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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.

What These Four Global Leaders Have in Common with Trump
February 2, 2017

President Donald J. Trump was elected on promises to “Make America Great Again,” and since January 20 he’s already signed a number of executive orders to tighten border security and ease regulations. Whether you approve of his actions or not, no one can deny that many of Trump’s policies are a sharp departure from American politics of the last 70 years, which has emphasized globalism and interventionism.

It isn’t until we look at the bigger picture, though, that we realize Trump’s ascent is in line with a nationalistic wave that’s spreading across the globe, from Asia to Europe and beyond. As investors, it’s important that we familiarize ourselves with these global policymakers, thought leaders, mavericks and disruptors. Government policy, after all, is a precursor to change.

Below are four such leaders who have more in common with Trump than you might realize.  

1. Narendra Modi – India

Narendra Modi’s 2014 campaign slogan, “Good times ahead,” is in many ways cut from the same idealistic cloth as “Make America Great Again.” Indeed, the similarities between Modi and Trump are numerous. Both men have made it their top goals to strengthen economic growth by deregulating key industries and taking a protectionist approach to manufacturing, reflected in their respective “Make in India” and “America First” policies. A former tea merchant, Modi has often been described as a Hindu nationalist, with alleged goals to replace secularism with Hinduism as the guiding principle of Indian government and society. Like Trump, he’s interested in “draining the swamp” of public corruption. To that end, Modi took an extreme measure in November, eliminating all 500 and 1,000 rupee banknotes—90 percent of the nation’s currency—one of the effects of which was a sharp decline in December’s gold demand.   

Modi's Demonetization Scheme Impacted India's Gold Imports in December 2016
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2. Xi Jinping – China

Upon taking leadership of the People’s Republic of China in 2013, Xi Jinping made it his mission to crack down on corrupt “flies” (rank-and-file party officials) and “tigers” (senior officials) who were suspected of lining their pockets with black money. Since Xi began to “drain the swamp,” courts have prosecuted more than 200,000 officials on corruption-related charges and disciplined hundreds of thousands more. His campaign, which has been wildly popular with the masses, hit Asian gaming capital Macau particularly hard. Before the crackdown, Macau, a special administrative region of China, was adding the equivalent of a Las Vegas Strip every year in revenue, according to the Wall Street Journal. More recently, Xi instructed senior officials to lead by example, warning them there were “no forbidden areas in intra-party supervision, and no exceptions.”

Macau's Gaming Revenue Took a Hit from Chinese Anti-Corruption Measures
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3. Mauricio Macri – Argentina

It might be hard to believe now, but Argentina once ranked among the top 10 wealthiest nations in the world, following the U.K., U.S. and Australia. Following years of rule by the far-left Justicialist Party, however, the South American country languished in corruption and stagnation. In November 2015, voters said “no, gracias” to further leftist rule by electing businessman and two-term Buenos Aires mayor Mauricio Marci as president. It was an upset victory for the people of Argentina, who have seen their once-prosperous nation deteriorate under decades of Marxist policies. Since being sworn in, Macri has made business growth and the economy a number one priority, loosening regulations in the telecommunications sector, easing currency controls, cutting energy subsidies and eliminating tariffs.

Can Mauricio Macri Make
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4. Nigel Farage – United Kingdom

Not all disruptors need to be presidents or prime ministers. As founder and once-leader of the populist, right-wing UK Independence Party (UKIP), Nigel Farage has already made a lasting impact on the United Kingdom. The former commodities trader was instrumental in the campaign to leave the European Union (EU), and following the referendum’s passage, Farage invoked the 1996 sci-fi action film “Independence Day” by declaring June 23 “our independence day” from failed socialist rules, regulations and immigration policies. Reportedly close to Trump, Farage was the first British politician to meet with the then-president-elect after the November election and has since come out in full support of his more controversial policies, including the “extreme vetting” of refugees.   

Brexit Pounded the POund
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Honorable Mention, Looking Ahead

These five global mavericks, Trump included, are certainly not the only ones in power right now, and we can expect to see more in the months and years ahead. Emboldened by Brexit and Trump, other nationalistic candidates are rising in European polls, with several major elections coming up this year in France, Germany, Hungary, the Netherlands and elsewhere.

