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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.

Fidel Castro’s Cuba vs Lee Kuan Yew’s Singapore: A Tale of Two Economies (UPDATE)
November 29, 2016

On Friday, November 25, Fidel Castro died at age 90. The former revolutionary and hardline dictator of Cuba was among the 20th century’s longest-serving leaders, third only to Elizabeth II and Bhumibol Adulyadej, the King of Thailand, who passed away in October.

Castro’s death comes at a pivotal moment in U.S.-Cuban relations. With trade between the two countries on the path to normalization, and with U.S. airlines making scheduled flights to Havana for the first time in more than 50 years, President-elect Donald J. Trump has pledged to reinstate many of the Cold War embargos that were lifted by President Barack Obama.

“If Cuba is unwilling to make a better deal for the Cuban people, the Cuban/American people and the U.S. as a whole, I will terminate deal,” Trump tweeted on November 28.

In light of Castro’s passing, we are rerunning this Frank Talk from March 2015, in which Frank compares and analyzes the widely divergent economies of Cuba and Singapore under their now-deceased leaders, Castro and Lee Kuan Yew. 

A Victoria's Secret in the Toronto Pearson International AirportIt would be nearly impossible to find two world leaders in living memory whose influence is more inextricably linked to the countries they presided over than Cuba’s Fidel Castro and Singapore’s Lee Kuan Yew, who passed away this Monday at the age of 91.

You might find this hard to believe now, but in 1959—the year both leaders assumed power—Cuba was a much wealthier nation than Singapore. Whereas Singapore was little more than a sleepy former colonial trading and naval outpost with very few natural resources, Cuba enjoyed a thriving tourism industry and was rich in tobacco, sugar and coffee.

Fast forward about 55 years, and things couldn’t have reversed more dramatically, as you can see in the images below.

Cube in 1950, Singapore in 1950, Cuba today, Singapore today

The ever-widening divergence between the two nations serves as a textbook case study of a) the economic atrophy that’s indicative of Soviet-style communism, and b) the sky-is-the-limit prosperity that comes with the sort of American-style free market capitalism Lee introduced to Singapore.

Sound fiscal policy, a strong emphasis on free trade and competitive tax rates have transformed the Southeast Asian city-state from an impoverished third world country into a bustling metropolis and global financial hub that today rivals New York City, London and Switzerland. Between 1965 and 1990—the year he stepped down as prime minister—Lee grew Singapore’s per capita GDP a massive 2,800 percent, from $500 to $14,500.

Since then, its per capita GDP based on purchasing power parity (PPP) has caught up with and zoomed past America’s.

Lee Kuan Yew's Singapore Flourished while Fidel Castro's Cuba Floundered
click to enlarge

Under Castro and his brother Raúl’s control, Cuba’s once-promising economy has deteriorated, private enterprise has all but been abolished and the poverty rate stands at 26 percent. According to the CIA’s World Factbook, “the average Cuban’s standard of living remains at a lower level than before the collapse of the Soviet Union.” Its government is currently facing bankruptcy. And among 11.3 million of Cuba’s inhabitants, only 5 million—less than 45 percent of the population—participate in the labor force.

Compare that to Singapore: Even though the island is home to a mere 5.4 million people, its labor force hovers above 3.4 million.

Singapore Had Third-Highest GDP Based on Purchasing Power Parity (PPP) Per Capita

Because of the free-market policies that Lee implemented, Singapore is ranked first in the world on the World Bank Group’s Ease of Doing Business list and, for the fourth consecutive year, ranked second on the World Economic Forum’s Global Competitiveness Report. The Heritage Foundation ranks the nation second on its 2015 Index of Economic Freedom, writing:

Sustained efforts to build a world-class financial center and further open its market to global commerce have led to advances in… economic freedoms, including financial freedom and investment freedom.

Cuba, meanwhile, comes in at number 177 on the Heritage Foundation’s list and is the “least free of 29 countries in the South and Central America/Caribbean region.” The Caribbean island-state doesn’t rank at all on the World Bank Group’s list, which includes 189 world economies.

