Share this page with your friends:

Print

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.

Gold Miners Are Crushing the Market in the Face of Higher Rates
December 24, 2018

Summary:

  • Anticipating trouble ahead, fund managers make a historic rotation out of equities into bonds.
  • Gold and gold mining stocks have been the one bright spot this quarter.
  • Tax reform turns one year old. Has it achieved what was expected?

Gold Miners Are Crushing the Market in the Face of Higher Rates

Disregarding strong opposition from the likes of DoubleLine Capital founder Jeffrey Gundlach, legendary hedge fund manager Stanley Druckenmiller, “Mad Money” host Jim Cramer, President Donald Trump and others, Federal Reserve Chairman Jerome Powell hiked rates last Wednesday for the fourth time in 2018.

Markets responded negatively, with the Dow Jones Industrial Average jumping around in a nearly 890-point range before closing at its lowest level in more than a year. By the end of the week, both the small-cap Russell 2000 Index and tech-heavy Nasdaq Composite Index had entered a bear market, while the S&P 500 Index was on track for not only its worst year since 2008, but also its worst month since 1931.

Among the sectors now in a bear market is financials, down around 20 percent since its peak in January. Regional banks, as measured by the KBW Regional Bank Index, have been banged up even worse, having fallen close to 30 percent since their all-time high in early June.

Canary in the Coal Mine? U.S. Financials Are Now in a Bear Market
click to enlarge

I bring up financials here because the sector is sometimes considered to be the “canary in the coal mine,” for the very good reason that financial institutions are highly exposed to the performance of the broader market.

What’s more, we learned last week that lenders are starting to pull back from riskier loans, a sign that they’re getting more cautious as recession fears loom. According to the New York Fed, the credit card rejection rate in October climbed to 21.2 percent, well above the year-ago rate of 15.7 percent. Banks also cut off credit from 7 percent of customers, the highest rate since 2013.

Fund Managers De-Risk in Favor of Bonds and Cash

Against this backdrop, fund managers have turned incredibly bearish on risk assets and bullish on defensive positions such as bonds, staples and cash. According to Zero Hedge’s analysis of a Bank of America Merrill Lynch report, this December represents “the biggest ever one-month rotation into bonds class as investors dumped equities around the globe while bond allocations rose 23 percentage points to net 35 percent underweight.” Fund managers’ average cash levels stood at 4.7 percent in November, above the 10-year average, according to Morningstar data.

Investors Just Poured a Record Amount of Money Into Bonds
click to enlarge

Equity outflows have been particularly pronounced. Lipper data shows that, in the week ended December 13, as much as $46 billion fled U.S. stock mutual funds and ETFs. That’s the most ever for a one-week period. It’s very possible that the selling is related to end-of-year tax-loss harvesting, but again, we’ve never seen outflows of this magnitude.

As such, I highly encourage investors to heed the recent advice from Goldman Sachs: Get defensive by positioning yourself in “high-quality” stocks. This probably isn’t the time to speculate.

Gold Has Been the One Bright Spot

I would also recommend gold and gold stocks. The yellow metal, as expected, is performing well at the moment, and commodity traders have taken a net bullish position for the first time since July. So far this quarter, gold has crushed the market, returning around 6 percent as of December 21, compared to negative 15 percent for the S&P 500 Index. Gold miners, though, as measured by the NYSE Arca Gold Miners Index, have been the top performer, climbing a phenomenal 12.3 percent.

Gold Miners Have Been the Standout Performer This Quarter
click to enlarge

On a recent episode of “Mad Money,” Jim Cramer aired his frustration with the Fed’s decision to move ahead with another rate hike, predicting that the central bank will “have to reverse course, maybe in the next four months.” When and if that happens, “you’ll regret selling because the market will rebound so fast.”

But in the meantime, Cramer says, investors should consider buying into the “bull market” in gold. He added that he likes Randgold Resources.

