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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.

Is This Just the Calm Before the Storm?
September 17, 2018

Hurricane Florence

Photo: Earth Science and Remote Sensing Unit, NASA Johnson Space Center

Florence, now a tropical depression, made landfall in North Carolina on Friday, bringing with it destruction and calamity, the cost of which could top $170 billion, according to analytics firm CoreLogic. If so, that would make it the costliest storm ever to hit the U.S. To date, 2005’s Hurricane Katrina holds the top spot, costing an estimated $160 billion, followed by last year’s Harvey ($125 billion) and Maria ($90 billion).

Not to minimize the impact Florence will have on millions of Americans’ lives, but storms, even of this size, have rarely triggered major equity selloffs. According to research firm CFRA, in the last 15 years, the S&P 500 Index declined an average 0.2 percent in the month after a hurricane, but was up an average 3.9 percent in the subsequent three months. Home improvement companies such as Home Depot and Lowe’s could be beneficiaries, while insurance companies might take a hit.

Markets are subdued right now, with the S&P 500 having gone more than 55 days without a 1 percent move in either direction. Trading volumes are also lower-than-average, suggesting Wall Street is in wait-and-see mode before making major adjustments.

Could this just be the calm before the storm?

Consumers and Small Business Owners Are Feeling Good

Lehman Brothers headquarters at Rockefeller Center in August 2007
By David Shankbone - Creative Commons Attribution-Share Alike 3.0 Unported license.

Appropriately enough, Florence comes to us on the 10-year anniversary of Lehman Brothers’ collapse— the spark that set off the financial crisis—reminding us it’s never the wrong time to prepare for such a catastrophe. (I’ll have more to say on Lehman later.) That includes now, even as a raft of positive economic data was released last week. The University of Michigan consumer sentiment index climbed to 100.8 in September, against expectations of only 96.6. This was its second-highest reading since 2004.

What’s more, the NFIB Small Business Optimism Index soared to 108.8 in August, its highest level ever in the series’ 45-year history.

“As the tax and regulatory landscape changed, so did small business expectations and plans,” commented National Federation of Independent Business (NFIB) president and CEO Juanita Duggan.

Against this background, Nobel laureate Robert Shiller told Bloomberg last Thursday that the market “could get a lot higher before it comes down… It’s highly priced, but it could get much more highly priced. It’s a risky market now.”

Time to Get Defensive?

Ray Dalio has a slightly different perspective. The billionaire founder of Bridgewater Associates, the world’s largest hedge fund, reminded investors last week that we’re in the “seventh inning” right now, and as such, investors should probably get “more defensive.” Recently I shared with you that the global purchasing manager’s index (PMI) is steadily slowing down, falling to a 21-month low of 52.5 in August.

Again, markets have been relatively tranquil for a while now, but just as people on the East Coast were urged to prepare in anticipation of Florence, now might be the time to adjust your portfolio in advance of a possible market downturn. Last week, Goldman Sachs reported that its bull/bear indicator, which gauges the likelihood of a bear market, climbed to its highest point since 1969.

Goldman Bull Bear indicator at highest level since 1969
click to enlarge

Goldman analysts point out, however, that the indicator could be read to mean not that a bear market is right around the corner, but that a period of lower returns could be expected.

One of the ways investors could batten down the hatches, so to speak, is with gold, which historically has performed very well in September as we approach Diwali and the Indian wedding season. Last week I had the privilege to join Liz Claman on FOX Business’ Countdown to the Closing Bell, and I told her that, under the circumstances, gold is doing exceptionally well. The precious metal may be under pressure from a strong U.S. dollar and higher Treasury yields, but in Japan, Germany and elsewhere, government bond yields are negative, which has boosted gold demand.

Frank and Liz on Fox Business

While I’m here, I’d like to congratulate Liz and her show—Countdown placed in the top four business news programs this past quarter, reaching nearly 230,000 viewers, according to Nielsen Media Research. Liz continues her reign as the highest-rated female business news anchor on television. I’m very honored to be able to share my views with her and her audience, and to have appeared in her 2007 book, The Best Investment Advice I Ever Received.

