Share this page with your friends:

Print

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.

Is India the New China?
June 6, 2016

Global slowdown worries high Indias booming economy

A “slow-growth trap.” That’s how the Organization for Economic Cooperation and Development (OECD) described the global economy last week in its latest Global Economic Outlook. The group sees world GDP advancing only 3 percent in 2016, the same as last year, with a slight bump up to 3.3 percent in 2017.

Catherine Mann, the OECD’s chief economist, urged policymakers around the world to prioritize structural reforms that “enhance market competition, innovation and dynamism,” as monetary policy has been used alone as the main tool for far too long. The longer the global economy remains in this “slow-growth trap,” Mann said, the harder it will become to revive market forces.

This is precisely in-line with what I, and many of my colleagues, have stressed for months now. To push the economy on a high-growth path, we need structural fiscal reforms, both here and abroad. One need only look at the global purchasing managers’ index (PMI) to see that manufacturing conditions have been slowing for the past several years since the financial crisis. The PMI in May registered a 50.0, which Markit Economics describes as “lethargic” and “low gear.”

Global Manufacturing Sector Stagnates May
click to enlarge

U.S. manufacturing also saw further weakness in May, with its PMI reading falling to 50.7, more than a six-year low. The eurozone’s PMI fell to 51.5, a three-month low. Meanwhile, the Caixin China General Manufacturing PMI came in at 49.2, still below the neutral 50 threshold.

It’s clear that policymakers need to address slow growth with smarter fiscal policies, lower taxes and streamlined regulations. Zero and negative interest rate policies are taking their final gasp as far as what they can accomplish.

Indian Prime Minister Narendra Modi

One of the bright spots continues to be India, whose own manufacturing sector expanded for the fifth straight month in May. The country’s GDP advanced an impressive 7.9 percent in the first quarter, following 7.3 percent year-over-year growth in 2015. This helps it retain its position as the world’s fastest growing major economy. Credit Suisse ranked India first in April’s Emerging Consumer Survey 2016, noting that “Indian consumers stand out among their emerging market peers with higher confidence about their current and future finances and relatively lower inflation expectations.”

Many analysts are referring to this as the “Modi effect,” in honor of Prime Minister Narendra Modi, elected two years ago on promises to reinvigorate business growth by cutting red tape and increasing infrastructure spending. Modi, who is scheduled to visit Washington this week, has had limited success at this point. But to be fair, India’s challenges run deep, and it will take quite a bit longer to make substantial changes to the country’s notorious regulations and corruption.

India’s Oil Demand Ready for Takeoff

Make no mistake, China’s oil demand is still massive, second only to the U.S. But it has begun to contract in recent months, and there to offset the difference is India, who is expected to have the fastest growing demand for crude between now and 2040, according to the International Energy Agency (IEA). India’s consumption stood at 4.5 million barrels a day in March, which is up considerably from an average of 4 million barrels a day in 2015. The Asian country represented a whopping 30 percent of total global consumption growth in the first quarter. This makes it the world’s “star performer” growth market, a role occupied until recently by China. India is now poised to overtake Japan as the second largest oil consumer in Asia, if this hasn’t already happened.

Indias oil consumption poised to overtake Japan
click to enlarge

Contributing to India’s oil binge are policy changes that make its economy resemble China’s in the late 1990s, soon before its industrial boom. Compared to other major economies, India’s per capita consumption of oil is relatively low, as ownership of automobiles and motorcycles—many Indians’ preferred mode of personal transportation—is still developing, with penetration at merely 144 per 1,000 people. If we look just at passenger cars, the rate is closer to 17 per 1,000 people. (In the U.S., the figure is 850 per 1,000 people.)

Vehicle ownership in india has been steadily rising
click to enlarge

This is the exciting part, of course. A couple of months ago I shared with you a factoid from my friend Gianni Kovacevic’s book “My Electrician Drives a Porsche?”, that in 1979 there were only 60 privately-owned automobiles in China. Today, it’s the world’s largest auto market.

India’s rise appears to be similarly dramatic. In the chart above, courtesy of a March report from theOxford Institute for Energy Studies, you can see that the number of vehicles driving on Indian roads doubled between 2007 and 2014, thanks not only to an exploding population but also the rise of India’s “spending class,” as Gianni calls it. More than 600 million Indians are under the age of 25, based on 2014 data, and many in this cohort aspire to have social mobility and the American Dream. The country is now on track to become the third largest auto market by 2020, behind China and the U.S., and obviously this has huge implications for oil consumption.

Did you know India has 600 million people under 25

Oil at $60 by the End of Summer?

