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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.

This Week in Bitcoin: The IRS Targets Coinbase, Venezuela to Mint Its Own Cryptocurrency
December 11, 2017

bitcoin accepted everywhere

Writing about blockchain and bitcoin right now is a little like buying a new computer in the 1990s. The tech was advancing so fast in those days that as soon as you brought the thing home, it was sorely outdated. Similarly, the cryptocurrency world is changing so rapidly at the moment that even before “the ink dries” on one of my posts, some important new development has already surfaced.

Case in point: When Bloomberg ran a particular story last Monday—Bitcoin Is Now Bigger Than Buffett, Boeing and New Zealand”—bitcoin’s market cap hovered just above $185 billion, making it worth more than the likes of PepsiCo, Boeing and McDonald’s.

Bitcoin is now worth more than some of the worlds biggest companies as of decemeber 4
click to enlarge

Well, here it is a week later, and this chart is already outdated. As of Monday morning, bitcoin’s market cap topped $275 billion, bringing its total value comfortably above Coca-Cola, Toyota and Verizon (and now Bank of America, Walmart, Procter & Gamble, Pfizer, AT&T and Chevron). Next stop is Alphabet, which had a market cap of $288 billion at the end of the third quarter.

Or consider this: In May 2011, an early bitcoin investor named Greg Schoen tweeted his regret that he sold at $0.30, as the currency had then risen to $8.00 apiece.

I wish I kept my bitcoin tweet

Obviously we’ve seen earth-shattering appreciation since then. As of my writing this, bitcoin has breached the $17,000 level, up nearly 5.6 million percent—yes, you read that right, 5,600,000 percent—from our friend Greg’s exit point in 2011.

Bitcoin, of course, is just the largest fish in the entire universe of cryptocurrencies, which now number somewhere in the vicinity of 1,340, according to CoinMarketCap. If we combine the total market cap of all “altcoins” Monday morning, the amount exceeded $440 billion. That’s larger than the economies of Thailand, Nigeria and Austria. As of my writing this, as many as 15 coins had market caps over $2 billion.

total cryptocurrency universe market cap exceeded 400 billion for first time
click to enlarge

Coinbase Now Has More Accounts Than Charles Schwab

opening a coinbase account is as easy as opening a tinder account

This meteoric growth has attracted not just retail investors but also, inevitably, regulators. San Francisco-based Coinbase, which allows users to trade digital currencies, now boasts more active users than fellow San Francisco-based Charles Schwab, the second biggest brokerage firm following Fidelity. As of December 1, Coinbase had 13 million accounts, Schwab 10.6 million.

Contributing to Coinbase’s attractiveness is the ease with which someone can join. Whereas it can take up to two weeks to create a Schwab account, a Coinbase account can be opened in mere minutes, and as effortlessly as a Tinder account. This is one of the many reasons why both the popular online trading platform and dating service appeal to millennials.

According to Coinbase, as much as $50 billion have been traded on its platform since its inception, but as the number of accounts grows, we’ll likely see this dollar figure surge exponentially. This is the effect of Metcalf’s law, which I featured in an earlier post and discussed with SmallCapPower during the Mines and Money conference in London last month.

Frank Holmes speaking at Mines and Money Conference in London

The Rule of Unintended Consequences

If you recall, President Reagan once said: “Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops, subsidize it.” Surprising no one, then, Coinbase’s success has raised alarm bells for regulators and other government officials.

Ironically, it’s regulators that have unintentionally created the current environment in which cryptocurrencies now thrive. Back in May, I shared with you the fact that the number of listed companies here in the U.S. fell by more than half between 1996 and 2016. The addition of new financial rules and regulations, from Sarbanes-Oxley to Dodd-Frank, has encouraged more and more startups to avoid going public altogether, which is why we’re seeing an explosion right now in both stock prices—fewer listed companies means greater consolidation of fund flows into select stocks—and nontraditional methods of fundraising, from initial coin offerings (ICOs) to angel investing.

mob boss al capones bootlegging business thrived in the era of restrictive government policies

Consider the unintended consequences of Prohibition. Thanks to the 18th Amendment, the U.S. saw a sharp rise in organized crime and the emergence of notorious figures such as Al Capone.

By invoking “Scarface,” I’m not suggesting that all activities involving cryptocurrencies are illegal or malicious. I’m only saying that when rules and regulations become too restrictive, it invites new opportunities in unexpected ways.

And the beat goes on. After a months-long pushback, Coinbase agreed at the end of November to turn over the identities of 14,000 of its users to the Internal Revenue Service (IRS), which asserted that only 800 to 900 taxpayers reported bitcoin earnings between 2013 and 2015.

The tax agency initially requested access to all 13 million of Coinbase’s users, so I would call this an overall win for the exchange.

Bad News Is Good News

You might presume the IRS’ crackdown on Coinbase would discourage some potential bitcoin investors from participating. I would argue that the IRS incident is actually constructive for bitcoin because there’s very recent precedent of similar setbacks being turned into a windfall for digital currencies.