You can read more of my thoughts on gold and gold mining stocks by clicking here.

Is It Time for the Fed to Take a Breather?

Although there’s more to the selloff than higher interest rates, industry leaders have been quick to point fingers at the Fed’s long-term accommodative policy. Speaking to CNBC last week, Jeffrey Gundlach commented that the problem isn’t so much that the Fed is currently hiking rates. The problem, he says, “is that the Fed shouldn’t have kept them so low for so long.”

Stanley Druckenmiller made a similar argument, writing in a Wall Street Journal op-ed that, in a best-case scenario, “the Fed would have stopped [quantitative easing] in 2010” when the recession ended. Doing so, he says, would have helped mitigate a number of problems, including “asset-price inflation, a government-debt explosion, a boom in covenant-free corporate debt and unearned-wealth inequality.” Too late now.

Other analysts have highlighted the untimeliness of this month’s rate hike. According to Bloomberg’s Lu Wang, rate hikes are “exceedingly rare” when “stocks are behaving this badly.” Not since 1994, Lu says, has the Fed decided to tighten in such a volatile market. Nor has it ever tightened like this when the budget deficit was expanding, as it is right now. (I’ll have more to say on the deficit later.)

Then again, there’s a case to be made that, should another recession strike, the Fed needs the ammunition to stanch further losses. If it doesn’t hike now, it won’t have the option to lower rates later. That’s the argument made by Axios’ Felix Salmon, who believes “the only way to prevent another catastrophic asset bubble is to allow interest rates to revert to something much more normal.”

Federal Funds Rate Turns Positive for the First Time in 10 Years
click to enlarge

Salmon points out that, when adjusted for personal consumption expenditures (PCE)—the Fed’s preferred measure of inflation—the federal funds rate is now positive for the first time in over a decade. That’s “something to be welcomed,” he says.

Deficit Is “Unprecedented” in Such a Strong Economy

There are other worrisome economic signs, including the ballooning deficit. I was surprised to learn last week that, outside of a war or recession, the U.S. deficit has never been as high as it is now. That’s according to the Committee for a Responsible Federal Budget (CRFB), which reports that the budget deficit in 2018 is projected to total around $970 billion, up more than 45 percent from $666 billion last year.

“This borrowing,” says the CRFB, “is virtually unprecedented in current economic conditions.”

Normally, deficits expand during recessions and shrink during times of economic growth. But because of increased entitlement spending and other obligations, not to mention higher debt service on interest payments, the government’s outlays are far outpacing revenues.

The Tax Cuts and Jobs Act Turns One Year Old

That brings me to the issue of corporate taxes. One year ago past weekend, President Trump signed into law the Tax Cuts and Jobs Act (TCJA), which, among other things, cut the corporate income tax rate from 35 percent to 21 percent. It was initially estimated that as much as $4 trillion would be repatriated back to the U.S. by multinational corporations that have long held hordes of cash overseas in more tax-friendly jurisdictions. So, has this happened?

December 21, 2017 Signing of the Tax Cuts and Jobs Act (TCJA)

I’m pleased to see the tax law working. Companies are indeed bringing funds back, though admittedly at much lower rates than was anticipated. According to data released last week by the Commerce Department, only $92.7 billion in offshore cash was repatriated during the September quarter. That’s the lowest quarterly amount this year and 50 percent down from the second quarter. All combined, a little more than half a trillion dollars have returned to the U.S. It’s a good start, even if it falls short of expectations.

Another projection was that companies would plow their tax savings back into employees, new equipment and overall expansion. Here the outcome is more mixed. Wages jumped 3.1 percent in the third quarter, the fastest rate in over a decade, which I believe can be directly attributed to the tax law.

But the biggest consequence of the tax law by far has been corporations’ historic buybacks of their own stock. For the first time ever, $1 trillion was spent this year on stock repurchases. That beats the prior record of $781 billion set in 2015.