Despite OPEC’s failure to agree on a production cap, global oil markets are rebalancing faster than expected. U.S. producers, reacting to low prices, continue to trim exploration and production spending, leading to fewer active rigs and, consequently, less output over the past 12 months.

U.S. oil production down as number of active rigs continues to drop
click to enlarge

Meanwhile, demand remains strong, not only in India but around the world. The IEA, in fact, expects global demand to outpace supply in mid to late 2017. What’s more, analysts with Bank of America Merrill Lynch believe that oil demand will peak sometime after 2050, “as long as we remain in a relatively low oil price environment of $55-75 per barrel in real terms.”

Global oil demand expected to outpace supply in 2017

click to enlarge

Many prominent analysts, including British financials firm Standard Chartered’s chief economist, now see oil climbing above $60 by the end of the summer. Goldman Sachs also appears to have turned bullish, noting that global storage levels are heading into a deficit “much earlier than we expected.” 

Helping to turn sentiment around is the arrival of the busy summer travel season, as I told CNBC’s Pauline Chiou last week. This year in particular is expected to be one for the history books—not just on roads but also by air. With fares down throughout 2015 and the first half of 2016, industry trade groupAirlines for America estimates 231.1 million passengers will fly on U.S. airlines during the months of June, July and August. This would mark a record high, up from the 222.3 million that flew over the same period last year.

All Eyes on Gold

Frank Holmes CNBC Fear Trade sees gold as store of value

I’d like to thank Verizon union members for the strong pop in gold prices on Friday last week. As you might already know, thousands of Verizon workers were on strike during the month of May and consequently were counted as unemployed. This contributed to the weakest jobs report since 2010—only 38,000 new jobs were created in May, a dramatic dive from March’s 180,000—adding to speculation that an interest rate hike this month will once again be delayed. This bodes well for gold, which had its strongest daily gain since March Friday, soaring up more than $33 an ounce.

More than that, though, gold is up on Fear Trade worries, with negative interest rates draining yield around the world.

With this in mind, I want to remind everyone to register for our next webcast, “All Eyes on Gold: What’s Attracting Investors to the Yellow Metal,” scheduled for this Wednesday at 4:15 P.M. Eastern time. I’m thrilled to be joined by World Gold Council CEO Aram Shishmanian, and you won’t want to miss his deep insights into the yellow metal.

Register now by clicking below!

All Eyes on Gold: What's Attracting Investors to the Yellow Metal - webcast

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 J.P. Morgan Global Purchasing Manager’s Index is an indicator of the economic health of the global manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. The Caixin China General Manufacturing PMI is a composite indicator designed to provide an overall view of activity in the manufacturing sector and acts as an leading indicator for the whole economy. When the PMI is below 50.0 this indicates that the manufacturing economy is declining and a value above 50.0 indicates an expansion of the manufacturing economy.

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 3/31/2016.

Share “Is India the New China?”

Can the TPP Save the Global Economy?
May 31, 2016

TPP Trans-Pacific Partnership

Last week, President Barack Obama was in Vietnam and Japan drumming up additional support for the Trans-Pacific Partnership (TPP), and meanwhile I was in the U.K., where Brexit drama is dominating headlines and airwaves. Only a month remains before voters decide whether the country will stay in or leave the European Union. As I said before, an exit could trigger a currency crisis with both the euro and pound, in which case owning gold might be a good idea.

Speaking of the yellow metal, I had the opportunity to meet with the World Gold Council (WGC) while I was in London. It’s a pleasure to share with you that the group’s CEO, Aram Shishmanian, has agreed to join me as a special guest during our next webcast, scheduled for Wednesday, June 8. We’ll be discussing gold, specifically the reasons behind its rally this year and the pullback we’re seeing this month. I highly urge you to register for the webcast because you won’t want to miss Aram’s rich insights into gold.

Aram Shishmanian, CEO of the world council

As Oil Hits $50 a Barrel, Americans Hit the Road

I was disappointed to see that U.S. manufacturing activity showed more signs of slowing growth, according to preliminary purchasing managers’ index (PMI) data. The PMI posted a 50.8, just above the neutral 50.0 threshold separating expansion and deterioration. What’s more, the index fell below its three-month moving average, which we’ve found to be a headwind for commodities and energy three to six months out.

Markit Flash US Composite PMI Falls below Three-Month Moving Average

click to enlarge

This could threaten additional recovery in the oil and gas industry. For the first time this year, West Texas Intermediate crude briefly touched $50 a barrel on Thursday last week. Prices between $50 and $60 are widely seen as a “goldilocks” scenario: high enough for oil companies to stay profitable yet low enough for consumers.