What Caused the Lehman Brothers Bankruptcy: A New Accounting Rule

Lehman Brothers headquarters at Rockefeller Center in August 2007

Before my interview, Liz spoke with the very man who was called in to conduct forensic accounting on Lehman Brothers’ bankruptcy, Anton Valukas. The fourth-largest U.S. bank at the time of its demise, with $85 billion worth of mortgage-backed securities, Lehman resulted in global market-cap erosion of $10 trillion in October 2008 alone.

Among the most eye-opening comments Valukas made during his interview is that “the federal government knew everything Lehman was doing—its risk exceedances [and] the fact that they did not have a liquidity pool.” According to Lehman’s 10-K from November 2007, the bank was leveraged an incredible 30.7 times its net worth, up dramatically from 23.7 times only four years earlier.

“Why were there no prosecutions or civil suits?” Valukas asked. Simply put: “The government knew.”

Some of the blame is also owed to an accounting rule, FAS 157—also known as “mark-to-market,” or “fair value accounting”—that was enacted in November 2007. A year later, after Lehman had sent global markets in a tailspin, FAS 157 was already being fingered by some as the culprit. William Isaac, the former chairman of the Federal Deposit Insurance Corporation (FDIC), said before the Securities and Exchange Commission (SEC) that the bankruptcy was “due to the accounting system, and I can’t come up with any other explanation.” Steve Forbes, chairman of Forbes Media, called mark-to-market accounting the “primary reason” for the meltdown.

I’m in agreement, writing back in March 2009 that “a case could be made that the convergence of FAS 157, highly leveraged balance sheets and the loss of the uptick rule were the trigger that set off the financial meltdown.”

The Financial Accounting Standards Board (FASB) proposed more lenient accounting guidelines in March 2009—the same month the market bottomed and began to recover. Coincidence?

Government policy is a precursor to change
click to enlarge

So not only did the government allegedly allow the meltdown to happen, it then used taxpayer money to bail out the banks, which I believe exacerbated economic anxiety and sewed further distrust in the beltway party.

In my view, this contributed to two things: bitcoin, and the election of Donald Trump. Many people’s faith in traditional banking was obliterated, opening up the opportunity for a new type of currency, a cryptocurrency, to fill.

As for Trump, I wrote last year that the “bully,” as some call him, was elected to take on even larger bullies in the beltway party—career bureaucrats, regulators and other entrenched officials who make it their mission to oppose any Washington outsider who threatens to shake up the status quo. They were hostile to President Jimmy Carter, a fellow outsider, and today they're just as hostile, if not more so, to Trump.

The Short End Is Your Friend

On a final note, with interest rates on the rise, it’s important to stay on the short end of the yield curve when investing in fixed-income, as shorter-maturity yields are less sensitive to rate increases than longer-term bonds. This is one of five reasons why I think it makes sense to invest in municipal bonds right now.

To learn the other four reasons why munis might make sense, click here!

 

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 Goldman Sachs bull/bear indicator takes into account five factors: growth momentum (measured by the average percentile for U.S. ISM indexes), the slop of the yield curve, core inflation, unemployment and stock valuations as measured by the Shiller price-earnings multiple.

The Michigan Consumer Sentiment Index (MCSI) is a monthly survey of U.S. consumer confidence levels conducted by the University of Michigan. It is based on telephone surveys that gather information on consumer expectations regarding the overall economy.

The NFIC Small Business Optimism Index is compiled from a survey that is conducted each month by the National Federation of Independent Business (NFIB) of its members.

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

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 06/30/2018: The Homes Depot Inc.

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Minute with the Trader: Meet Michael Matousek
September 11, 2018

Meet Mike Matousek—head trader at U.S. Global Investors. With over 20 years’ worth of industry experience, Mr. Matousek is responsible for managing the trading desk and conducting rebalances for our ETFs and growth and large-cap mutual funds. In addition to advising the investment team about market behavior, he spends much of his day executing trades based on technical and quantitative metrics.

Mike joined U.S. Global Investors in January 2008 and was promoted to head trader not long after. Before joining our team, he was a proprietary trader and then director of institutional sales and trading for a broker-dealer, advising the firm’s hedge fund clients on technical trading strategy and implementation.

