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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.

Invest in Optimism: A Conversation With Keith Fitz-Gerald
April 24, 2019

If you’re as much a consumer of financial news as I am, chances are very good you’ve seen Keith Fitz-Gerald as a regular contributor on Fox Business, CNBC and elsewhere. That, or read his invaluable market commentary online.

Nothing beats catching him in person, though, and I highly advise you do so if you get the opportunity.

Part investment guru, part motivational speaker, Keith manages to make you feel as if you can conquer the world… and have a great time doing it. I’ve had the privilege of seeing him present a number of times before—most recently at Money Map Press’ Black Diamond Conference in Delray Beach, Florida—and I’m always in awe not just of his depth of market knowledge but also the amount of energy he brings to the table.

The longtime writer of the popular Money Map Report and High Velocity Profits newsletters, Keith was gracious enough to chat one-on-one with me recently. Below are highlights from our conversation, during which we touched on a number of topics ranging from portfolio construction to the similarities between investing and the martial arts.

You have a unique story about how you first got interested in investing. If I remember, it began with your grandmother.

Thanks for remembering! We all called her Mimi. She was widowed at a very young age and turned a small life insurance settlement into everything she needed to live out the rest of her life and then some. She became a global investor long before that term even existed. When I turned 15, Mimi didn’t give me the usual books or sweaters other teenagers might have received. Instead, she got me subscriptions to Value Line and Forbes, and every Sunday afternoon we would meet over martinis and ham sandwiches to talk about the markets.

Mimi wanted me to understand that the world was much bigger than my garage. Our discussions weren’t necessarily about investing, but about the companies, products and services that were changing the world I would inherit. We talked about how and why that mattered and, of course, how to invest in markets that would change dramatically during my investing lifetime.

She often used to say “Get out there and see it.” Mimi traveled all over the world as a means of vetting her investments and that’s a habit I’ve kept up to this day. Eventually, Mimi got so good at translating what she saw into investment ideas that the Merrill Lynch brokers she worked with used to call her and ask for her thoughts.

Mimi was an exceptionally bright and astute observer of the world around her. Yet, at the same time, she was a very humble person. I miss her today but have no doubt she’s out there watching the markets carefully and looking, as she always did, ahead for cues as to what’s next.

Hopefully, those are traits that I’ve picked up. I am a big believer in “boots on the ground” when it comes to exploring potential investments. I’ve traveled widely all over the planet over the past 36 years, often on my motorcycle with my wife. I want to see the world around me so I can accurately ascertain where the best opportunities are because there is no proxy for firsthand knowledge.

Speaking of your wife… I understand she has two black belts? What’s that like?

That’s right, she does. I’ve been doing martial arts since I was 15 years old, and Noriko’s been doing it since she was about five, so we’re a good match. Practically speaking, I don’t worry very much about home security if she’s on the case! Noriko’s the  love of my life and we’ve been together nearly 24 fabulous years.

Many people don’t realize that the martial arts are not about defense or even attack. Instead, they’re really about personal growth and character—who you are as a person. One of the very first things you learn when you obtain a black belt, for example, is just how much you don’t know. In the Western world people commonly believe that a person with a black belt knows everything and must therefore be an expert. Yet, the first time you put one on, you realize just how much you don’t know and what a student of life you have become. In that sense, a black belt is really another door opening… to more advance and highly personal learning. And having married Noriko, and being exposed to the martial arts, and subsequently my life in Japan over the last 30-something years, I very much have that mindset.

It sounds like there’s a lot of crossover between martial arts and investing.

Absolutely. I think about that every day, in fact. I’ll give you a great example. There’s a Japanese proverb—and I’m paraphrasing here—the bamboo that bends is stronger than the oak that resists. That’s just as true in martial arts as it is in the markets. If you try to block a punch or a kick straight on, chances are you’re going to have to take the blow and risk getting hurt. But redirect that energy or sidestep it before impact, and now you’ve got the upper hand.

Investing is very similar. You will lose money if you remain inflexible. Success and big profits come from constantly adapting to changing conditions rather than trying—as a lot of investors do—to second-guess the unguessable.

You’ve been in the capital markets for a while now. What’s the hardest lesson you’ve had to learn during that time?

That’s an interesting question with many possible answers. However, if I had to choose just one, the single toughest lesson is learning to pay attention to the environment around you. And I don’t just mean reading the headlines or the internet either. I mean really becoming a student of what’s happening around you and why.

