural gas production increased in 2017, despite there being fewer wells. This is thanks in large part to horizontal wells, which “contact more reservoir rock and therefore produce greater volumes” of oil and gas. Although more expensive to drill, horizontal wells are growing faster than traditional vertical wells. In 2017 they accounted for 13 percent of total well drills, up from only 10 percent three years earlier.

Also in the IEA’s outlook: By 2040, emerging markets, led by China and India, will account for 40 percent of global energy demand, up from 20 percent in 2000. Below, note how the European Union is expected to be displaced by India and Africa in terms of energy demand within the next couple of decades.

Emerging markets will account for 40 percent of global energy demand by 2040
click to enlarge

I believe only the U.S. fracking industry would be able to meet this demand. Russia and Saudi Arabia are pumping at record levels right now, but production cuts of as much as 1.4 million barrels per day are being discussed among members of the Organization of Petroleum Exporting Countries (OPEC) to firm up prices. If cuts do go into effect, U.S. producers can be expected to fill in the supply gap.

“It can happen but would be a small miracle,” said Fatih Birol, the IEA’s executive director.

U.S. Shale “More Profitable Than Ever”

Normally, ever greater supply would weigh on prices and weaken profitability. Based on new data, it looks as if the U.S. fracking industry has changed the game.

According to Reuters, “U.S. shale firms are more profitable than ever after a strong third quarter,” according to the agency’s analysis of 32 independent producers. “These companies are producing more efficiently, generating more cash flow and consolidating in a wave of mergers.”

Nearly a third of these 32 companies “generates more cash from operations than they spent on drilling and shareholder payouts, a group including Devon Energy, EOG Resources and Continental Resources. A year ago, there were just three companies on that list,” Reuters writes.

Thanksgiving Travel to Hit 13-Year High

On a final but related note, this week is Thanksgiving, the busiest travel season of the year in the U.S. The American Automobile Association (AAA) predicts that the number of travelers on Thanksgiving Day, by auto and air, will top 54.3 million people, an increase of almost 5 percent from last year, and the highest volume since 2005.

Similarly, Airlines for America (A4A) believes U.S. Thanksgiving air travel demand between last Friday and November 27 will climb to an all-time high of 30.6 million passengers. “It is thanks to incredibly accessible and affordable flight options that more travelers than ever before are visiting loved ones, wrapping up year-end business or enjoying a vacation this Thanksgiving,” commented A4A Vice President and Chief Economist John Heimlich.

Thanksgiving 2018 US air travel demand estimated to rise 5 percent from last year
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While I’m on the topic of aviation, A4A also reported that U.S. airport revenues have grown faster than the consumer price index (CPI) as well as the number of air passengers and aircraft departures. From 2000 to 2017, airport revenues rose 87 percent, double the pace of U.S. inflation. Increased growth came thanks to a number of resources, from taxes and fees to the Passenger Facility Charge (PFC) and Airport & Airway Trust Fund (AATF).

US airport revenues have grown faster than flights passengers and inflation
click to enlarge

According to Fitch Ratings, “strong overall performance for U.S. airports should continue undeterred for the foreseeable future.” Over 90 percent of the airports Fitch currently rates have a “Stable Rating Outlook,” signifying continued stability deep into 2019.

Curious to learn more? Explore our latest slideshow, “How Do Airports Make Money?”

 

Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.

The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals.  The weights of components are based on consumer spending patterns.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 9/30/2018.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

 

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Here's How We Discovered This Disruptive Gold Stock... Before It Went Public
November 14, 2018

If you’ve run into difficulties lately finding the best gold stocks to invest in, you’re not alone. Sentiment has been down. But there are still some very attractive opportunities out there in the goldfields, one of which I want to share with you.

First, a quick recap: The price of gold tested support of $1,200 an ounce on Monday as the U.S. dollar strengthened to a 16-month high, propelled by expectations of additional interest rate hikes. A stronger greenback, remember, weighs on gold as well as a number of other commodities, including oil, since they’re priced in dollars. I’ve inverted the dollar’s values in the chart below so it’s easier to see this relationship.

