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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.

5 Reasons to Consider Investing During This Summer Travel Season
June 1, 2017

The busy summer travel season is here yet again, and according to forecasts, this year could set a number of new records for airlines and highways. Thanks to a steadily improving economy, rising gross domestic product (GDP), strong consumer confidence and affordable airfare and fuel costs, more people than ever before are expected to fly on U.S. airlines and drive on the nation’s highways this summer.

Below are five reasons why this summer travel season could be a favorable one for investors.

1. Millions Leaving on a Jet Plane

a record 234.1 million passengers are expected to fly on U.S. airlines this summer

Airlines for America (A4A), the main airline industry trade group, projects a record 234.1 million people flying worldwide on U.S. carriers between June 1 and August 31. That figure’s up a healthy 4 percent from last summer.

To accommodate the 2.54 million expected daily passengers—100,000 more than normal—airlines will need to add an extra 123,000 seats a day.

2. Consumer Confidence and Satisfaction Up

The surge in air travel demand is a reflection of an improving domestic economy. Consumers are happy to spend their money right now, with the Consumer Confidence Index posting a 117.9 in May. Even though this is a couple of points below the April reading, optimism still stands at a historically high level.

U.S. Consumer Confidence Near All-Time High in May
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It doesn’t hurt that airfare is relatively affordable at the moment. According to big data firm Hopper, airfare to Europe should be a huge bargain this summer, down an expected 18 percent from last year on average.

Glowing customer satisfaction is another contributing factor to increased demand. The just-released J.D. Power 2017 North America Airline Satisfaction Study shows that passengers are more satisfied with their service than at any other time in the study’s 10-year history. Despite the regretful United Airlines incident in April, when a man was dragged from a Chicago flight bound for Louisville, overall satisfactory rose for a fifth consecutive year, reaching its highest level ever. For the 10th straight year, Alaska Airlines was ranked first among traditional carriers. Delta Air Lines, which we own in our All American Equity Fund (GBTFX), came in a close second.  

3. Rockin’ Down the Highway

Airline passengers won’t be the only ones enjoying an improved economy and low fuel costs this summer. More motorists than ever before are expected to make use of U.S. roads and highways, with 56 percent of Americans saying they plan on traveling more than 500 miles round trip, a 10 percent increase over last summer, according to GasBuddy.

Also pushing up travel expectations is what GasBuddy calls “a feat never before seen.” For the first time in recent memory, the price of gasoline at the beginning of the summer is nearly the same as it was at the beginning of the year. We normally see gas rise about 50 cents during the first five months of the year, but in 2017 it’s risen only 1.5 cents ($2.28 per gallon in January versus $2.30 in May). This should help encourage more Americans to splurge on a longer summer road trip.  

The Great American Summer Road Trip Getting Longer
click to enlarge

4. Appetite for Production

As a result, we expect to see another new high in gasoline consumption. During the summer months of 2016, gas consumption in the U.S. reached an average of 9.62 million barrels a day, surpassing the previous record of 9.57 million barrels a day set in the summer of 2007. With even more motorists taking longer road trips this year compared to last summer, we could see the amount edge closer to 10 million barrels a day.

This bodes well for oil and gas companies such as Phillips 66, Exxon Mobil and Valero, all held in our All American Equity Fund (GBTFX).

5. Vacation Had to Get Away

These airline and highway projections become even more likely to happen when we factor in that Americans are reportedly using more of their vacation time. According to Project: Time Off, an advocacy research initiative run by the U.S. Travel Association, American workers took an average 16.8 days off in 2016, up slightly from 16.2 days the previous year. Though the difference seems marginal, the additional 0.6 days added an extra $37 billion to the U.S. economy in 2016, creating an estimated 278,000 jobs.

So whether you plan on traveling by road or air this summer, you can probably expect to be accompanied by more people than in years past. This might lead to congestion and packed airports, but ultimately it’s a good opportunity for investors.

Seeking investment opportunities in domestic travel and consumer spending? Explore the All American Equity Fund (GBTFX) today!

 

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

Stock markets can be volatile and share prices can fluctuate in response to sector-related and other risks as described in the fund prospectus.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the All American Equity Fund (GBTFX) as a percentage of net assets as of 3/31/2017: United Continental Holdings Inc. 0.00%, Delta Air Lines Inc. 1.40%, Phillips 66 1.75%, Exxon Mobil Corp. 2.17%, Valero Energy Corp. 2.23%.

Administered by the Conference Board, the Consumer Confidence Index (CCI) measures how optimistic or pessimistic consumers are with respect to the economy in the near future. The idea behind the Index is that if consumers are optimistic, they tend to purchase more goods and services.