Gas prices, in fact, were expected to be the lowest in 10 years this Memorial Day weekend, according to the American Automobile Association (AAA). The motor club estimated prices would average around $2.26 a gallon, or 45 cents less than last year. More than 38 million Americans were expected to travel this past weekend, AAA says, the second-highest volume on record. If you’re one of them, I wish you happy, safe travels! But however you plan on spending the weekend, remember to honor those who bravely served the U.S. and gave the ultimate sacrifice.

The U.S. Can Now Export Weapons to Vietnam

Last Monday, Obama lifted the 40-year-old weapons embargo against Vietnam, ending what many see as the last vestige of the U.S. and Southeast Asian country’s former animosity. It was also part of his administration’s “pivot” to Asia to deepen relations with countries in the fastest growing region of the world.

Indeed, Vietnam is in an exciting position right now. In the fourth quarter of 2015, its gross domestic product (GDP) growth rate expanded an impressive 7.01 percent, and Goldman Sachs predicts its economy will become the 17th largest by 2025, up from 55th today. The most populous city, Ho Chi Minh City, commonly known as Saigon, has blossomed into one of the world’s premier manufacturing and tech startup hubs, with huge investments flowing in from companies such as Samsung and Intel.

Vietnam’s defense spending has also been growing rapidly in recent years, and today a lot of business is up for grabs. Between 2011 and 2015, the country was the world’s eighth largest arms importer, just one rung above the U.S., according to the Stockholm International Peace Research Institute (SIPRI). This year it’s expected to spend $5 billion, a dramatic increase from the estimated $1 billion it spent in 2005.

With the embargo out of the way, American aerospace and defense contractors such as Lockheed Martin and Raytheon have the opportunity to move into this new Asian market. Boosted by recent geopolitical fears and terrorist activity, both companies are trending near their all-time highs.

Lockheed Martin Raytheon Trending Near All Time Highs

click to enlarge

They also provide attractive dividends, which are increasingly sought-after in a world that’s seen a third of all government bond yields around the world turn negative.

Read how negative interest rates are also pushing foreign investors into American muni bonds!

Selling the TPP

One of Obama’s main objectives in visiting Vietnam and Japan was to shore up support for the TPP, the historic trade agreement that, if ratified by all 12 participating countries, is designed to eliminate as many as 18,000 tariffs. Sixteen to 30 years after ratification, 99 percent of all goods trade among these countries will be entirely liberalized.

In the map below, you can see the massive scale of who’s involved. TPP countries have a combined GDP of $28 trillion, close to 40 percent of world GDP, and they account for almost a quarter of total world exports.

The United States Total Trade with TPP Countries

click to enlarge

Vietnam has the most to gain from the TPP Eliminating thousands of tariffs should allow its important apparel and textile industry to export even more goods to the U.S. In turn, the U.S. would have the opportunity to sell more vehicles in the Asian country. The World Bank estimates a 10 percent bump in Vietnam’s economy over a decade as a result of the deal.

Among the TPP countries, the U.S. runs the largest trade deficit, which widened to $57.5 billion in April. As you can see, the U.S. has an unfavorable (and worsening) trade gap with Vietnam (-$2.7 billion in March) and Japan (-$6.7 billion). The TPP could help rebalance this.

Americas Ever Widening Trade Deficit with Vietnam

click to enlarge

Americas Ever Widening Trade Deficit with Vietnam

click to enlarge

According to the Peterson Institute for International Economics (PIIE), the TPP “will increase annual real incomes in the United States by $131 billion, or 0.5 percent of GDP, and annual exports by $357 billion, or 9.1 percent of exports, by 2030.” For all member nations, the deal is expected to add $492 billion in real income.

Challenges Ahead

Of course, none of this will come to pass if the TPP can’t be ratified. The PIIE warns that delaying the TPP’s launch by even a year could lead to a permanent opportunity loss of between $77 billion and $123 billion for the U.S. Obama has repeatedly said he wants to see it passed by the end of 2016.

But a delay at this point appears highly possible, with both major U.S. presidential candidates opposing it. Support in Congress is muted. Of the 12 TPP countries, only Malaysia has ratified it.

There’s still strong support for the deal. The U.S. Conference of Mayors, responding to recent positive findings by the International Trade Commission, wrote an open letter asserting its support, stating that passage of the TPP is critical for the U.S. to remain a leader in the global marketplace.

I agree. The deal is far from perfect, but it’s what we need now to help reignite global growth.

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 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. Composite PMIs are published monthly by Markit Economics in conjunction with sponsors, and are based on surveys of over 400 executives in private sector service companies. The surveys cover transport and communication, financial intermediaries, business and personal services, computing & IT and hotels and restaurants.