A strengthening U.S. Dollar has been a headwind for gold
click to enlarge

Gold miners have felt the pressure, too. In the 12-month period as of November 12, the FTSE Gold Mines Index, which reflects the stock performance of producers from around the world, lost 17.66 percent.

This may have made it challenging for some gold investors to find promising stocks. As such, assets have dropped. Gold and precious metal ETFs in North America saw net outflows of 58 metric tons in 2018 through October 31, according to the World Gold Council (WGC).

But selling now is the wrong move, I believe. Gold stocks appear to be highly undervalued relative to the S&P 500 Index, and a sharp drop in the market could strongly boost demand for the yellow metal. This means it might be time to consider accumulating.

Meet Menē, Gold Jewelry Disruptor

For investors who wish to increase their exposure to gold, I believe our Gold and Precious Metals Fund (USERX) is an attractive option with a history of strong performance. USERX is actively managed, meaning we rely on fundamentals and on cultivating relationships with management teams to decide which companies go in and out of the fund.

One of those companies, the one I hinted at earlier, is a newcomer to the industry—Menē Inc.

You might not have heard the name Menē yet, but you could soon enough, especially if you’re in the market for fine jewelry.

Founded in 2017 by Roy Sebag, co-founder of gold financial services firm Goldmoney, and Diana Widmaier-Picasso, granddaughter of—you guessed it—Pablo Picasso, Menē ’s mission is to disrupt the gold jewelry market by selling directly to the consumer and pricing its merchandise fairly and transparently. Unlike traditional sellers like Tiffany & Co. and Cartier, which sometimes have high premiums, Menē prices its jewelry based on the changing value of gold. It then charges a 15 percent to 20 percent design and production fee on top of that.

What also sets the company apart is that its jewelry—from earrings to necklaces, bracelets to charms—is made of 24-karat gold or platinum. No alloys, no insets of diamonds or other stones. That’s done to help the pieces retain their value over time.

Here at U.S. Global Investors, we believe gold is money and a timeless investment. Menē , which takes its name from the Aramaic word for “money,” has clearly run with that idea, going so far as to trademark the phrase “investment jewelry.”

It’s a business model that seems to have resonated with consumers and investors alike. In its first 10 months of operation, Menē did as much as $7 million in sales in more than 53 countries, as of October 2018.

Active Management Can Help You Invest in Attractive Companies Before the Street Does 

The reason I tell you this is to highlight our potential ability to find and invest in little-known yet promising companies before they become overvalued. In the case of Menē , we managed to get in even earlier, before shares in the company were made available to the public.

Menē went public on the Toronto Stock Exchange (TSX) earlier this month. But thanks to active management and our industry relationships, we were able to buy shares privately seven months ago. So even before its stock was available to retail investors, Menē accounted for 2.46 percent of the Gold and Precious Metals Fund (USERX) as of September 30.

For the one-year, five-year and 10-year periods, USERX beat its benchmark, the FTSE Gold Mines Index, as of September 30, 2018. You can see its performance here.

USERX holds an incredible four-star rating overall from Morningstar as of September 30 in the Equity Precious Metals category. It also holds four stars for the three-year, five-year and 10-year periods, based on risk-adjusted returns.

Learn more by visiting the Gold and Precious Metals Fund (USERX) now!

 

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Foreside Fund Services, LLC, Distributor. U.S. Global Investors is the investment adviser.

Total Annualized Returns as 9/30/2018
Fund One-Year Three-Year Five-Year Ten-Year Gross
Expense
Ratio
Gold and Precious Metals Fund -16.56% 11.45% -1.43% -2.83% 1.86%
FTSE Gold Mines Index -21.33% 12.38% -4.34% -5.47% n/a

Expense ratios as stated in the most recent prospectus. Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. For a portion of periods, the fund had expense limitations, without which returns would have been lower. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance does not include the effect of any direct fees described in the fund’s prospectus which, if applicable, would lower your total returns. Performance quoted for periods of one year or less is cumulative and not annualized. Obtain performance data current to the most recent month-end at www.usfunds.com or 1-800-US-FUNDS.