The J.D. Power 2017 North America Airline Satisfaction Study measures passenger satisfaction among both business and leisure travelers, and is based on responses from 11,015 passengers who flew on a major North American airline between March 2016 and March 2017. The study was fielded between April 2016 and March 2017.

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

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5 Things You Need to Know from Last Week (Look What Gold Just Did!)
May 30, 2017

Hedge Fund Managers Pour SALT on U.S. Stocks, Look to Europe

It was a whirlwind week. After attending two big conferences, I landed in Vancouver Friday where I presented at the International Metal Writers Conference. Markets continued to close at record highs, even as political uncertainty remained and the threat of terrorism loomed large over Western nations. Last Monday, gold flashed a bullish signal we haven’t seen in over a year.

There’s much to talk about! Below are five things you need to know from the week now behind us.

1. Quants Now Control Wall Street

A special report by the Wall Street Journal last week confirmed what I’ve been saying for a while: Wall Street is now run by the quantitative analysts, or quants. Numbered are the days when traders and fund managers picked stocks on gut instinct. Today, a decision is made only after whole oceans of data have been processed using sophisticated algorithms.

And yet quants’ role has even further room to expand. As the WSJ reports, quant hedge funds now represent 27 percent of all U.S. stock trades by investors, up from 14 percent in 2013.

To get some idea of the type of analysis quants conduct, take a look at the matrix below. Of course, their methods are far more sophisticated, their data crunched in a matter of nanoseconds, but it’s helpful to see how they might codify many points of data.

Investment analysis decision matrix

We aspire to conduct the same sort of analysis, from technical to tactical, to make better, more strategic investment decisions.

2. Paul Singer Says It’s Time to Build Up Some Dry Powder

Paul Singer

Last week at a Chief Executives Organization (CEO) event, I had the privilege of hearing billionaire hedge fund manager Paul Singer speak. His firm, Elliott Management, has one of the most impressive long-term track records, generating a compound annual growth rate (CAGR) of 13.5 percent since its inception in 1977, with only two down years.

Elliott Management currently manages close to $33 billion—not including the $5 billion it raised this month in as little as 24 hours. Yes, billion with a b. Singer, suggesting a potential investment opportunity in distressed stocks could soon open up, recently called on investors to commit a fresh infusion of cash. The resultant $5 billion in dry powder, the most ever raised in the firm’s history, is expected to be deployed at some later date.

Singer continues to be a huge advocate for gold. At the event, he mentioned that he still holds the yellow metal, noting its attractive diversification benefits. This is in line with what I frequently say: You’re unlikely to get rich investing in gold, but as a diversifier it helps to reduce some of the volatility in your portfolio. I like to recommend a 10 percent weighting in gold—5 percent in bars and coins, the other 5 percent in gold stocks—with annual rebalances.

Gold posted a “golden cross” last week, which is what happens when the 50-day moving average climbs above the 200-day moving average, often seen as a bullish move.

gold posts a golden cross
click to enlarge

The metal is up about 10 percent year-to-date on a weaker U.S. dollar, which has declined more than 5.5 percent over the same period.

 

3. BBH: Just Say No to Overdiversification

Diversification can sometimes help minimize volatility, but too much of it can lead to mediocre returns. That was the main theme of another speaker at the CEO event, this one from Brown Brothers Harriman (BBH), one of the largest private banks in the U.S. BBH research shows that, if your investment goal is to get rich, a highly-concentrated portfolio is the surest way to achieve it. An S&P 500 Index fund, while possibly delivering positive returns, is unlikely to make anyone a millionaire.

This is good to know, but the problem is that most investors can’t stomach the volatility inherent in a portfolio that holds only a few assets. With minimal diversification, daily swings can be dizzying. Professional money managers and investment banks such as BBH know how to use this volatility to their advantage, but for everyone else, it’s prudent to be diversified in gold, municipal bonds and other assets often seen as havens.

For more on how to deal with market volatility, download my whitepaper, “Managing Expectations.”

4. Want Volatility? Look No Further Than Bitcoin

Markets watched in amazement last week as bitcoin, the online-only currency, soared to a fresh high of $2,740, more than twice the value of an ounce of gold. On Thursday alone, it traded within a $510 range, underscoring the nearly 10-year-old cryptocurrency’s high levels of volatility and speculation.

Bitcoin's meteoric rise
click to enlarge

Some bitcoin analysts forecast even higher gains, while others see the formation of a bubble they liken to the dotcom crash of the late 1990s and early 2000s. Since only March, when it surpassed gold, the digital currency has doubled in value.

