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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.

Nearly 100 Days In, Is Trump Any Closer to Fiscal Reform?
April 24, 2017

I will be visiting the White House next week for the Energy Policy & Geopolitics Conference

This week I will be in Washington, D.C., attending Evercore ISI’s Energy Policy & Geopolitics Conference, where I will be visiting senior staff from the White House infrastructure team and House Energy and Commerce Committee. I will also be meeting with John Fagan, head of the Treasury Department’s Markets Room, and Robin Dunnigan, the Bureau of Energy Resource’s Deputy Assistant Secretary for Energy Diplomacy. Among the topics of discussion will include energy independence, legal and policy issues impacting the energy sector, tax reform and geopolitical risks in Syria, Russia and Iran.

I want to extend my gratitude for this opportunity to Evercore ISI chairman Ed Hyman, who was ranked as the top economist by Institutional Investor magazine for 35 straight years, from 1980 to 2014. I’ll have much to share with our investment team when I return.

Let’s Get Fiscal

Last FridayPresident Donald Trump tweeted his frustration with the “ridiculous standard of the first 100 days,” claiming that no matter what he accomplishes during this period, the “media will kill” it.

There’s some truth here. No U.S. president in modern history has been so vehemently and routinely lambasted by a hostile press corps as Trump has. Harsh jabs have even been thrown by business news sources such as the Wall Street Journal and Bloomberg, which are normally pretty centrist. 

But for those keeping score, Trump’s 100th day arrives this Sunday, April 29, and it would be disingenuous to describe his tenure so far as smooth sailing. He’s faced a number of significant setbacks and distractions, including federal judges’ smackdown of his two travel bans, a failure to repeal and replace Obamacare and an ongoing investigation into his administration’s possible collusion with the Russian government in the months leading up to the November election.

Although consumer confidence remains at scorching-hot levels, markets are beginning to express doubt in Trump’s ability to streamline corporate tax and regulation reform. From their all-time high in mid-March, blue chip stocks have given back more than 1 percent, while the U.S. dollar has contracted more than 3.4 percent since late December.

Are markets pricing in a longer-than expected delay in tax reform?
click to enlarge

I believe this response is way overdone. BCA geopolitical strategist Marko Papic said as much during his visit to our office last month. Marko insisted that tax reform is still on its way, despite Congress’ earlier failure to repeal Obamacare. Just last week, House Speaker Paul Ryan said lawmakers were putting the “finishing touches” on a new health care bill—one that reportedly might scrap protections for people with preexisting conditions—while Treasury Secretary Steven Mnuchin reassured Americans they can soon expect to see proposals for “the most significant change to the tax code since Reagan.”

Trump himself says a “massive” tax reform package could be unveiled as early this Wednesday.

Treasury Secretary Steven Mnuchin: This will be the most significant change to the tax code since Reagan.

Such change can’t come soon enough. Since 1993, the U.S. has had a top statutory corporate tax rate of 35 percent, the highest of any other economy in the Organization for Economic Cooperation and Development (OECD). Trump expressly prefers to lower the rate to 15 percent, but I wouldn’t be surprised if it ends up between 20 and 25 percent. Regardless, tax relief would be a major win for small and mid-cap firms especially and encourage large multinational companies to repatriate foreign cash. According to one recent estimate, the top 50 largest American corporations stashed as much as $1.6 trillion overseas in 2015. It’s time we give them an incentive to bring some of that cash back home.

It’s worth pointing out that Trump is not yet lagging his predecessors in terms of delivering fiscal reform. Going back to the Kennedy administration, the average number of months into a new presidential term for fiscal legislation to be enacted is six months, according to LPL Research. It took nearly a year for the Tax Reform Act of 1969 to reach President Nixon’s desk. Last week marked Trump’s third month in office, so I see no cause for alarm just yet.

When Will Trump Sign Fiscal Legislation?
President Action Date Passed Months into New Term
Kennedy Spending Increases June 1961 5
Nixon Tax Cut December 1969 11
Ford Tax Cut March 1975 7
Reagan Tax Cut August 1981 7
Clinton Tax Increase August 1993 7
George W. Bush Tax Cut June 2001 5
Obama Tax Cut and Spending February 2009 1
Average: 6 Months
Source: LPL Research, U.S. Global Investors

As for the American Recovery and Reinvestment Act of 2009, signed by President Obama not 30 days into his first term, it had already been in the works before he took office.