Morningstar Rating

Overall/67
3-Year/67
5-Year/65
10-Year/46

Morningstar ratings based on risk-adjusted return and number of funds
Category: Equity Precious Metals
Through: 9/30/2018

Morningstar Ratings are based on risk-adjusted return. The Morningstar Rating for a fund is derived from a weighted-average of the performance figures associated with its three-, five- and ten-year Morningstar Rating metrics. Past performance does not guarantee future results. For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.)

Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5% to 10% of your portfolio in these sectors.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The FTSE Gold Mines Index encompasses all gold mining companies that have a sustainable and attributable gold production of at least 300,000 ounces a year, and that derive 75% or more of their revenue from mined gold. The U.S. dollar index (USDX) is a measure of the value of the U.S. dollar relative to the value of a basket of currencies of the majority of the U.S.'s most significant trading partners. This index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Gold and Precious Metals Fund as a percentage of net assets as of 9/30/2018: Menē Inc. 2.46%.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

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Midterm Elections: Gridlock Was the Best Possible Outcome
November 12, 2018

Midterm Elections Gridlock Was the Best Possible Outcome

Celebrated value investor Benjamin Graham, who mentored a young Warren Buffett, liked to say that the market is a voting machine in the short term, a weighing machine in the long term. Last week the market voted to reward stocks in the aftermath of the midterm elections, which gave Democrats control of the House and left the Senate in the hands of Republicans. This all but guarantees that gridlock will be the status quo in Washington, at least for the next two years.

A divided Congress might very well be the only time gridlock is a positive. Corporate gridlock can hold a company back from growing, and there’s not a soul alive who enjoys sitting in bumper-to-bumper traffic. The congestion in Austin, just north of our headquarters, is legendary, costing commuters as much as 43 hours a year. (This congestion could be improved with better infrastructure, which I’ll get to in a second.)

The truth is that markets favor divided government. Both Republican and Democratic presidents have had the greatest effects on stocks when Congress was split and gridlock prevailed, according to Bank of America Merrill Lynch data. Granted, such leadership makeups are rare, occurring for only a combined 11 years in the past 90, so I’ll be curious to see if the trend holds true.

Stock markets have generally thrived under a divided government
click to enlarge

But in the short term, markets showed a lot of enthusiasm. The S&P 500 Index advanced more than 2 percent on Wednesday, marking the best post-midterm rally since 1982. Stocks got slammed only after the Federal Reserve announced more rate hikes were forthcoming.

I want to remind you that we’ve already entered the three most bullish quarters for stocks in the four-year presidential cycle. Average returns in the fourth quarter of year two have historically been 4 percent, followed by 5.2 percent in the first quarter of year three and 3.6 percent in the second quarter.

Record Votes, Record Campaign Spending

Voter turnout was abnormally high for a midterm election. Here in Texas, nearly 53 percent of registered voters cast ballots—a very strong showing thanks in large part to the much-publicized and heavily funded Senate race between Senator Ted Cruz and Congressman Beto O’Rourke.

Indeed, a whole lot of cash passed hands this cycle. For the first time in U.S. history, more than $5 billion was spent during a midterm election by candidates, political parties and other groups, according to the Center for Responsive Politics (CRP). That’s up almost 40 percent from spending levels in 2014. The biggest independent donor was billionaire Sheldon Adelson, founder and CEO of Las Vegas Sands, and wife Miriam, who shelled out more than $113 million in support of Republican candidates.

More than 5 billion was spent on midterm elections far surpassing previous totals
click to enlarge

Because it’s such a massive amount, it might help to put $5.2 billion into perspective. An estimated 113 million Americans participated in the midterm election, a new record, meaning roughly $46 was spent on each voter.

Here’s another way to look at it. Between the House and Senate, 470 seats were up for grabs. That comes out to an incredible $11 million per seat.

Big Winners: Infrastructure and Cannabis

Like every election cycle, this one is sure to have some huge consequences—not least of which is House Democrats’ pledge to turn up the heat on President Donald Trump. Representatives Maxine Waters, Adam Schiff, Elijah Cummings and other staunch critics of the president are expected to lead key oversight and intelligence committees that could open investigations into Trump’s finances and handling of White House personnel changes as soon as this January.