These were among some of the discussions at Consensus, a bitcoin technology conference, which I also attended last week in New York. One of the highlights of the conference was hearing from Fidelity CEO Abigail Johnson, who surprised many attendees by embracing the digital currency and supporting its growth. I admire Johnson, head of a traditional financial firm, for recognizing the fact that bitcoin is already disrupting our industry and will likely continue to do so for some time. Not only does Fidelity now allow its workers to buy their lunches using bitcoin, but there are also plans to make it possible for clients to see and manage their bitcoin assets.

Paul Singer

Fidelity isn’t the only firm trying to position itself as a bitcoin pioneer. Both Nasdaq and the Chicago Mercantile Exchange (CME) were sponsors of the conference, indicating cryptocurrencies’ gradual shift from fringe curiosity to legitimate speculative asset.

I was shocked to learn that there are now somewhere in the neighborhood of 700 cryptocurrencies, all of them locked in a race to see which ones will come out on top. They’re collectively up more than 400 percent so far this year, the market having risen from $17.6 million in January to $88 million today, according to cryptocurrency and blockchain technology news site CoinDesk.

To “mint” a new cryptocurrency, I learned, speculators raise capital not through conventional means but through crowdfunding, like a 21st century Gold Rush. All regulatory oversight and governance is therefore bypassed. The currency is then issued in an initial coin offering (ICO), after which it can be “mined” using powerful, energy-hogging computers. Naturally, the cheaper the electricity, the better. The hunt for the world’s cheapest kilowatt hour has taken “miners” all over the globe, from parts of Russia to Iceland to Finland to rural China.

5. Make American Wheat Great Again

America wheat on top

It looks as if wheat exporters are great again. After being displaced by Russia in August 2016, the U.S. has regained its title as the world’s top exporter of the grain—for now. Interestingly enough, the investigation into possible collusion between Donald Trump’s campaign and Russia has driven the U.S. dollar’s devaluation since the start of the year, which in turn has made U.S. exports cheaper for overseas buyers. Egypt, Algeria, Mexico and Japan all reportedly increased their purchase amounts of American wheat.

U.S. once agin the world's top wheat exporter. But for how long?
click to enlarge

Two years ago, it was the Russian ruble’s weakness—prompted by the dramatic decline in oil prices and international sanctions following Russia’s occupation of Ukraine—that gave Russian exporters an edge. Coupled with a bumper crop, the country outpaced both the U.S. and European Union, then the leader.

As I said earlier, the dollar has declined 5.5 percent year-to-date, helping to give American exporters an edge. According to Bloomberg, the U.S. is expected to ship more than 28 million metric tons of wheat this season, an increase of 34 percent compared to the same time last year.

 

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.

Diversification does not protect an investor from market risks and does not assure a profit.

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Hedge Fund Managers Pour SALT on U.S. Stocks, Look to Europe
May 22, 2017

Hedge Fund Managers Pour SALT on U.S. Stocks, Look to Europe

Europe is back on the map. That was one of the main takeaways last week from the SkyBridge Alternatives (SALT) hedge fund conference in Las Vegas, where $3 trillion in assets was represented. Speaker after speaker touted European equities for their attractive valuations and as a means to diversify away from the volatile American market in light of rising U.S. geopolitical risk. France’s election of centrist Emmanuel Macron over far-right nationalist Marine Le Pen this month has especially eased investors’ fears that antiestablishment forces would challenge the integrity of the European Union (EU).

Economic growth is finally picking up in Europe—“solid and broad,” as European Central Bank (ECB) president Mario Draghi recently put it—and many countries’ purchasing managers’ indexes (PMIs) are at five- and six-year highs. Export orders and hiring have accelerated. Labor participation is improving. European commodity sectors, including energy and metals, look cheap and oversold, meaning it might be time to start accumulating.

Trading at around 17 times earnings, European companies are priced to move compared to American firms, which are trading at 22 times earnings.

European Stocks Have an Attractive Dividend Yield

Dividend yields also look attractive relative to U.S. stocks. The MSCI Emerging Europe Index, which is most heavily weighted in Russian, Polish and Turkish stocks, currently yields 3.2 percent. The S&P 500 Index, by comparison, yields 2 percent.

A recent Barron’s article, “Europe on Sale: Time to Buy Foreign Stocks,” makes the same bullish case as many of the SALT presenters. Its author, Vito J. Racanelli, suggests that the eight-year bull run in the U.S. could be coming to an end, and that the baton is being passed to Europe. Overseas markets have already attracted more fund flows so far this year than the U.S. market, with a whopping $6.1 billion being plowed into European equity funds in the week ended May 10.