In mid-September, we saw the price of bitcoin dip sharply after China restricted new ICOs and JPMorgan Chase CEO Jamie Dimon knocked the digital currency as a “fraud,” comparing it to the Dutch tulip bubble in the 17th century. The one-two punch purged the market of weak-stomached investors, resulting in an intraday loss of $711 per coin.

Since mid-September, though, bitcoin has rallied close to 380 percent, even after the IRS came for its pound of flesh. On November 29, bitcoin swung wildly from as high as $11,427 to as low as $9,001, a difference of $2,426.

Those who managed to tolerate these swings in the past will likely continue to stay aboard the S.S. Bitcoin—after all, the big banks and IRS’ opposition to digital currencies is precisely why they’re in the game in the first place. Bitcoin enthusiasts value the currency because it’s decentralized, anonymous, finite and cannot be manipulated by “the powers that be,” unlike fiat money.

Put another way, that some world governments, big banks and the IRS seek to quash bitcoin is unequivocal confirmation of its value.

If You Can’t Beat Them, Join Them

That brings us to Venezuela’s recent announcement that it plans to launch its own cryptocurrency, dubbed the “petro,” which will reportedly be backed by oil, gold and diamond reserves.

The revelation comes as the beleaguered South American country’s economy continues to deteriorate since Nicolás Maduro took office in 2013. The country owes around $60 billion to bondholders yet has only $9.6 billion sitting in the bank. An estimated 80 percent of Venezuelans currently live in poverty. Food, medicine and other necessities are dangerously scarce, and inflation right now is among the worst the world has ever seen, comparable to Germany in the 1920s and Zimbabwe in the 80s.


Venezuela expected to face even higher hyperinflation

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This is inexcusable for such a resource-rich country. Venezuela, which depends on oil for around 95 percent of its export revenues, sits atop the world’s largest known oilfield. Amazingly, though, its output has been declining for several straight months. In September, production fell below 2 million barrels a day, a three-decade low, according to the Organization of Petroleum Exporting Countries (OPEC).

Conditions aren’t likely to improve for the country since Maduro consolidated power in July, effectively making himself absolute dictator and inviting harsh economic sanctions from the U.S. government.

This is precisely what drives Maduro’s interest in establishing a cryptocurrency—to circumvent U.S.-led sanctions. The petro will serve as a “buffer” between transactions, encrypting all incoming and outgoing money to free up the country’s monetary system from controls imposed by the U.S.

As explained by Bloomberg’s Leonid Bershidsky, foreign investors “will be able to lend money to Venezuela and get repaid in cryptocurrency, which Maduro wants them to spend on oil and other Venezuelan commodities” that are tied up by the U.S.

Russia has similar ambitions with its “CryptoRuble,” unveiled in October. Like Venezuela, Russia grapples with steep U.S. and international sanctions following its annexation of Crimea in 2014 and meddling in the 2016 U.S. election. Below is a flowchart— courtesy of Zura Kakushadze, professor of quantitative finance at Free University of Tbilisi, and Jim Kyung-Soo Liew, assistant professor of finance at John Hopkins University—illustrating how the CryptoRuble is designed to allow the Russian government to maintain full control of money flow into and out of the country’s coffers.


Schematic depiction of the money flow into and from cryptoruble

click to enlarge

According to Kakushadze and Kyung-Soo Liew:

With government-issued cryptocurrencies, central banks and sovereign governments will gain even more control, not less, than with the current banking system… This is any government’s dream come true!

To be clear, the way in which Venezuela and Russia plan to use cryptocurrencies is antithetical to their appeal in the eyes of many investors. Unlike bitcoin, Ethereum, Litecoin and other popular digital currencies, the petro and CryptoRuble are centralized—they are conceived and will be controlled exclusively by the Venezuelan and Russian governments.

And unlike bitcoin, they will not be mined, as gold is, but issued by governments, as fiat money is.

Again, Kakushadze and Kyung-Soo Liew:

The world order as we know it is changing, right before our eyes. This disruptive technology—cryptocurrencies—will indeed end up disrupting the status quo. However, at least in the mid-term, forward-thinking sovereign states that embrace and adapt it to their advantage will end up being the disruptors as opposed to disrupted. The U.S. is the sovereign state with the most to lose in their process, with a clear policy implication: adapt to the changing reality, issue CryptoDollars now, or risk being marginalized.

This assessment dovetails perfectly into a November report from Deutsche Bank strategists Jim Reid and Craig Nicol, who reflect on what they see as the end of traditional fiat money within the coming decades. Because fiat currencies are “inherently unstable and prone to high inflation,” Reid and Nicol write, “We may need to find an alternative.” Among other solutions, the two suggest cryptocurrencies, which “are as much about blockchain as anything else.”

Speaking of blockchain, Australia’s main stock market, the Australian Securities Exchange (ASX), is soon poised to become the first in the world to use blockchain’s superior ledger technology to process transactions, according to Bloomberg. It wouldn’t surprise me if other global stock markets, including the New York Stock Exchange (NYSE), quickly embraced this exciting new technology. 