You can’t ignore the past like a lot of investors do. History won’t repeat, but it rhymes, and the markets have a very defined upward bias, which means that you can align your money with some really super profit potential if you understand how, why and where the move “fits.” The other thing people don’t realize, because they get so focused on the trees that they cannot see the forest, is that the financial markets have a very defined preference for moving forward. That’s why there are future-looking valuation methods. And if you’re trapped in the past making decisions on data that’s based solely on the past, on emotion, on stuff that should be in the rear-view mirror, you’re going to miss the opportunities.

You’re known for the 50-40-10 portfolio, among other things. Describe that for us.

Thanks for pointing that out. Let me start by saying that conventional thinking about diversification is, I believe, badly flawed. The theory is a lot like throwing spaghetti against a wall and seeing what sticks. The proposition is that you have lots of great stocks that don’t go up and down at the same time, but the reality is that it’s more like rearranging the deck chairs on the Titanic in today’s highly computerized markets, when correlation is higher than it’s been at any point in financial history.

If you want to get ahead and diversify your portfolio, the irony is that you don’t spread it all over. You don’t, for example, see buildings named after “diversifiers,” but you do see ‘em named after people who have made a boatload by taking well-reasoned, calculated risks. If you can do that, the returns—the giant profits, really—will come.

The simplest way to describe the 50-40-10 portfolio is to think of your money like a food pyramid. The stuff at the bottom is what I call the “50”—the 50 percent, the Base Builders—that’s like the stuff your mother told you to eat even though it tastes like wallpaper because it’s good for you. The stuff in the middle, the 40 percent, is what I call Global Income and Growth. That’s the stuff that you wouldn’t mind having another helping of because it actually tastes good and it’s good for you and your money. But then you get to the 10 percent, the Rocket Riders. That’s the chocolate ice cream, the beer, the chips—whatever your favorite indulgence is.

This structure gives you unprecedented stability, lowers your risk… yet keeps you profit-oriented at all times even in market conditions that send other investors packing.

the 50-40-10 portfolio

Unfortunately, many investors “invert” the pyramid. They think that they’re investing but find out the hard way they’re speculating, and when the markets go against them, they lose a lot of money. That’s because instead of having 10 percent in speculative stocks, they’ve got 50, 60, 70 or even 80 percent in speculative stocks. And then they get slammed up one side and down the other. Emotion takes over and they sell out, often at huge losses they’ll never make up.

But if you’re using the 50-40-10, even on the market’s worst days you can confidently stride into the future knowing that the bulk of your money is built on a solid foundation. Your volatility is lower and you have the freedom to screw up every now and then. Plus, periodically rebalancing means you are forcing yourself to buy low and sell high over time.

In today’s market, what are some examples of speculative stocks?

Defining that term depends on how you view the future. I view the future through a very simple lens that I’ve developed over the years and which builds upon the 50-40-10 portfolio model I’ve just described. I divide the world into companies using two categories… those making “must-have” products and services you can’t live without and those that make “nice-to-have” products and services. The former is what you want to own every chance you get while the latter is usually a risk you can do without.

Examples of nice-to-haves today would be Lyft or Uber. Those companies are nothing more than glorified taxi companies with software to help you hail a ride. They’re no different from picking up the yellow pages 50 years ago, except now you’re using your smartphone.

Compare that to a company like Becton Dickinson (BDX), which makes billions of single-use syringes at a time when the population is aging and insulin injections are made more and more.

Both groups have their ups and downs, but Becton Dickinson is far more stable and will continue to pull ahead over time thanks to a combination of appreciation and income. Many investors underestimate the impact that yield can have on their money.

becton, dickinson & co. (BD) vs. the market
click to enlarge

Lyft and Uber, on the other hand, may never be profitable according to their own documents and information. Last time I checked, hope was not a viable investment strategy.

I’m a simple guy. That’s one of the things that I learned from Mimi. If you can’t explain a product, a service or even a company to your grandmother, then maybe it’s too complicated or too risky.

I think it was Einstein who said that if you can’t explain something simply, you don’t understand it well enough.

That’s my understanding. Take Fitbit and GoPro. Those are great examples of nice-to-have companies. I use their products myself. They’re interesting devices, but they’re not must-haves.

Apple, on the other hand, is transitioning from a nice-to-have to a must-have because it’s getting into medical devices. It’s making a medical pivot, really. Imagine the profit potential when doctors begin prescribing Apple devices—something I think is a very real possibility within the next few years. That’s a real game changer.