There are other obvious reasons for lowering the corporate tax rate. Just take a look at Singapore and Hong Kong, both of which enjoy a top tax rate of between 16 and 17 percent. Consequently, they stand as glittering marvels of the modern world.

In the World Bank’s 14th annual “Doing Business 2017” report, Singapore ranked second in the world in ease of doing business, Hong Kong fourth. The U.S., meanwhile, came in at number eight. Tax reform could have the potential of moving the country up the scale.

Banks Awaiting Deregulation

Besides tax reform, hearings are expected to take place this week on how best to loosen Wall Street regulations. At the top of the docket is the 2010 Dodd-Frank Act, for which Rep. Jeb Hensarling of Texas has drafted a 600-page replacement called the Financial Choice Act 2.0. If passed, the legislation would relax some of Dodd-Frank’s more restrictive rules and limit the powers of the Consumer Financial Protection Bureau (CFPB) and Securities and Exchange Commission (SEC). It would also roll back the so-called Volcker Rule, named for former Federal Reserve Chair Paul Volcker, which effectively bans banks from making speculative investments that don’t directly benefit their customers.

In Hensarling’s words, the Financial Choice Act “holds Wall Street and Washington accountable, ends taxpayer-funded bank bailouts and unleashes America’s economic potential.”

Also facing a questionable future is the Labor Department’s Fiduciary Rule, which regulates how financial advisors service their clients, specifically by eliminating conflicts of interest. Originally scheduled to go into effect April 10, the Trump administration has delayed it until June 9, pending review.

As I wrote back in January, the Fiduciary Rule, though well-intentioned, would inevitably limit the number of investment products available to retail investors. In an effort to remain compliant with the rule, well-meaning financial professionals would recommend only the least expensive products, regardless of whether they’re a good fit. As a result, many mutual funds—which might be better performing but have higher expenses than other investment vehicles—would fall off of brokerage firms’ platforms.

In all fairness, there’s definitely demand for improved investor service among financial professionals. In a recent survey conducted by advisory firm Financial Engines, 93 percent of respondents said they felt financial advisors should legally be required to put investors’ interests first. 

Nine out of 10 Investors Favor the Fiduciary Rule
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However, the same survey found that nearly 70 percent of respondents had not heard of the DOL’s Fiduciary Rule. This tells me they might not have considered all the ramifications, including the good and the bad, of holding advisors to such strict standards.

A Modest Proposal

To be clear, I’m not in favor of scrapping every banking regulation that’s been introduced post-financial crisis. I am in favor of reviewing them, as Trump has ordered, and streamlining them to make them work for the financial sector and consumers rather than against them. This week Federal Reserve Governor Jerome Powell made a similar statement, cautioning policymakers against rolling back “core reforms” that in many ways have strengthened our financial system.

In addition, the International Monetary Fund (IMF), in its Global Financial Stability Report, warned that a “wholesale dilution or backtracking” of existing regulations in the U.S., coupled with deep tax cuts, could lead to dangerously high financial risk-taking such as we saw pre-2008.

“Many nonfinancial firms do have the balance sheet capacity to expand investment, and reductions in corporate tax burdens could have a positive impact on their cash flow,” the IMF writes. “But reforms could also spur increased financial risk-taking and, in some scenarios, could raise leverage from already-elevated levels.”

Indeed, as you can see below, median corporate leverage among the largest U.S. companies is nearing a record high as measured by debt-to EBITDA (earnings before interest, taxes, depreciation and amortization).

Median corporate leverage among big U.S. firms is close to an historic high
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Aux yeux de tous

The world was watching France this past weekend as voters headed to the polls in the first round of the country’s presidential election. It was currently a four-way race, with political novice  and social liberal Emmanuel Macron polling slightly ahead of the far-right candidate Marine Le Pen. Radical socialist candidate Jean-Luc Mélenchon had gained impressive ground, closing in on center-right François Fillon, the former prime minister of France.