Stock Buybacks Hit a Record $1 Trillion in 2018 After Tax Reform
click to enlarge

These buybacks helped stocks head higher this year—until they didn’t—but they’ve been strongly criticized for a number of reasons. One criticism is that aggressive buyback programs are often launched when stock prices are elevated, rather than when they’re on sale.

With most of the S&P 500 now in a bear market, many stocks certainly look like a bargain. I would proceed with caution, however, and make sure that I’m following the 10 percent Golden Rule: 5 percent in physical gold and the other 5 percent in well-managed gold mutual fund and ETFs. Now would be a great time to rebalance.

On a final note, I want to wish all readers and shareholders a very Merry Christmas! May this time bring you comfort and happiness as we head into a new year.

The Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. The Russell 2000 index is an index measuring the performance of approximately 2,000small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States. The KBW Regional Banking index is a modified-capitalization-weighted index, created by Keefe, Bruyette & Woods, designed to effectively represent the performance of the broad and diverse U.S. regional banking industry. The S&P 500 Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The S&P 500 Financials Index comprises those companies included in the S&P 500 that are classified as members of the GICS financials sector. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver. The index benchmark value was 500.0 at the close of trading on December 20, 2002.

Personal consumption expenditures (PCE), or the PCE Index, measures price changes in consumer goods and services. Expenditures included in the index are actual U.S. household expenditures. Data that pertains to services, durables and non-durables are measured by the index.

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

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 09/30/2018.

Share “Gold Miners Are Crushing the Market in the Face of Higher Rates”

The Gold Bulls Just Regained the Upper Hand
December 18, 2018

The Gold Bulls Just Regained the Upper Hand

Commodity traders appear excited about gold again as stocks are on pace for their worst year since 2008, and their worst December since 1931. Bullish bets on the yellow metal outnumbered bearish ones for the week ended December 11, resulting in the first instance of net positive contracts since July, according to Commodity Futures Trading Commission (CFTC) data.

traders make first bullish bet on gold since july as stocks tumble
click to enlarge

As many of you know, December has historically been a strong month for stocks. But fears of a slowdown in global growth, rising interest rates and the U.S.-China trade war have prompted many investors to pare down their stocks in favor of gold, often perceived as a safe haven in times of economic and financial instability.

Now, as we head into 2019, gold “is poised to take the bull-market baton from the dollar and stocks,” writes Bloomberg  Commodity Strategist Mike McGlone. Although the U.S. dollar has been strengthening since September, which would ordinarily dent the price of gold, the yellow metal has shown “divergent strength on the back of increasing equity-market volatility,” McGlone adds.

Gold and Metal Miners Have Crushed the Market

So far this quarter, gold has crushed the market, returning more than 5 percent as of December 18, compared to negative 11.9 percent for the S&P 500 Index. Gold miners, though, as measured by the NYSE Arca Gold Miners Index, have been the top performer, climbing nearly 12 percent.

Gold Miners Have been the standout performer this quarter
click to enlarge

We could see even higher gold and gold equity prices next year and beyond, but the dollar will likely need to come down. For that to happen, the Federal Reserve will need to call time out on its quarterly rate hikes. Many industry leaders now support this idea, including Jeffrey Gundlach and Stanley Druckenmiller, not to mention President Donald Trump.

“I hope the people over at the Fed will read today’s Wall Street Journal Editorial before they make another mistake,” Trump warned in a tweet Tuesday morning. “Also, don’t let the market become any more illiquid than it already is. Stop with the 50 B’s. Feel the market, don’t just go by meaningless numbers. Good luck!”

The WSJ editorial Trump refers to makes the case that “economic and financial signals suggest [Fed Chairman Jerome Powell] should pause,” a line the president has been repeating for months now.