Many successful international businesses have emerged and thrived in the Singapore that Lee created, the most notable being Singapore Airlines. Founded in 1947, the carrier has ascended to become one of the most profitable companies in the world. It’s been recognized as the world’s best airline countless times by dozens of groups and publications. Recently it appeared on Fortune’s Most Admired Companies list.

Singapore AIrlines

We at U.S. Global Investors honor the legacy of Lee Kuan Yew, founder of modern-day Singapore. He showed the world that when a country chooses to open its markets and foster a friendly business environment, strength and prosperity follow. Even on the other side of the globe, the American Dream lives on.

 

 

The Global Competitiveness Index, developed for the World Economic Forum, is used to assess competitiveness of nations. The Index is made up of over 113 variables, organized into 12 pillars, with each pillar representing an area considered as an important determinant of competitiveness: institutions, infrastructure, macroeconomic stability, health and primary education, higher education and training, goods market efficiency, labor market efficiency, financial market sophistication, technological readiness, market size, business sophistication and innovation.

The Ease of Doing Business Index is an index created by the World Bank Group. Higher rankings (a low numerical value) indicate better, usually simpler, regulations for businesses and stronger protections of property rights.

The Index of Economic Freedom is an annual index and ranking created by The Heritage Foundation and The Wall Street Journal in 1995 to measure the degree of economic freedom in the world's nations.

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 9/30/2016.

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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Small-Cap Investors See Big League Growth Under Trump
November 23, 2016

I’ve been in the financial industry a long time, and I’m continually amazed at the market’s astuteness in making reliable, actionable forecasts.

Consider the run-up to this year’s election. Nearly every poll pointed to Hillary Clinton taking the White House, with many pegging her chances at greater than 90 percent. The market took these prognosticators to task. Historically, when the S&P 500 has turned negative between July 31 and October 31, it’s spelled doom for the incumbent party candidate. This year, the market fell more than 2 percent, setting the stage for a Donald Trump victory. 

The Wisdom of Crowds: Market Accurately Predicted President-Elect Trump
click to enlarge

A thought-provoking Atlantic article asserts that “the press takes [Trump] literally, but not seriously; his supporters take him seriously, but not literally.” This is ostensibly how many Trump supporters were able to excuse his more off-color language and instead focus on his proposals. Markets were willing to do the same.  

Now, those same markets seem to be placing their bets on the likelihood that Trump’s “America First” policies will benefit small-cap companies especially.

The media is already calling it the “Trump rally.” As I write this, the Dow Jones Industrial Average closed above 19,000 for the first time ever, with the S&P 500 Index and Nasdaq Composite Index having recently set all-time highs.

But small-cap stocks have fared even better. Since Election Day, the small-cap Russell 2000 Index has made “big league” gains, surging more than 11 percent and hitting a record high. The index has been up for 13 straight days—its best run since 1996.

The Wisdom of Crowds: Market Accurately Predicted President-Elect Trump
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But why are investors focused on small-cap stocks specifically? Simply put, a bet on domestic small caps is a bet that Trump will deliver on his promise to “make America great again.”

Making Domestic Stocks Great Again

The president-elect’s proposals are aggressively inward-facing, which bodes well for companies with little foreign exposure. As a group, small caps have far less exposure to foreign markets than larger, multinational companies do. Because they rely a lot less on exports, they’re not as negatively affected by a strong U.S. dollar, which has the effect of making American-made products more expensive for foreign buyers.

Today the dollar is trading at 14-year highs, with expectations of moving even higher after a possible rate hike next month, followed by Trump’s inauguration in January.

The Wisdom of Crowds: Market Accurately Predicted President-Elect Trump
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According to his website, Trump plans to create at least 25 million new jobs over the next decade and grow the economy at 3.5 percent per year on average. He will manage to do this, he says, by lowering taxes and “scaling back years of disastrous regulations unilaterally imposed by our out-of-control bureaucracy.”

As I’ve shared with you before, regulations cost the U.S. economy approximately $2 trillion a year.