How to Gain Exposure to Bitcoin Without Owning Any

And finally, both the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME) have set the table to offer bitcoin futures contracts for the first time ever this month—the CBOE this past Sunday, the CME a few days later. This will give investors a new way to participate in bitcoin and, in many skeptics’ minds, help “legitimize” the currency as a serious asset.

There are other ways to participate without actually owning bitcoin. In a recent Bloomberg story, Tom Lee of market research firm Fundstrat lists several companies and funds with exposure to the digital currency. Among his favorites is HIVE Blockchain Technologies, a blockchain infrastructure company involved in the mining of fresh new coins, never before traded. The first company of its kind to sell shares to the public, HIVE began trading on the TSX Venture Exchange on September 18.

I’m sure I’ll have more to say on these topics at a later time. In the meantime, I invite you to watch this short, 16-minute film titled “Cryptocurrency Revolution: On the Frontlines of the World’s Hottest Tech Opportunity.” It features myself, Frank Giustra and Marco Streng, co-founder and CEO of Genesis Mining, the world’s largest cloud bitcoin mining company.

 

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. 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 (09/30/2017): The Boeing Co., Chevron Corp.

Frank Holmes has been appointed non-executive chairman of the Board of Directors of HIVE Blockchain Technologies. Both Mr. Holmes and U.S. Global Investors own shares of HIVE, directly and indirectly.

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Move Over, Tesla! China Holds the Keys to Electric Vehicles
November 28, 2017

Woman holding electric car keys

Earlier this month, I shared with you a quote from Arnoud Balhuizen, chief commercial officer of BHP Billiton, the largest mining company in the world. In a September interview with Reuters, Balhuizen called 2017 the “revolution year [for electric vehicles], and copper is the metal of the future.”

Balhuizen’s assessment couldn’t be more accurate, and the implications for investors is too compelling to ignore.

In the third quarter, global sales of electric vehicles (EVs) soared 63 percent compared to the same period last year, 23 percent compared to the second quarter. A total of 287,000 units were reportedly sold in the September quarter, leading Bloomberg New Energy Finance to project total annual sales to exceed 1 million units for the first time.

As the world’s largest auto market, China was responsible for about half of the sales as the crackdown on polluting industries has propelled renewable alternatives from power generation to consumer products.

60 Million Electric Cars by 2040?

This is only the beginning. The chart below, highlighted by Katusa Research and originally provided by Bloomberg New Energy Finance, takes a look at annual global EV sales forecasts through the year 2040. As you can see, China, the U.S. and Germany will push the adoption of EVs forward, with the rest of the world following closely behind. Many analysts believe that by 2040, the global EV market could exceed 60 million vehicles sold per year.

Projected annual global electric vehicle sales
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Chinese automakers are moving fast to meet the demand. Volvo Cars, owned outright by Hangzhou, China-based Geely Auto, has already stated it will cease production of fossil fuel-powered vehicles by 2020. On top of that, the company is currently building electric versions of London’s iconic taxis, and Uber is rumored to buy as many as 24,000 electric Volvos.

In October, Great Wall Motors announced its plans to form a joint venture with Germany’s BMW to begin production on a new fleet of EVs. Toward that end, the manufacturer bought a 3.5 percent stake in an Australian lithium-mining company to support long-term development of battery resources and control pricing power.

And although it’s not as big a powerhouse as its peers, relative newcomer Guangzhou Automobile Group also has high ambitions to introduce EVs in as many as 14 global markets including North America, Africa, South and Eastern Europe and South East Asia. It recently signed an agreement with tech behemoth Tencent to cooperate on artificial intelligence (AI)-driving and “smart” vehicles.

Electrified shares of chinese automakers headed higher
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Looking ahead to 2040, China is forecast to capture more than 40 percent of the world EV market, according to a recent report from the International Energy Agency (IEA), as well as nearly 30 percent of total new wind, solar and nuclear capacity additions. 

China leads the push for new energy technologies
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As for the European market, Germany is expected to outpace its neighbors in adopting EVs as Volkswagen, the world’s number one automaker by sales, seeks to become a global leader in electric and self-driving cars. The Wolfsburg-based company announced plans to invest as much as $40 billion over the next five years to expand its selection of EVs.

China’s Campaign Against Pollution to Could Drive Global Energy Trends

China’s interest in EVs is only part of a much broader effort to improve its deteriorating air quality. Faced with worsening smog in large East Coast cities, the Asian giant has ordered thousands of factories and manufacturers, especially those that burn coal, to shut down in accordance with the government’s four-year climate action plan. The capacity cuts are contributing to higher metals prices, with the S&P GSCI Industrial Metals Index having gained more than 24 percent year-to-date.  

Take a look at the following chart courtesy of the IEA. Whereas President Donald Trump is seeking to revitalize coal mining in the U.S., coal demand in China, the world’s largest energy consumer, is expected to decline nearly 500 million tonnes of coal equivalent (mtce) between 2016 and 2040. This comes after demand stood at more than 2 billion tonnes between 1990 and 2016. Instead, the country is actively pivoting into cleaner-burning natural gas and renewables such as wind, solar and hydro.