Looking ahead five years, the investment case for gold and gold miners gets even more attractive. London-based precious metals consultancy firm Metals Focus projects a gradual increase in gold consumption between now and 2023, supported by strong jewelry demand and physical investment.

gold consumption forecast through 2023
click to enlarge

“From late 2019 onwards,” Metals Focus analysts write, “we expect a bull market in gold to emerge, which in our view will remain in place for the next two to three years.”

Greenspan Urges Investors to “Run for Cover”

In an interview this week with CNN, former Federal Reserve Chairman (and gold fan) Alan Greenspan urged investors to “run for cover,” as he doesn’t see the market moving much higher than they are now.

“It would be very surprising to see it sort of stabilize here, and then take off,” Greenspan said.

I believe the best way to “run for cover” is with gold and short-term, tax-free municipal bonds. As for gold, I always recommend a 10 percent weighting, with 5 percent in bullion, coins and jewelry, the other 5 percent in high-quality gold stocks, mutual funds and ETFs.

 

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 Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver.  The index benchmark value was 500.0 at the close of trading on December 20, 2002.

Share “The Gold Bulls Just Regained the Upper Hand”

Christmas Comes Early for This Precious Metals Streaming Company
December 17, 2018

Gold mining investors and Canadian capital markets received an early Christmas gift last Friday. Wheaton Precious Metals, one of the largest precious metals streaming companies in the world, announced that it reached a settlement with the Canadian Revenue Agency (CRA), the equivalent of the IRS. Before now, Wheaton had been in an ongoing legal feud with the agency over international transactions between 2005 and 2010.

According to the agreement, income generated through Wheaton’s foreign subsidiaries will not be subject to Canadian taxes. The company, however, will need to mark-up the cost of service provided to foreign subsidiaries, from 20 percent to 30 percent.

“The settlement removes uncertainty with the use of our business model going forward and puts the tax issue behind us so that we can continue to focus on what we do best: building and managing our high-quality portfolio both organically and by accretive acquisitions,” commented Randy Smallwood, Wheaton president and CEO.

“We expect the stock to react positively to the news given the tax dispute was an overhang,” Credit Suisse analysts shared in a note to investors today. Indeed, Wheaton stock was trading up as much as 12.4 percent in New York following the news, hitting a four-month high of $19.63 a share.

wheaton precious metals stock jumped after tax settlement news
click to enlarge

I want to congratulate everyone at Wheaton, particularly Randy for his resilience and strong leadership. He’s always offered invaluable insights to our team and investors. I encourage interested registered investment advisors (RIAs) to check out the July 2018 webcast I did with Randy, where we discussed our seven top reasons to invest in gold. You can listen to the replay by clicking here.

congrats Wheaton Precious Metals Randy Smallwood CEO

Monetary and Fiscal Risks Boost Gold’s Investment Case

The investment case for gold and other precious metals got a boost last week in light of news that might concern some equity investors. The European Central Bank (ECB) announced that it would be drawing quantitative easing (QE) measures to a close by halting its 2.6 trillion-euro bond-purchasing program, begun four years ago as a means to provide liquidity to the eurozone economy after the financial crisis. Interest rates, however, will be kept at historically low levels for the time being.

The ECB, then, will become the next big central bank, after the Federal Reserve, to end QE and normalize monetary policy. Although it’s steadily been tapering its own purchases of bonds, the Bank of Japan (BOJ) is still committed to providing liquidity at this point. Assets in the Japanese bank now stand north of 553.6 trillion yen ($4.86 trillion)—which, amazingly, is more than 100 percent of the country’s entire gross domestic product (GDP). Holdings, in fact, are larger than the combined economies of India, Turkey, Argentina, Indonesia and South Africa.

Major Central Banks' Total Assets
click to enlarge

In the past, I’ve discussed the economic and financial risks when central banks begin to unwind their balance sheets. The Fed has reduced its assets six times separate occassions before now, and all but one of those times ended in recession, according to research firm MKM Partners.

“Business cycles don’t just end accidentally,” MKM Chief Economist Mike Darda said in 2017. “They are killed by the Fed.”