My hope is that Democrats and the president can agree to come together on areas of common interest. That includes infrastructure. Remember the $1 trillion infrastructure plan? Remember “Infrastructure Week”? It’s possible we could finally see a spending bill of some kind, as both the Democrats and Trump support the idea. This would be a massive tailwind for raw materials, commodities and energy.

Materials and construction services stocks—including Vulcan Materials, Martin Marietta Materials, Quanta Services and AECOM—jumped in response to the election outcome.

Can the new congress make infrastructure stocks great again
click to enlarge

As I’ve shared with you before, U.S. infrastructure is badly in need of a spit shine. Last year, the American Society of Civil Engineers (ASCE) gave the country’s roads, bridges and waterways a D+ while noting that there’s a $2 trillion infrastructure funding gap between now and 2025. Because this affects all Americans, it shouldn’t be turned into a partisan issue.

Another winner last week was the U.S. cannabis industry, which is expected to be worth some $75 billion by 2030, according to Cowen & Co. Michigan voted to legalize recreational marijuana, the 10th state to do so, while Missouri and Utah voters approved medical marijuana. Pot stocks, led by Canadian grower and distributor Tilray, surged on the news.

Tilray jumped nearly 6 percent last Tuesday, another 30 percent on Wednesday following the ouster of now-former Attorney General Jeff Sessions. As the head of the Department of Justice, Sessions strongly opposed legalization. Industry advocates hope the next permanent AG will be more open to relaxing federal law.

Oil Notched a 10th Straight Day of Losses

As recently as last month, it didn’t look as if anything could stop oil from heading even higher. Friday, however, marked the 10th straight day of losses for West Texas Intermediate (WTI), as inventories continue to build and the U.S., Russia and Saudi Arabia produce at record or near-record levels.

Oil slipped into bear territory
click to enlarge

Down more than 20 percent from its recent high of $76 in early October, oil was trading below $60 a barrel friday and is now considered to be in a bear market.

Although bad news for producers and refiners, lower oil prices are good for nearly everyone else, including net importer countries and airlines. As I told CNBC Asia’s Akiko Fuijita last week, when oil prices have fallen below their 50- and 200-day moving averages, quant traders especially have poured money into airlines.

Jets fyling high

It’s important to note, too, that demand remains very strong, outpacing capacity growth. According to a report by the International Air Transport Association (IATA) dated October 19, airline passenger load factor climbed to a 28-year high in August. Global load factor, a measure of an airline’s capacity usage, rose to 85.3 percent for the first time since 1990.

Watch my CNBC Asia interview by clicking here!

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. By clicking the link(s) above, you will be directed to a third-party website(s). U.S. Global Investors does not endorse all information supplied by this/these website(s) and is not responsible for its/their content.

The S&P 500 Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 9/30/2018.

 

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India's Booming Economy Expected to Firm Up Gold Demand
November 7, 2018

Gold and Diwali

Starting today, the five-day festival known as Diwali—literally, “a row of lights”—will be observed by millions of Hindus, Sikhs and Jains worldwide. A celebration of good triumphing over evil, the festival typically coincides with the Hindu new year. Regular readers of Frank Talk should know that Diwali is also an auspicious time to buy gold coins and jewelry as gifts for loved ones, and in the past the increased demand has been enough to move gold prices to the upside.

This year, however, demand for coins and jewelry was muted leading up to the fall festival on account of a weaker rupee relative to the U.S. dollar. This made the precious metal less affordable for some buyers. By the end of October, gold prices were at their highest level since September 2013, according to Reuters. Gold ordinarily goes for a premium in anticipation of Diwali, but this year many retailers reported trying to attract customers by offering discounts.

Price of gold surged in India on weaker rupee denting Diwali demand
click to enlarge

And there could be more rupee pain ahead. In a recent note to investors, UBS forecast that the Indian currency will likely remain under pressure as global oil prices stay elevated. India is a net importer of crude oil, which has risen more than 20 percent in the 12-month period, thanks to supply disruptions in Venezuela, Libya and elsewhere.

U.S. sanctions on major oil state Iran—India’s third largest supplier of crude following Iraq and Saudi Arabia—have also lifted prices. Those sanctions went into effect this week.