Some analysts sounded the warning bell in March when the yield curve inverted for the first time since the financial crisis. At the recent Money Map Press Black Diamond conference, though, you downplayed the significance of the inversion. Why aren’t you as concerned as some others are?

Well, you have to remember where they’re  coming from. Much of Wall Street wants you scared and confused because they know that you’ll trade more and generate hundreds of millions of dollars in commission for them.

Instead of doing that, let’s look at the data. It’s very clear. Just because you have an inverted or flat yield curve doesn’t mean you get a recession right away. In fact, one data source that I saw recently suggests it takes as many as 44 months before you get an actual recession. And during that time, the market may continue to rise another 70 percent—possibly more.

Pessimists rarely make money. How many times over the past 100 years have we heard that the end is near? Better run for the hills! All of those folks ended up looking pretty foolish when they took their money out of the market and it continued to run for another 20 to 50 months and they missed every penny of the profit potential.

Again, I’d rather concentrate on the upside potential in the must-have companies and the 50-40-10 model because I know those things can create huge profits year in, year out and in all sorts of market conditions. Missing opportunity is always more expensive that trying to avoid losses.

Playing devil’s advocate here, but let’s say a recession is imminent. Where would you recommend people be positioned right now?

The same way I’d recommend they’re positioned now. It’s logical to assume that we’re in a late stage of economic growth, but then again, people have been saying that since 2009 when they thought the end of the financial universe was upon us. But that’s where risk management comes in. If you’ve got it in place, then that concern goes away. Instead, you can concentrate on the pursuit of profits knowing your money is protected if the markets go against you. There’s no second-guessing required. I am particularly focused on dividend-paying stocks with global market share, well-known brands and the ability to protect margins. They’re going to run higher faster and be more stable if there’s a downturn for any reason. People will still buy the stuff they make if the you know what hits the proverbial fan.

You’ve been the chief investment strategist at Money Map Press since 2007. Talk a little about some of the newsletters you’re involved with there.

It’s a real honor. Coming from very simple beginnings oriented around a single publication, the Money Map Report, I think we are now the single largest private investment research publisher. Today we have a family of newsletters covering everything from structured long-term investing, like the 50-40-10 I advocate in the Money Map Report, to more sophisticated options, resources, cryptocurrencies, cannabis and more.

I personally still write the Money Map Report as well as High Velocity Profits and have recently launched Straight Line Profits. The latter are more active momentum-oriented services. I can also be found at Total Wealth Research, which is a free e-letter published three times a week. That’s where a lot of folks start as they get to “know” me and, eventually, our team.

Thank you for your time, Keith! It was a pleasure speaking with you.  

Thanks for including me! It’s a real honor.

 

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.

There is no guarantee that the issuers of any securities will declare dividends in the future or that, if declared, will remain at current levels or increase over time.

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 3/31/2019.

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The Hunger for Muni Bonds (And Gold!) Is Real
April 22, 2019

Gold is the second best performing asset class since 1999

Another Tax Day has come and gone. Although it might be some time before we get the full picture of what Americans earned and paid in taxes last year, it’s probably safe to assume that the top 1 percent of earners shouldered most of the U.S. tax burden.

In 2016, the most recent year of available data, the top 1 percent was responsible for over 37 percent of all income taxes. Compare that to the bottom 50 percent, which was responsible for about 3 percent of all taxes.

Of course, the highest earners also paid the highest average income tax rate of 26.9 percent, which is seven times more than the rate faced by the bottom 50 percent.

This was the first year that Americans paid taxes under President Donald Trump’s tax cuts. And yet many filers—especially those living in high income tax states such as New York, California and New Jersey—saw their payments rise significantly due to state and local tax (SALT) deductions being capped at $10,000.

This change has been a boon for municipal bonds, which are exempt from taxes not only at the federal level but also, in most cases, state and local levels.

Muni bond funds, in fact, just had their best quarter of inflows since 2009, as you can see below.

muni bond funds had their best quarter of ivnestor inflows since 2009
click to enlarge

According to Morningstar data, tax-free muni bonds saw more than $8.8 billion in net flows in the three months ended March 31, beating U.S. equity funds ($6.2 billion) and international equity funds ($1.3 billion). This tells me that investors were seeking stability as well as a strategy to counteract the changes to the tax code.

Investors Prefer Actively Managed Muni Bond Funds

Actively managed muni funds were more popular than passively managed funds, including ETFs. Active funds attracted $7.5 billion, more than five and a half times more than passive muni funds, which saw only $1.3 billion in net flows, according to Morningstar.