China's switch to a cleaner energy mix will drive global trends
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According to the Wall Street Journal, coal power production in China was negative for the second straight month in October, bringing 2017 growth to negative 3 percent. Hydropower output, on the other hand, grew 17 percent.

Lots of Room for Potential Growth

Returning to EVs, adoption isn’t currently widespread across the globe, with only 14 large metropolitan areas accounting for roughly a third of all sales, according to a recent report by the International Council on Clean Transportation (ICCT). The group highlights 20 “electric vehicle capitals” of the world, where EV sales beat the global norm in the past two years. China claimed seven of these cities, Europe a further seven. Only four U.S. cities made the list: New York City, Los Angeles, San Francisco and San Jose.

Local laws and ordinances have inevitably played a huge role in speeding up the transition from gas-powered to electric cars. In Shenzhen, for instance, all public buses must be emission-free by the end of the year, making it the first city in the world to have an all-electric fleet. Beijing will be replacing all 69,000 of its taxis with EVs. And Qingdao, about midway between Shenzhen and Beijing, is offering consumers subsidies of between $5,000 and $9,000 per electric vehicle.

Like blockchain technology and cryptocurrencies, electric vehicles are still in the early innings, with great potential growth still ahead.

Metals Gaining Leadership in Commodities Space

As I’ve pointed out a number of times before, this is all very constructive for copper, cobalt, lithium and other metals that are used predominantly in the production of EVs. On average, an electric vehicle requires three to four times as much copper as a car with a traditional internal combustion engine.

The red metal is one of the best performing materials for the 12-month period, currently up more than 17 percent on increased demand and a weakening U.S. dollar. Over the same period, cobalt has returned an incredible 112 percent.

A weakening US dollar is constructive for commodities
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In a Bloomberg Intelligence report this week, commodity strategist Mike McGlone says that “positive second-half commodity-market momentum is set to accelerate in 2018,” adding that “metals are poised to sustain leadership, particularly as the dollar has peaked.”

Read more on how to invest in China’s new high-tech economy!

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 U.S. Dollar Index (USDX, DXY) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S.trade partners' currencies.

The S&P GSCI Industrial Metals Index provides investors with a reliable and publicly available benchmark for investment performance in the industrial metals market.

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 9/30/2017: BHP Billiton Ltd., Geely Automotive Holdings Ltd., Guangzhou Automobile Group Co., Great Wall Motor Co. Ltd., Tencent Holdings Ltd.

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Gobble, Gobble: Thanksgiving Dinners Stuffed with Savings Despite Rising Fuel Costs
November 27, 2017

Live turkeys

I spend a lot of time writing and talking about inflation, especially as it affects the price of gold, oil and other commodities and raw materials. The year-over-year percent change in the cost of living has been reasonably low for the past five years, averaging about 1.3 percent on a monthly basis. For commodities, the average change has been even lower at negative 0.9 percent, as measured by the producer price index (PPI). This hasn’t been too constructive for gold and oil producers, but it’s been a windfall for American consumers and manufacturers.

A helpful way to look at inflation is the changing cost of a typical Thanksgiving dinner for 10 people. For the second straight year, the cost actually declined from the previous year’s holiday, according to the American Farm Bureau Federation (AFBF). This year’s feast, including staples such as turkey, rolls, sweet potatoes and more, fell $0.75 to a five-year low of $49.12. On an inflation-adjusted basis, that’s down more than $10 from 30 years ago. The turkey alone cost about 1.6 percent less than last year.

Cost of Thanksgiving dinner for 10 people 1986 to 2017
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So why’s this happening? Obviously there’s no shortage in demand for turkey, with an estimated 88 percent of American households enjoying it during last week’s Thanksgiving feast. U.S. turkey consumption, in fact, has nearly doubled over the past 25 years, according to the National Turkey Federation (NTF). As you might expect, this has led to an explosion in production over the same period, which has helped keep costs relatively stable for a generation.

On Friday, shares of Tyson Foods, one of the top processors of the poultry, were trading above $80, up more than 30 percent year-to-date.

Again, this is good news for consumers. Also good? Multiple studies have found that Americans gain only about a pound in weight as a result of engorging themselves on Thanksgiving Day. So don’t feel so guilty about having helped yourself to that extra slice of pumpkin pie.

Record Number of Americans Hit the Road and Take to the Skies

Holiday gasoline prices, however, are on the rise, with the cost per gallon rising to its highest level since 2014. A trip to the pump this past Thanksgiving will cost motorists an extra 18 percent compared to last year and nearly 25 percent more compared to 2015. 

Thanksgiving gas prices
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As I shared with you earlier this month, oil prices climbed to two-year highs following Saudi Arabia’s purge of princes and ministers. Markets also appear to be pricing in expectations that the Organization of Petroleum Exporting Countries (OPEC) will extend production cuts to the end of 2018.

West Texas Intermediate (WTI) was trading on Friday at a 52-week high of $59 a barrel. The next stop is $60, a level we haven’t seen since May 2015. In a strategy report last week, BCA Research recommended an overweight position in energy.