Likely influencing voters’ decisions was last week’s attack on Paris’ iconic Champs-Élysées boulevard—just a few blocks from the presidential palace—which left one police officer dead. ISIS has already claimed responsibility. The incident is eerily reminiscent of a 2012 French thriller film titled “Aux yeux de tous,” about a terrorist attack in Paris that occurs mere days before a presidential election.

In the end, voters gave centrist Macron a slight edge over Le Pen, prompting global stocks to soar. Nevertheless, the outcome is a sharp rebuke of France’s more traditional parties. Macron and Le Pen will face off in the second round of voting on May 7.

 

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

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

The Doing Business Report (DB) is a study elaborated by the World Bank Group since 2003 every year that is aimed to measure the costs to firms of business regulations in 185 countries.

The Global Financial Stability Report is a semiannual report by the International Monetary Fund (IMF) that assesses the stability of global financial markets and emerging market financing.

The net debt to earnings before interest, depreciation, and amortization (EBITDA) ratio is a measurement of leverage, calculated as a company's interest-bearing liabilities minus cash or cash equivalents, divided by its EBITDA.

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Get Ready for Inflation! Lumber Logs a 12-Year High
April 17, 2017

There a lot construction Zurich now

As if you need more proof that inflation is finally starting to pick up, lumber prices rose to a 12-year high last week, supported mainly by expectations that steep duties will soon be levied on cheap softwood imports from Canada. Lumber futures rose to nearly $415 per thousand board feet last Monday, a level unseen since March 2005, soon after homeownership peaked here in the U.S.

lumber logs a 12 year high
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At issue is a mini-trade war between U.S. and Canadian loggers. For some time now, the American lumber industry has blamed its Canadian counterpart of unfairly dumping lumber in the U.S. that’s far below market value. Now, several factors are pushing timber prices higher. Chief among them are the likelihood of duties being raised at the Canadian border, possibly as early as next month; President Donald Trump’s calls to renegotiate NAFTA; and growing demand for new homes following the housing crisis as consumer optimism improves and millennial buyers finally seem eager to enter the market.

Shares of Canfor Corporation and Western Forest Products, Canada’s number two and number five lumber producers by annual output, have had a good three months, advancing 25.5 percent and 16.8 percent respectively as of April 12. Timberland-owner Weyerhaeuser has also impressed lately.

canadian loggers surge on higher lumber prices
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Gold Glimmers Brightly

As I told Daniela Cambone during last week’s edition of Gold Game Film, this is all very constructive for the price of gold, which has historically been used as a hedge during periods of rising inflation. The yellow metal closed above $1,270 an ounce last week for the first time since soon after the November presidential election. A “golden cross” has not yet occurred, with the 50-day moving average still below the 200-day, but such a move appears likely in the next few trading sessions if upward momentum can be sustained.

gold surges to a five month high on inflation and geopolitical risk
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Fueled also by geopolitical tensions associated with Syria, Russia and North Korea, gold demand is on the rise, with last Tuesday’s trading volumes on gold calls surging 10 times Monday’s amount on the New York Mercantile Exchange. As I already shared with you, investor sentiment of gold during the recent European Gold Forum was particularly strong. A poll taken during the conference showed that 85 percent of attendees were bullish on the metal, with a forecast of $1,495 by year’s end.

With the U.S. ramping up military action overseas, including its dropping of a devastating bomb in Afghanistan on Thursday, many investors are lightening their risk assets in favor of “safe haven” instruments such as gold and Treasuries. The S&P 500 Index dropped below its 50-day moving average last week, signaling a slowdown in blue chip stocks.

Stock Market Tumbles 50 Day Moving Average
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Financials were among the biggest laggards as investors have begun to question President Trump’s ability to deregulate the banking sector. After several disappointments and setbacks, including a failure to repeal and replace Obamacare, renewed military involvement in Syria and Afghanistan might provide a welcome boost to Trump’s sluggish job approval rating.

Gold also responded positively to recent comments by Trump on U.S. dollar strength and monetary policy. Specifically, he said the dollar is “getting too strong” and later supported a low interest rate policy, suggesting he might keep Janet Yellen as the Federal Reserve chair.