As I told you in a previous post, I think the reason investors prefer active muni funds is that they want a manager who knows how to conduct deep credit research, adjust for duration and monitor for risks and opportunities. You don’t get that with a passive fund.

Muni Supply Has Tightened

Trump’s tax law supports the outlook for muni demand in more ways than one. The supply of municipal debt has been restricted thanks to the elimination of a category known as “advanced refunding issues,” which in years past accounted for about a fifth of muni bond issuances annually.

Any casual student of economics knows that tighter supply, combined with increased demand, creates investment opportunities. And since the tax law went into effect in January 2018, muni bonds have outperformed both 10-year Treasuries and investment-grade corporate debt.

Munis have been the best performing fixed income since tax law went into effect
click to enlarge

On a final note, I should point out that munis have a history of doing well in late-cycle environments, which we seem to be in right now. This, along with flat issuance and stronger demand for tax-free income, should help the asset class remain resilient throughout the year and beyond.

Gold “Lives Up to the Hype”

Another asset whose supply is forecast to tighten in the coming years is gold, due mainly to shrinking exploration budgets and the lack of large discoveries. As I told Streetwise Reports last week, the gold mining industry hasn’t seen any technological breakthroughs as there have been in oil and gas with fracking.

Also like munis, demand for the yellow metal remains strong and should continue to strengthen as incomes grow in emerging markets such as China, India and Turkey.

Last week, the price of gold fell to a 2019 low of around $1,270 an ounce as the 10-year Treasury yield ticked up and U.S. dollar stayed at elevated levels.

gold price has stumbled on a steady U.S. dollar
click to enlarge

Nevertheless, some analysts continue to see this as an “extremely attractive environment,” in the words of British banking firm Standard Chartered.

“We are very constructive on gold, both within our strategy teams and within our commodity research teams,” Standard Chartered’s Eric Robertson told Bloomberg. “Even with the recovery that we’ve seen in equity prices and nominal bond yields over the last few weeks, real or inflation-adjusted yields remain extremely low. And that’s a better indicator for gold.”

In a report last week titled “Gold lives up to the hype as a safe haven,” research firm Capital Economics said it sees gold rallying to $1,400 an ounce or more by mid-2019 on equity weakness.

“Given that we expect the S&P 500 to drop by roughly a fifth this year, we think gold’s safe-haven credentials will soon come to the fore again,” says commodities economist Ross Strachan, who goes on to explain that in seven out of eight times since 1990 in which the S&P declined more than 10 percent over a prolonged period, the price of gold rose 7.2 percent on average. 

Venezuela’s $400 Million Sale Weighed on Gold

Gold traded down following the news on Monday that Venezuela sold as much as $400 million of the metal, the South American country’s only remaining liquid asset. This comes after Venezuela opposition leader Juan Guaido in February urged the U.K. not to send cash to President Nicolas Madura upon sale of the country’s gold reserves, held in the Bank of England’s (BoE) vaults.

The recent sale could mean that President Maduro has found a way to sidestep sanctions, according to Bloomberg.

The report also points out that Venezuela’s central bank “has been operating with what it calls an emergency team of only about 100 workers of about 2,000 since a power outage left its headquarters without running water.” What Maduro has done to this once prosperous country and its people is nothing short of tragic.

In any case, the gold market should stabilize once Venezuela is done selling this quarter.

Frank Talk at 12

I’m delighted to share with you that my CEO blog, Frank Talk, turned 12 this month. Its mission is the same today as it was then—to educate curious investors about not just the whats but the whys in today’s marketplace, and to relay interesting insights I pick up along my global travels.

Something else that hasn’t changed is the joy it brings me to be able to communicate directly with you. To those who’ve taken this journey with me over the years, in whole or in parts, I say thank you! To those who only recently discovered Frank Talk, I say welcome!

No matter which category you fall into, I hope that you stick around because there’s so much more to come. Become a Frank Talk subscriber by clicking here!

 

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

The S&P Municipal Bond Index is a broad, market value-weighted index that seeks to measure the performance of the U.S. municipal bond market. The S&P U.S. Treasury Bond Current 10-Year Index is a one-security index comprising the most recently issued 10-year U.S. Treasury note or bond. The S&P 500 Investment Grade Corporate Bond Index, a sub-index of the S&P 500 Bond Index, seeks to measure the performance of U.S. corporate debt issued by constituents in the S&P 500 with an investment-grade rating. The U.S. Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The S&P 500 Index is a float-adjusted market-cap weighted index. It's calculated by taking the sum of the adjusted market capitalization of all S&P 500 stocks and then dividing it with an index divisor, which is a proprietary figure developed by Standard & Poor's.