The president-elect also plans to spend as much as $1 trillion on infrastructure over the next 10 years, which the market has responded to approvingly.
This market behavior is yet another example of the “wisdom of crowds,” which I’ve discussed numerous times before. In one of my favorite books, 2005’s The Wisdom of Crowds,business writer James Surowiecki convincingly makes the case that large groups of people will nearly always be smarter and better at making predictions than an elite few.

The Wisdom of Investors

The Wisdom of Crowds BookAt first blush, this idea might seem counterintuitive. We’ve all heard of mob mentality. Indeed, giant crowds of people are sometimes capable of making impulsive, irrational and destructive decisions. Think of the Salem witch trials, which ended with the execution of 20 people, or the Holocaust.

But Surowiecki’s thesis says that large groups of diverse and independently-deciding people—investors, for instance—are far better at analyzing and aggregating mass amounts of information than individuals, even experts.

As an example, Surowiecki explores the market’s now-famous response to the tragic Challenger shuttle explosion in 1986. In the minutes following the televised disaster, “investors started dumping the stocks of the four major contractors who had participated in the Challenger launch: Rockwell International, which built the shuttle and its main engines; Lockheed, which managed ground support; Martin Marietta, which manufactured the ship’s external fuel tank; and Morton Thiokol, which built the solid-fuel booster rocket.”

One of these names, however, was hit the hardest—Thiokol. By the end of the trading day, it was down almost 12 percent, more than six standard deviations in the three months before the explosion, according to economists Michael Maloney and Harold Mulherin. What the market seemed to be saying is that Thiokol was to blame.

Investors Accurately Faulted Morton Thiokol for Challenger Explosion
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The thing is, there had been no public comments implicating the now-defunct manufacturer. It wouldn’t be for another six months, during a presidential commission hearing on the disaster, that evidence was released showing Thiokol’s O-ring, which is supposed to prevent hot gases from escaping the booster rockets, had been faulty.

On that day, Surowiecki writes, the stock market was “working as a pure weighting machine, undistorted by the factors—media speculation, momentum trading and Wall Street hype—that make it a peculiarly erratic mechanism for aggregating the collective wisdom of investors.”

Similarly, the market in 2016 managed to cut through the ugly campaign noise and rhetoric to select the candidate who eventually emerged as victor. And now, they appear just as convinced that Trump’s policies can unleash American growth and ingenuity.

 

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 Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The Nasdaq Composite Index is a capitalization-weighted index of all Nasdaq National Market and SmallCap stocks. 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.

Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.

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 9/30/2016: Lockheed Martin Corp.

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Muni Bonds a Key to Making America Great Again
November 16, 2016


Ever since he made his presidential bid in June 2015, Donald Trump has vowed to “make America great again.” Part of that promise includes rebuilding the nation’s infrastructure, a monumental task that will require the financial backing of tax-free municipal bonds.

“We are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools, hospitals,” the president-elect told reporters the day after his historic victory. “We’re going to rebuild our infrastructure, which will become, by the way, second to none.”

To accomplish this, Trump has proposed a spending package as high as $1 trillion over the next 10 years. Although the private sector will be expected to finance a large portion of the work, massive amounts of public debt will be necessary.

This could be a “very big item for the muni market in the coming years,” according to John Vahey, managing director of federal policy for Bond Dealers of America, a trade association for  fixed-income dealers.

Americans already appear eager to get started repairing their infrastructure, which is facing a $3.6 trillion shortfall, according to the American Society of Civil Engineers (ASCE).

So far this year, state and local governments have issued nearly $150 billion in municipal bonds for new infrastructure projects, putting 2016 borrowing on a path to exceed levels in each of the last five years. And on Election Day, U.S. voters approved $55.7 billion in debt, the most since 2008.

Stay the Course

A possible headwind for munis is Trump’s proposal to reduce the top marginal income tax rate, from 39.6 percent to 33 percent. Although good for your pocketbook, such a move could limit the appeal of munis’ tax-exempt status among some top-earning investors.