India’s Economy to Grow Faster Than China’s

Nevertheless, India’s economy is advancing at the world’s fastest pace right now. I believe this should have a positive effect on gold demand in the long term as the size of the country’s middle class expands. The International Monetary Fund (IMF) recently predicted the Indian economy this year to grow 7.3 percent, or 0.7 percentage points over China’s anticipated growth rate and an incredible 2.6 percentage points over emerging and developing economies on average. Next year India is expected to grow even faster, at 7.4 percent.

India projected to be fastest growing economy this year and next
click to enlarge

What’s more, India’s billionaire wealth increased 36 percent in 2017, according to a recent report by UBS. The number of billionaires in India rose by 19 to 119 in total. Again, I expect this to have a noticeable impact on gold demand, the greater this wealth builds.

Curious to learn more? Be sure to visit our slideshow:

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

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The "Black Swan" Author Just Issued a Powerful Warning About Global Debt
November 5, 2018
The Black Swan author Nassim Taleb
By Photo:flickr/Joe Loong | Creative Commons Attribution 2.0 Generic

The world is more fragile today than it was in 2007. That’s the opinion of former derivatives trader Nassim Taleb, whose bestseller, The Black Swan, is about how people make sense of unexpected events, especially in financial markets. True to form, he made a whole lot of money after predicting the global financial crisis more than a decade ago.

Speaking with Bloomberg’s Erik Schatzker last week, Taleb said the reason why he has reservations about today’s economy is that it suffers from the “same disease” as before. The meltdown in 2007 was a “crisis of debt,” and if anything, the problem has only worsened.

Indeed, debt is on the rise. By the end of the first quarter, the total amount the world owes climbed to a record $247 trillion, according to the Institute of International Finance (IIF). That’s up almost $150 trillion over the past 15 years.

A lot of this debt, Taleb said, may have moved to different places since the financial crisis—it’s shifted from housing to governments and corporate balance sheets—but the debt “is still there.” Student loan debt in the U.S., for example, stands at about $1.5 trillion today, or nearly $33,000 per borrower. After mortgages, student debt is now the largest form of debt in the U.S.

Just look at the federal government’s balance sheet. Gross debt has more than doubled from pre-recession levels, meaning Washington now owes slightly more than the entire size of the U.S. economy.

US government debt situation has only worsened since the financial crisis
click to enlarge

Higher Debt Levels Pose an “Economic Threat”

President Donald Trump said last week that “we’re going to start paying down debt.” But all the signs appear to say otherwise. The Treasury Department estimates that it will issue some $1.338 trillion in debt this year—more than twice the amount as last year. And the Office of Management and Budget (OMB) recently reported that the government is set to run trillion-dollar deficits for the next four years, despite a roaring economy.

The Black Swan author Nassim Taleb
Photo: Gage Skidmore | Creative Commons Attribution-Share Alike 3.0 Unported license

According to Taleb, the U.S. government is now in a “debt spiral,” meaning it must borrow to repay its  creditors. And with rates on the rise, servicing all this debt will continue to get more and more expensive.

Did you know that the government could soon pay more in interest than on defense? Interest costs are projected to become the third largest category in the federal budget by 2026, according to the Peter G. Peterson Foundation’s analysis of Congressional Budget Office (CBO) data. By 2046, these payments could become the second largest category; and by 2048, the single largest category.

“It is a fact that when your national debt gets to the level ours is, that it constitutes an economic threat to the society,” National Security Adviser John Bolton said last week in Washington, D.C. “And that kind of threat ultimately has a national security consequence for it.”

Spending reform, especially entitlement spending reform, is politically unpopular and will require bipartisan support, according to Senate Majority Leader Mitch McConnell.

“I think it’s pretty safe to say that entitlement changes, which is the real driver of the debt by any objective standard, may well be difficult if not impossible to achieve when you have unified government,” McConnell told Bloomberg last month.

The U.S. isn’t alone in its budget woes, of course. Several European Union (EU) members are facing big budget crunches of their own, with Belgium, Spain and Italy leading the way. Last month, Moody’s Investors Service reported that “rising mandatory spending and slowing economic growth have left a number of euro area governments with less budget flexibility than before the financial crisis a decade ago.”