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What's the Second Best Performing Asset Since 1999?
April 15, 2019

Gold is the second best performing asset class since 1999

Last week the world got its first look ever at a black hole, one of those cosmic bodies so supermassive and powerful that not even light can escape its pull. These things literally destroy all matter that comes within their reach, making them the trash compactors of the universe.

Some of you reading this right now can probably point to a few investments you made over the years that had more in common with black holes than you would care to admit.

Gold, I’m happy to say, is not among those investments, despite all the negative press it sometimes gets. The evidence keeps rolling in that the yellow metal has historically been a wise investment. Because it has a negative correlation with the market, gold has helped investors diversify their portfolios and improve their risk-adjusted returns. Back in January, I shared several charts showing how the price of gold has beaten the market over several time periods, including the 21st century (so far).

Take a look at the chart below, using data released last week by JPMorgan. For the 20-year period ended December 31, 2018, gold as an asset class had the second best annualized returns at 7.7 percent. Only REITs (real estate investment trusts) did better at nearly 10 percent.

Gold Had the Second Highest Annualized Returns for the 20-year period
click to enlarge

The S&P 500, by comparison, returned only 5.6 percent on an annualized basis, but that’s after it underwent two huge pullbacks that greatly impacted performance. Bonds—which include Treasuries, government agency bonds, corporate bonds and more—came in next at 4.5 percent. Not bad, considering the asset class has lower overall volatility and risk than equities.

In last place is the “average investor” with a lackluster 1.9 percent.

Everyday Investors Have Lagged the Market by a Wide Margin

Surprised? You shouldn’t be. Quantitative analysis of investor behavior, conducted by research firm DALBUR, has shown time and again that everyday retail investors regularly lag the market, in good times and in bad, by an alarmingly wide margin. Last year they lost approximately 9.42 percent, or more than twice as much as the S&P did.

This is due mainly to bad timing. Instead of taking a buy-and-hold approach and riding out short-term volatility, many investors tend to sell at the absolute worst time. And that’s often after missing the rally and buying at the peak.

I shouldn’t have to tell you that this strategy, if it can be called that, is like a “black hole” for your money.

Don’t get me wrong. Trading can be fun and sometimes very profitable. But it’s not investing. If you insist on trading, I believe it’s still crucial to maintain a sizeable allocation in high-quality stocks and bonds, exercise discipline and allow your investment to compound over time.

And as always, I recommend the 10 Percent Golden Rule, which you can learn about by clicking here.

Ray Dalio Remains a True Believer in Gold

Ray Dalio, the world's most profitable hedge fund manager, is a strong bliever in the power of gold
Ray Dalio, the world's most profitable hedge fund manager, is a strong believer in the power of gold
Photo by: Harry Murphy/Web Summit via Sportsfile | Attribution 2.0 Generic (CC BY 2.0)

Someone who follows the Golden Rule, with his own and other people’s money, is Ray Dalio, the billionaire founder of the world’s largest and most successful hedge fund firm, Bridgewater Associates. Last year the firm’s flagship Pure Alpha strategy delivered an incredible 14.6 percent gain (compared to “average” investors’ return of negative 9.42 percent, remember). This was not only Bridgewater’s best performance for the year since 2011, but it also helped keep Dalio atop the list of the most profitable hedge fund managers.

If you drill down into Bridgewater’s SEC filing for the fourth quarter of 2018, you’ll find that Dalio holds significant positions in gold across all tiers in the industry. These positions include physical gold (via SPDR Gold Shares and the iShares Gold Trust), senior gold miners (Barrick Gold, Newmont Mining, Goldcorp, etc.), junior gold miners (Yamana Gold, B2Gold, New Gold, etc.) and gold royalty and streaming companies (Franco-Nevada, Wheaton Precious Metals and Royal Gold).

As many of you know, I like to get access to the precious metal market with royalty companies. Back in January, Paradigm Capital showed that this small group of companies crushed all other tiers in the gold mining industry, delivering an unbelievable 16 percent in compound annual growth from 2004 to 2018. That’s Ray Dalio-caliber performance.

Ray Dalios Bridgewater Associates Holds Precious Metal Royalty Companies
click to enlarge

Dalio Sounds Off on Capitalism

While on I’m the topic of Dalio, the multibillionaire recently had some choice words to say about capitalism. In a lengthy post on LinkedIn, which you can read here, Dalio shared his belief that it is no longer working as it should for most Americans. As such, he argues, capitalism must be “reformed.”