Individual Income Tax Brackets Under the Trump Plan
Ordinary Income Rate Capital Gains Rate Single Filers Married Joint Filers
12% 0% $0 to $37,500 $0 to $75,000
25% 15% $37,500 to $112,500 $75,000 to $225,000
33% 20% $112,500+ $225,000+
Source: Tax Foundation, U.S. Global Investors

Other investors might be dazzled by what the media are calling the “Trump rally.” With the Dow Jones Industrial Average ending at a record high on Monday and Tuesday, munis could lose favor as investors increase their exposure to equities.

However, it’s important that we don’t overreact to market swings. A well-structured, diversified portfolio—one that also includes munis—is still the most prudent strategy going forward.

Reduce Volatility with Short-Term, Investment-Grade Munis

Something else to keep in mind are interest rates. It’s highly expected that the Federal Reserve will raise them next month, the first time it would do so since December of last year.

Even though rates will likely be lifted as little as 0.25 percent, it’s important to be aware that when rates rise, bond prices fall. At first glance, this inverse relationship might seem illogical, but it makes sense. If newly-issued bonds carry a higher yield, the value of existing bonds with lower rates declines.

That’s why investors should consider taking advantage of shorter-duration, investment-grade munis, which are less sensitive to rate increases than longer-term bonds whose maturities are further out.

Our Near-Term Tax Free Fund (NEARX) invests primarily in high-quality, investment-grade muni bonds in attractive jurisdictions. This strategy has led to more than two decades of positive annual returns, regardless of where interest rates were, what equity markets were doing or who occupied the White House.

Near-Germ Tax Free Fund Annual total Return
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I invite you to explore NEARX, which has delivered a phenomenal 21 straight years of positive returns. That’s a rare accomplishment that has been achieved by only 39 out of 31,306 equity and bond funds—around 0.12 percent—according to Morningstar data.

 

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.

Past performance does not guarantee future results.

Total Annualized Returns as of 9/30/2016
Fund One- Year Five-Year Ten-Year Gross
Expense
Ratio
Near-Term Tax Free Fund (NEARX) 1.26% 1.80% 2.88% 1.09%

Expense ratios as stated in the most recent prospectus. The Adviser of the Near-Term Tax Free Fund has contractually limited, through April 30, 2017, the total fund operating expenses (exclusive of acquired fund fees and expenses, extraordinary expenses, taxes, brokerage commissions and interest) to not exceed 0.45%. Total annual expenses after the waiver of 0.64% were 0.45%. Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. For a portion of periods, the fund had expense limitations, without which returns would have been lower. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance does not include the effect of any direct fees described in the fund’s prospectus, which, if applicable, would lower your total returns. Performance quoted for periods of one year or less is cumulative and not annualized. Obtain performance data current to the most recent month-end at www.usfunds.com or 1-800-US-FUNDS.

Bond funds are subject to interest-rate risk; their value declines as interest rates rise. Though the Near-Term Tax Free Fund seeks minimal fluctuations in share price, it is subject to the risk that the credit quality of a portfolio holding could decline, as well as risk related to changes in the economic conditions of a state, region or issuer. These risks could cause the fund’s share price to decline. Tax-exempt income is federal income tax free. A portion of this income may be subject to state and local taxes and at times the alternative minimum tax. The Near-Term Tax Free Fund may invest up to 20% of its assets in securities that pay taxable interest. Income or fund distributions attributable to capital gains are usually subject to both state and federal income taxes.

The Near-Term Tax Free Fund invests at least 80 percent of its net assets investment-grade municipal securities. At the time of purchase for the fund’s portfolio, the ratings on the bonds must be one of the four highest ratings by Moody’s Investors Services (Aaa, Aa, A, Baa) or Standard & Poor’s Corporation (AAA, AA, A, BBB). Credit quality designations range from high (AAA to AA) to medium (A to BBB) to low (BB, B, CCC, CC to C). In the event a bond is rated by more than one of the ratings organizations, the highest rating is shown.

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

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

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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What Trump’s Stunning Upset Means for Markets
November 14, 2016

Donald Trump and Hillary Clinton

Call it Brexit 2.0: American Edition.