Among the candidates with a reasonable chance to gain control is Marine Le Pen, president of France’s Front National Party, which takes a hard Euroskeptic stance. (She is, in fact, daughter of its founder, Jean-Marie Le Pen.) If elected president of France in May, Le Pen pledges many dramatic changes, including withdrawing from  the Schengen Area, which eliminates border controls and passports among 26 European countries; giving priority to French citizens with regard to jobs and housing; reintroducing the death penalty and boosting spending on prisons; and issuing a “Frexit” referendum to quit the EU.

 

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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China Sets the Stage to Replace the U.S. as Global Trade Leader
January 30, 2017

golden rooster

Saturday marked the Lunar New Year, the most important date in the Chinese calendar. It’s also the start of the longest holiday at two weeks, during which the largest mass migration of humans occurs every year as families reunite and go on vacations, both domestic and overseas.

2017 is the year of the 10th Chinese zodiac, the fire rooster, one of whose lucky colors is gold. Year-to-date, gold—the metal, not the color—is up 3.5 percent, which is below the 5.7 percent it had gained so far around this time last year. Unfortunately, gold prices won’t find support from Chinese traders this week, as markets will be closed in observance of the new year. If you remember, the yellow metal had one of its worst one-day slumps of 2016 back in October during China’s Golden Week, when markets were similarly closed.

But there are other opportunities to get excited about. More than 3 billion trips are expected to take place domestically this year—58 million by air alone. That’s up from 55 million last year and is equivalent to the combined populations of Texas, Ohio and New York. China Southern Airlines, the largest carrier in Asia, added as many as 3,600 flights to accommodate the demand.

58 Million Expected Flight Chinese New Year
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As disposable incomes rise in the world’s second-largest economy, travelers are more inclined to take their new year celebrations outside the country. This year, 6 million Chinese tourists are expected to travel abroad and spend more than $14 billion in 147 destinations, the U.S. included. As I’ve mentioned before, China is home to some of the biggest overseas spenders, with 128 million people spending a whopping $292 billion in 2015 alone.

Betting on China’s Surging Middle Class

A theme I’ve written and spoken about frequently is the emergence of new investment opportunities as more and more Chinese citizens join the middle class and build disposable incomes. The size of the Asian giant’s middle class has already exceeded that of America’s. Looking ahead 10 years, the number of Chinese households with incomes over $35,000 is now expected to surge 300 percent, from 40 million today to 160 million by 2025. That projection can be found in a January report from Oxford Economics, which points out that these new middle-class Chinese consumers “will demand more of the services and higher-end products that American companies export.”

Chinas Surging Middle Class Growth Market US Businesses
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“As China’s middle class expands, we expect demand for American-made goods and services to rise as well,” the economic advisory firm writes.

Among those goods are advanced-technology products (ATPs), made in American industries such as robotics, aerospace, electronics and pharmaceuticals. Chinese demand for such goods has indeed risen, from less than 24 percent of total imports in 2002 to close to 34 percent in 2016. However, the U.S. has been losing market share in exporting ATPs to China, according to a report this week from BCA.

Chinas Demand Advanced Technology Products Opportunity US
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Free Trade Has Benefited American Businesses and Consumers

BCA argues that President Donald Trump will need to work more cooperatively with the Chinese to regain market share for American ATPs if he’s truly committed to creating quality manufacturing jobs here in the U.S. At the moment, it’s unclear whether he’s serious about actually imposing sanctions on Chinese goods or whether he’s using the threat simply as a negotiating tactic.

I agree with BCA’s analysis. Trump’s isolationist and protectionist leanings certainly raise the specter of a trade war with China, which would likely end up being worse for U.S. businesses and consumers in the long run. According to Oxford Economics, our trade relationship with China supports about 2.6 million jobs in the U.S. and has helped put money in Americans’ wallets by keeping consumer prices lower than they otherwise would have been. A typical American family making $56,500 in 2015 saved about $850 that year because of trade with China, Oxford estimates.