 

Millennial Homebuyers Finally Entering the Housing Market

April is New Homes Month, and to celebrate, the National Association of Home Builders (NAHB) shared some of the significant contributions housing provides to the U.S. economy. According to the Washington, D.C.-based group, “building 100 single-family homes in a typical metro area creates 297 full-time jobs and generates $28 million in wage and business income and $11.1 million in federal, state and local tax revenue.” The sector currently accounts for 15.6 percent of U.S. gross national product (GNP).

Indeed, housing has a phenomenal multiplier effect on the economy, as I’ve pointed out before, and I’m pleased to see its recovery after nearly a decade.

Not only is consumer confidence up, but homebuilder confidence, as measured by the NAHB, hit a 12-year high in March, supported by an improving economy and President Trump’s pledge to roll back strict regulations. In February, new housing starts hit 1.29 million units, beating market expectations of 1.26 million units.

Rising mortgage rates and home prices are also likely encouraging buyers to enter the market. With the 30-year rate having recently fallen to a fresh 2017 low, we might see an even stronger surge in mortgage applications.

us home prices and mortgages headed higher
click to enlarge

Declines in homeownership among lower-income, nonwhite and young adults were especially dramatic following the housing crisis, as subprime lending, which many homeowners had previously relied on, all but dried up. Homeownership rates in the U.S. steadily fell to a 50-year low, which only lengthened the recovery time of the Great Recession. According to Rosen Consulting, a real estate consulting group, the U.S. economy would have been $300 billion larger in 2016 had the housing market fully returned to its long-term level of construction and homebuying.

did us homeownership just bottom
click to enlarge

Millennials, or those generally born between 1981 and 1998, have been the biggest holdouts, but we’re finally starting to see that change. The cohort—the largest group of homebuyers in the U.S. right now—represented around 45 percent of all new home loans in January of this year. It’s likely we’ll see this figure rise as more millennials become better established in their careers and tire of renting.

 

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 invest.

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 3/31/17: Canfor Corp., Western Forest Products.

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

The S&P/Case–Shiller U.S. National Home Price Index is a composite of single-family home price indices for the nine U.S. Census divisions. It is calculated monthly, using a three-month moving average.

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No Trade War Between the U.S. and China… Yet
April 11, 2017

Presidents Donald Trump and Xi Jinping, pictured with their wives Melania and Peng Liyuan. The two leaders met last week at Trump's Mar-a-Lago estate

Crisis averted—for now. Last week President Donald Trump met for the first time with Chinese President Xi Jinping at his luxury Palm Beach estate Mar-a-Lago, where the two leaders discussed North Korea and trade, among other topics.

Several times before I’ve commented on the implications of a possible U.S.-China trade war in response to Trump’s repeated calls to raise tariffs on goods shipped in from the Asian giant. On the campaign trail, Trump threatened to name China a currency manipulator and even suggested that, were he to become president, he would serve Xi a “McDonald’s hamburger” instead of a big state dinner.

I’m happy to say that no Big Macs appeared to be on the menu last week. Nor were there any immediate signs of a disastrous trade war. In a much-needed win for Trump, the two leaders agreed on a 100-day assessment of the trade imbalance between the world’s two largest economies. In addition, Xi pledged to give the U.S. better market access to important Chinese industries such as financials and consumer staples. Specifically, he conceded to lift China’s ban on U.S. beef imports, in place since 2003.

Perhaps Trump is the master negotiator he’s always claimed to be.

As encouraging as this news is, it will likely take a while before significant improvement can be made in balancing trade between the two nations. In 2016, the U.S. trade deficit with China stood at a staggering $347 billion, down from $367 billion in 2015.

Gold Expected to Continue Benefiting from Low to Negative REal Rates
click to enlarge

China’s Importance as a Trading Partner Should Only Increase

My use of the word “crisis” above was not made lightly. China is currently America’s third-largest export market after Canada and Mexico, having bought $116 billion worth of U.S. merchandise in 2016. That’s up from $19 billion in 2001, an increase of 510 percent.