Higher fuel costs aren’t expected to discourage domestic travel, though. This Thanksgiving season, approximately 51 million Americans were projected to travel 50 miles or more from home on U.S. roads, highways, airlines, rails and waterways, according to the American Automobile Association (AAA). That’s up 3.3 percent from last year and the highest volume since 2005. President Donald Trump mentioned the impressive figure in a tweet last week, adding that “traffic and airports are running very smoothly!”

Trump tweets about travel

Looking at air travel alone, a record 28.5 million passengers were estimated to take to the skies this year during the 12-day Thanksgiving period, according to Airlines for America (A4A). That equates to an additional 2.38 million passengers a day.

Record number of passengers expected to fly on US carriers this Thanksgiving
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With the economy improving, incomes on the rise and consumer confidence at multiyear highs, airline executives expressed optimism in continued flight demand growth and profitability. According to October’s Airline Business Confidence Survey, conducted by the International Air Transport Association (IATA), 80 percent of airline chief financial officers (CFOs) said profits improved in the third quarter compared to the same three-month period in 2016. An overwhelming 87 percent were confident such profitability would persist or improve over the next 12 months. Eighty-six percent of CFOs reported increased passenger demand year-over-year in the third quarter, while 71 percent expected traffic volumes to rise a year from now.

 

Holiday Shopping Sales Could Exceed $107 Billion

On a final note, retailers were bracing for a blowout holiday shopping season. Earlier this month, Adobe Analytics released its forecast that U.S. sales during the Thanksgiving weekend and Cyber Monday could climb above $107 billion, a year-over-year increase of 13.8 percent. Cyber Monday alone might generate as much as $6.6 billion, 16.5 percent more than last year, making it the largest online sales day in history. Among the most hotly anticipated gift items this year are Apple Air Pods, home assistants (Amazon Echo and Google Home) and Sony PlayStation virtual reality (VR) headsets.

Looked at another way, more than 164 million consumers, or nearly 70 percent of all Americans, planned to shop during the Thanksgiving weekend and Cyber Monday, according to a survey conducted by the National Retail Federation (NRF). Today, Black Friday might have seen the largest volume of potential shoppers at 115 million, or 70 percent of those polled, followed by 78 million on Cyber Monday.  

More than 164 million consumers plan to shop during Thanksgiving weekend and cyber Monday
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So how could investors take advantage of these findings? According to a recent report from LPL Financial, since 2009 the S&P Retail Select Industry Index has seen the strongest gains during the months of February and March, after companies report sales for the fourth quarter. Retailers are actually down about 6 percent year-to-date, and LPL Financial adds that “it is likely that the performance of individual company stocks be more dispersed than they have been historically, which may favor active management in the sector moving forward.” I agree with this assessment, as we’ve seen quite a lot of volatility in the space.

I want to wish everyone a blessed week! I often say that having gratitude improves your altitude in life. It’s important that we take stock not only in our finances but also the people who matter most, from family and friends to coworkers and business associates.  

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 Producer Price Index (PPI) is a weighted index of prices measured at the wholesale, or producer level. A monthly release from the Bureau of Labor Statistics (BLS), the PPI shows trends within the wholesale markets, manufacturing industries and commodities markets.

The S&P Retail Select Industry Index represents the retail sub-industry portion of the S&P Total Market Index (TMI). The S&P TMI tracks all the U.S. common stocks listed on the NYSE, AMEX, NASDAQ National Market and NASDAQ Small Cap exchanges. The Retail Index is a modified equal weight index.

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 (09/30/2017): Tyson Foods Inc.

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Synchronized Global Growth May Have Arrived
November 20, 2017

Synchronized global growth may have arrived

Nearly 10 years after the financial crisis brought the global economy to its knees, conditions have finally improved enough to crystallize my conviction that synchronized global growth is currently underway. Revenue and earnings growth are up year-over-year, not just in the U.S. but worldwide. Despite President Donald Trump threatening to raise tariffs and tear up trade deals, global trade is accelerating. World manufacturing activity expanded to a 78-month high of 53.5 in October, with faster rates recorded in new orders, exports, employment and input prices.

Global manufacturing PMI at 78 month high in October
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Additional trends and indicators support my bullishness. Worldwide business optimism, as recorded by October’s IHS Markit Global Business Outlook survey, climbed to its highest level in three years, with profits growth and hiring plans continuing to hit multiyear highs. Optimism among U.S. firms was at its highest since 2014, with sentiment above the global average for the second straight survey period.

Small business owners’ optimism remained at historically high levels in October, according to the latest survey conducted by the National Federation of Independent Business (NFIB). Its Small Business Optimism Index came in at 103.8, up slightly from September and extending the trend we’ve seen since the November 2016 election.

Small business owner optimism remained at historically high levels in October
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As I told CNBC Asia anchor Bernie Lo last week, U.S., Europe and China’s economies are strong, which is igniting the rest of the world. The eurozone purchasing manager’s index (PMI), in particular—rising to 58.5 in October, an 80-month high—is very constructive for world economic growth in the next six months.