US China Trade Largely Benefited American Businesses Consumers
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“Brewing trade tensions between the world’s two largest economies are undoubtedly negative for both the global economy and financial markets,” BCA writes, recommending that investors “should certainly hedge against such a scenario… with long positions on the dollar, gold, and the VIX,” or the Chicago Board Options Exchange (CBOE) Volatility index.   

BCA makes a compelling case for gold. I’ve always recommended a 10 percent weighting—5 percent in bullion (coins, wafers and 18-22 carat jewelry), the other 5 percent in quality mining stocks and mutual funds.

 

China Champions Free Trade

Now that Trump is rethinking America’s involvement in free-trade agreements such as NAFTA, having already withdrawn the U.S. from the controversial Trans-Pacific Partnership (TPP), President Xi Jinping seems interested in positioning China as the global leader in free trade.

Earlier this month, Xi made the first-ever visit by a Chinese president to the World Economic Forum’s annual meeting in Davos, Switzerland, where he urged the world to “say no to protectionism.”

“Pursuing protectionism is like locking oneself in a dark room. While wind and rain may be kept outside, so are light and air,” he colorfully said. “No one will emerge as a winner in a trade war.”

It’s definitely a sharp departure from the norm of the past several decades that China should emerge as the world’s top defender of global trade at a time when the U.S. is set to turn inward, but this is the reality we live in now. I’m not the only one who feels this way. Speaking to Congressional Republicans in Philadelphia last week, U.K. Prime Minister Theresa May said that, while both countries are now on a more isolationist trajectory, the U.S. and U.K. must resist the “eclipse of the West.”

“We—our two countries together—have a joint responsibility to lead,” she said, “because when others step up as we step back, it is bad for America, for Britain and the world.”

As if to reaffirm its commitment to being a global leader in trade and economic development, China just agreed to cooperate with the Philippines on 30 regional infrastructure projects valued at $3.7 billion, according to Global Trade Magazine. This comes despite the two countries sharing a traditionally strained relationship over territorial rights.

What’s more, the China-led Asian Infrastructure Investment Bank (AIIB)—founded in 2015 to serve as an alternative to Western creditors such as the World Bank and International Monetary Fund (IMF)—will be joined by 25 new member-nations this year alone, including Ireland, Canada, Ethiopia and Sudan. The bank is leaving the door open for U.S. membership, but that appears unlikely under a Trump administration.

In its monthly investment report, HSBC recommends an overweight position in Chinese equities, citing improved economic activity, policy stimulus and strong credit. As for a U.S.-China trade war, the investment bank believes it to be unlikely. However, “rising trade protectionism or U.S.-China trade frictions may accelerate the development of high-valued industries in China,” it writes.

 

Touring the World’s Largest Building

Boeing factory

On a final note, I was in Vancouver last weekend attending and speaking at the annual Vancouver Resource Investment Conference alongside old friends and colleagues such as Frank Giustra, Thom Calandra and many others.

While up there, my friend Marin Katusa of Katusa Research organized a tour of Boeing’s monolithic Everett factory near Seattle, where the plane-maker builds its 747, 767, 777 and 787 Dreamliner jets.

At 13.3 million cubic meters, Boeing’s factory is recognized as the world’s largest building by volume. Words fail me in trying to describe how small and insignificant you feel in the presence of the site, which covers a massive 98.3 acres. The doors alone are the size of football fields. Among the world locations that could comfortably fit inside are the Pentagon, the Pyramids and all of Disneyland.

The thing is so monstrous, it has its own weather system.

Boeing Profits 787 Dreamliner Stock Record High
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It’s helpful to think of the factory as a small enclosed city, complete with its own hospital, daycare center, fire department and more. Security is very tight, and a strict “no photos” policy is enforced, for obvious reasons.

That’s why I recommend you go on the factory tour yourself the next time you’re in the Seattle area. Or make a special trip of it. Take a friend. It’s an impressive, awesome reminder of what American ingenuity and innovation is capable of, and I’m grateful to Marin for the opportunity to visit it.

On behalf of everyone at U.S. Global Investors, I want to wish you a Happy Chinese New Year! May the Year of the Rooster bring you lasting happiness, strong health and good fortune!

 

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.