The U.S., in other words, really can’t afford a trade war with such an important trading partner.

On Tuesday, the president tweeted that China would get a “far better” deal with the U.S. “if they solve the North Korean problem.” But then, it’s the U.S. that’s seeking a better deal from the Chinese, not the other way around.

Among the most valuable U.S. exports to China are, in descending order, oilseeds and grains, aerospace products and parts, motor vehicles and electronic components such as semiconductors.

Since 2010, China has been the world’s top purchaser of light vehicles manufactured by General Motors, and today it’s an exploding market for aerospace and defense companies. Between 2010 and 2015, China surpassed Japan, the U.K., Canada and France to become the number one importer of U.S aerospace and defense equipment, according to Deloitte. The Asian country spent $16.48 billion on American-made civilian aircrafts, engines and aviation parts in 2015, up more than 180 percent from five years earlier.

China Now the Number One Importer of U.S. Aerospace and Defense Boeing is currently China’s leading provider of commercial jets. Back in September, the Chicago-based aerospace company announced that China was in need of more than 6,800 new aircrafts over the next 20 years, an ongoing enterprise valued at roughly $1 trillion.

So crucial is the Chinese market that Boeing, in cooperation with Chinese aerospace manufacturer Commercial Aircraft Corporation of China (COMAC), just began construction on a Boeing 737 completion center in the island-city of Zhoushan. The center is Boeing’s first-ever overseas facility. By 2018, it should be capable of delivering as many as 100 737s per year.

Demand for health care goods and services is also set to expand dramatically as the country’s population ages. By 2030, an estimated 345 million Chinese will be over the age of 60, necessitating even more medicines, treatments and medical devices.

Once this 100-day assessment period ends, my hope is that the U.S. and China can continue to work on strengthening trade. China should continue to be a valuable partner as its gross domestic product (GDP) grows and its citizens’ incomes rise. As I shared with you in February, Morgan Stanley projects the country to become a high-income nation sometime between 2024 and 2027. Looking ahead, the Asian country could conceivably become America’s number one export market—provided Trump can hash out a better trade deal without inciting retaliatory trade blockades.

 

 

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.

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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Amid Global Uncertainty, Pay Attention to this Manufacturing Index
April 10, 2017

There a lot construction Zurich now

Last week I returned from Zurich, where I spoke at the European Gold Forum. Investor sentiment for the yellow metal was particularly strong on negative real interest rates and heightened geopolitical uncertainty in the U.S., Europe, Middle East and South Africa. A poll taken during the conference showed that 85 percent of attendees were bullish on gold, with a forecast of $1,495 an ounce by the end of the year.

The upcoming presidential election in France is certainly raising concerns among many international investors. On one end of the political spectrum is Marine Le Pen, the far-right National Front candidate who, if elected, might very well pursue a “Frexit.” On the other end is Jean-Luc Mélenchon, a socialist of such extreme views that he makes Bernie Sanders look like Ronald Reagan. I was shocked to read that Mélenchon has pledged to implement a top tax rate of 100 percent—and even more shocked to learn that he’s moving up in the polls. An insane 100 percent tax rate would surely return the country to medieval-era feudalism, which is just another name for slavery. All the wealth naturally goes to the very top, and corruption thrives.

South African President Jacob Zuma

It’s important to recognize that in civil law countries such as France, hard line socialism is much more likely to take hold. Just look at South Africa. While in Zurich, I had the pleasure to speak with Tim Wood, executive director of the Denver Gold Group and former associate of South Africa’s Chamber of Mines.  According to Tim, the poor government policies of South Africa’s socialist president, Jacob Zuma, is driving business out of the country and has led to the resignations of several members of parliament. Tens of thousands of protestors have taken to the streets of Johannesburg demanding Zuma to step down, especially following his firing of Finance Minister Pravin Gordhan. The rand, meanwhile, has plummeted and the country was recently downgraded to “junk” status

One of the consequences of a weaker rand has been stronger gold priced in the local currency and higher South African gold mining stocks, as measured by the FTSE/JSE Africa Gold Mining Index. Among the gold companies that have seen some huge daily moves in recent days are Sibanye Gold and Harmony Gold. 