Synchronized global growth may have arrived

Fewest Number of Countries in Recession

Speaking on CNBC’s “Trading Nation” recently, Deutsche Bank chief international economist Torsten Slok made the case that global economic health “has never been more robust,” citing the fact that the number of countries in recession has dropped to its lowest level in decades.

“We have never seen a smaller number of countries in recession as we do at the moment,” Slok said. “And if you look ahead to the next few years… we are going to see that fall even lower.”

The Organization for Economic Cooperation and Development (OECD) backs up this claim in its quarterly economic outlook. According to the Paris-based group, synchronized global growth is finally within sight, with no major economy in contraction mode for the first time since 2008. World GDP is expected to advance 3.5 percent in 2017—its best year since 2011—and 3.7 percent in 2018.

Taken together, this should help boost exports and global trade even further as more countries have the capital and demand to make purchases on the world market.

Exposure to Foreign Markets Boosted Companies’ Bottom Line

Bolstered by a weaker U.S. dollar, exports by American firms hit a three-year high in August, the Commerce Department reported this month. Exports rose to nearly $200 billion, the highest level since December 2014.

US exports up as dollar weakened
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As further proof that the global economy is humming along, S&P 500 Index companies with greater exposure to foreign markets, especially Europe, saw higher revenue and earnings growth in the third quarter than those companies whose business is more focused domestically.

According to FacSet data, revenue grew 10 percent year-over-year for firms that generated 50 percent or more of their sales outside the U.S., compared to only 4.2 percent for firms whose sales were conducted mostly within the U.S. The difference was even greater for earnings growth—13.4 percent for S&P 500 companies with strong foreign exposure, 2.3 percent for companies with less exposure.

US companies with more Global exposure reported higher earnings growth
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We saw similarly impressive results with Dow Jones Industrial Average (DJIA) companies. According to FactSet’s November 17 Earnings Insight :

Overall, 11 of the 30 companies in the DJIA provided revenue growth numbers for Europe for the third quarter. Of these 11 companies, nine reported year-over-year growth in revenues. This number was the highest number of Dow 30 companies… to report revenue growth in Europe on a quarter basis since Q2 2014. Of these nine companies, five reported double-digit revenue growth in Europe for the third quarter.

FactSet adds that Nike reported its seventh straight quarter of year-over-year revenue growth in European markets, Apple its fifth straight quarter.

As of Friday, 95 percent of S&P 500 companies have reported earnings for the third quarter, and of those, nearly three quarters have logged earnings per share (EPS) that are above the five-year average.

The U.S. isn’t the only economy that’s had a standout quarter. According to Thomson Reuters data, 65 percent of companies in the MSCI Europe Index have beaten third-quarter expectations, with overall year-over-year earnings growth standing at nearly 10 percent.

Enthusiasm Over Corporate Tax Cuts Drive Stock Prices Higher

As you’re likely aware, it’s been one year since the U.S. election, and since then the market has surged more than 21 percent on improved global growth, higher corporate earnings and hopes that President Trump’s pro-growth agenda of tax reform and deregulation will improve business conditions in the U.S. In the past 12 months, there have been nearly three times as many weeks posting market gains above 1 percent than those with losses below negative 1 percent. This makes it one of the most profitable markets to have invested in for many years.

US stocks were a profitable place to invest in year following November 2016 election
click to enlarge

So where does the Trump rally rank? Looking at the 12 months following every November presidential election since 1950, LPL Research found that the bull run we’ve seen under Trump ranks fifth place, following Presidents Bush Sr. in 1988; Obama in 2012; Kennedy in 1960 and, in first place, Clinton in 1996, with gains climbing to nearly 32 percent.


Where Does the Trump Rally Rank?
Since 1950

Election Date Winning President S&P 500 Return One Year Later Rank
11/05/1996 Clinton 31.7% 1
11/08/1960 Kennedy 28.4% 2
11/06/1912 Obama 23.9% 3
11/08/1988 Bush Sr. 21.7% 4
11/08/2016 Trump 21.1% 5
Past performance does not guarantee future results.
Source: LPL Research, FactSet, U.S. Global Investors

Before year’s end, we could see prices appreciate even more as investors act on enthusiasm over tax reform. Last week the House approved $1.5 trillion in tax cuts that, if signed into law, would slash corporate taxes down from 35 percent to a much more competitive 20 percent. The bill is now in the Senate’s court where hopefully it doesn’t suffer the same fate as the failed Obamacare repeal-and-replace efforts. Goldman Sachs analysts place the chances of tax reform being completed by early 2018 at 80 percent—encouraging for sure, but there are some tough challenges ahead. A handful of Republican Senators, including Jeff Flake (AZ) and Ron Johnson (WI), have already said they will not vote for the Senate bill as it’s currently written.

Despite the bill’s uncertain future, markets responded very favorably to the House news. The S&P 500 Index closed up 0.82 percent on Thursday, its best one-day move since June, with gains led by retailers such as Foot Locker, Ross Stores and Gap.