In this brief Q&A, Mike recounts how he found his way to U.S. Global Investors and shares his take on what it means to be a trader.

Tell us about your journey to become a trader. What drew you to the investment business?

When I was younger, I remember seeing news of the 1987 crash. Later, in my sophomore economics class, we studied the junk bond fiasco in the early ‘80s. I believe those events, along with the excitement of building wealth for clients and myself  in the capital markets, drove my interest early on in stocks and trading. As I gained experience, I started to learn I really enjoyed trading—specifically proprietary trading, or the art of pulling money out of the capital markets.

I traded for myself and started teaching others some of my strategies before becoming a full-time proprietary trader. My trading style in those days could be described as scalping, or trading for “quarters” on an intraday basis.

Then in 2001, when U.S exchanges started quoting the bid/ask prices in decimals, my trading profitability started to decline. I figured I needed to reinvent my trading style, so I enrolled in the Chartered Market Technician (CMT) program to learn more about technical and quantitative trading.  This was a real eye-opener. It showed me you always have to be seeking new and different ways to pull money out of the markets.

Once I passed the CMT program, I was one of only 500 CMTs in the world. Now I think there are about 3,000.

Eventually, I thought I was getting “burned out,” so I stepped away from trading and became a consultant for a sell side broker-dealer. I focused on trading strategy development and implementation for their hedge fund clients. It was a really fun position. I had the chance to meet with multibillion-dollar investment advisors and talk markets and trading strategies.

But eventually I began to miss trading, so when the company was purchased by another entity, it seemed like the right time to exit this part of my career path.

I started trading for myself again and was living in San Antonio when I came across the opportunity at U.S. Global Investors. They were looking for a derivatives/ETF trader for their hedge funds and mutual funds. Because San Antonio doesn’t have a huge financial district, and given my trading experience, I was a top candidate. I remember the director of human resources telling me it was hard to find someone with my experiences in “sleepy San Antonio.” Initially, I wasn’t sure if I was going to accept the offer, but one of my friends said, “You’ve got a chance to work with Frank Holmes! You’ve got to do that!” I figured it was a great opportunity, so I accepted.

ETFs have become increasingly popular in the last few years. What is your take on the shift from mutual funds to ETFs?

It’s funny—I was a proponent of ETFs even before I joined U.S. Global Investors. In fact, I started trading them back in 1998 and would write about them in a newsletter I was publishing as a hobby. I remember when I first started at U.S. Global, we were a “mutual fund shop.” At the time, there was a huge rivalry between mutual fund firms and ETF providers, with both sides claiming they had the superior product. Today, I manage our lineup of ETFs.

What should traders keep in mind for the remainder of 2018?

Everyone has a different view of what a trader is. My opinion is that traders are more short-term in nature. We generally don’t buy and hold something for a long period of time. But the trade can become “longer term” if the position continues to turn a profit. Admittedly, my background in proprietary trading and day-trading might skew my thoughts about this a bit.

Knowing that, I don’t believe in predictions. I don’t want to have an opinion, but I also want to follow the market direction with the least amount of resistance. 

So I believe for the remainder of 2018, traders need to trust the trend when it is heading in a particular direction. Stay invested, but always manage the risk. Risk is the only thing we can fully control.

There’s a saying in the industry: “Do you want to be right in your opinion—or make money?” Unfortunately, when people have opinions, pride steps in and bad decisions are sometimes made. I would rather make our investors’ money.

Want to stay on top of market trends? Subscribe to the award-winning Investor Alert newsletter for a weekly recap of the biggest market-moving events.

 

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

Alpha is a measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha.

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This Self-Made Billionaire Reminds Americans that Only Capitalism Creates Wealth
September 10, 2018
Mapping the belt and road initiatives progress

“Capitalism works” is how Ken Langone, billionaire co-founder of Home Depot, opens his new book, I Love Capitalism!: An American Story.

“Let me say it again: It works! And—I’m living proof—it can work for anybody and everybody…. Show me where the silver spoon was in my mouth. I’ve got to argue profoundly and passionately: I’m the American Dream.”

Last week, I had the privilege to attend the Cornerstone Macro Conference in New York. Langone’s presentation, moderated by Omega Advisers CEO Lee Cooperman, stood out as one of the highlights.