“Given attractive valuations, diminished political risk, low interest rates and a pickup in global growth, international markets, and Europe in particular, could finally start to outperform,” Racanelli writes.

 

 

Talking Geopolitics

Before moving on, I want to share a few other takeaways from SALT. One of the highlights was hearing billionaire investor Dan Loeb, who manages the $16 billion hedge fund firm Third Point. Loeb said that serious investors should closely monitor geopolitics as a backdrop or overlay when making investment decisions because government policy can have the fastest and most significant impact on your portfolio.

Daniel S. Loeb

That was flattering to hear. Not only do I spend a lot of time discussing and analyzing geopolitics, both here in the weekly commentary and my CEO blog Frank Talk, but it’s baked right into U.S. Global Investors’ methodology: Our investment process clearly asserts that “government policy is a precursor to change.” Loeb’s comments, I felt, validated our emphasis on geopolitics.

Many conferences I attend can often get bogged down in partisan politics, but SALT was refreshingly balanced. Joe Biden was as welcome on-stage as Jeb Bush. No one came out entirely in favor of or against President Donald Trump or his policies. Instead, presenters discussed the inherent risks and opportunities in an intelligent, even-handed manner. I aspire to do the same.

One of the speakers was John Brennan, the former CIA director, who’s scheduled to testify before the House Intelligence Committee later this month as part of its investigation into Russia’s alleged involvement with the 2016 election. Brennan, who told lawmakers as far back ago as August that the agency had information pointing to possible collusion between Russia and the Trump campaign, shed some much-needed light on allegations that Trump shared sensitive intelligence with Russian officials this month—a “serious mistake,” he said—explaining that such leaks to the media are potentially just as damaging to national security as the president’s actions.

Also notable was former Federal Reserve Chair Ben Bernanke’s thoughts on Washington’s little-known power dynamics. He said there are really three parties jockeying for control in the capital—Republicans, Democrats… and the “beltway party.” It’s this last group, composed of deeply entrenched lobbyists and career bureaucrats, that gives Washington outsiders such as Trump the hardest time and actively tries to sabotage agendas that shake up the status quo.

Trump's young presidency closely resembles Jimmy Carter's

In this regard, Bernanke said, the presidency Trump’s tenure so far resembles the most is not Richard Nixon’s, as some have suggested. It’s not even Andrew Jackson’s, which Trump himself expressly would like to emulate. Instead, it’s Jimmy Carter’s.

This might seem counterintuitive, but think about it: Both men were Washington outsiders. Both men arrived in the beltway with aspirations to transform the capital’s insular culture and “drain the swamp.” Both men had the great fortune of working with a party majority in both chambers of Congress. But because they exuded an “I alone” attitude and often picked fights with members of their own party, both men faced unusual difficulties in getting key components of their agendas passed. And just as Carter had little success in his first 100 days—in his entire four-year term, in fact—Trump’s young presidency has similarly been unable to make significant strides so far in getting much accomplished.

A White House in Crisis?

This is precisely what markets were reacting to last Wednesday, the worst week for major U.S. indices in months. Investors, fearing Trump’s pro-growth agenda could be threatened by troubling news and allegations coming out of the White House, punished small-cap stocks in particular, sending the Russell 2000 Index down 2.62 percent, its sharpest one-day loss since March. Recall that it was small caps that saw the strongest surge following the election, as investors bet on domestic growth stemming from the then-president-elect’s “American first” proposals.

the importance of diversification
click to enlarge

Now, however, some are wondering if Trump, embroiled in numerous scandals, will finish out his term. A few SALT presenters even uttered the “i” word. Jim Chanos, founder and investment manager of Kynikos Associates in New York, told the packed auditorium that he believes the market hopes Vice President Mike Pence will become president. Investors are seeking deregulation and tax cuts, plain and simple, Chanos said, and the “more stable” Pence is seen as having a better shot at delivering. This squares with reports from British gambling and betting company Ladbrokes, which announced last week that Trump is now odds-on, or highly likely, to face impeachment by the end of his first term, with bookies having to cut the price from 11/10 to 4/5.   

Banks, which stand to benefit from Trump’s plan to loosen financial regulations, were Wednesday’s biggest losers. JPMorgan was down 3.81 percent, or $3.34 a share. Goldman Sachs fell 5.27 percent, or $11.88 a share.

Apple finished the day down 3.36 percent, wiping away some $20 billion in market value. The smartphone giant, which recently became the first company ever to be worth more than $800 billion, could also benefit from Treasury Secretary Steven Mnuchin’s efforts to make it easier for multinationals to repatriate cash that’s held overseas. And if that describes any company today, it would be Apple: The iPhone-maker holds nearly $250 billion in cash and securities in offshore accounts.  