This week I’ll have more to add on consumer spending forecasts for the upcoming holiday shopping season. This Black Friday is expected to be the largest-ever for online shopping. In the meantime, explore investment opportunities in domestic companies with exposure to foreign markets by clicking here!

The Purchasing Managers' Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

The Business Outlook Survey for Global Manufacturing and Services is based on a survey of around 11,000 manufacturers and service providers that are asked to give their thoughts on future business conditions. The reports are produced on a tri-annual basis, with data collected in February, June and October.

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 Standard & Poor's 500, often abbreviated as the S&P 500, or just the S&P, is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices.

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.

The MSCI Europe Index captures large and mid-cap representation across 15 Developed Markets (DM) countries in Europe. With 445 constituents, the index covers approximately 85% of the free float-adjusted market capitalization across the European Developed Markets equity universe.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the articles were held by one or more accounts managed by U.S. Global Investors as of 9/30/2017: NIKE Inc. 2.87%, Foot Locker Inc. 1.99%.

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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5 Agents of Change Investors Need to Know About Now
November 6, 2017

the world is running out of gold mines, here's how investors can play it

The world is changing fast right now in ways that many investors might not easily recognize or want to admit. This could end up being a costly mistake. If you’re not paying attention, you could be letting opportunities pass you by without even realizing it.

With that in mind, I’ve put together a list of five agents of change that I think investors need to be aware of and possibly factor into their decision-making process. 

1. Xi Jinping

October cover of The Economist

At China’s 19th National Party Congress two weeks ago, Xi Jinping’s political thought was enshrined into the country’s constitution, an honor that, before now, had been reserved only for Mao Zedong, founder of the People’s Republic of China, and Deng Xiaoping. It was Deng, if you recall, who in 1980 established special economic zones (SEZs) that helped turn China into the economic powerhouse it is today.

But back to Xi. His elevation to Chairman Mao-status not only cements his place in the annals of Chinese history but also makes him peerless among other world leaders in terms of political and militaristic might, with the obvious exception of U.S. President Donald J. Trump.

But whereas Trump has been criticized by some for setting the U.S. on a more isolationist path—shrinking the size of the State Department, just to name one example—Xi sees China emerging as the de facto global leader by 2050. To get there, his country is spending billions on the “Belt and Road Initiative” and other massive infrastructure projects, opening its doors to foreign investors, reforming state-run enterprises, weeding out corruption, investing heavily in clean energy and public transportation and expanding its middle class. And let’s not forget that the Chinese yuan, also known as the renminbi, was included in the International Monetary Fund’s (IMF) basket of reserve currencies in 2015, placing it in the same league as the U.S. dollar, British pound, Japanese yen and euro.

During his three-hour speech before the congress, Xi made reference to the “Chinese dream,” adding that the “Chinese people will enjoy greater happiness and well-being, and the Chinese nation will stand taller and firmer in the world.”

Xi has his own detractors, of course, who see China’s rise as a threat to established world order. But if his vision is to be realized, it might be prudent to recognize and prepare for it now. China’s economy grew a healthy 6.8 percent in the third quarter year-over-year, helping it get closer to meeting economists’ target of 6.5 percent for 2017. And although manufacturing expansion slowed in October, falling from 52.4 in September to 51.6, it was still well above the 50 threshold.  

China manufacturing power expanded at slightly lower pace in October
click to enlarge

Citing these indicators as well as strong medium and long-term bank lending to nonfinancial corporations, research firm BCA recommended that investors overweight Chinese stocks relative to the emerging market aggregate.

 

 

2. Poland

Besides China, another region I’m keeping my eye on is Poland. Already one of the fastest growing economies in Europe, the country was just upgraded from the “advanced emerging” category to “developed” by FTSE Russell, effective September 2018. This will place Poland in the same company as, among others, the U.S., U.K., Japan, Germany, Singapore and South Korea, the last country to have joined the club of top-ranking economies. Poland is the first Central and Eastern European (CEE) country to receive “developed” status.

Among the decisive factors behind the upgrade were the country’s advanced infrastructure, secure trading and a high gross national income (GNI) per capita. The World Bank expects Poland’s economic growth in 2017 to reach 4 percent, up significantly from 2.7 percent in 2016, on the back of a strong labor market, improved consumption and the child benefit program Family 500+.

Poland one of the fastest growing economies in th eEuro area
click to enlarge

Economists aren’t the only ones noticing the improvement. Young Polish expats who had formerly sought work in the U.K. and elsewhere are now returning home in large numbers to participate in the booming economy, according to the Financial Times. Banks and other companies, including JPMorgan Chase and Goldman Sachs, are similarly considering opening branches in Poland and hiring local talent.

This represents quite an about-face for a country that, as recently as 1990, was languishing under communist rule.

One of U.S. Global’s analysts, Joanna Sawicka, has seen the dramatic transformation firsthand. A native of Bialystok, Poland, Joanna has vivid memories of waiting in line for hours just to buy food and school supplies. After returning to the U.S. from a visit to her hometown in 2015, though, she was singing its praises:

“I saw big changes. There’s now a small business on every street corner. A lot of my old friends own businesses now. Poland is the largest beneficiary of European Union funds, and people are clearly taking advantage of having more money and better opportunities.”