We can now add the ECB and, at some point, the BOJ to this list. The three top central banks control approximately $14 trillion in assets, a mind-boggling sum, and it’s unclear at this point what the ramifications might be once these assets are allowed to roll over.

The Widest November Budget Deficit on Record

In addition, the Treasury Department revealed last week that the U.S. posted its widest budget deficit in the nation’s history for the month of November, as spending was double the amount of revenue the government brought in. The budget shortfall, then, came in at a record $205 billion, almost 50 percent over the spending gap from a year ago.

This follows news that U.S. government debt is on pace to expand this year at its fastest pace since 2012. Total public debt has jumped by $1.36 trillion, or 6.6 percent, since the start of 2018, making it the biggest expansion in percentage terms since the last year of President Barack Obama’s first term, Bloomberg reports.

As of last Monday, the national debt stood at just under $22 trillion, and by as soon as 2022, it could top $25 trillion, according to estimates.

U.S. Debt Projected to Jump by $7.5 trillion from 2016 to 2023
click to enlarge

As I shared with you in November, the government could very well be in a “debt spiral” right now, in the words of Black Swan author Nassim Taleb. This means it must borrow to repay its creditors. And with rates on the rise, servicing all this debt will continue to get more and more expensive.

It’s for this reason, among others, that I recommend a 10 percent weighting in gold, with 5 percent in bullion and gold jewelry, the other 5 percent in high-quality gold stocks, mutual funds and ETFs.

Will There Be a Santa Claus Rally?

U.S. Debt Projected to Jump by $7.5 trillion from 2016 to 2023

On a final note, there are only a few more trading days left to 2018. Will we see a Santa Claus rally? Last week I had the opportunity to speak with CNBC Asia’s Akiko Fujita on this very topic. To watch the interview and hear my thoughts, 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.

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 9/30/2018: Wheaton Precious Metals Corp.

Share “Christmas Comes Early for This Precious Metals Streaming Company”

No One Ever Said Brexit Was Going to Be Easy
December 11, 2018

The Yield Curve Just Inverted for the First Time in Years. Time to Reconsider Risk?

If you followed some of my posts from two years ago, you might recall that I was in favor of Brexit. I still am. One of British voters’ main grievances was the heavy burden of European Union (EU) regulations, many of which are decided by unelected bureaucrats in Brussels. Altogether, these regulations cost U.K. businesses an estimated 33.3 billion pounds every year. Voters should have the right to decide whether to abide by these rules, which hamper business, or choose a different path.

At the same time, I was realistic about the huge, unprecedented challenges this divorce presented—to the United Kingdom, but also to the EU and its main trading partners. “Global growth is unstable, especially in the EU, and Brexit will only add to the instability,” I wrote. “This will likely continue to be the case in the short and intermediate terms as markets digest the implications of the U.K.’s historic exit.”

No one said it was going to be easy.

Today was supposed to be the day when U.K. Members of Parliament (MPs) voted on Prime Minister Theresa May’s Brexit deal with the EU, capping off two and a half years since Britons elected to leave the 28-member bloc.

Yesterday, however, May postponed the vote in the face of certain defeat, thanks largely to disagreement over how best to deal with the border between Northern Ireland (part of the U.K.) and the Republic of Ireland (part of the EU).

The British pound sterling promptly lost as much as 1.25 percent against the U.S. dollar, falling to its lowest level in more than a year and a half as foreign investors halted nearly all trading of the currency, according to the Financial Times.

British stocks, as measured by the FTSE 100 Index, extended losses for the fourth time out of the past five trading days. Telescoping their uncertainty of May’s deal, investors sent London-listed stocks plummeting 3.15 percent last Thursday in the worst session since the day after the Brexit referendum in June 2016.

British pound and stocks slipped after delay of Brexit vote
click to enlarge

The question on everyone’s mind is: What happens now? 