South African Gold Stocks Rand Weakness
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South African gold stocks look very attractive in the short term. Over the long term, however, producers might find it increasingly difficult to operate efficiently and profitably in such a mismanaged jurisdiction.

 

PMIs Show Impressive Manufacturing Growth

It was an eventful week, to say the least. The U.S., for the first time, became directly involved militarily in Syria’s years-long civil war. Senate Republicans invoked the “nuclear option” to prevent a Democratic filibuster, allowing federal judge Neil Gorsuch to obtain Supreme Court confirmation. President Donald Trump met with Chinese leader Xi Jinping at Mar-a-Lago, the so-called “Winter White House,” to discuss trade and North Korea, among other issues.

And on Friday we learned the U.S. added only 98,000 jobs in March, down spectacularly from the 235,000 that came online in February. In response to this and the Syrian air strike, gold jumped more than 1 percent, touching $1,272 in intraday trading, its highest level in five months.

Fresh purchasing manager’s index (PMI) readings for the month of March were also released, showing continued manufacturing sector expansion in the world’s largest economies, including the U.S., China and the eurozone. All of Zurich was under construction, it seemed, with cranes filling the skyline in every direction. And when I flew back into San Antonio, sections of the international airport were also under heavy construction. This all reflects strong local and national economic growth in Switzerland and the U.S.

I especially like the Zurich Airport. I travel a lot, and it’s the only airport I know of where you can sit out on an open deck and watch and listen to the jets take off and land.

Panoramic Zurich Airport

The official China PMI rose to 51.8, the fastest pace in nearly five years. Because the PMI is a forward-looking tool, this bodes well for industrial metals, as measured by the London Metal Exchange Index (LMEX). The Asian giant, as I’ve pointed out before, consistently ranks among the top importers of copper, aluminum, steel and more.

Industrial Metals Tracked China Manufacturing PMI
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The U.S. Manufacturing ISM cooled slightly to 57.2, down from 57.7 in February. This still remains high on a historical basis. Because the U.S. is the number three producer of crude, following Russia and Saudi Arabia, oil prices have tended to track the country’s manufacturing index.

Crude Oil Has Mostly Tracked US Manufacturing ISM
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Trump Tackles U.S. Trade with China

Again, Trump met with China’s Xi, a man who can be considered the U.S. president’s counterpart in many more ways than one. In February, I included Xi in a list of four global leaders who have more in common with Trump than some people might realize. Last week the Brookings Institute compiled a list of the many “striking similarities” between the two men. Among other commonalities, they’re both nationalists; they’re both populists and have expressed a desire to fight corruption; they both have a rocky relationship with the press and intellectual community; and they both prioritize domestic affairs over foreign affairs.

None of this stopped Trump from being very critical of China on the campaign trail. He threatened to name the country as a currency manipulator and raise tariffs as much as 35 percent. It will be interesting to see what agreements, if any, can come out of this meeting between the two leaders.

Trump is not wrong to raise the alarm over U.S.-China trade. In 2016, the U.S. trade deficit with China stood at a whopping $347 billion. This is down slightly from $367 billion in 2015, but still a huge number. If you look at the total U.S. balance of payments since 1960, you get an even greater sense of the imbalance.

Can Trump Balance US Trade
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At the same time, world trade volume growth has improved in recent months, especially in emerging markets and Asia.

World Trade Volume Growth Headed Right Direction
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It’s important that Trump put ample thought into improvements on international trade. I’m not convinced tariffs and border adjustment taxes (BATs) are the solution. Look at what happened in the 1930s with the Smoot-Hawley Tariff Act. In an effort to “protect American jobs,” the U.S. raised tariffs on more than 20,000 goods coming into the country, many of them as high as 59 percent. Once the act went into effect in June 1930, a trade war promptly ensued and global trade all but dried up. Today, historians almost unanimously agree that the policy, which President Franklin Roosevelt later overturned, only exacerbated the effects of the Great Depression.