Chicago Board Options Exchange (CBOE) Volatility Index (VIX) shows the market's expectation of 30-day volatility.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 12/30/2016: China Southern Airlines Co. Ltd., The Boeing Co.

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It Might Be Time to Grab the Commodities Bull by the Horns
January 25, 2017

Commodity investors have had to endure a dry spell for a while now, but those days are starting to look as if they might be behind us. We see encouraging signs that a bottom has been reached and a new commodities super-cycle has begun, as global manufacturing expansion and inflation are finally gathering steam following the financial crisis more than eight years ago.

As a group, commodities had their first positive year since 2010, ending 2016 up more than 11 percent, as measured by the Bloomberg Commodity Index.

commodities end positively for the first time in six years
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A large percentage of this growth occurred in the days following the U.S. election, suggesting the reflation trade is officially in motion, which should be supported in the coming weeks and months by President Donald Trump’s pro-growth policies.

Just this week, Trump signed executive orders to proceed with the controversial Keystone XL and Dakota Access pipelines, emphasizing that the steel to be used in their construction will be American-made. Following the announcement, stock in energy infrastructure company TransCanada, which is expected to resubmit plans for the pipeline after it was rejected by the Obama administration, immediately hit a new high, while shares of several steel companies traded up.

Between Election Day and Inauguration Day, the commodities index rose 5.4 percent, with double-digit growth in crude oil (up 17.1 percent), copper (10.5 percent) and iron ore (17.7 percent).

commodities up double digits since trump's election
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Of the 14 commodities that we track in our ever-popular Periodic Table of Commodity Returns—which has been updated for 2016 and is available for download—only two ended the year down: corn and wheat. All this, following the group’s worst annual slump since the 2008 financial crisis.

The Periodic Table of Commodity Returns

Investment Banks Turn Bullish on Commodities

Back in May, Citigroup was first to say that the worst was over for commodities, and in December it made the call that most raw materials were poised to “perform strongly” in 2017 on global fiscal stimulus and economic expansion.

Now, for the first time in four years, Goldman Sachs has recommended an overweight position in commodities, following reports that revenue from commodity trading at the world’s 12 biggest investment banks jumped 20-25 percent in the fourth quarter of 2016 compared to the same period in 2015.

As reported by Bloomberg, Goldman’s head of commodities research, Jeffrey Currie, drew attention to the “cyclical uptick in global economic activity,” which is “driving demand, not only for oil but all commodities.”

“U.S. and China are focal points where we’re seeing the uptick,” Currie continued, “but even the outlook for Europe is much more positive than what people would have thought six months to a year ago.”

Indeed, manufacturing activity continues to expand at a robust pace, with January’s preliminary purchasing managers’ index (PMI) for the U.S. and the eurozone registering an impressive 55.1 and 54.3, respectively. We won’t know China’s January PMI until next week, but in December it improved at its fastest pace in nearly four years. As I shared with you earlier this month, the global manufacturing PMI expanded for the fourth straight month in December, reaching its highest reading since February 2014. I’m optimistic that it will expand again in January.

Global Manufacturing Climbs to 34-Month High in December 2016
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Again, we closely monitor the PMI, as our research has shown that it can be used to anticipate the performance of commodities and energy three and six months out. It looks as if the world’s big banks have begun to acknowledge this correlation as well. With the health of global manufacturing trending up, we see commodities demand following suit in the coming months.

Number of Auto Sales Hits an All-Time High

Case in point: auto sales. Last year marked a new record high, with 88.1 million cars and light commercial vehicles driven off of car lots. That figure was up 4.8 percent from 2015.

Global Auto Sales Reached a New Record in 2016
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China was the standout, which increased sales 13 percent and saw 3.2 million new units sold. It should be noted, however, that sales were assisted by a 50 percent tax cut on smaller vehicles, which is no longer in place.

China sold a record number of automobiles in 2016
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But consider this: Here in the U.S., the average age of cars and light trucks continues to creep up and is now 11.6 years, as of January 2016, according to IHS Markit. Improvements in quality is the main reason for the increase.

Even so, these aging vehicles will need to be replaced in the next few years, meaning domestic auto sales should remain strong. This bodes well for platinum and palladium, both of which are used in the production of catalytic converters.