 

Dollar Weakness Gives a Boost to Gold

More so than equities, the U.S. dollar is highly sensitive to geopolitical drama. Last week, the greenback tumbled to its lowest level since the November election compared to other major currencies.

U.S. Dollar Gives up its post-election gains
click to enlarge

This helped gold, miners and commodities end the week in positive territory. Gold gained 2 percent, gold miners 0.57 percent and commodities 1.36 percent. The S&P 500, meanwhile, finished the week down 0.8 percent.

For diversification benefits, I always recommend around a 10 percent weighting in gold and gold stocks, and last week proved yet again that this strategy could help mitigate the losses in risk assets.

Unsure what else drives the price of gold? Find out!

 

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

The MSCI Emerging Markets Europe Index captures large and mid-cap representation across 6 Emerging Markets (EM) countries in Europe. With 83 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. 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 NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver. The Bloomberg Commodity Index is made up of 22 exchange-traded futures on physical commodities. The index represents 20 commodities, which are weighted to account for economic significance and market liquidity.

Dividend yield is a financial ratio that indicates how much a company pays out in dividends each year relative to its share price. There is no guarantee that the issuers of any securities will declare dividends in the future or that, if declared, will remain at current levels or increase over time.

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 3/31/2017.

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The 5 Costliest Financial Regulations of the Past 20 Years: A Timeline
May 18, 2017

The 5 Costliest Financial Regulations of the Past 20 Years: A Timeline

Last year, the Federal Register—the U.S. government’s depository of rules and regulations—hit an all-time high of 81,640 pages. Among the industries that bear the greatest regulatory oversight is financials, which has seen a disproportionate amount of scrutiny in recent years, especially following the 9/11 attacks and subprime mortgage crisis.

Although I agree with the need to have and play by the rules, financial regulations have become so onerous that they render all but the largest firms noncompetitive. It’s a game whose rules are continually shifting, and there often seems to be more referees than players. A recent Thomson Reuters survey found that more than a third of all financial firms spend at least a whole work day every week tracking and analyzing regulatory changes. This is an obligation most companies simply can’t afford in the long term.

It serves no one, least of all investors and borrowers, to have fewer options in the capital markets. But this is precisely what the most recent regulations have contributed to. In the last 20 years, the number of listed companies has been cut in half, and since 2008, one in four regional banks has disappeared.

President Donald Trump and the Republican-controlled Congress are actively working to alleviate any additional regulatory pressure. In January, the House passed a bill requiring securities officials to conduct a cost-benefit analysis of any new rule—something that should have been done in the first place—and in February the president signed an executive order requiring the elimination of two federal regulations for every new one that’s adopted.

As for when those that are already in place can be lifted, in whole or in part, is a different matter.

Having said that, I want to share with you a timeline of the five costliest financial regulations of the past 20 years. Please note that when I say “costly,” I’m referring not only to dollar figures but also additional workload and compliance hours.

October 2001: International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001

Passed in October 2001 as part of the USA PATRIOT Act, this particular act aims to prevent black money from being used to finance terrorist activities. It actually reforms two previous anti-money laundering (AML) laws, the Bank Secrecy Act of 1970 and the Money Laundering Control Act of 1986.

Although I think most of us would agree that catching terrorists is an admirable mission, the AML rules come at a very high cost to financial institutions. According to a 2016 study conducted by the Heritage Foundation, the current rules cost the U.S. economy between $4.8 billion and $8 billion annually. And with so few money laundering cases opened and investigated every year, each conviction since the law went into effect carries an estimated $7 million price tag.

Consequently, many banks, facing strict penalties and compliance costs, have cancelled thousands of “high-risk” accounts, including those belonging to money-transfer firms and humanitarian organizations.

July 2002: Sarbanes-Oxley Act of 2002 (SOX)

Enacted in July 2002, Sarbanes-Oxley, or SOX, was intended to prevent large-scale corporate and accounting fraud that led to the demise of Enron, WorldCom and others. It set in place new requirements for public companies.

The most burdensome of these is Section 404, which requires external auditors to report on the adequacy of a firm’s “internal controls.” Since such auditing is so complex and costly—sometimes quadruple the normal amount—many smaller companies have found it prohibitively difficult to raise capital in the public markets. Before SOX, there were an average 528 initial public offerings (IPOs) a year, according to Dealogic data. Since it was enacted, that number has fallen to 135, a decline of nearly 75 percent.