In one of the more eye-opening segments of his essay, Dalio says that political divisiveness and the widening “opportunity gap” in the U.S. is creating what he sees as eerie similarities between now and the late 1930s:

Disparity in wealth, especially when accompanied by disparity in values, leads to increasing conflict and, in the government, that manifests itself in the form of populism of the left and populism of the right and often in revolutions of one sort or another. For that reason, I am worried what the next economic downturn will be like, especially as central banks have limited ability to reverse it and we have so much political polarity and populism. 

This definitely isn’t cheerful bedtime reading. I’m not asking you to agree with Dalio here—he doth protest too much, methinks—but if his thoughts resonate at all with you, I believe it’s even more reason to make sure you’re invested in gold.

Central Banks Continue to Gobble Up Gold

On a final note, the price of gold crossed above $1,300 an ounce again last week following news that China increased its gold holdings in March for the fourth straight month. The People’s Bank of China raised reserves to 60.62 million ounces, or 1,885 tonnes, as trade tensions between the U.S. and the Asian giant continue to drag on. This puts it on course to overtake Russia and Kazakhstan, the top buyers of the yellow metal in 2018.

China wasn’t alone, however. Global central banks bought a net 51 tonnes of gold in February, the largest monthly increase since October 2018, according to a recent report by the World Gold Council (WGC).

Central Bank gold Demand Off to a Strong Start in 2019
click to enlarge

“Central banks’ gold holdings have grown by 90 tonnes in the first two months of the year, compared with 56 tonnes in the same period in 2018 (and the highest level of growth since 2008),” writes the WGC’s Krishan Gopaul. “This shows that collectively, central banks—mostly from the emerging markets—continue to accumulate gold at a healthy pace.”

For even more timely market insight on gold and natural resources, subscribe to my award-winning CEO blog, Frank Talk!

 

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 (03/31/2019): Barrick Gold Corp., Newmont Mining Corp., Yamana Gold Inc., B2Gold Corp., Franco-Nevada Corp., Wheaton Precious Metals Corp., Royal Gold Inc.

A real estate investment trust is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centers, hotels and timberlands. Some REITs engage in financing real estate.

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

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

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What You Need to Know About Indonesia Ahead of Next Week's Election
April 9, 2019

On Wednesday of next week, the world’s largest presidential election will be held. Voters in Indonesia will go to the polls to decide whether to give incumbent president Joko Widodo another five years, or elect former general Prabowo Subianto.

I think of Indonesia’s presidential election as the “world’s largest” for a couple of different reasons. One, voters are given the day off, which encourages higher turnout. In 2016, some 138 million Americans voted in the general election, compared to 193 million Indonesians who are expected to vote next week. That’s despite the Southeast Asian country having a smaller overall population than the U.S.

And two, Indonesians get a direct vote. Whereas the U.S. elects its presidents indirectly through the Electoral College, voters in Indonesia get to choose their presidents directly—one voter, one vote.

This effectively makes Indonesia one of the largest democratic countries in the world.

In the meantime, the Indonesian market has been in a holding pattern so far this year as investors await the election outcome.

Indonesian markets stuck in a holding pattern awaiting April 17 election
click to enlarge

I’ll share something else investors will really want to know about Indonesia—but first, a brief American history lesson. Don’t worry, it will all make sense.

The Economic Windfall of the U.S. Homestead Act

The Homestead Act is one of the most consequential pieces of legislation in U.S. history. Passed in 1862, the statute gave scores of families the once-in-a-lifetime opportunity to become proud owners of as many as 160 acres of federal land in Western territories.

Certain conditions had to be met first to receive a land title, but the beauty of the statute is that nearly anyone was eligible so long as they were willing to put in the work. U.S. citizens, immigrants and freed slaves all stood to benefit. Families who before had little or no assets suddenly found themselves with the financial independence so many had never known. For the first time, homesteaders gained access to banking and loans, as they could now put up their land as collateral.

Not only did the Homestead Act hasten the development of the American West, but it also ushered in the most productive agricultural economy the world had ever seen. The U.S. became a more attractive place for investors.

Today, an estimated 93 million Americans can trace their ancestries back to those original homesteaders.

So why am I telling you this?

Can Lightning Strike Twice in Indonesia?