There is no guarantee that the issuers of any securities will declare dividends in the future or that, if declared, will remain at current levels or increase over time.

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 3/31/2016: Lockheed Martin Corp., Raytheon Co.

Share “Can the TPP Save the Global Economy?”

China: Still the World’s Number One Heavy Metal Rock Star
April 26, 2016

I want to begin with a quote from a recent Cornerstone Macro report that succinctly summarizes the research firm’s view on growth prospects in emerging markets and China specifically. Emphasis is my own:

Our most out-of-consensus call this year is the belief that China, and by extension many emerging markets, will see a cyclical recovery in 2016. We understand the bearish case for emerging markets on a multiyear basis quite well, but we also recognize that in a given year, any stock, sector or region can have a cyclical rebound if the conditions are right. In fact, we’ve already seen leading indicators of economic activity and earnings perk up in 2016 as PMIs have rebounded in many areas of the world. That is all it takes for markets, from equities to CDS, to respond more favorably as overly pessimistic views get rerated. And like in most cyclical recoveries that take place in a regime of structural headwinds, we don’t expect it to last beyond a few quarters.

There’s a lot to unpack here, but I’ll say upfront that Cornerstone’s analysis is directly in line with our own, especially where the purchasing managers’ index (PMI) is concerned. China’s March PMI reading, at 49.7, was not only at its highest since February 2015 but it also crossed above its three-month moving average—a clear bullish signal, as I explained in-depth in January.

I spend a lot of time talking about the PMI as a forward-looking indicator of commodity prices and economic activity. As money managers, we find it to be far superior to GDP in forecasting market conditions three and six months out. In the past I’ve likened it to the high beams on your car.

GDP and PMI

We were one of the earliest shops to make the connection between PMIs and future conditions, and we continue to be validated. Just last week, J.P.Morgan admitted in its morning note that “stocks are taking their cues from the monthly PMIs,” the manufacturing surveys in particular, as opposed to GDP.

We eagerly await China’s April PMI reading and are optimistic that this cyclical recovery has legs.

Cornerstone’s outlook is supported by a recent study conducted by CLSA, which found that 73 percent of “Mr. and Mrs. China” expect to be better off three years from now, while only 3 percent expect to be worse off:

Optimism is strongest among those in higher-tier cities, reflecting the disparity in economic vibrancy across tiers: as many as 80 percent of families in first-tier cities have optimistic outlook. The figure is lower, albeit still strong, at 68 percent among families in the third tier.

More than half of those surveyed said they expected to be driving a nicer car and living in a bigger home in the next few years, which is a boon for materials and metals such as platinum and palladium, used in catalytic converters.

As a reflection of growing demand for new homes, house prices in China are climbing right now in first-tier and, to a lesser extent, lower-tier cities, a sign that more and more citizens are seeking the “Chinese dream.”

Housing Prices Rising in China, Year-over-Year Growth
click to enlarge

China’s Insatiable Appetite for Metals

China’s appetite for metals—gold, silver, copper, iron ore and more—is growing, another sign that the Asian giant is in turnaround mode.

China is the world’s largest importer, consumer and producer of gold. Last year, physical delivery from the Shanghai Gold Exchange (SGE) reached a record number of tonnes, more than 90 percent of total global output for 2015. Meanwhile, the People’s Bank of China continues to add to its reserves nearly every month and is now the sixth largest holder of gold—the fifth largest if we don’t include the International Monetary Fund (IMF). As of this month, the bank holds 1,788 tonnes (63 million ounces) of the yellow metal, which amounts to only 2.2 percent of its total foreign reserves, according to calculations by the World Gold Council.

Now, in a move that’s sure to boost China’s financial clout in global financial markets even more, the country just introduced a new fix price for gold, one that is denominated in Chinese renminbi (also known as the yuan).

Gold is currently priced in U.S. dollars. That’s been the case for a century. But since gold demand has been shifting from West to East, China has desired a larger role in pricing the metal. The Shanghai fix price is designed with that goal in mind.

It’s unlikely that Shanghai will usurp New York and London prices any time soon, but over time it will allow China to exert greater control over the price of the commodity it consumes in vaster quantities than any other country.

China’s gold consumption isn’t the only thing turning heads. I shared with you earlier last week that the country imported 39 percent more copper in March than in the same month last year. (Shipments also rose 18.7 percent in renminbi terms in March year-over-year.)

The heightened copper demand has fueled renewed optimism in the red metal. Prices are up 6 percent month-to-date.

Housing Prices Rising in China, Year-over-Year Growth
click to enlarge

Caixin reports that China’s iron ore imports are surging on lower prices. In the first two months of 2016, the country purchased 86 percent more iron than it needs. What’s more, total imports were up 84 percent from the same time last year.