But what about electric cars, which have no need for catalytic converters since they’re emissions-free? As I’ve shared with you before, electric cars—the demand for which continues to climb—use three times more copper wiring than vehicles with a conventional internal combustion engine.

There’s always an opportunity if you know where to look!

 

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 Bloomberg Commodity Index is made up of 22 exchange-traded futures on physical commodities. The index represents 20 commodities, which are weighted to account for economic significance and market liquidity.

The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

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 12/31/2016.

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“America Works… Never Bet Against America”
January 23, 2017

America works and I think it'll work fine under donald trump... never bet against America. Warren Buffett

And like that, it happened. Despite the polls, despite what anyone believed was possible, including many of his own supporters, billionaire developer Donald J. Trump was sworn in as the 45th President of the United States.

Whether you agree with him not, he’s now leader of the world’s largest economy and commander of history’s most powerful military force.

This is something that could only happen in the U.S.

President Trump and now-former President Barack Obama couldn’t be more different in their backgrounds, visions and leadership styles—more so than any other two men whose administrations happen to adjoin the other’s.

And yet the transition went remarkably smoothly and orderly.

I don’t believe there’s ever been such a meaningful and potentially consequential transfer of power in U.S. history, with the incoming president all but promising to undo every last policy of his predecessor, line by line. That Obama peacefully and cordially handed over the executive office to a man who led the charge in questioning his legitimacy for a number of years is a testament to the strength and durability of our democratic process.

It’s a process that’s key to America’s exceptionalism.

Although I don’t always agree with Trump, it saddens me to see so much negativity about him in the media and protests in the streets. Now that he’s president, the time has come to unite behind him and root for his success. If he succeeds, America succeeds. If he fails—as many seem to hope for—America fails.

Take Warren Buffett. He backed Hillary Clinton throughout the primaries and general election. And yet on the eve of Trump’s inauguration, he said he supported the new president and his cabinet “overwhelmingly,” adding that he’s confident America “will work fine under Donald Trump.”

I think what Buffett recognizes is that the vast majority of people who voted for Trump did so for the right reasons. Throughout his campaign, Trump’s promise to bring back American jobs and secure the nation’s borders resonated with everyday folks who have begun to feel overlooked. Entrepreneurs, small business owners and those working in the financial industry found hope and encouragement in his pledge to lower corporate taxes and roll back regulations.  (Just today, Trump told a room full of CEOs that he promised to cut regulations “by 75 percent, maybe more.”) I believe most Americans, regardless of political ideology, want these things—which is why we saw such a large number of people who previously voted for Obama give Trump their vote this time.

As I often say, government policy is a precursor to change, and we’re likely about to see some sweeping changes. But as investors, it’s as important as ever that we don’t panic or get distracted by the noise. Instead, continue to focus on the fundamentals and keep your eyes on the long-term prize.

Inflation Plays Catch-Up

Inflation, as measured by the consumer price index (CPI), got a strong jolt in December, rising 2.1 percent year-over-year, its fastest pace in at least two-and-a-half years. Higher gasoline prices—which rose more than 8 percent in December—and health care costs were the main culprits, with medical bills surging the most in nine years.

Good for Gold: U.S. inflation climbs above 2% in December
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Although they might hurt your pocketbook, pricier goods and services have historically been constructive for gold, as I’ve explained many times before. In August 2011, when gold hit its all-time high of $1,900 an ounce, inflation was running at 3.8 percent and the government was paying you an average 0.23 percent on the 2-year T-Note. That means investors were earning a negative 3.5 percent return, which helped boost gold’s “safe haven” status.

I expect CPI to continue to climb throughout this year and next, supported by additional interest rate hikes—two or three in 2017 alone—and President Trump’s protectionist policies.

The metal’s investment case could be strengthened even more now that Trump has officially been sworn in. His personal shortcomings and public office inexperience might raise more than a few “unknown unknowns” for some investors, prompting them to seek an alternative to stocks and bonds. Scotiabank hinted at this in a recent note, saying it expects gold holdings “to increase as investors look to diversify their portfolios in what seems likely to be a challenging year for investors.”

On Inauguration Day, gold rose a little under 1 percent to close at $1,210.