So how will this all play out, and what can investors do?

Could the “Barbell Strategy” Whip Your Portfolio Into Shape?

We all know what happened in 2007 and 2008, after debt levels became unsustainable. During the interview, Taleb stopped short of predicting another such crash, but he stressed the importance of paying attention to the risks.

As for his current allocations, he’s invested in real estate, short-term Treasuries and gold, “just in case.” If you own stocks, he said, make sure you have some kind of put protection. Readers of his books might recognize this approach as the “barbell strategy.” Here he is in The Black Swan:

If you know that you are vulnerable to prediction errors, and if you accept that most “risk measures” are flawed… then your strategy is to be as hyperconservative and hyperaggressive as you can be instead of being mildly aggressive or conservative. Instead of putting your money in “medium risk” investments… you need to put a portion, say 85 to 90 percent, in extremely safe instruments, like Treasuries—as safe a class of instruments as you can manage to find on this planet. The remaining 10 to 15 percent you put in extremely speculative bets, as leveraged as possible (like options), preferably venture capital-style portfolios. That way you do not depend on errors of risk management.

Nassim Taleb's Barbell Strategy

I share Taleb’s unconventional allocation strategy with you not because I fully endorse it but simply as food for thought. It evokes the discussion I had earlier in the week about investing vs. speculating, with gold and government bonds on one end, venture capital and digital currencies on the other. And although I believe your portfolio should leave room for equities—domestic as well as emerging market—there is some merit to Taleb’s idea that you should be both incredibly defensive and incredibly aggressive.

You can watch the full Bloomberg interview by clicking here.

The Fear Trade and Love Trade Make Gold Look Compelling

Speaking of gold, the Fear Trade moved prices in October, the “jinx month,” as volatility spiked and stocks lost most of their gains for the year. The yellow metal managed to notch its first positive month since March, despite still being under pressure from a stronger U.S. dollar and higher yields.

gold had its first month of gains since march as stocks tumbled
click to enlarge

The third quarter was a solid one for gold’s Love Trade, according to the most recent report by the World Gold Council (WGC). Total demand in India was up 10 percent from the same time a year ago, just ahead of this week’s Diwali festival. Chinese demand increased at about the same rate, with jewelry sales up during the Qixi festival, China’s equivalent of Valentine’s Day.

Purchases made by central banks, meanwhile, were very robust in the third quarter, up an impressive 22 percent from a year ago. At 148.8 metric tons, the amount was the highest for any quarter since the end of 2015.

I’ve pointed out before that global gold demand has benefited from a rise in wealth, which we’re seeing today. A recent report by UBS showed that wealth shared among the world’s billionaires enjoyed its greatest-ever increase in 2017, rising 19 percent to a new all-time high of close to $9 trillion. China, however, was the clear standout, with wealth among its now-373 billionaires climbing 39 percent to $1.12 trillion. That’s double the global rate.

the number of chinese billionaires has exploded this century
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The Asian giant minted two new billionaires per week last year, according to UBS, an incredible feat for an economy that had only one billionaire at the beginning of the century.

It’s the Policies, Not the Party

On a final note, midterm elections are tomorrow. Historically, the president’s party has lost Congressional seats in his first term, but it’s important to temper whatever expectations you might have with some perspective. When evaluating the macro investment climate, it’s not the party that matters so much as the policies, and so I’m a firm believer that there are ways to make money no matter which party is in control. I’ll definitely be sure to share with you my thoughts on the election results!

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Net Asset Value
as of 01/18/2019

Global Resources Fund PSPFX $4.47 0.02 Gold and Precious Metals Fund USERX $6.67 -0.15 World Precious Minerals Fund UNWPX $2.69 -0.02 China Region Fund USCOX $7.75 0.07 Emerging Europe Fund EUROX $6.41 0.06 All American Equity Fund GBTFX $23.29 0.28 Holmes Macro Trends Fund MEGAX $16.16 0.14 Near-Term Tax Free Fund NEARX $2.20 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change