Steel production, which requires iron ore, is likewise ramping up.  Output is currently at 70.65 million tonnes, an increase of nearly 3 percent year-over-year.

Chinese Steel Production is on the rise
click to enlarge

 

For reasons unknown, China has also been growing its silver inventories pretty substantially for the past six months, according to an article shared on Zero Hedge. This month, as of April 19, the Shanghai Futures Exchange added a massive 1,706 tonnes, which is a 452 percent increase from the amount it added in April 2015. Shanghai silver inventories are now at their highest level ever.

Silver Mountain
click to enlarge

Though unconfirmed, it’s possible this silver will eventually be used in the production of solar panels, every one of which uses between 15 and 20 grams of the white metal. China is already the world’s largest market for solar energy—it surpassed Germany at the end of last year—with 43.2 gigawatts (GW) of capacity. (By comparison, the U.S. currently has 27.8 GW.) But get this: It plans on adding an additional 143 GW by 2020, which will require a biblical amount of silver.

Not to be outdone, India also plans significant expansion to its solar capacity, with a goal of 100 GW by 2022, according to the Indian government.

Metals Still Have Room to Rock

We know that money supply growth can lead to a rise in commodity prices. Note that Chinese money supply peaked in 2010 and has since fallen, along with commodity prices.

New Loans and M2 Money Supply in China
click to enlarge

New bank loans in China have spiked dramatically this year while money supply has grown more than 13 percent year-over-year, which is good for metals and manufacturing.

The increase in metals demand, not to mention the weakening of the U.S. dollar, has allowed silver to become the top performing commodity of 2016 after overtaking gold.

Metals Make Huge Gains
click to enlarge

Despite the rally, gold doesn’t appear to be overbought at this point, based on an oscillator of the last 10 years. We use the 20-day oscillator to gauge an asset’s short-term sentiment. When the reading crosses above two standard deviations, it’s usually considered time to sell. Conversely, when it crosses below negative two standard deviations, it might be a good idea to buy.

Silver is currently sitting at 1.2 standard deviations, suggesting a minor correction at this point would be normal.

Gold Still Has Plenty of Upside Potential, Silver Long in the Tooth?
click to enlarge

Time to Take Profits in Oil?

The same could be said about Brent oil, which has returned 61 percent since hitting a recent low of $27.88 per barrel in January. This has driven up the Russian ruble and energy stocks. (We’ve recently shown the correlation between world currencies and commodities.)

The rally has been so strong over the past three months that it’s signaling an opportunity to take profits or wait for a correction. Based on the 20-day oscillator, Brent’s up 1.3 standard deviations, which suggests a correction over the next three months.

Brent Crude Oil 20-Day Percent Change Oscillator
click to enlarge

Oil has historically bottomed in January/February. The rally this year has not disappointed. Further, it has helped many domestic banks that have been big lenders to the energy sector. High(er) oil prices translate into stronger cash flows for loans.

 

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 GSCI Total Return Index in USD is widely recognized as the leading measure of general commodity price movements and inflation in the world economy. Index is calculated primarily on a world production weighted basis, comprised of the principal physical commodities futures contracts.

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.

Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. 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.

M2 Money Supply is a broad measure of money supply that includes M1 in addition to all time-related deposits, savings deposits, and non-institutional money-market funds.

The 100 Cities Index tracks pricing data for 100 Tier 1, Tier 2, and Tier 3 cities in China.

Share “China: Still the World’s Number One Heavy Metal Rock Star”

If You’re Not Following this Energy Trend, You’re Being Left in the Dust
April 18, 2016

Investor and author Gianni Kovacevic visited USGI office this week. My Electrician Drives a Porsche book

Last week our office was visited by my friend, investor and author Gianni Kovacevic, who is at the halfway point of a cross-country book tour to promote the latest edition of “My Electrician Drives a Porsche?” As part of the tour, he’s driving a Tesla Model S from Boston to Palo Alto, California—Tesla’s hometown—to demonstrate the potential of green energy and spread his message that “the future is now.”

His book features a successful young man—the titular electrician, and an analogue of Gianni himself—who instructs his older family doctor on how to invest in the rise of the new spending class. Not only is “Electrician” a fact-filled, convincing treatise on the importance of following long-term trends in China, copper and other “financial soap operas,” it’s also a real page-turner. I urge you to grab a copy and check it out.