This has resulted in the rise of private capital and has locked retail investors out of high-growth investment opportunities.

Speaking to the Detroit Economic Club in 2013, Home Depot founder and former CEO Bernie Marcus said that, had SOX existed when he helped conceive the company in the late 1970s, he wouldn’t have been able to get it off the ground, let alone take it public. This would have been a shame, as Home Depot is now one of the largest employers in the U.S. and has among the highest market caps, standing at nearly $188 billion. A $5,000 investment in the company when it first IPOed in September 1981 would today be worth well over $27 million. In its current form, SOX threatens to put an end to such high-growth opportunities.

March 2010: Foreign Account Tax Compliance Act (FATCA)

March 2010: Foreign Account Tax Compliance Act (FATCA)

Signed by then-President Barack Obama, the Foreign Account Tax Compliance Act (FATCA) allegedly aims to clamp down on tax evasion by requiring participating foreign financial institutions (FFIs) to provide the Internal Revenue Service (IRS) with names, addresses and account details of all American accountholders living abroad with assets over $50,000.

As I wrote back in 2014, the law’s mandates would be felt hardest “not by wealthy ‘fat cat’ tax dodgers but hardworking Americans who have no intentions of cheating the U.S. tax system.”

I’m not alone here. The IRS, of all groups, has come out on the side of taxpayers, writing in 2015 that “the IRS’s approach to FATCA implementation has created significant compliance burdens and risk exposures to a variety of impacted parties.” The rule’s underlying assumption, it says, is that “all such taxpayers should be suspected of fraudulent activity, unless proven otherwise.”

Until the law is reformed, the IRS adds, its efforts “will continue to be unsystematic, unjustified and unsuccessful.”

Many others apparently agree—especially those FATCA targets. The number of overseas individuals renouncing their U.S. citizenship crossed above 5,000 in 2016, an all-time high, with 2,300 expatriating in the final quarter alone.

Crude Oil Historical Patterns
click to enlarge

July 2010: Dodd-Frank Wall Street Reform and Consumer Protection Act

The most sweeping reform of the U.S. financial services industry since the Great Depression, the Dodd-Frank Act was signed into law July 2010, creating some 400 new rules and mandates as well as several new councils, bureaus and agencies. Standing at more than 22,000 pages, Dodd-Frank is such a behemoth piece of legislation that it’s impossible to discuss it comprehensively in such a short space.

Suffice it to say, though, that since it went into effect, a startling number of community banks have gone under, giving borrowers fewer options. Lower-income customers are disproportionately at a loss, as many banks have done away with free checking.

Both former Federal Reserve Chair Alan Greenspan and billionaire investor Warren Buffett have suggested Dodd-Frank needs to go, with Greenspan saying he’d love to see the 2010 law “disappear.” Buffett, meanwhile, commented that the U.S. is “less well equipped to handle a financial crisis today than we were in 2008. Dodd-Frank has taken away the Federal Reserve’s ability to act in a crisis.”

Reforming Dodd-Frank is supposedly near the top of President Trump’s priorities, and a 600-page replacement called the Financial Choice Act 2.0 has already been drafted. 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.

April 2016: Department of Labor (DOL) Fiduciary Rule

On its surface, the Department of Labor’s Fiduciary Rule sounds like something everyone can get behind. It mandates that all who serve as fiduciaries—broker-dealers, investment advisors, insurance agents and the like—must act in the best interest of their clients. Fine. But how the rule will be interpreted and applied could have negative consequences in the securities markets.

What’s naturally going to happen is financial professionals, in an effort to remain compliant with the rule, will recommend only the least expensive products, regardless of whether they’re a good fit for their clients. Many mutual funds—which might be better performing but have higher expenses than other investment vehicles—will fall off brokerage firms’ platforms.

It would be like the DOL telling consumers they can only shop at Walmart and buy their coffee from Dunkin’ Donuts because anything more expensive—Target or Starbucks, say—is “riskier,” even though it’s of higher quality.

Issued in April 2016, the rule was delayed for 60 days by the Trump administration and is now scheduled to go into effect early next month. It’s already had disruptive consequences. Investment Company Institute (ICI) President and CEO Paul Schott Stevens, speaking this month to ICI members, stated the rule was “causing great harm,” adding that brokers are “simply resigning from small accounts en masse” to avoid legal and regulatory risk.

It might be difficult for Trump and Congress to provide relief from these and other financial regulations—especially now that the multiple investigations into the Trump campaign threaten to sideline such efforts—but I still have faith.

For expert insight and intelligence on gold, emerging markets and natural resources, subscribe to our weekly, award-winning Investor Alert!