Whether you support the new president’s policies or not, it’s still prudent to maintain a 10 percent weighting in gold, with 5 percent in gold stocks, the other 5 percent in coins and bullion.

Another Gold Rally in the Works?

Look at the chart below. It’s indexed at 100 on the day the Federal Reserve raised rates in 2015 and 2016 (December 16 and 14, respectively). Although past performance doesn’t guarantee future results, gold prices so far this year appear to be tracking last year’s performance pretty closely, suggesting further upside potential. 

gold prices are tracking last year's performance since rate hike
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In the first half of 2016, gold rallied more than 31 percent, from a low of $1,046 in December 2015 to a high of $1,375 in July. With mid-December 2016 as our starting point, a similar 31 percent move this year would add close to $360 to the price of gold, taking it to above $1,520 an ounce.

Gold Has a 100-Year History of Outperforming All Major Currencies

In its 2017 outlook, the influential World Gold Council (WGC) listed six major trends that will likely support gold demand throughout the year, including heightened geopolitical risks (Brexit, Trump, the global rise of populism), a potential stock market correction, rising inflation expectations and long-term Asian growth.

The group also calls out currency depreciation. Over the past 100 years, gold has strongly outperformed all major currencies. Whereas global gold supply grows at an annual average of only 2 percent, there’s no limit to how much fiat money can be printed.   

all major currencies have depreciated over the past century relative to gold
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Inflation and currency depreciation are among the Fear Trade’s triggers that I often write and speak about.

Spending Watchdog: U.S. Is on an “Unsustainable Fiscal Path”

This point about currency depreciation is especially relevant in light of an alarming new report from the U.S. Government Accountability Office (GAO), the nation’s watchdog. According to the report, the federal government’s spending is “unsustainable,” and if no action is taken to rectify the problem, the debt-to-GDP ratio will soon exceed its historical high of 106 percent, set in 1946.

To be clear, that means our nation’s debt will be larger than its economy.

an unsustainable fiscal path debt-to-gdp ratio expected to surpass its historical high
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The federal deficit increased to $587 billion in 2016, after six years of declining deficits. Spending increases were driven by entitlement programs such as Medicare and Medicaid, which surged 4.9 percent and 5.3 percent, respectively, during the year.

Whether Trump can change any of this, we’ll just have to wait and see. He seems interested in lowering costs and bringing some fiscal sanity to the government, as demonstrated by his criticism of Boeing over the perceived cost of Air Force One. At the same time, massive tax cuts, coupled with a $1 trillion infrastructure package, will likely drive up deficit spending even more.

All the more reason to have a portion of your portfolio invested in gold and gold stocks.

In the meantime, I wish President Trump all the best!

 

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 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. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 12/31/2016: The Boeing Co.

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American Small Businesses Party Like It's 2004
January 17, 2017

France reported last week that its summer hosting of Euro 2016, Europe’s soccer championships, added $1.26 billion to its economy.

This is good news, for sure, and worth celebrating.

But here’s the thing: Why doesn’t France put as much effort into supporting its businesses and markets as it does its soccer franchises?

After all, the country has an entrepreneurship problem—as in, business growth and its labor market are struggling.

A lot of the blame lies at the feet of its labyrinthine web of regulations, which the Organization for Economic Cooperation and Development (OECD) once called “unnecessarily complex.” Barriers to entry in several key industries, including architecture, accounting and legal services, are prohibitively high, which has decimated the country’s labor market in the last few years. More than 25 percent of all working-age French under the age of 25 are unemployed right now, a meaningfully higher rate than for youth in the European Union (18 percent unemployment), United States (10 percent) and Japan (4 percent). Household savings rates are skyrocketing, consumer confidence is on life support and investments growth has been sluggish.

Investments Growth France Among Slowest 2020
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As a result of all this, economic growth in France is among the worst for major EU economies. There it will remain, sadly, unless officials commit to strengthening competition by streamlining its tax system and reforming regulations. But at least it has some great soccer clubs.