Copper: Beneficiary of Unprecedented Number of New Consumers

Central to the book’s thesis is a concept that is both simple and yet profound: As the size of the world’s middle class continues to grow, demand for “things that come with an electrical cord” will surge. Below is a brief excerpt:

My point is that once a group of people make the move from rural to urban, from peasant to worker and on to consumer, their way of life changes. Subsistence disappears from their vocabulary and their lives begin to revolve around the three Cs: comfort, convenience and communication. And in order to achieve any of those things, it takes a whole lot more stuff than ever before. We get a dishwasher to free up time and a television to waste it. We get an air conditioner to stay cool and a heater to stay warm. Then later on, we get other luxuries like solar panels on our roofs and newer, more modern cars. When a society achieves its very own consumer revolution, as China and the developing world are undergoing right now, life becomes less about needs and more about wants. With an unprecedented number of new consumers, these luxuries need way more stuff to make them possible.

Back in 2014, Microsoft founder and philanthropist Bill Gates predicted that by 2035, there will be “almost no poor countries left in the world.” You might scoff, but for a moment let’s imagine this turns out to be the case. What effect would that have on energy demand? Millions more people joining what Gianni calls the spending class will increase the demand for millions more things—dishwashers, air conditioners, smartphones, cars—and necessitate the production of thousands more megawatts of electricity than the world currently generates.

All of which is a boon for copper. However energy is produced, the red metal is needed for conductivity. In fact, even more copper wiring is used in new energy technologies than in traditional sources. An electric car such as the Tesla Model S uses three times as much copper wiring than an internal combustion engine vehicle.

Each New Generation of Car Needs More Copper Wiring
click to enlarge

It was reported this week that China imported 39 percent more copper (and 13 percent more crude oil) in March than in the same time last year, a sign that the Asian giant’s appetite for commodities and energy remains strong. Despite a slowdown in GDP growth, China is still the number one importer of metals and number two consumer of oil.

China's Copper Imports Surge in March
click to enlarge

Shipments out of China also rebounded the most in a year, rising 11.5 percent in the first quarter. This suggests its economy fared much better than what analysts were predicting.

China Exports Surge 11.5 Percent in First Quarter
click to enlarge

The country’s manufacturing industry saw very welcome improvement last month as well, with the purchasing managers’ index (PMI) coming in at 49.7—still below the key 50 threshold, but the highest reading since February of last year. The PMI was also above its three-month moving average for the first time since October.

Chinese Manufacturing Edges Close to Expansion
click to enlarge

The Rise of the Chinese Spending Class

Consider the dramatic difference in size between college graduates in older and younger Chinese generations. According to Gianni’s book, there are 160 million people aged 56 to 65, yet this cohort has only one million graduates. Meanwhile, millennials are 415 million strong—100 million more than the entirety of the U.S. population—and of those, 107 million have college degrees. So far. As this number rises, so too will incomes as well as the desire to live a more “Western” lifestyle filled with stuff.

This new generation is not only big in size, but also big in aspirations

You can check out the entire Visual Capitalist infographic on Gianni’s website.

The Asian country’s middle class is already larger than America’s. In October, Credit Suisse reported that there are more than 109 million middle-class consumers in China, compared to 92 million in the U.S.

109 Million. For the first time, the size of China's middle class has overtaken the U.S., 109 million compared to 92 million.

Indeed, domestic consumption in China is following a staggering upward trajectory. In 2015, total retail sales touched a record, surpassing 30 trillion renminbi, or about $4.2 trillion. By 2020, sales are expected to climb to $6.5 trillion, representing 50 percent growth in as little as five years. This growth will “roughly equal a market 1.3 times the size of Germany or the United Kingdom,” according to the World Economic Forum.

By 2020, Chinese Private Consumption Will Have Grown $2.3 Trillion
click to enlarge

The new Chinese spending class is still very concentrated along the country’s highly-urbanized eastern coast, in megacities such as Shanghai, Beijing, Guangdong and Shenzhen. But this is changing rapidly, with 39 percent of middle-class growth shifting inland toward more rural areas by 2022, according to McKinsey & Company. This will introduce new investment opportunities as these areas will require modern roads, railways and—most important—energy infrastructure.  

Chinese Middle-Class Growth is Shifting Inland

It’s estimated that between 2010 and 2025, 300 million Chinese citizens—a little less than the entire population of the U.S.—will migrate from rural areas to cities. As Gianni points out, lifestyles drastically change when this occurs, shifting from one of subsistence to one that revolves around convenience and comfort.

Tesla Disrupts the Auto Market

Key to this migration is transportation. In 1979, there were only 60 privately-owned automobiles in China. (That’s according to a 2006 report by legendary Canadian investment strategist Don Coxe, and cited in “My Electrician Drives a Porsche?”) Fast forward to today and China is now the world’s largest auto market. More than 21.1 million passenger cars were sold in the country last year, a 7.3 percent increase from 2014. Compare that to the U.S., the number two car buyer, where sales totaled 17.5 million, an all-time record.