Growing up poor in Roslyn Heights, Long Island, the son of a plumber and a school cafeteria worker, Langone didn’t initially seem destined for greatness.

Mapping the belt and road initiatives progress

But like other self-made billionaires, Langone didn’t let his humble background stand in the way of his ambitions. Married with a toddler and another baby on the way, he quit a good-paying insurance position to try and make it on Wall Street—a “closed, Waspy world back in those bad old days,” as he describes it in I Love Capitalism

He managed to get his first Wall Street job, in institutional sales at broker-dealer R.W. Pressprich, after offering to get paid a secretary’s salary. The rest, as they say, is history.

Since co-founding Home Depot—which employs upwards of 400,000 people and hit $100 billion in sales for the first time last year—Langone has become a prominent philanthropist.

Remember hearing recently that New York University (NYU) would now be tuition-free for all incoming med students? That was made possible not because of socialism, but because of donations from capitalists like Langone. He and his wife gave the school $100 million after learning that the U.S. could face a serious doctor shortage in the coming years.

As he explained at the conference, only capitalism creates wealth, which is then freely redistributed. Socialism creates little to no wealth and redistributes poverty. People in Venezuela, sadly, are learning this lesson firsthand, as inflation there is forecast to hit an unbelievable 1 million percent by the end of the year.

I believe this is a lesson many Americans need to be reminded of, especially now as faith in capitalism is waning and interest in socialism is getting stronger, according to a Gallup poll in August. Capitalism “is not perfect,” Langone said on FOX Business last month, “but it’s the best out there.”

Check out our latest slideshow on the world’s 10 youngest billionaires!

Global Risks May Bring the Polish to Gold

Keep your eyes on the price of gold because the Fear Trade is about to heat up. And I’m not just saying that because the U.S. trade war with China is about to intensify even further, with tariffs on $267 billion worth of Chinese goods announced on Friday.

It’s been 10 years now since the start of the global financial crisis, and emerging markets are signaling trouble that some investors fear could have a spillover effect into developed markets. Last week, the MSCI EM Index, which consists of 24 countries, entered bear market territory after falling more than 20 percent from its January high.

EM currencies have been under considerable pressure so far this year, with some of them falling to record or near-record lows against the U.S. dollar. Other factors include global trade tensions and higher oil prices—both of which contribute to faster inflation. Rising U.S. interest rates are also making it harder for governments to pay off dollar-denominated debt.

Emerging market currencies have faced considerable turmoil this year
click to enlarge

The fear is that the EM slowdown could spell contagion, as we saw in the late 1990s with the Asian financial crisis. Although I don’t believe the current situation to be as bad as the one in 1997, it might prove prudent to ensure that your portfolio has the recommended 10 percent weighting in gold bullion and high-quality gold funds with a proven track record. In its latest report, research firm Metals Focus warns that global growth could take a hit should these markets continue to stumble, “with the resultant stock market impact encouraging investors to gradually rotate in favor of gold.”

We’re already seeing some slowdown in the global manufacturing expansion rate. The purchasing manager’s index (PMI) has been dropping steadily since its recent high in December 2017, and in August it fell slightly to 52.5 from a July reading of 52.8, with “confidence regarding the outlook for one year’s time [dipping] to a near two-year low,” according to IHS Markit, which compiles the monthly PMI data.

global manufacturing fell to 21-month low in august
click to enlarge

Last week gold was trading in the $1,200 an ounce range. But there’s even greater upside potential, I believe, as investors, especially those in emerging markets, seek a safe haven from their country’s weakening currencies against the dollar. Now could be a good opportunity to add to your exposure at an attractive valuation.

Another Emerging Market Crisis?

Turkey was among the fastest growing economies last year, expanding 7.4 percent, but it could be facing stagflation on higher inflation—consumer prices rose close to 18 percent in August—U.S.-imposed sanctions and a private sector debt crisis. The lira has lost more than 40 percent this year, and as I shared with you last month, President Recep Erdogan has urged his fellow Turks to convert gold and hard currencies into lira in an attempt to shore up the country’s troubled currency.