 

 

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. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 3/31/2017.

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Let's Talk About Tax, Baby
May 1, 2017

By Frank Holmes
CEO and Chief Investment Officer 
U.S. Global Investors

This week I had the opportunity to take a tour of the Treasury Department

Last week I had the pleasure of attending Evercore ISI’s Energy Policy & Geopolitics Conference in Washington, D.C., where I visited with senior staff responsible for infrastructure and energy decision-making. The meetings were encouraging and highly instructive, and they opened my eyes up to some of the lesser-known inner workings of the government. Among them is the reconciliation process, whereby Congress instructs a number of committees to report on any budgetary changes a new bill or spending package might trigger. For example, if President Donald Trump truly wishes to build a wall on the southern border, he’ll need to acquire the capital from other areas of the government’s budget. In other words, “the wall” must turn out to be revenue- and distribution-neutral. It’s a highly complex process—all matters of policy are entwined in and affect various departments, after all—which partly explains why Congress often seems to have such difficulty getting anything accomplished, including repealing Obamacare.

As President Donald Trump admitted to Reuters last week: “[Governing] is more work than in my previous life. I thought it would be easier.”

The Environmental Protection Agency (EPA), part of the reconciliation process, is one such entity that’s notorious for standing in the way of infrastructure and energy projects. The agency has traditionally held the attitude that the best development is no development. However, the Trump administration has an ace up its sleeve: the Fixing America’s Surface Transportation (FAST) Act, signed into law in December 2015. According to the official website, FAST-41, as it’s known, “was designed to improve the timeliness, predictability and transparency of the Federal environmental review and authorization process for covered infrastructure projects.” Project delays, therefore, can be combatted with transparency and accountability. 

Standing outside Treasury Department

I also had the opportunity to visit the Treasury Department. I was pleased to hear that its senior analyst, who reports directly to Secretary Steven Mnuchin, closely monitors the purchasing manager’s index (PMI) and China, as we do, and keeps an eye on both oil and gold, which the department views as a currency. He seemed genuinely concerned about how federal rules and regulations might affect the work of professional brokers and traders. Specifically, he worries about impairing liquidity in capital markets, which makes price discovery exceedingly challenging. Having served in both the Obama and Trump administrations, the analyst was very insightful, articulate and balanced in his views. Not once did he have an explicitly negative thing to say about either president, and I got the sense that he cared deeply about the execution of his job, which was highly encouraging.

 

Can Trump Get His Way on Tax Reform?

As promised, the president unveiled his long-awaited U.S. tax reform proposal last Wednesday, exciting many investors who might have begun to doubt his resolve following a number of significant setbacks. Most of the stock market gains actually occurred in anticipation of the announcement, with the Dow Jones Industrial Average and S&P 500 Index slightly losing ground on Wednesday, despite both indices logging positive monthly gains in five of the last six months. The small-cap Russell 2000 Index closed at an all-time high Wednesday, presumably because smaller domestic companies have the most to gain from Trump’s plan to lower the corporate tax rate from 35 percent, in effect since 1993, to a much more competitive 15 percent.

If Trump gets his way—and let’s be clear, it’s going to be an uphill fight—U.S. corporate taxes will decline from being the highest among fellow Organization for Economic Cooperation and Development (OECD) economies to just a few degrees north of Ireland’s highly favorable 12.5 percent.

competitive again president trump proposes a 15 percent corporate tax rate
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Not only would this be the most meaningful overhaul of our tax code in more than 30 years, but it would also put the U.S. in very good company. If you recall from a September Frank Talk, I shared with you some of the accolades the Republic of Ireland has received partly as a result of its low tax rate, including being named “the most effective country in the EU in which to pay business taxes” by PricewaterhouseCoopers (PwC). It also ranks seventh in world competitiveness, according to Switzerland’s International Institute for Management Development (IMD), and is the fastest-growing European economy.

In the final quarter of 2016, Ireland expanded an impressive 7.2 percent year-over-year. Compare that to America’s sluggish start to 2017 with growth at 0.7 percent, the slowest quarterly rate in three years. Analysts had expected 1.2 percent. Gold, long considered a safe haven asset, closed up nearly 0.3 percent.

Obviously, there’s more to Ireland’s success than low corporate taxes, and we can’t expect the U.S. to enjoy the same momentum overnight after adopting a 15 percent tax rate. But it’s a start. As I said last week, there’s still much more work that needs to be done, including streamlining burdensome financial regulations.