Like their British counterparts, who voted in June to cut ties with the European Union (EU), American voters resoundingly rejected globalism last week, calling into question the United States’ involvement in military alliances such as the North Atlantic Treaty Organization (NATO)—which is 72 percent funded by U.S. tax dollars—and international trade deals, from the North American Free Trade Agreement (NAFTA) to the Trans-Pacific Partnership (TPP). Over the course of his campaign, Donald Trump sharply criticized such groups, vowing either to renegotiate the terms or pull out of them altogether. The future of the Paris climate agreement, ratified by over 100 countries as of this month, has also been thrown into uncertainty.

We all remember how Brexit was inaccurately predicted, with polls saying the referendum would fail. In a modern-day equivalent of “Dewey Defeats Truman,” U.S. polls also got the presidential election spectacularly wrong, missing the forest for the trees. Many polls, including CNN, Huffington Post and the Princeton Election Consortium, had Clinton’s chances of winning above 90 percent.

How did the media and pollsters get Election 2016 so wrong - visual capitalist

But in a reverse example of the so-called “Bradley effect,” which I shared with you before, people told pollsters one thing but did the exact opposite in the privacy of the voting booth.

U.S. voters largely repudiated political correctness, the Washington establishment and a biased media. They demanded sweeping, fundamental changes, and yet another Clinton or Bush just wasn’t the person for the job.

Zero Hedge quoted Nassim Taleb, scholar and author of “Black Swan: The Impact of the Highly Improbable” who put into words this frustration:

What we have been seeing worldwide, from India to the U.K. to the U.S., is the rebellion against the inner circle of no-skin-in-the-game policymaking “clerks” and journalists-insiders, that class of paternalistic semi-intellectual experts with some Ivy League, Oxford-Cambridge, or similar label-driven education who are telling the rest of us 1) what to do, 2) what to eat, 3) how to speak, 4) how to think… and 5) who to vote for.

In an interview on NPR, Alfonso Aguilar of the Latino Partnership for Conservative Principles spoke about the somewhat surprising election results, particularly among Latino voters, who were expected to hinder Trump’s chances of winning, especially with Trump’s comments about Mexican immigrants and immigration proposals. However, Aguilar commented that the reason 29 percent of the Latino vote went to Trump was because of the same issues cited by other American voters, namely jobs and the economy.

Congratulations, Readers

America's Best Hope - The Economist

National polls and financial publications might not have gotten it right, but you did. In an October 31 Frank Talk poll, I asked who you predicted would win the election. A third of you said Hillary Clinton, the other two thirds, Donald Trump. Our readers joined some neural network models and Jeffrey Gundlach, the DoubleLine Capital CEO and a Ph.D. mathematician, as some of the few who accurately predicted the outcome, beating the mega media channels.

World markets appeared to have wagered Clinton would win, judging from the selloff that ensued after it became clear Trump could pull off an upset. The one notable exception was Russia, as hopes improved that the U.S.—led by Trump, who has expressed admiration of Vladimir Putin—would lift economic sanctions against the Eastern European country.

Domestic stocks, however, were pointing to a Trump win all along, echoing the presidential election cycle that I’ve written about many times. In the three months ended October 31, the S&P 500 Index fell about 2 percent, and even more recently, the S&P 500 closed down for eight days in a row, the longest losing streak since October eight years ago. Historically, any loss during this period has foreshadowed a victory by the non-incumbent party candidate.

Social Media: The Great Disruptor

America just endured its first presidential election in which the majority of the electorate got its news from social media, says AdAge.

America's Best Hope - The Economist

Those worried about the bias of mainstream media need not worry, as it seems a majority of voters were paying more attention to discussions being had, and news being posted, on non-unionized social media. Both candidates utilized social platforms. Trump’s Twitter account in particular gave a no-frills view of his personal thoughts throughout the entire campaign…to all of his 14 million followers.

A Reuters article explains the cost effectiveness of social media on the campaign trail, saying Trump’s win has “upended prevailing concepts about the influence of money in American politics and raised question of whether a lean, media-savvy campaign can become the new model for winning office in the United States.” In fact, Trump is approaching, or may have passed, $100 million from donors who have given “small” donations of $200 or less, reports Politco.com. This surpasses the small donations made throughout the campaigns of many Democrats before him – the most memorable, perhaps, being Barack Obama’s.