Between a Rock and a Hard Place

As I see it, there are three main options: 1) leave the EU without a deal (the “hard” Brexit); 2) halt the entire Brexit process, leaving open the possibility of another referendum; and 3) go back to the drawing board and renegotiate.

By any measure, a hard Brexit would be disastrous. Thomas Verbraken, executive director of risk management research at MSCI, estimates that U.K. stocks could fall as much as 25 percent, European stocks at least 10 percent, if either Parliament rejects the deal or a “disorderly Brexit” is triggered. In such a scenario, according to Morningstar’s Alex Morozov, the British auto industry would fare the worst since its entire supply chain is highly integrated with the EU, including parts manufacturing and vehicle production. U.K. and EU aerospace and defense companies such as Airbus, Rolls-Royce and Meggitt are also highly exposed to Brexit risks.

As for the second option, May has already nixed the idea of bringing a halt to Brexit, even though the European Court of Justice (ECJ) just ruled that the U.K. can “unilaterally withdraw its notification to leave the European Union without the permission of other EU countries,” according to Politico.

May’s job may be in peril because of her handling of Brexit—Jeremy Corbyn, leader of U.K.’s Labour Party, could push for a vote of no confidence at some point—but here I think she made the right decision. The people of the United Kingdom spoke. Even though Britons’ approval of EU leadership has improved since the 2016 referendum, disapproval is still above 50 percent.  

More than half of britons still disapprove of european union leadership
click to enlarge

That brings us to option number three. The problem here is that the nearly-600-page agreement already required a year’s worth of back-and-forth. European Commission President Jean-Claude Juncker made clear today that Brussels will not reopen negotiations. “The deal we have achieved is the best deal possible—it’s the only deal possible,” Juncker said. “So there is no room whatsoever for renegotiation.”

What there is room for, according to Juncker, is clarification and reinterpretation of the deal.

So Where Does This Leave Things?

I don’t believe anyone knows the answer to this question. As of now, the U.K. is scheduled to leave the 28-member bloc on March 29 of next year. I hope that before that time, MPs can be convinced that the package May has delivered is the best possible solution to an impossible situation.

I urge investors to be cautious. Brexit isn’t the only geopolitical risk to stocks right now. Here in the U.S., Democrats will take control of the House in about a month, and although talk of impeaching President Donald Trump is premature, it’s certain we’ll see innumerable new investigations into this administration.

With a new year about to begin, it might be a good time to rebalance your portfolio and make sure you have a 10 percent weighting in gold, with 5 percent in bullion and jewelry, the other 5 percent in high-quality gold mining stocks, mutual funds and ETFs. I also recommend short-term, tax-free municipal bonds, as they’ve performed well even in times of economic pullbacks and bear markets.

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 FTSE 100 Index is an index of the 100 companies listed on the London Stock Exchange with the highest market capitalization.

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 9/30/2018.

 

Share “No One Ever Said Brexit Was Going to Be Easy”

A New Wrinkle in the U.S.-China Trade Dispute
December 10, 2018

Frank in Washington at the Senate Press room

Last week I had the opportunity to attend the Young Presidents Organization (YPO) parliamentary intelligence forum in Washington, D.C. More than 200 members of parliaments from as many as 60 European countries joined us to hear from such dignitaries as Congressmen Robert Pittenger (R-NC) and Mike McCaul (R-TX), chairman of the Homeland Security Committee.

While in D.C., I was very honored to be invited into the epicenter of power and decision-making. That includes the Senate Press Office, pictured above, and the west front of the U.S. Capital facing the National Mall, where every president since Ronald Reagan in 1981 has been inaugurated.

It was there that George H.W. Bush took the oath of office, exactly 200 years after George Washington did. Newly arrived to Texas from Canada, I remember watching Bush’s inauguration on TV and being moved by his testament to freedom: “We know how to secure a more just and prosperous life for man on Earth,” he said, “through free markets, free speech, free elections and the exercise of free will unhampered by the state.”