The worst performing currency in emerging markets so far this year is the Argentinian peso, off 50 percent as South America’s second-largest economy edges closer to recession. Investors were rattled last week when President Mauricio Macri’s administration unexpectedly enacted new export taxes and austerity measures, including ministry cuts, in an effort to balance the budget ahead of a $50 billion emergency loan from the International Monetary Fund (IMF). With interest rates at an eye-watering 60 percent, the highest in the world, economists surveyed by the country’s central bank forecast an economic contraction of nearly 2 percent in 2018.

And then there’s South Africa. Its economy has slipped into recession for the first time since 2009, having contracted for two straight quarters, according to the national statistical service.

south africa's economy slips into first recession since 2009
click to enlarge

Among the weakest sectors in South Africa during the second quarter was agriculture, which plunged almost 30 percent on lower production. The best performing sector was mining, which rose nearly 5 percent on increased production of platinum metals, copper and nickel.

Exacerbating all of this is historically high levels of debt. Debt in emerging markets stood at $63 trillion in 2017, up sevenfold from 2002 levels, according to the Institute of International Finance (IIF). And as I said earlier, higher U.S. interest rates make servicing this debt more expensive.

total emerging market debt in trillions
click to enlarge

American Workers Get a Raise

Speaking of interest rates, I believe it’s a near-guarantee that they’ll be hiked again this month after Friday’s positive jobs report. The U.S. added 201,000 jobs in August, beating economists’ expectations of 190,000. This is the 95th straight month that U.S. employers hired more people than fired—a record streak.

Americans got the biggest pay raise since the great recession
click to enlarge

What’s more, wages for American workers in August accelerated 2.9 percent year-on-year—right in line with official annnual inflation and marking the fastest pace of wage growth since the financial crisis.

This is good news indeed for retailers such as Home Depot. It’s also constructive for the U.S. economy as a whole. Second-quarter gross domestic product (GDP) growth is expected to be revised up to 4.4 percent from the earlier 4.2 percent, based on higher-than-anticipated consumer spending. And the Federal Reserve Bank of Atlanta now predicts GDP in the third quarter to expand at the same rate, 4.4 percent, spurred by strong consumer confidence, lower corporate taxes and deregulation.

 

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 MSCI Emerging Markets Index captures large and mid-cap representation across 24 Emerging Markets(EM) countries*. With 1,137 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

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. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 6/30/2018: The Home Depot Inc.

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5 World Currencies That Are Closely Tied to Commodities
September 5, 2018

This year, commodity prices have been under pressure from a strong U.S. dollar and trade war fears. This has made a huge dent in the balance sheet of many net exporters of resources, in turn weakening their currencies. However, commodities could be on the rebound and are flashing a massive buy signal.

This should come as a shock to no one, but what most people don’t realize is just how closely some currencies track certain commodities. I have shared several charts that show this correlation over the years at numerous industry conferences. Attendees were always astounded when I got to these slides – and we’re talking professional economists, money managers and CEOs here.

With that said, I think it’s important that you see this correlation as well. Below are five world currencies that have been impacted by lower commodity prices.

1. Australian Dollar

Australia is the world’s top iron ore producer and exporter, with usable iron ore output of 880 metric tons in 2017. This means that its income is very sensitive to price changes. As demand from China, the world’s largest consumer of iron ore and top steel producer, has softened, so too has the Australian dollar.

Australian Dollar Tracks Iron Ore Prices
click to enlarge

2. Canadian Dollar

The fifth-largest oil producer in the world is Canada, with an average production of 4.59 million barrels per day in 2016. Oil accounts for almost 11 percent of the nation’s exports – almost all of which is sent straight to the U.S. The strong correlation between the Canadian dollar and oil prices is largely due to crude oil being the largest single contributor of foreign exchange to the nation. Should oil prices continue to rise, so too should the Canadian dollar.

Canadian Dollar Tracks Oil Prices
click to enlarge

3. Russian Ruble

Compared to Canada and Australia, Russia’s export mix isn’t nearly as diversified: about half of its exports in terms of value are a combination of oil and natural gas. (Russia sits atop the third-largest oil reserves in the world and the number one natural gas reserves.) It should come as no surprise, then, that its currency is highly influenced by the price of crude. When oil fell in July 2014, so did the ruble. However, the ruble and crude decoupled in early 2018 when the U.S. imposed sanctions against the Eastern European country for its alleged meddling in the 2016 presidential election.