The Winners and Losers

Like the British pound following Brexit, the Mexican peso tumbled dramatically, dipping to a record low on the heightened possibility that Trump, with the cooperation of a Republican-controlled Congress, would tear up NAFTA and make good on his promise to build a “big, beautiful” wall along the nearly 2,000-mile U.S.-Mexico border. Such a wall is estimated to cost between $15 billion and $25 billion.

Mexican Peso Selloff Following the U.S. Presidential Election
click to enlarge

Infrastructure names such as Vulcan Materials and Caterpillar rallied last Wednesday morning. Other winners included drug makers and pharmaceuticals, driven by the apparent relief that price controls would not be imposed under a Clinton administration. Private prison stocks such as Corrections Corp. and GEO Group also surged, as did global defense firms Northrop Grumman, Lockheed Martin and Raytheon.

A Trump presidency could be good news for the financial industry. Back in August, Trump announced that, if elected, he would place a “temporary moratorium” on new financial regulations, such as the Labor Department’s fiduciary rule, which regulates how financial advisors service clients. In fact, as laid out in Trump's first 100-day plan, he wants to implement a rule that eliminates two regulations for every one new regulation. As I’ve written about previously, this is very similar to what former Canadian Prime Minister Stephen Harper proposed – Canada’s “One-for-One Rule” introduced in April 2012.

If Trump has his way, taxpayers will be winners also. Many economists agree that cutting taxes will be good for corporate earnings, and by extension, the investing public. As Deutsche Bank points out, the Republicans want to “lower the effective corporate tax rate and try to stimulate growth and hopefully this causes the tax cut to pay for itself over time.”

Reduction in the statutory U.S. tax rate

Going forward, losers could include multinational technology firms that manufacture some or all of their products in China (Apple and Microsoft, for instance) and retailers that mostly sell Chinese-made goods (Walmart). The new president-elect has expressed interest in levying tariffs on Chinese imports, which, I was surprised to learn, he could very well do through the Office of the United States Trade Representative (USTR) and Commerce Department.

This would certainly push inflation up—raising prices on everything from TVs to iPhones to shoes to houseware—which in turn could light a fire under the Fear Trade.

Gold Swings on Trump Victory

Gold had a phenomenally volatile day last Wednesday, the biggest since Brexit. It rose as much as $60, breaching $1,300 an ounce, before ending the day down after U.S. equities rose and the dollar strengthened.

Gold ended down on Wednesday after an extremely volatile day.

Now that the initial shock of Trump’s win is over, the next big test for the yellow metal’s movement is the possibility of a December rate hike. Although gold continues to find support from low to negative government bond yields, we can likely expect the metal to remain relatively flat, at least until we know what the Federal Reserve’s next move will be.

As I shared with you in a recent Investor Alert, HSBC analysts predict a Trump win will be extremely bullish for gold. According to analyst James Steel, Trump’s “protectionist” policies could have a negative impact on global trade and increase federal deficits, which would be supportive of gold. The bank sees gold rising to as high as $1,500 an ounce by year-end.

In events reminiscent of 1997 and 2006, we are seeing an unwinding of the carry trade, which is putting pressure on gold. Investors have been buying Japanese debt at 0 percent interest rates, to buy gold and emerging markets. But now Japan is calling in its debts, causing investors to sell their gold and emerging markets investments.

In this environment, investors can keep in mind that short- term municipal bonds have been much more stable than two-year and five-year government bond yields, especially with the probability that the Fed will raise rates next month.

I invite you to join our upcoming webcast on gold, taking place this Thursday, November 17, at 3:30pm CT. I hope to share further insight into the world of gold and how the landscape is evolving – from the presidential election, to political events around the world, to the rise of complex algorithms influencing our daily lives. We believe that gold remains attractive for investors worldwide and hope that you’ll join in.

