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.

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

Nanpu Bridge  

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

Chinese Manufacturing Beats Expectations
click to enlarge

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

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

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

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

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

China Expected Surpass North America Automobile Sales
click to enlarge

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

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

China Attracting Assets

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

Chinas Golden Cross
click to enlarge

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

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

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

Who Will Lead the SEC in a Clinton Administration?

SEC Chair Elizabeth Warren

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

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

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

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

Although pure speculation, the scenario is worth pondering.

Another Infrastructure Boom Ahead?

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

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

China Imported Record Volumes Crude September
click to enlarge

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

China Leads World Electricity Generation
click to enlarge

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

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

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

Chinas multi trillion dollar belt and road initiative
click to enlarge

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

HSBC: Your Candidate’s Win Could Reward Gold Investors

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

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

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

 

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

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

The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

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.

Share “Manufacturing Activity in China Just Shifted into Overdrive”

The Season for Consolidation
November 2, 2016

The Season for Consolidation

Last year saw a record number of mergers and acquisitions (M&As), altogether valued at a monumental $4.78 trillion worldwide.

Since then, M&A activity has sharply declined overall, with deals limited mostly to larger, multinational corporations. According to M&A database group PitchBook—itself to be acquired by Morningstar—there were 31 deals with estimated values of at least $10 billion in the third quarter alone, more than the entirety of 2015.

Volume Completed Deals in Third Quarter Saw a Steep Plunge
click to enlarge

Despite tightening regulatory and antitrust hurdles, more of these monster-size deals are on their way, including stalwart American brands.

Reach Out and Touch Someone

No doubt you’ve heard by now that AT&T is about to get into the movie and television business. The Dallas-based telecommunications giant announced last week that it would be purchasing Time Warner, the world’s largest media empire, whose vast portfolio includes CNN, TNT and HBO, as well as reliable cash cows Harry Potter and DC Comics, home to Superman and Batman.

Barring any antitrust obstacles—which AT&T is no stranger to—the $85.4 billion deal is expected to close by the end of 2017.

What AT&T Gets for $85 Billion
click to enlarge

The deal makes a lot of sense. People’s viewing preferences are changing such that they’re just as likely now to get their programming on WiFi-enabled devices as they are via cable and satellite. Traditional TV still plays an overwhelmingly huge role in most of our lives, but with online streaming services such as Netflix and Amazon Prime adding subscribers every day, more and more of the content we consume is migrating to laptops, smartphones and other non-TV screens.

Device preferences for watching TV in the U.S.
click to enlarge

According to Pew Research, as many as one in four American adults now report being either a cord-cutter or so-called “cord-never”—someone who’s never subscribed to cable or satellite.

This trend is turning up even in National Football League (NFL) ratings. Once believed to be immune to changing viewing habits, professional football viewership is actually down about 10 percent from last season. Part of this has to do with presidential election coverage, but it’s also a function of games being streamed live on Twitter and other online channels, which takes market share away from TV networks.
This is all bad news for traditional cable and satellite providers, good news for AT&T, which is betting hard that people’s tastes will increasingly favor online content and distribution. The company is set to roll out a 100-channel, $35-a-month package called DirecTV Now, which will be delivered to you over the internet—no cable box or satellite dish needed.

The AT&T-Time Warner deal was followed by news that General Electric would be combining its oil and gas business with Houston-based Baker Hughes.

The resultant company—62 percent owned by GE, 37 percent by Baker Hughes—is expected to give GE a more cost-efficient way to take advantage of a recovery in the energy space. It will also put it in a better position to compete against industry giants Schlumberger and Halliburton.

Both Time Warner and Baker Hughes stock saw significant pops following the announcements.

Time Warner and Baker Hughes Rally Following Deal Announcements
click to enlarge

A Record Number of Failed U.S. Deals

These gargantuan deals follow a relatively tepid first half of the year. In the U.S. alone, 59 deals worth a combined $463 billion crashed and burned in the first half, the most ever for that period, according to Fox Business.

One of the biggest failed deals involved U.S. drug maker Pfizer, whose attempted $160 billion acquisition of Ireland-based Allergan was scuttled by the Obama administration’s anti-inversion regulators in April. Halliburton and Baker Hughes were likewise prevented from realizing their $35 billion deal, announced back in November 2014. Antitrust concerns also squashed the $6 billion merger between office supply rivals Staples and Office Depot.

Mergers & Acquisitions 2016
click to enlarge

Other factors that could have influenced M&A activity include geopolitical uncertainty—specifically, Brexit and the upcoming U.S. presidential election. A recent report from Chicago-based law firm Baker & McKenzie estimates that the global M&A market could see a deficit of up to $1.6 trillion in lost dealmaking opportunities “unless an orderly and swift Brexit process is followed.” We already know the divorce proceedings will take two years. How “orderly” they will prove to be is anyone’s guess at this point.

And then there’s the U.S. election. Historically, M&A activity has slowed during election years, especially when both parties nominate non-incumbent candidates, as is the case this year. Companies have tended to put deals on ice until after it’s known who will end up in office and what his or her policies will be.

But as we all know, this year has been anything but typical. That AT&T, GE and others are willing to move ahead with their plans so close to the election shows how strong the need for consolidation is right now.

 

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 09/30/2016.

Share “The Season for Consolidation”

Forget Everything You Know About Presidential Elections
October 31, 2016

2016 Elections

So here we are, eight days before America picks its poison, with most national polls showing a win for Hillary Clinton. If she pulls it off, she’ll become not only the first woman and first first lady to rise to the country’s highest office but also the first Democrat to succeed another two-term Democrat since Martin Van Buren succeeded Andrew Jackson in 1837.

