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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.

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.

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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.

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
click to enlarge

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
click to enlarge

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!

 

 

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.

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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Frank Talk Just Turned 10 Years Old
April 27, 2017

Ten years ago, U.S. Global Investors embarked on an experiment in digital communications.

Let me set the stage. It was April 2007, when the financial crisis was not yet a blip in the capital markets. The Dow Jones Industrial Average was holding steady above 13,000, while gold averaged $680 an ounce. The gross national debt stood at a little over $11 trillion. The very first iPhone wouldn’t be available for at least another two months. Facebook, then only three years old, had about 20 million active users, versus 2 billion today.

How times have changed.

My vision then was to author a blog that would speak directly to investors on topics ranging from behavioral finance to gold investing to government policy. Blogging had been around for a few years already, but no one I knew of had applied it to the mutual fund business. It was uncharted territory, fraught with all sorts of obstacles and other “unknown unknowns” such as regulatory compliance concerns and time constraints.

Like all risky propositions, success was not guaranteed.

Nevertheless, we forged ahead, and Frank Talk was born. Since then, this labor of love has attracted thousands of readers from all over the world and is regularly republished in a number of major financial news sources. It’s also been the recipient of several awards.

Today I want to extend my deepest gratitude to all my readers, from those who’ve been around since the very beginning (I know you’re out there!) to those who just stumbled on the blog last week. During my travels, it’s always humbling to meet loyal Frank Talk readers who generously compliment its quality of research, compelling visuals and balanced approach. Such readers truly make all the hard work that goes into producing Frank Talk worth it.

In celebration of Frank Talk’s 10th anniversary, the U.S. Global marketing team put together a video, embedded below, highlighting 10 facts you might not know about the blog. I invite you to enjoy it, share it widely—and stick around for the next 10 years. Cheers!

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

The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.

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

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

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

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

Let’s Get Fiscal

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Banks Awaiting Deregulation

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

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

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

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

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

Nine out of 10 Investors Favor the Fiduciary Rule
click to enlarge

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

A Modest Proposal

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

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

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

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

Median corporate leverage among big U.S. firms is close to an historic high
click to enlarge

Aux yeux de tous

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

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

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

 

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

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

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

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

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

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

There a lot construction Zurich now

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

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

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

canadian loggers surge on higher lumber prices
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Gold Glimmers Brightly

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

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

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

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

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

 

Millennial Homebuyers Finally Entering the Housing Market

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

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

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

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

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

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

 

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

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 3/31/17: Canfor Corp., Western Forest Products.

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

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

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Net Asset Value
as of 11/22/2017

Global Resources Fund PSPFX $5.97 0.03 Gold and Precious Metals Fund USERX $7.36 No Change World Precious Minerals Fund UNWPX $5.76 0.03 China Region Fund USCOX $12.18 0.03 Emerging Europe Fund EUROX $7.09 0.04 All American Equity Fund GBTFX $24.06 -0.05 Holmes Macro Trends Fund MEGAX $21.36 -0.06 Near-Term Tax Free Fund NEARX $2.21 -0.01 U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change