One of the biggest reasons why the U.S. has such a trade deficit is due to its abnormally high corporate tax rate. The country’s largest export is intellectual and human capital. Think Apple and Google, which are designs and ideas. The problem is that the dollars received in exchange for these goods and services are sitting in Ireland, or elsewhere, and are thus not counted in the official trade balance. Should the corporate tax rate decline to an average of around 18 to 20 percent, which is consistent with other developed countries, U.S. multinational companies would likely be more inclined to repatriate those profits and tilt the balance back in America’s favor.

Tax reform, therefore, is key in making sure the U.S. remains competitive on the world stage.

 

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

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 12/31/16: Sibanye Gold Ltd., Harmony Gold Mining Co. Ltd.

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.  The ISM manufacturing composite index is a diffusion index calculated from five of the eight sub-components of a monthly survey of purchasing managers at roughly 300 manufacturing firms from 21 industries in all 50 states.

The London Metals Exchange Index (LMEX) is an index on the six designated LME primary metals contracts denominated in US dollars. Weightings of the six metals are derived from global production volume and trade liquidity averaged over the preceding five-year period. The index value is calculated as the sum of the prices for the three qualifying months multiplies by the corresponding weights, multiplied by a constant. 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 FTSE/JSE African Gold Mining Index is a market capitalization weighted index.

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Strategist: Keep Calm, Tax Reform Is On Its Way
March 27, 2017

keep calm tax reform

Stocks had their worst day in months last Tuesday. The S&P 500 Index retreated more than 1 percent for the first time since October, and the small-cap Russell 2000 Index gave back more than 2 percent for the first time since September. As of Friday, the Dow Jones Industrial Average was down nine out of the past 10 days.

Throwing a monkey wrench into the Trump rally was fresh uncertainty House Republicans could successfully repeal and replace Obamacare, one of their headline campaign promises for seven years now. Failure to do so, it’s believed, could seriously push back tax reform. And the promise of tax reform—along with deregulation and infrastructure spending—is arguably what’s driven the Trump rally.

This uncertainty was confirmed Friday when President Donald Trump asked House Speaker Paul Ryan to pull the new health care bill from consideration—a stunning setback for the new president, who largely ran on his credentials as a master negotiator and closer.

Trading the “Trump Slump"

The thing is, the selloff was a huge overreaction. That’s the opinion of Marko Papic, geopolitical strategist with BCA Research, who visited our office last Thursday and briefed us on the investment implications of the domestic and European political climate. As always, Marko dazzled us with his deep intellect, quick wit and infectious enthusiasm.  

In his view, the market rally that immediately followed the election of President Donald Trump is still the “right” response. Among the companies that saw impressive returns were domestic, small-cap names, which have the most to gain (and less to lose) from Trump’s pledge to lower corporate taxes, slash regulations and raise tariffs. Small business optimism, meanwhile, posted its highest readings since 2004.

Small Businesses Investors Still Faith Trump
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Investors, according to Marko, are making too much of the Obamacare issue. Regardless of its failure to be repealed, tax reform is on its way. On Friday, Treasury Secretary Steven Mnuchin reassured Americans that we could still expect “comprehensive” tax reform by August. It’s also worth recalling that, even though he failed to reform health care during his eight years in office, President Bill Clinton still managed to tackle tax reform with the Omnibus Budget Reconciliation Act of 1993.

 

Does President Trump Lack Political CapitalIncreasing the likelihood that tax reform and infrastructure spending can be brought to light is, paradoxically, President Trump’s historically low approval rating. As you can see, he significantly trails the average rating of nine previous presidents during their same weeks in office. Congress’ job approval fares even worse at 28 percent, as of February.

What this means is the sound of the clock ticking is deafening. Midterm elections are less than 20 months away, and Trump could very well be a one-term president. According to Marko, this gives Trump tremendous political capital among those who share his vision and urgently wish to pass legislation toward that end.

Trump is seeking high growth now, not in 2020 or 2024, and I think it’s a mistake for investors to dismiss him,” Marko said, adding that the president’s goal of 4 percent GDP growth is more than attainable. But how?