 

 

3. Bitcoin

One of the most influential agents of change right now is bitcoin, and indeed the entire digital currency market. Cryptocurrencies are challenging underlying notions of the global monetary framework, upending the way many companies raise funds and disrupting the investment world.

All this from an asset class nobody even knew about 10 years ago.

For the first time last week, bitcoin traded above $7,000 a coin, bringing its 2017 gains to around 650 percent. Some are calling this a bubble, but I recently shared with you a chart that shows that, when placed on a logarithmic scale, bitcoin doesn’t appear to have found its peak yet.

Bitcoin broke above 7000
click to enlarge

 

Bitcoin can no longer be called a curiosity or niche investment. Large brokerage firms and financial institutions, including Fidelity and USAA, now allow clients to use their websites to check their holdings of bitcoin and other digital currencies alongside their more traditional assets. And just last week, the Chicago Mercantile Exchange (CME) announced it will be offering a bitcoin futures contract by the end of the year, giving investors an easier way to trade cryptos.

Following the announcement, Coinbase, a leading digital currency broker, saw a record number of people opening new accounts on its platform. Within a single 24-hour period, as many as 100,000 new users opened accounts, helping to double the number of Coinbase clients since the beginning of the year.

This explosion in interest hasn’t come without consequences in other markets, however. The U.S. Mint reported that this year’s sales of American Eagles, the popular gold coins, have fallen to their lowest level since 2007, presumably as investors who otherwise would have bought bullion have instead put money in bitcoin as a store of value.

4. U.S. Tax Reform

It’s been at least a generation at least since the U.S. has had meaningful tax reform. That might be about to change, though, as Congress and the president last week unveiled their plans to overhaul the tax code and deliver the “biggest tax cut in U.S. history,” according to Trump.

If passed and signed, the plan would consolidate the number of income brackets, currently at seven, down to only four, while also eliminating a number of tax credits and exemptions, including the alternative minimum tax (AMT). The fourth bracket, with a rate of 39.6 percent for the nation’s top earners, was added at the last minute to address concerns the new code would blow up the deficit. Many savers are no doubt relieved to learn that 401(k)s will be left alone, ending rumors that annual contribution caps would be lowered.

As for corporate taxes, the plan is to slash them from 35 percent—the highest among any country in the Organization for Economic Cooperation and Development (OECD)—to a much more competitive 20 percent. This change would be both immediate and permanent.

Right now, as much as $2.5 trillion or more in cash is estimated to be held overseas by multinational corporations to avoid having to pay the steep rate. Lowering it would allow these firms to bring profits home and reinvest them in workers, new equipment and more. It would also encourage American companies to relocate operations back to the U.S., as we saw last week with semiconductor manufacturer Broadcom.

After failing to repeal and replace Obamacare, both Congress and the president need this win if they expect voters to give them another term.

5. Jerome Powell

For the final agent of change, I’m picking someone whom some readers might not agree reflects real change. Jerome “Jay” Powell, the person Trump has tapped to replace Federal Reserve Chair Janet Yellen—assuming he gets Senate confirmation—is being described as someone who’ll mostly hold to the status quo established by his two immediate predecessors, Yellen and Ben Bernanke. Powell appears to be dovish and supportive of the cautious interest rate hikes we’ve seen during Yellen’s tenure, which will come to an end in February 2018. 

Federal reserve chair Janet Yellens tenure
click to enlarge

There’s one huge difference, however—one that likely convinced Trump a change was needed, despite his previous acclaim for Yellen’s handling of the job. Whereas Yellen has expressed support for the raft of financial regulations that were introduced in the wake of the financial crisis, Powell generally seems to be in favor of deregulation, in line with Trump’s own agenda. On numerous occasions I’ve written that our industry needs more streamlined rules and laws, so I see this as very constructive. Although Powell, as head of the Fed, won’t have any policymaking authority to alter or reverse such rules, at least he’ll serve as an ideological ally of Trump’s.

On top of all this, Powell’s appointment will set new precedent. He’ll be the first Fed chair in decades not to hold an advanced degree in economics—he’s a former investment banker with the Carlyle Group—and he’ll also be the first in nearly as many years to replace someone before the end of their full 14 years.

In any case, I speak for everyone at U.S. Global by wishing Powell the best, once confirmed, and hope his policies can help the U.S. economy continue moving in the right direction.

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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.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 9/30/2017.

Share “5 Agents of Change Investors Need to Know About Now”

Net Asset Value
as of 12/15/2017

Global Resources Fund PSPFX $5.91 -0.03 Gold and Precious Metals Fund USERX $7.27 -0.06 World Precious Minerals Fund UNWPX $5.67 -0.05 China Region Fund USCOX $11.08 -0.09 Emerging Europe Fund EUROX $7.06 -0.01 All American Equity Fund GBTFX $24.78 0.24 Holmes Macro Trends Fund MEGAX $22.12 0.24 Near-Term Tax Free Fund NEARX $2.21 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change