The memory was made all the most poignant by the flags flying at half-staff, and the fact that I was standing in the same building where, just 24 hours earlier, the former president’s remains lied in state.

Remembering the 41st President

President George HW Bush 1924-2018

The life of George Bush, son of a U.S. senator and father of two governors and a president, stands as a case study in sacrifice and service. On the same day that he graduated from high school in 1942, he enlisted in the United States Navy. The country’s youngest Navy pilot at the time, Bush went on to receive the Distinguished Flying Cross after completing a bombing mission despite his plane being engulfed in flames from Japanese fire.

And from there it only gets more interesting.

Founder of a successful oil and gas company, congressman in the House of Representatives, ambassador to the United Nations, special envoy to the People’s Republic of China (before the U.S. had diplomatic relations with the Asian country), director of the Central Intelligence Agency (CIA), two-term vice president—Bush was and remains to this day perhaps the most qualified and well-equipped chief executive ever to set foot in the Oval Office.

As the 41st president, he oversaw the collapse of the Soviet Union and reunification of Germany, putting him at odds with U.K. Prime Minister Margaret Thatcher and French President Francois Mitterrand, who favored a divided Germany. His decision to push back Iraqi forces from Kuwait, arguably the greatest defining moment of his one-term presidency, was both a military and political success.  

American voters ultimately denied him a second term, however, once they felt his pledge to create “no new taxes” went unfulfilled. As part of a compromise with the Democratic-controlled Congress, Bush agreed to raise taxes to help reduce the national deficit. The episode is a reminder of a time when politicians’ duty to country trumped duty to party, even if it jeopardized reelection.

That deep sense of duty sustained him for the rest of his 94 years. Bush was involved in a number of charities and humanitarian efforts, most notably the Bush Clinton Coastal Recovery Fund. The fund— spearheaded in cooperation with his former political rival and, some might say, unlikely friend Bill Clinton—raised tens of millions of dollars for families impacted by 2005’s Hurricane Katrina.

On behalf of everyone at U.S. Global Investors, I extend my gratitude and sympathy to the Bush family. May George Herbert Walker rest in peace and remain firmly in our memory.

Stocks Hit on Renewed U.S.-China Trade Concerns

On a very different note, global stocks last week plunged on concerns that trade negotiations between the U.S. and China are not running as smoothly as initially thought. The S&P 500 Index is not only having one of its worst quarters in years, but it could also end up in the red for the year for the first time since 2008.

Adding to the uncertainty was news of the arrest in Canada of the chief financial officer (CFO) of Chinese tech giant Huawei. Although no charges have been filed yet, the company has long been investigated by U.S. authorities, and more recently it’s been suspected of violating economic sanctions against Iran. The CFO, Meng Wanzhou, faces extradition to the U.S.

A Huawei smartphone

The name might not be known to most Americans, but Huawei is the world’s second-largest manufacturer of smartphones following Samsung, and the largest supplier of telecommunications equipment. Meng is not only a top executive but also the daughter of the company’s founder, Ren Zhengfei, a former officer in the People’s Liberation Army who has close ties to the Communist Party of China.

Imagine a foreign power arresting the daughter of Steve Jobs, and you might get some idea of how big a deal this is.

President Donald Trump has levied much of his criticism on China for “unfair” trade practices and stealing intellectual property from the U.S. As I told you back in March, China’s J-31 stealth fighter jet is believed to be a knockoff of Lockheed Martin’s F-35. (A 2014 whitepaper on Huawei, in fact, states that the tech firm got its start in 1987 by “reverse-engineering foreign products and using that as the foundation to develop more complex technologies.”) But America’s beef with Huawei, and its Hong Kong-listed rival ZTE, go back further than the start of this administration and rest on suspicions their phones and other telecomm products might be used for espionage.