By the way, 2015 sales of the Toyota Corolla, one of the top-selling sedans in the U.S., were a little over 350,000. That’s slightly more than the number of preorders for the Tesla Model 3, the company’s first mass-produced vehicle, within a single week of its unveiling on March 31. In a blog post, Tesla promptly proclaimed it “the week that electric vehicles went mainstream.”

The future, as Gianni says, is indeed now.

 

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 Caixin China Manufacturing PMI, released by Markit Economics, is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 400 private manufacturing sector companies.

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 12/31/2015: Microsoft Corp.

Share “If You’re Not Following this Energy Trend, You’re Being Left in the Dust”

Did Oil Prices Just Find a Bottom?
March 14, 2016

At 2,717 feet, Burj Khalifa looms over downtown Dubai.

At 2,717 feet, Burj Khalifa looms over downtown Dubai.

As the Middle East’s main business hub, Dubai is the most populous city in the United Arab Emirates (UAE) and home to the world’s tallest manmade structure, the 163-story Burj Khalifa, which climbs to a neck-craning 2,717 feet. Designed by Adrian Smith, who attended Texas A&M University, the Khalifa Tower is an engineering marvel and stands as a symbol not only of the futuristic and forward-thinking look of this oil-rich country but also its emphasis on seeking intellectual capital from all over the world.

Last week I had the pleasure of attending the annual Young Presidents’ Organization (YPO) event, held this year in Dubai, where I learned best practices on leadership as well as how to strike the right balance between business and family life. The YPO has 24,000 peer-to-peer members who together employ 15 million people across 130 countries and generate $6 trillion in revenue every year.

It was an enriching experience, equaled only by my admiration for what the UAE has managed to accomplish with its oil revenues. Tall construction cranes can be seen in every corner of Dubai, signaling urban growth. There are plans to expand its efficient light rail system, which shuttled me from the airport to downtown for only $1. I was happy to see many of the train stations colored gold.

A sleekly designed monorail station in Dubai

Five Guys in Dubai

As is the case in China and elsewhere, spending on infrastructure is key for long-term sustainable growth. Countries and city-states such as Singapore, Hong Kong and now Dubai have spent wisely on new airports, sea ports, subways, light rail and hospitals—all wise fiscal spending that has always given the U.S. a huge advantage. With oil revenues, UAE leadership has paid for citizens to earn degrees in America and military training in the U.S., including San Antonio, Texas. The city of Dubai has a massive U.S. naval base for regional security.

The Dubai Mall, the second-largest in the world, is a wonder to explore. It contains 1,600 stores and restaurants from the U.S. and Europe and also features the Dubai Aquarium, one of the world’s largest. You truly feel as if you are in America, with the most popular restaurants being Five Guys Burgers and Fries, the Cheesecake Factory and U.S. pizza chains. I was surprised to see Tex-Mex food being delivered on motorcycles.

The Palazzo Versace is one of Dubai's leading 5-star fashion hotels.

This is the sort of extravagance and attention to detail travelers have come to expect from the country’s most popular attractions. At the Palazzo Versace hotel in Dubai, for instance, visitors can beat the desert heat by relaxing in air-conditioned sand. In Abu Dhabi, the Shaikh Zayed Grand Mosque is believed to have the world’s largest carpet, capable of accommodating more than 44,000 worshippers. The intricate craftsmanship of the marble and gold along the walls and columns is breathtaking to behold.

The Sheikh Zayed Mosque

The Impact of Electronic Payments

I also want to point out that the digital banking system has made a huge impact on the UAE’s economy. I just read an article in the Khaleej Times newspaper, reporting that electronic payments have boosted the UAE’s GDP by $3.7 billion in five years. This increase is indicative of a trend of rising card usage across many countries, as you can see in the chart below.

In the same edition of the newspaper, I was interested to read that for the third year in a row, Singapore has been listed as the most expensive city in the world, followed by Zurich and Hong Kong.  According to the article, “Falling commodity prices have created deflationary pressures in some countries, but in others, currency weakness caused by these falls has led to spiraling inflation.”

Light at the End of the Tunnel? The IEA Calls a Bottom in Oil Prices

Despite its relatively small size in population and land mass, the UAE is the world’s sixth-largest oil producer, following the U.S., Saudi Arabia, Russia, China and Canada. Among Organization of Petroleum Exporting Countries (OPEC) members, it’s the second-largest, after Saudi Arabia.