Russian Ruble Tracks Oil Prices
click to enlarge

4. Colombian Peso

The same story can be found in Colombia, where oil exports are responsible for about 20 percent of government revenue and 25 percent of total exports. Although oil exports fell from $12.7 billion in 2015 to $8.26 billion in 2016, production exceeded targets in 2017 with an average 854,121 barrels per day. As Venezuela’s economy falls further into disarray, Colombia has taken its place as the number five exporter of oil to the U.S. – one of the world’s biggest markets.

Colombian peso tracks oil prices
click to enlarge

5. Peruvian Sol

Copper is Peru’s most important mineral export by value, amounting to 24 percent of exports in 2016 worth $8.77 billion. With around 81 million metric tons of copper reserves, it’s the second-largest producer after Chile. As such, the Peruvian sol has declined in tandem with the red metal.

Peruvian Sol Tracks Copper Prices
click to enlarge

How familiar are you with the world’s currencies? Test your knowledge in this interactive quiz!

 

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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China's Belt and Road Initiative Opens Up Unprecedented Opportunities
September 4, 2018

 

Mapping the belt and road initiatives progress
click to enlarge

It was the best of times, it was the worst of times. A tale of two world leaders, U.S. president Donald Trump and China president Xi Jinping—both of whose countries have among the world’s best economies right now. But whereas Xi is playing Santa Claus to the rest of the world, doling out loans to finance-starved countries, Trump is playing Scrooge, waging an economic war with Canada, the European Union, China and others.

Respected economist Art Laffer, whom I’ve written about before, has always supported leaders who ignite global trade rather than close off its borders. A full-blown trade war, Laffer said recently, would be a “curse” on the U.S. economy.

Post-World War II, it was the U.S. that led global trade and infrastructure build-out—the Marshall Plan in Europe, the Interstate Highway System domestically. Both projects required massive amounts of commodities and raw materials, and employed hundreds of thousands of people.

Today, of the two leaders mentioned above, it’s Xi who has a clear foreign policy when it comes to trade and infrastructure.

U.S. Fund Flows Into Africa Are Slowing

Case in point: This week, Beijing will host the Forum on China-Africa Cooperation (FOCAC). The summit, which takes place once every three years and is attended by representatives from 52 African countries, touches on areas as diverse as technology, trade, infrastructure, diplomacy, culture and agriculture.

During the last forum, in 2015, China pledged as much as $60 billion toward Africa’s development in interest-free loans. The Asian country, in fact, has increased its investments in the continent around 520 percent over the last 15 years, according to Global Trade Magazine.

As just one example, Kenya agreed to let China finance and build a standard gauge railway (SGR) connecting two major cities at a cost of $3.8 billion. Contracted by China Road and Bridge, the Mombasa-Nairobi SGR is Kenya’s largest infrastructure project since it declared independence from the U.K. in 1963.

Meanwhile, U.S. fund flows to Africa have been receding, and they’re expected to slow even more during Trump’s administration.

Chinese investment in Africa has held steady as the United States declines
click to enlarge

Xi isn’t doing this out of the goodness of his heart, of course. China, having been Africa’s largest trading partner for nine consecutive years now, likely expects its investments to pay diplomatic and economic dividends for many decades to come.

Even Trump’s own commerce secretary, Wilbur Ross, acknowledges that the U.S. must do more in Africa. “By pouring money into Africa,” Ross wrote on CNBC in August, “China has seen an opportunity to both gain political influence and to reap future rewards in a continent whose economies are predicted to boom in the coming decades,” due mainly to a younger demographic.

The Belt and Road Initiative Will Affect 60 Percent of the World’s Population

The most well-known among China’s projects is the Belt and Road Initiative (BRI), one of the most ambitious undertakings in human history. The biblical-size trade and infrastructure endeavor—a sort of 21st century Silk Road—could cost 12 times as much as what the U.S. spent on the Marshall Plan to rebuild Europe following World War II. The BRI has the participation of 76 countries from Asia, Africa and Europe, and is poised not only to reshape globe trade but also raise the living standards for more than half of the world’s population.