In 2012, after investigating Huawei and ZTE, the House Permanent Select Committee on Intelligence concluded that the two firms could be seeking to “undermine core U.S. national-security interest.” Committee members recommended that the U.S. block any mergers and acquisitions involving the companies and that all U.S. governmental agencies not use their equipment. Earlier this year, officials with the CIA, National Security Agency (NSA), Federal Bureau of Investigation (FBI) and Defense Intelligence Agency (DIA) testified before the Senate Intelligence Committee that Huawei and ZTE’s phones posed a security risk to American consumers.       

In any case, Meng’s arrest last week rattled investors, convincing many of them that U.S.-China trade talks are deteriorating rather than improving. We saw a knock-on effect among a number of Huawei’s suppliers, including lens-maker Sunny Optical (down almost 5.5 percent last Thursday), data networking firm Inphi (off 9.25 percent) and California-based NeoPhotonics (down more than 16 percent).

U.S. Trade Deficit Just Widened Even More

Speaking of trade, the U.S. deficit with the rest of the world tumbled to a 10-year low in October. According to Zero Hedge, the “trade deficit was $55.5 billion in October (worse than the $55.0 billion expected and well down from the $54.6 billion revised print for September)… underscoring continued fallout from the trade dispute with China.”

As for the U.S.-China trade deficit—the difference between exports and imports—that measure widened to a new all-time low of $43.1 billion in October, down from $40.2 billion a month earlier. The fall in net exports is expected to weigh heavily on fourth-quarter gross domestic product (GDP) growth.

US trade deficit with China fell to a record low in October
click to enlarge

The trade report comes at a time when additional tariffs on goods coming into the U.S. are increasingly to blame for stock volatility this year. A new analysis by Bank of America Merrill Lynch suggests that worries about tariffs have trimmed some 6 percent off domestic stocks in 2018 alone.

What’s more, tariffs could be costing American households more than most realize. Last month a study conducted by consulting firm ImpactECON and commissioned by Koch Industries—an opponent of Trump’s trade policies despite its billionaire chief executive brothers, Charles and David, being top Republican donors—estimated that tariffs would cost each U.S. household nearly $2,400 in 2019, or $915 per person. GDP growth could be reduced 1.78 percent next year, with losses close to $2.8 trillion between now and 2030, if current trade actions were allowed to stay in place, the study says. As many as 2.75 million American workers “are likely to become unemployed” in 2019 “if all trade actions are implemented concurrently.”

Gold Price Rises on Weaker-Than-Expected Jobs Report

Speaking of employment, the U.S. added 155,000 jobs in November, falling far short of expectations. The U.S. dollar pulled back slightly as a result, prompting gold to trade at a five-month high of more than $1,255 per ounce. Earlier in the week, the price of palladium briefly overtook gold’s on tightening supply and increased automobile demand. (The silvery white metal is used to manufacture catalytic converters). But if economic uncertainty continues to weigh on the dollar, we could see gold lift even higher and safely retain its spot as the most valuable precious metal.

Palladium briefly became most precious metal for first time in 16 years
click to enlarge

As I reminder, I recommend that investors maintain a 10 percent exposure to gold in their portfolio—half of that in gold coins, bars and jewelry; the other half in high-quality gold mining stocks, mutual funds and ETFs. Remember to rebalance at least once a year.

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

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 09/30/2018: Sunny Optical Technology Group Co.

Share “A New Wrinkle in the U.S.-China Trade Dispute”

Net Asset Value
as of 04/18/2019

Global Resources Fund PSPFX $4.63 -0.01 Gold and Precious Metals Fund USERX $6.79 -0.10 World Precious Minerals Fund UNWPX $2.60 -0.05 China Region Fund USCOX $9.22 0.02 Emerging Europe Fund EUROX $6.78 -0.02 All American Equity Fund GBTFX $24.85 -0.04 Holmes Macro Trends Fund MEGAX $17.59 0.02 Near-Term Tax Free Fund NEARX $2.21 0.01 U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change