Surging Demand for California Munis

By comparison, look at California, whose economy just surpassed France’s in size. Say what you will about the state and some of its colorful residents, it’s successful because it recognizes talent and fosters an environment in which innovation and entrepreneurism can thrive. Silicon Valley is seeing a boom right now, which has helped the state government generate budget surpluses. Debt is being paid down, and the state’s rainy-day savings account is growing. This has contributed to California enjoying its highest credit rating since the turn of the century, Bloomberg reports, and caused demand for its municipal debt to climb.

At the same time, California munis can be volatile because state revenue depends on wealthy taxpayers whose incomes are tied closely to the stock market. According to Bloomberg, the top 1 percent of earners paid half of the state’s income tax revenue in 2014.

It shouldn’t come as a surprise to anyone, then, that California has one of the highest Gini coefficients, a measure of economic inequality, in the nation. Although some might balk at this, I think it’s proof there are huge, life-changing opportunities in California, and in the U.S. in general, that can turn “regular folk” into billionaires almost overnight.

Speaking of which, check out our latest slideshow, “10 Living, Self-Made Billionaires.”

Small Business Optimism in the U.S. Is Soaring Right Now

As further proof that France should do more to open up its economy, look at what President-elect Donald Trump’s pledge to lower taxes and slash regulations is doing to business optimism here in the U.S. Last month, the Index of Small Business Optimism soared a phenomenal 7.4 points to 105.8, its highest reading since 2004. The National Federation of Independent Business (NFIB), which conducts the survey, reported that attitudes toward capital spending and job creation in particular surprised to the upside. Research firm Evercore ISI called it a “blowout report,” and I have to agree.

Gold Should Be Supported by Even Deeper Negative Real Rates
click to enlarge

In their commentary, the NFIB’s William Dunkelberg and Holly Wade expressed cautious optimism that the incoming administration could satisfactorily relax some of the regulatory burden on businesses.

“Politicians say they want to create jobs, but their regulations and laws… only increased the cost of hiring a worker, and that is not good for job creation,” they wrote.

(Consider compliance-related paperwork alone. In fiscal year 2015, Americans spent a jaw-dropping 9.78 billion—yes, billion—hours complying with federal rules and regulations, according to a recent report from the Office of Management and Budget (OMB). That’s up nearly 4 percent from 2014.)

Many chief executives of large multinationals have been very  receptive to Trump’s proposals, taking him at his word that he can succeed at fostering an improved business environment in the U.S. Ford recently scrapped plans for a Mexico factory, while Fiat Chrysler announced a $1 billion investment in Michigan and Ohio, expected to create up to 2,000 new jobs. After meeting with the president-elect this week, Jack Ma, founder and CEO of Chinese ecommerce site Alibaba, said he was committed to adding 1 million U.S. companies to his hugely popular online shopping platform. The chief executive of active wear company Under Armour told CNBC that it would be bringing jobs back to the U.S., specifically Baltimore, where it’s headquartered. And on Thursday, Amazon unveiled plans to grow the number of its full-time, U.S.-based jobs by 100,000—from 180,000 today to over 280,000 by 2018.

As I’ve said many times before, there’s a lot of uncertainty surrounding Trump, who will be sworn into office this Friday. At the same time, businesses and investors clearly like what they’re hearing. Appearing on CNBC last week, legendary economist Robert Shiller perfectly summarized this distinction, saying that “nervousness can go along with optimism.” Although he didn’t vote for Trump, Shiller acknowledges that animal spirits are running high, adding that he sees the Trump equities rally spilling over into the housing market this year.

Alexander Green of The Oxford Club

Joining Shiller in offering a balanced assessment of Trump is my old friend Alexander Green, whose writing skills I admire and opinions I greatly respect. In his most recent blog post, Alex makes a convincing case against Trump’s protectionism, which are “not good for the economy or the market” and “undermines American economic growth.” Although investors have moved billions into the stock market since the election, the Trump rally could easily turn into the Trump correction, Alex says, “unless he changes his tune” on international trade.

“Why does a flat-panel HDTV that cost more than $10,000 in 2003 cost less than $400 today? Globalization,” he writes. “How can you walk into a Marshalls store and buy a fine cashmere sweater for 35 bucks? Globalization. Why does an $8 million supercomputer from 20 years ago sit in your pocket and cost less than $200? Globalization.”