I’m sharing this with you to draw a direct link to what’s currently happening in Indonesia. Under the leadership of President Widodo, the Southeast Asian country’s government is similarly in the process of distributing wealth to its people by certifying as many as 9 million hectares (ha) of public land. Indonesia is the fifth largest country by area in Asia, with massive natural resources—it has the world’s largest known gold reserve—but land ownership per capita has historically been very low.

Elected in 2014, President Widodo, popularly known as “Jokowi,” has pledged to change that with land reform. As of November, the government has certified 3.86 million ha, or 43 percent of target, according to CLSA. The full 9 million ha is scheduled to be issued by 2025.

Central Banks Haven't Bought This Much Gold Since Nixon Was President Indonesian president Joko Widodo (left) enjoys personally handing out land certificates to the people.
Photo by: State Dept./Erik A. Kurniawan, U.S. Embassy, Jakarta | Attribution-NoDerivs 2.0 Generic (CC BY-ND 2.0)

Although there’s no guarantee that Jokowi’s policy will lead to the explosive economic growth seen here in the U.S., it’s almost certain to raise incomes, improve prosperity and help turn Indonesia into a more attractive place for foreign investors.

Like the original American homesteaders, Indonesian land certificate recipients can now enter the official economy, with newfound access to borrowing. As you can see below, banking penetration in Indonesia has been low relative to other Asian countries, so I see this as having a huge multiplier effect on the local economy.

Indonesias land reform program should help expand banking penetration
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Indonesia Projected to Become the World’s Fourth Largest Economy

The Indonesian economy is already expected to expand dramatically over the next 10 years and more, thanks in large part to its young, vibrant population. More than half of its roughly 270 million citizens are under the age of 40, while the 0-to-14 age group accounts for around a quarter of the population, according to World Population Review.

Indonesians aged 40 and below account for more than half the voters
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Not only is Indonesia the fourth largest country by population, following China, India and the U.S., but its economy is on track to become the world’s fourth largest using purchasing power parity (PPP) in as few as 11 years. Between 2017 and 2030, the economy is projected to grow an incredible 216 percent, from $3.2 trillion to $10.1 trillion.

Top 10 countries by nominal GDP using PPP exchange rates by the year 2030
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I’m eager to see the results of next week’s election. However it unfolds, I hope that the land certifications proceed as planned, as I see it opening up huge investment opportunities.

Curious to learn more about Indonesia? View this slideshow on the country’s important palm oil industry by clicking here!

 

The Shanghai Composite Index is a market composite made up of all the A-shares and B-shares that trade on the Shanghai Stock Exchange. The MSCI Emerging Markets Asia Index captures large and mid-cap representation across nine emerging markets countries. With 883 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. The IDX Composite is an index of all stocks listed on the Indonesia Stock Exchange.

Purchasing power parity (PPP) is an economic theory that compares different countries' currencies through a "basket of goods" approach. According to this concept, two currencies are in equilibrium or at par when a basket of goods (taking into account the exchange rate) is priced the same in both countries.

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 Ballooning Corporate Debt Means for Investors
April 8, 2019

Frank Homles speaking at the Money Map Press Black Diamond Conference in Delray Beach Florida

Last week I was in Delray Beach, Florida, where I presented at Money Map Press’ Black Diamond Conference.

What I love about this event, and others like it, is that it gives investors a chance not only to hear from their favorite newsletter writers but also speak with them face-to-face on a wide range of topics, from metals and mining to bitcoin and cannabis, and so much more. Among the most sought-after presenters this year were early-stage tech investor Michael Robinson, who I interviewed last year; Money Map Chief Investment Strategist Keith Fitz-Gerald; and Sprott CEO Rick Rule.

In case you didn’t get the chance to attend, I’ll be sure to cover the highlights in the coming days.

Right now I want to share with you the latest from Metals Focus. The London-based commodities research group just released the 2019 edition of its widely-read Gold Focus report, and the big news is that global gold demand will climb to its highest level in four years. The uptick is expected to be driven by an increase in jewelry fabrication, with India, China and Italy leading consumption higher.

Global gold demand forecast to edge marginally higher in 2019
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Interest in gold jewelry has indeed improved in recent years, a phenomenon we’ve noticed with the success of such companies as Menē. Late last year, Google inquiries for “gold jewelry” hit an 11-year high.

But there’s more to the story than the Love Trade. Metals Focus analysts see gold also benefiting from a more dovish Federal Reserve and fears of a global economic slowdown.

“We expect U.S. real gross domestic product (GDP) to slow in 2019 and 2020,” comments Metals Focus Director Nikos Kavalis. “This reflects a natural tapering, following two very strong years, the fading of windfall gains from the late-2017 tax reforms and, eventually, also the impact of trade wars on U.S. consumer spending.”