Get Ready for Inflation

I’ve written about the inflationary implications of Trump’s more protectionist policies before. Over the past 30-plus years, free trade agreements (FTAs) such as NAFTA have certainly been easy on consumers’ pocketbooks. But the downside is that many U.S. companies have found it challenging, if not impossible, to compete with overseas companies whose operating expenses are a fraction of the cost, forcing them to shut down or move production out of the country.

There’s disagreement among economists and policymakers about the extent of FTAs’ impact on jobs and wages here in the U.S., but the case can be made that they’ve been negative. Certainly this is the case Trump and his supporters made during his campaign.

In the chart below, I compare U.S. wages as a percent of GDP between 1970 and 2013 and the KOF Globalization Index, which measures the economic, social and political dimensions of globalization on a scale from one to 100. The closer to 100, the more globalized a country is. As you can see, there’s at least a strong correlation between rising globalization and falling wages in the U.S.

Is Globalization Blame Lower Wages
click to enlarge

Trump’s director of the National Trade Council, Peter Navarro, argued in January that “there is no question” the U.S. needs a border adjustment tax (BAT) to bring jobs back and grow wages:

“Would you rather have cheap subsidized… goods dumped into Walmart and not have a job and not have your wages go up in 15 years, or would you like to pay a little bit more—not much—a little bit more, and have a job and have your wages going up? I think the American people are going to make that choice.”

Whether you agree with Trump and Navarro on this point, it’s important to recognize that inflation is poised to surge in the coming years. Consumer prices rose 2.7 percent year-over-year in February, the seventh straight month they’ve advanced. And if Trump manages to restrict immigration and raise trade barriers, we can expect prices to rise even more—along with manufacturing activity, wages and ultimately GDP growth.

Bullish on Europe

A final thought I want to share from Marko’s visit is his bullishness on Europe right now. “Forget about what you see in the news about Europe,” he said, “and look at the data.”

He has a point. For one, the Markit Flash Eurozone PMI, released Friday, showed the region’s manufacturing activity growing at its fastest pace in six years. For the month of February, its PMI rose to 56.7.

Terrorism remains a concern, as we saw in London last week, but the Syrian refugee crisis is emphatically done. Also overblown are Euroscepticism—or criticism of the European Union and its currency, the euro—secessionism and Trump-like populism. Geert Wilders’ far-right, anti-Muslim Party for Freedom (PVV) failed to secure an electoral victory in the Netherlands last week. Meanwhile, in France, the far-right Marie Le Pen still struggles to close the gap between herself and her two rivals, former prime minister of France François Fillon—currently being investigated on charges of corruption—and the socialist Emmanuel Macron.

Marie Le Pen No Trump
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With only one month remaining before France’s presidential election, Le Pen trails both rivals by about 20 points, throwing her candidacy into doubt. At this point in the U.S. presidential election, Trump had proven himself a very competitive candidate, trailing the much more politically experienced Hillary Clinton by single digits.

The key risk, according to Marko, is the upcoming Italian election, to be held no later than May 23. More and more, Italians are turning against the euro, and Euroscepticism is alarmingly high relative to other European Union countries. Whereas productivity is rising in Germany, France and Spain, Italy’s has stagnated since 2000.

Whatever happens, it’s important to monitor the eurozone’s PMI because, as I’ve often pointed out, it’s a precursor to commodities demand.

 

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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.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The Russell 2000 Index is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000®, a widely recognized small-cap index.

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.

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.

The KOF Globalization Index, which measures the economic, social and political dimensions of globalization, observes changes in the globalization of a series of countries over a long-term period. Based on 23 variables, the KOF Globalization Index 2016 covers 187 countries and relates to the period 1970 to 2013. The Index comprises an economic, a social and a political component and measures globalization on a scale from 1 to 100.

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Net Asset Value
as of 04/24/2017

Global Resources Fund PSPFX $5.38 0.02 Gold and Precious Metals Fund USERX $7.31 -0.14 World Precious Minerals Fund UNWPX $6.39 -0.08 China Region Fund USCOX $8.52 No Change Emerging Europe Fund EUROX $6.26 0.17 All American Equity Fund GBTFX $24.18 0.15 Holmes Macro Trends Fund MEGAX $19.29 0.19 Near-Term Tax Free Fund NEARX $2.22 -0.01 U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change