U.S. Economy Could Get a Boost in the Near Term

The World Bank contributed to the wave of good news last week, making encouraging projections for the U.S. economy in light of Trump’s business-friendly policies. In its flagship report on global economics, the financial institution explained that expansionary fiscal policies—including tax cuts and plans to upgrade America’s infrastructure—could boost U.S. economic growth as high as 2.5 percent this year and 2.9 percent in 2018.

This would be a welcome surprise, as growth slowed considerably in 2016 to 1.6 percent, down from 2.6 percent in 2015, according to the World Bank.

 

China Likely to Remain Top Engine of Global Growth

And the good news isn’t limited to the U.S. Across the Pacific Ocean, China saw its producer price index (PPI) in December rise 5.5 percent, its fastest pace in more than five years and fourth consecutive positive reading after 54 straight negative ones.

The country’s PPI, which measures prices received by producers at the first commercial sale, is strengthening on higher commodity prices. What’s more, there’s an 85 percent correlation between China’s PPI and its nominal GDP, according to Evercore ISI, so growth in the world’s second-largest economy should pick up some steam this year.

85 Correlation Chinas Nominal GDP PPI
click to enlarge

“Based on history, the PPI’s increase of +3.3. percent year-over-year (y/y) in the fourth quarter suggests +15 percent y/y nominal GDP growth,” the firm wrote. It estimates fourth-quarter growth to be more than 8.8 percent and more than 9.6 percent in the first quarter of this year.

Meanwhile, the country’s purchasing manager’s index (PMI) has remained at or above 50—indicating manufacturing expansion—for the past six months, which is bullish for commodity prices.

Chinese demand for commodities, which were up 25 percent in 2016, is indeed skyrocketing, with imports of oil, iron ore, copper and soybeans reaching all-time highs last year. This helped solidify the country’s role as the world’s top engine of economic growth once again, contributing an estimated 33.2 percent to global economic expansion, according to China’s National Bureau of Statistics.

China Estimated 33 Global Economy Expansion 2016
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It’s expected we’ll see a repeat of outsize commodity demand this year, which should support prices.

 

Looking at copper, further support should come in the form of market deficits, which are expected to widen until at least 2020. As investment bank Jefferies explained in a note, “unexpected disruptions”—including undercapitalization of mines and the risk of labor strikes at Chile’s Escondida, the world’s largest copper mine—will likely add to supply constraints.

Copper Market Deficit Expected Support Prices 2020
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“From a supply perspective, the outlook for mined commodities is very bullish,” Jefferies added.

That includes gold. As a friend recently reminded me, China’s official gold holdings account for only 2 percent of its foreign reserves. Two percent! That’s remarkably low, far lower than most large economies. (In the U.S., it’s around 75 percent, according to the World Gold Council.) China is obviously interested in supporting its currency, and since it sold off quite a lot of U.S. Treasuries in the past year—Japan is now the top holder of U.S. government debt—it will likely need to substantially build up its gold reserves.

The People’s Bank of China (PBoC) has been accumulating gold, even if the rate has slowed recently, but imagine if it decided to boost holdings up from 2 percent of foreign reserves to 10 percent, which is more in line with other countries. That would have a monumental impact on the price of the yellow metal.

At this point, there’s no evidence the PBoC plans to follow such a route, but the possibility is there, with huge implications for gold.

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 Small Business Optimism Index is compiled from a survey that is conducted each month by the National Federation of Independent Business (NFIB) of its members.

The Producer Price Index (PPI) measures prices received by producers at the first commercial sale.  The index measures goods at three stages of production:  finished, intermediate and crude. The Purchasing Manager's Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 09/30/2016: Ford Motor Co.

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Net Asset Value
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Global Resources Fund PSPFX $5.45 -0.03 Gold and Precious Metals Fund USERX $7.74 -0.16 World Precious Minerals Fund UNWPX $6.79 -0.08 China Region Fund USCOX $8.52 0.04 Emerging Europe Fund EUROX $6.15 0.01 All American Equity Fund GBTFX $24.37 -0.04 Holmes Macro Trends Fund MEGAX $18.92 -0.01 Near-Term Tax Free Fund NEARX $2.22 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change