Can’t Please All of the People All of the Time

Not everyone is entirely on board with Trump’s idea, however. Many Democrats claim the plan—which includes both corporate and income tax reform—favors only the top earners, while fiscal conservatives worry the tax cuts could dig the U.S. deeper into deficit spending and add to the already-mountainous national debt, requiring another showdown over raising the debt ceiling.

another self inflicted crisis in the works
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The bipartisan, Washington, D.C.-based Committee for a Responsible Federal Budget (CRFB) estimates that Trump’s plan could add between $3 trillion and $7 trillion to the federal debt over the next decade, stating emphatically that “America can’t afford” it. In addition, Bloomberg analysts see increased deficit spending over the next several years, provided everything else remains the same.

trump tax reform expected to add to federal deficit
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Others aren’t as negative. According to the highly-respected Tax Foundation, the oldest tax think tank in the country, an additional 1 percent growth in GDP would need to occur every year for the next 10 years to offset the cost of Trump’s plan. Although this doesn’t sound so out-of-reach, the report’s author, Alan Cole, makes it clear that this 1 percent growth must go “above and beyond” analysts’ top forecasts.

“Don’t Fear the Tax Haven—Be the Tax Haven”

As expected, among the most enthusiastic cheerleaders of the reform are members of Trump’s inner circle, including economic adviser Gary Cohn and Treasury Secretary Steven Mnuchin, who insists that the economic growth that results from the tax cuts will sufficiently self-finance the costs of the tax cut.

I’m inclined to agree, with reservations.

According to Oxfam, the U.S. loses out on approximately $135 billion each year as multinational companies continue to move operations overseas, presumably to avoid the astronomical tax and burdensome regulatory environment. In 1953, an estimated $1 out of every $3 of federal revenue was collected in corporate taxes. Today it’s closer to $1 out of $9, even as profits have surged dramatically since the 1950s. In 2015, the 50 largest U.S. corporations stashed as much as $1.6 trillion overseas, according to Oxfam.

us loses an estimated 135 billion each year due to corporate tax dodging
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Provided Trump can also deliver on his campaign promise to streamline corporate and financial regulations, I’m confident that a large percentage of this cash can be repatriated back into the U.S.

But what if there was another way? In a recent article in National Review, the conservative news magazine founded by William F. Buckley in 1955, columnist Kevin D. Williamson takes a hardline stance, arguing that Trump’s 15 percent tax is “about 15 points too high.” The corporate tax, Williamson says, leads to double taxation, as income is taxed once at the corporate rate and again as a salary or dividend.

Scrapping the corporate tax, Bahamas- or Cayman Islands-style, “would not represent a tax-free windfall to a bunch of pinstriped boardroom schmucks and Wall Street types and corporate shareholders.” Instead, he writes, it would unleash economic growth for the rich and poor alike, such as we’ve never seen. Imagine:

But if [businesses] pay [the saved 39 percent] out in salaries and bonuses, whether to fat-cat executives or ordinary line workers, those people pay the individual income tax on that money. If they pay it out to shareholders in the form of dividends, the shareholders pay the capital-gains tax on that money. If it is distributed through other capital gains, the same thing applies. If it is used to acquire facilities or equipment, then that money becomes income for another company, which has the same choices about how to dispose of it. The money still gets taxed, but not until it hits someone’s bank account.

Unrealistic? Probably. But Williamson’s idea is interesting food for thought regardless.

Frank Talk Turns 10 Years Old

I’m very excited to tell you that Frank Talk, my CEO blog, turned 10 years old in April. We were one of the very first financial and investment companies to attempt such a thing, and I’m so grateful and happy we took the chance. Not only has this labor of love won several awards, it’s also helped attract readers to the U.S. Global Investors site from more 200 countries and territories all across the globe. To help celebrate its 10th anniversary, our marketing mavens put together a brief video listing 10 facts about the blog you might not know. I invite you to watch it, share it with friends and family and sign up for email alerts if you haven’t already.

Then I hope you stick around for the next 10 years. Cheers!

 

 

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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 Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Russell 2000 Index is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000. The Russell 3000 Index consists of the 3,000 largest U.S. companies as determined by total market capitalization.

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Net Asset Value
as of 09/25/2017

Global Resources Fund PSPFX $5.78 -0.04 Gold and Precious Metals Fund USERX $8.02 0.06 World Precious Minerals Fund UNWPX $6.69 0.06 China Region Fund USCOX $10.96 -0.46 Emerging Europe Fund EUROX $6.94 -0.06 All American Equity Fund GBTFX $24.34 0.10 Holmes Macro Trends Fund MEGAX $19.99 0.03 Near-Term Tax Free Fund NEARX $2.23 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change