These rankings might very well rise in the coming years, however, as the Middle Eastern country plans to expand production between 30 and 40 percent by 2020, even as Brent crude prices have struggled to crack $40 per barrel.

But on a global scale, oil production is finally dropping—and that’s constructive for prices. In a report released on Friday, the International Energy Agency (IEA) writes that “prices might have bottomed out,” citing a February decline in both OPEC and non-OPEC output and hopes of U.S. dollar weakness.

Although I’m cautious, the current recovery is in line with oil’s seasonality trends for the five- and 15-year periods, which show that prices have risen between March and the beginning of the busy summer travel season.

West Texas Crude Oil Historical Patterns
click to enlarge

The PHLX Oil Service Sector Index has gained 4.4 percent since the beginning of the year, while prices have rallied above their 50-day moving average, touching three-month highs.

Oil Responds to Easonality Trend
click to enlarge

As the IEA points out, this rally is being spurred by optimism that OPEC and Russia can agree on a production freeze—not a cut, as some people think. A meeting date has yet to be decided upon, however, presumably because Iran announced it will not agree to an output freeze until it reaches its pre-sanction market share.

Like Iran, Saudi Arabia has resisted capping production. To plug up the deficit, it’s reportedly seeking up to $8 billion from international banks, the first time it has done so in more than a decade. The kingdom is also considering issuing foreign bonds and listing a part of its state oil company, Saudi Arabian Oil, or Aramco.

With WTI up 25 percent in 2016 and 3 percent in March, investor sentiment has improved since October, when it crossed into “panic” territory for the first time since 2011.

Investor Sentiment Improving after October Dip
click to enlarge

U.S. Companies Looking for $50 Per Barrel

To remain profitable, most U.S. producers need oil prices to be above $50 per barrel—a level we haven’t seen in eight months. In such an environment, U.S. oil companies are finally beginning to make meaningful production cuts, with the IEA expecting producers to remove more than half a million barrels per day from the market this year. In December, the monthly year-over-year change in production turned negative for the first time since September 2011.

U.S. Oil Production Dropping Off
click to enlarge

The number of North American rigs in operation fell below 400 for the first time since December 2009, according to Baker Hughes, helping to support prices.

Oil Prices Jump on Further Rig Count Declines
click to enlarge

Until now, per-well productivity has been slow to budge. Years of $100-per-barrel oil incentivized companies to develop new ways to extract crude, including fracking, and these technological advancements have greatly increased efficiency. Today, not only can a new well be drilled in record time, it can also produce four to five times what it could have only five years ago.

What Oil Companies Can Learn from Airlines

Highly-leveraged companies across the globe have had little choice but to trim their workforces, curb expenditures and let go of undeveloped projects. According to consulting firm AlixPartners, overall capital spending fell 20 percent in 2015, with a further decline of at least 30 percent expected this year.

Global Oil Companies Slash Exploration and Production Spending
click to enlarge

These adjustments, the most severe since the oil rout in the 1980s, have saved or raised global exploration and production (E&P) companies $130 billion, says Deloitte Consulting. But this won’t be enough for many companies: Nearly a third of all pure-play E&P companies worldwide are at high-risk of bankruptcy this year.

That’s not necessarily a bad thing. A little over a decade ago, the airline industry also found itself in extreme duress. A large percentage of carriers landed in bankruptcy court, and a wave of consolidation swept through the industry. Today, airlines are positing record quarterly profits.

In the past year, we’ve already seen some huge mergers and acquisitions in the oil industry—think Dutch Royal Shell and BP, as well as the proposed Halliburton and Baker Hughes deal. It’s likely we’ll see many more in the coming months. In the meantime, short of geopolitical turmoil, a coordinated production cap agreement among OPEC and non-OPEC countries might be the only option to firm up prices.

 

Some links above may be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

The PHLX Oil Service Sector Index (OSX) is a price weighted index composed of companies involved in the oil services sector.

The Credit Suisse Risk Appetite Index is a sentiment indicator designed by Credit Suisse comparing risk-adjusted returns across a wide spectrum of global assets.

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 12/31/2015: Baker Hughes Inc.

Share “Did Oil Prices Just Find a Bottom?”

Net Asset Value
as of 10/23/2018

Global Resources Fund PSPFX $4.95 -0.08 Gold and Precious Metals Fund USERX $6.87 No Change World Precious Minerals Fund UNWPX $3.48 -0.02 China Region Fund USCOX $8.08 -0.13 Emerging Europe Fund EUROX $6.25 -0.03 All American Equity Fund GBTFX $25.04 -0.20 Holmes Macro Trends Fund MEGAX $17.84 -0.16 Near-Term Tax Free Fund NEARX $2.19 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change