Recognizing Other Leaders

Last week, while I was in Melbourne to present a keynote address during the International Mining and Resources Conference, I also had the pleasure of presenting Mines and Money’s 2016 Legend in Mining award to Jake Klein, Executive Chairman of Evolution Mining. Jake, who formerly worked in the commodities division of Macquarie Group, got his start in the mining industry after making several visits to mines and smelters in China. He and two of his colleagues started the company called Sino Mining in 1995, where he was president and CEO. The company grew and was later sold for more than AU$2 billion. After this, he joined Conquest Mining, a small Australian company, which later became Evolution Mining, one of Australia’s rapidly growing gold mining companies.

Frank Holmes presents Jake Klein, executive chairman of evolution mining with legend in mining award this week at IMARC.

Jake was nominated by previous winners of the award as well as by members of the Australian investment community. Congratulations again!

 

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 links above, you will 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.

The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 09/30/2016: Evolution Mining Ltd., Lockheed Martin Corp., Northrop Grumman, Raytheon Co.

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

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Manufacturing Activity in China Just Shifted into Overdrive
November 7, 2016

Nanpu Bridge  

A wave of positive economic data suggests the Chinese economy is stabilizing and that business confidence is improving. The country’s purchasing managers’ index (PMI), which measures the health of its manufacturing industry, rose to 51.2 in October, handily beating economists’ estimates of 50.3.

Chinese Manufacturing Beats Expectations
click to enlarge

Expanding at its fastest pace since July 2014, the industry was stimulated by a strong rebound in new orders and higher commodity prices. Output rose to an incredible five-and-a-half-year high. And with backlogs of work beginning to pile up, manufacturers trimmed employees at the slowest pace in 17 months.

I’ve previously written about the importance of tracking the PMI, which you can read here.

Also encouraging is the country’s third-quarter gross domestic product growth, which came in at 6.7 percent for the third straight quarter, all but assuring investors that the economy can achieve the government’s earlier guidance of between 6.5 percent and 7 percent. Higher business confidence helped maintain steady growth, “as proved by the rebound of medium to long-term corporate loans and reacceleration of private investment growth,” according to Singapore-based OCBC Bank.

Consumer spending appears to be robust. In the first nine months of the year, consumption contributed nearly 60 percent to GDP growth, with significant demand gains made in health care, education, financial products and entertainment.

Automobile sales jumped a phenomenal 32 percent year-over-year in September, the fourth straight month of growth exceeding 20 percent. Sales have been so robust—reflecting a rush to purchase new cars before the government’s reduction in sales tax on small vehicles expires at year-end—that new vehicle purchases in China are expected to surpass sales in North America for the first time ever this year.

China Expected Surpass North America Automobile Sales
click to enlarge

Such a great number of cars on the road has resulted in famously massive traffic jams that turned miles of highways into parking lots. Some as many as 50 lanes wide, the very worst incidents in Beijing found hundreds of drivers stuck in lines for days. Beijing officials have recently proposed stopgap measures, but the nightmare congestion underscores the need for greater capacity, which will require even more investment from the Chinese government, not to mention untold amounts of cement, asphalt, steel and other materials.

But really, these are traffic jams you have to see to believe.

China Attracting Assets

The market seems to like what it sees. The Shanghai Composite Index is back up to levels last seen in January, fueled by not only encouraging manufacturing data but also hopes the government will make good on its promises to support infrastructure spending and restructure state-run enterprises. Stocks recently signaled a bullish “golden cross,” when the shorter-term moving average crosses above the longer-term average. 

Chinas Golden Cross
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In a note last week, Goldman Sachs analysts reported they expect reforms to accelerate in the next few years as China transitions from a middle-income country to an advanced economy. Reforms include efforts to restructure or eliminate “zombie” state-owned enterprises and remove marginal capacity. New policies on how to address public corruption have also been floated.

Among ETFs focused on a single emerging market, China funds attracted the largest inflows in the month of October, with new money totaling $275 million, according to Citi Research data.

Inflows into Mexico-focused ETFs were a distant second, at $133 million, indicating a surplus of bets on a Hillary Clinton presidential win this week.

Who Will Lead the SEC in a Clinton Administration?