Are We Headed for Another Recession?

Few people know the risks in today’s economy and marketplace as much as David Rosenberg, chief economist and strategist at Canadian wealth management firm Gluskin Sheff & Associates. For years he’s educated investors with his popular “Breakfast with Dave” newsletter, which you can subscribe to here. He’s also a regular contributor to the Globe and Mail and the Financial Post.

Considered by many to be a Wall Street permabear, Rosenberg successfully predicted the 2007-2008 financial crisis.

Now he’s predicting another recession to make landfall as soon as the second half of this year. Why? In short, the Fed has been too aggressive tightening liquidity at a time when corporate debt is at an all-time high. What’s more, the Trump administration has already enacted fiscal stimulus in the form of tax reform, which has historically been reserved for times of economic turmoil, not expansion.

“How are we going to stimulate fiscal policy [in the event of a recession]?” he asked recently on CNBC’s Trading Nation. “We already did that at the peak of the cycle. We don’t have the fiscal ammunition.”

Corporate Debt Nearing Half of U.S. GDP

Rosenberg recently spoke at the CFA Societies Texas Investor Summit in San Antonio, U.S. Global Investors’ hometown, where he laid out his thought process.

Since the last recession, nonfinancial corporate debt has ballooned to more than $9 trillion as of November 2018, which is nearly half of U.S. GDP. As you can see below, each recession going back to the mid-1980s coincided with elevated debt-to-GDP levels—most notably the 2007-2008 financial crisis, the 2000 dotcom bubble and the early 90s slowdown.

Non-financial corporate debt to GDP has exceeded record levels
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Through 2023, as much as $4.88 trillion of this debt is scheduled to mature. And because of higher rates, many companies are increasingly having difficulty making interest payments on their debt, which is growing faster than the U.S. economy, according to the Institute of International Finance (IIF).

On top of that, the very fastest-growing type of debt is riskier BBB-rated bonds—just one step up from “junk.” This is literally the junkiest corporate bond environment we’ve ever seen.

Combine this with tighter monetary policy, and it could be a recipe for trouble in the coming months.

During his presentation, Rosenberg reiterated the saying that business cycles don’t die of old age, but rather they’re killed by the Fed. Take a look at the chart below. It shows commercial and industrial loan delinquency rates, overlaid by fed fund rates shifted 10 quarters ahead. What it suggests is that roughly 10 quarters after the Fed began to tighten, loan delinquencies surged.

Corporate loan delinquencies have surged following rate hike cycles
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The good news is that it’s been more than 10 quarters since the Fed started lifting rates in December 2015, and so far we haven’t seen a noticeable increase in delinquencies.

Could this be because the rate hikes this cycle have been small relative to those in past cycles? Not likely, says Rosenberg. According to him, it’s not the amount that matters so much as the change. Whether rates go up 2.50 percent or only 0.25 percent, it can still be a shock on the financial system.

To be clear, I’m not predicting a recession any time soon, only passing along Rosenberg’s expert opinion.

But if his position makes sense to you, it might be time to consider your options on how to prepare. Rosenberg recommends overweighting fixed-income and REITs (real estate investment trusts).

I would add gold to that mix, as it’s performed well as a store of value during economic pullbacks. As always, I recommend a 10 percent weight in gold, with 5 percent in gold bars, coins and jewelry, and 5 percent in gold stocks, mutual funds and ETFs.

Concerned about Brexit? Read my thoughts on how it could impact gold prices by clicking 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.

A bond’s credit quality is determined by private independent rating agencies such as Standard & Poor’s, Moody’s and Fitch. Credit quality designations range from high (AAA to AA) to medium (A to BBB) to low (BB, B, CCC, CC to C).

Investing in real estate securities involves risks including the potential loss of principal resulting from changes in property value, interest rates, taxes and changes in regulatory requirements.

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 12/31/2018: Menē Inc.

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Net Asset Value
as of 04/25/2019

Global Resources Fund PSPFX $4.54 -0.02 Gold and Precious Metals Fund USERX $6.68 -0.04 World Precious Minerals Fund UNWPX $2.54 No Change China Region Fund USCOX $8.89 -0.13 Emerging Europe Fund EUROX $6.69 -0.06 All American Equity Fund GBTFX $25.04 -0.11 Holmes Macro Trends Fund MEGAX $17.73 -0.10 Near-Term Tax Free Fund NEARX $2.21 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change