According to the International Monetary Fund (IMF), the “BRI has great potential for China and participating countries. It could fill large and long-standing infrastructure gaps in partner countries, boosting their growth prospects, strengthening supply chains and trade and increasing employment.”

The BRI, which turns five years old this fall, announced in 2013, will have a strong presence in Eastern Europe, also a prime destination for China FDI, as the countries there offer a wealth of metals, minerals and agricultural products.

GPD and PMI car anolog

According to Stratfor, Chinese companies have invested as much as $300 billion in Eastern Europe over the past decade. Last May, China and Ukraine agreed to cooperate on joint projects valued at nearly $7 billion, and in November, it was announced that China Railway International and China Pacific Construction would build a $2 billion subway line in the Ukrainian capital, Kiev. More recently, Chinese engineers with China Harbor Engineering completed a $40 million dredging operation in Ukraine’s Yuzhny Sea Port, allowing it to receive larger ships.

Like the Marshall Plan before it, the BRI will require tremendous amounts of commodities, metals and fuel.

In 2011, members of our investment team and I had the opportunity to see one of China’s high speed trains firsthand. The train averaged 185 miles per hour during our 923-mile trip from Shanghai to Beijing. As I wrote then, “I’ve traveled to all corners of the world and have seen many things during my travels, but viewing China’s explosive growth as it flies by you is something I will never forget.”

U.S. Investors Hiked Exposure to China

In light of all this, there’s no lack of negative news on China right now. I see headline after headline on the country’s “slowing economy” and “weakening consumption,” but like most things are in the media, these proclamations are overblown.

Look at China’s purchasing manager’s index (PMI). Fresh data out last Friday showed that manufacturing expansion in August accelerated slightly faster than in the previous month. The PMI hit 51.3, up from 51.2 in July and beating analysts’ expectations of 51.0. This was the 25th straight month of economic expansion, despite what I earlier described as the Trump-Kudlow trade war with China.  

China manufacturing activity accelerated in august despite trade concerns purchasing managers index from august 2016 to august 2018
click to enlarge

Also, as the Peterson Institute for International Economics (PIIE) wrote last week, “there is no empirical evidence that consumption in China is weakening,” contrary to what “official” retail sales data show.

The PIIE’s Nicholas Lardy cited Alibaba’s recent announcement that sales rose 60 percent in the most recent quarter compared to a year ago—“a sign that Chinese retail sales data likely do not fully capture China’s burgeoning digital retail.”

“In any case,” Lardy continued, “retail sales are an increasingly less useful measure of consumption, as China’s large and still growing middle class is spending a growing share of their rising income on education, health care, travel and other services that are not captured in official data on retail sales.”

gross domestic product in absoluve terms and gdp on purchasing parity valuation
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Savvy investors, I believe, get it and can see the opportunity in the world’s number one economy, as ranked by purchasing power parity (PPP). Reuters reports that, in the week ended August 22, U.S. investors poured $572 million into funds that invest in Chinese equities. That was the most for such funds since January.

Although some expect Trump to impose tariffs on $200 billion additional Chinese imports, perhaps as early as this week, “investors are expecting Beijing to continue counteracting the effects of the [trade] dispute with increasingly relaxed monetary and fiscal policies,” Reuters says.

Curious to learn more? Watch this short video on investment opportunities in China!

 

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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.

Gross domestic product (GDP) is the total value of goods produced and services provided in a country during one year. Purchasing power parity (PPP) is a theory which states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries.

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 6/30/2018.

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Net Asset Value
as of 09/18/2018

Global Resources Fund PSPFX $5.37 0.05 Gold and Precious Metals Fund USERX $6.57 No Change World Precious Minerals Fund UNWPX $3.49 0.06 China Region Fund USCOX $9.02 0.15 Emerging Europe Fund EUROX $6.36 0.09 All American Equity Fund GBTFX $26.52 0.12 Holmes Macro Trends Fund MEGAX $20.20 0.08 Near-Term Tax Free Fund NEARX $2.19 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change