SEC Chair Elizabeth Warren

SEC Chair Elizabeth Warren
Photo by Tim Pierce / CC-BY

While I’m on the topic of the election, I find it worth sharing that a shake-up at the very top of the Securities and Exchange Commission (SEC) could be unfolding in front of our eyes—with some potentially serious ramifications.

Massachusetts Sen. Elizabeth Warren, one of the most outspoken critics of Wall Street serving in Congress today, recently urged President Barack Obama to remove Mary Jo White as head of the SEC for, among other things, failure to fully implement the Dodd-Frank financial reforms.

The White House flatly rejected Warren’s request, but it raises a few questions: Is she positioning herself to run the SEC herself? Could Sen. Warren, a strong supporter of Clinton, be appointed as the new SEC chair if Clinton were to win? What effect would that have on capital markets?

Although pure speculation, the scenario is worth pondering.

Another Infrastructure Boom Ahead?

Much has been made of the Chinese economy’s transition from one driven by industrial production to one supported by consumption and services. While this shift is indeed taking place, China still remains the world’s largest engine for energy and materials demand, with support from a growing population and rising household income.

The country imported a record amount of crude oil in September, up 18 percent year-over-year, surpassing the U.S. for the second time in 2016. Averaging 8 million barrels a day, imports came close to the 8.6 million daily barrels the U.S. produces on average.

China Imported Record Volumes Crude September
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I also would like to point out that China remains the world’s number one generator of electricity. The chart below shows just how dramatic capacity growth was in the first decade of the century. In 1990, the country’s electricity needs were equivalent to Latin America’s, but as its government pushed ahead with fiscal spending for huge infrastructure projects, demand blew past the continents of Europe and North America.

China Leads World Electricity Generation
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Although infrastructure investment has declined overall from this period, there’s still plenty to get excited about. In the first eight months of 2016, infrastructure spending rose an impressive 19.7 percent over the same period last year, and in May, the government announced it would be pumping more than $721 billion into as many as 303 transportation projects over the next three years.

Two projects in particular are worth noting here. Construction on what will eventually be the world’s largest airport by surface area is currently underway in Beijing. Upon completion in 2019, the $12 billion airport, to be called Beijing Daxing International Airport, will serve as many as 100 million passengers a year, roughly in line with the world’s busiest airport, Hartsfield-Jackson Atlanta International Airport.

Then there’s the ongoing Belt and Road Initiative (BRI), one of the most ambitious undertakings in human history. With total infrastructure costs estimated at $5 trillion, the biblical-size trading endeavor—a sort of 21st century Silk Road—will cost 12 times as much as what the U.S. spent on the Marshall Plan to rebuild Europe following World War II. The initiative has the participation of 65 countries from Asia, Africa and Europe, and is poised to raise the living standards for more than half of the world’s population.

Chinas multi trillion dollar belt and road initiative
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“Though China’s pace of expansion has slowed from the double-digit rates seen in the first decade of the century,” writes HSBC’s Noel Quinn, Chief Executive of Global Commercial Banking, “its global influence—as the world’s second-largest economy and a trading powerhouse—is far greater than 10 or even five years ago. The country’s overseas investments are only likely to increase, further underlining its pivotal role.”

HSBC: Your Candidate’s Win Could Reward Gold Investors

With the U.S. presidential election upon us, London-based HSBC says gold investors should see a significant bump in price no matter who wins.

The bank sees a Trump victory more supportive of gold as a potential “protection against protectionism”—the New York businessman has been very critical of trade deals, including the North American Free Trade Agreement (NAFTA) and the proposed Trans-Pacific Partnership (TPP)—but a Clinton win could also help boost prices to as high as $1,400 by year end, HSBC says.

As always, I recommend a 10 percent weighting in gold—5 percent in bullion and coins, 5 percent in gold stocks. Rebalance every year.

 

The Shanghai Composite Index (SSE) is an index of all stocks that trade on the Shanghai Stock Exchange.

The Caixin China Report on General Manufacturing is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 420 manufacturing companies. The panel is stratified by company size and Standard Industrial Classification (SIC) group, based on industry contribution to Chinese GDP. Survey responses reflect the change, if any, in the current month compared to the previous month based on data collected mid-month.

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.

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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