She’ll also become the first to be under FBI investigation. On Friday we learned that the bureau is reopening her email case, mere days after WikiLeaks released even more damning files on the nominee. I find it interesting that back in July, eccentric internet entrepreneur Kim Dotcom predicted that WikiLeaks founder Julian Assange would turn out to be Hillary’s “worst nightmare”—a prediction that has largely come true.

Meanwhile, if Donald Trump manages an upset, he will become the oldest person ever to take the oath of office and the first to transition directly from the business world to the presidency without any past experience as a high-ranking government official (like William Howard Taft and Herbert Hoover) or military officer (like Zachary Taylor, Ulysses S. Grant and Dwight D. Eisenhower).

To Trump’s supporters and many others, of course, this is one of his main assets.

But back to the polls. In the end, they can often be misleading. I can point to several previous polls that said one thing but in the end turned out to be inaccurate, starting with those that suggested Brexit wouldn’t happen. As you know, they were way off.

In a now-classic example, California polls gave L.A. mayor Tom Bradley a wide lead in the days leading up to the 1982 gubernatorial election, and yet he was roundly defeated. Known today as the “Bradley effect,” the accepted theory is that voters told pollsters they supported Bradley, an African-American, so as not to appear racist. But in the privacy of the voting booth, those same voters pulled the lever for his opponent.

Many now wonder if a reverse Bradley effect could be taking shape in the current presidential election, with voters not wanting to admit their support for Trump—the least-liked person ever to run in U.S. history, followed closely by Hillary—but casting their ballot for him anyway.

Will this Election Buck the Trend?

I’ve written before about the presidential election cycle theory, developed several decades ago by Yale Hirsch, whose son Jeffrey serves as editor of the indispensable Stock Trader’s Almanac, now in its 50th edition. But because this year’s election breaks the mold in a number of important ways, it raises the question of how closely it will hew to past elections, at least where market reaction is concerned. 

One of the most significant factors to keep in mind this year is that no incumbent’s name appears on the ballot. This is rarer than you might initially think. Since 1947, when the number of terms was limited to two, only five people have been elected twice and completed two full terms.

This two-term presidential cycle can often have a measurable effect on markets, as I wrote about in-depth in “Managing Expectations.” A president who’s up for reelection has a huge incentive to enact policies that support the economy and labor market, which investors like.

Stocks Have Stumbled in Second-Term Election Years

By the end of his second term, however, markets are faced with the reality that someone new will be occupying the Oval Office soon, complete with a new cabinet, new agenda, new governing style and new policies. This uncertainty has historically given investors the jitters—even when they’re in favor of the incoming president. (Even the most ardent Trump supporter must admit he’s more volatile and higher-risk than Hillary, who would likely maintain the status quo. But like a high-risk stock, Trump could also potentially deliver much higher returns.)

In second-term election years, then, equities dipped an average 4 percent, compared to an average increase of 7 percent during all election years.

Will we see a repeat of this in 2016? There’s no way to say for sure. But as of October 27, stocks are up more than 6 percent year-to-date. Although slightly below the average, this is much higher than returns in the last two election cycles when a new president had to be selected: In 2008, the market plunged nearly 40 percent; in 2000, it ended down 9 percent.

 

Looking Past November 8

would a democratic president and republican congress be best for capital markets?

Again, it’s the policies that matter, not necessarily the party. However, there is evidence that stocks have performed slightly better when a Democrat is president, especially when Congress is split, as it was during most of Barack Obama’s administration.

Members of both parties might not like hearing this, but it’s what data mining has uncovered.

By-and-large, though, markets seem to be agnostic as to which party is in control of the White House. So many other factors exert just as much, if not more, influence over market performance, including monetary policy, inflation/deflation and whether the country is at war or peace.

Average Market Returns Democratic and Republican Presidents
click to enlarge

Whichever way you swing, it’s becoming more compelling to have some of your portfolio in tax-free municipal bonds, which in the past have provided a certain level of stability in times of uncertainty.

Could Venezuela Become the Next Syria?

Speaking of poor policymaking, hyperinflation and violence—Venezuela is sliding closer and closer to the brink of collapse, with some sobering consequences.

This was among the topics of conversation last week at the Mining & Investment Latin America Summit in Lima, Peru. While there, I had dinner with a couple of Canadian lawyers who represent a few Latin American oil producers, some of them based in Venezuela.

Things have gone from bad to worse, they informed me. Since 2013, when Nicolás Maduro took power after the death of Hugo Chávez, the socialist country has struggled with skyrocketing inflation, food and medicine shortages, a shrinking economy and rising violence and corruption. (Its capital city of Caracas recently overtook San Pedro Sula, Honduras, for having the world’s highest homicide rate.)

These have only intensified since oil prices fell by half more than two years ago, as oil accounts for 95 percent of Venezuela’s export earnings.

Venezuela's shrinking economy
click to enlarge

Now, President Maduro has effectively suspended a scheduled recall referendum, backed by the opposition-controlled National Assembly, despite as many as 80 percent of Venezuelans in favor of his removal from office. The suspension has led to widespread protests in the streets, with accusations of a coup being tossed around on both sides.

Venezuelan Presiden Nicolas Maduro has effetively suspended democratic elections, spurring mass protests.

The fear, the lawyers said, is that if Caracas falls, the vacuum it leaves behind would serve as a prime terrorist base of operations—a Latin American Syria, as it were, complete with the world’s largest proven oil reserves to finance it.

We’ve already seen the country cozy up to fellow OPEC member Iran, recognized by the State Department as the world’s leading state sponsor of global terrorism. According to the Gatestone Institute, a New York-based international policy think-tank, Iran is “partnering with Venezuela’s drug traders and creating a foothold” in the Latin American country.

It’s such a travesty that a nation as resource-rich as Venezuela could allow itself to rot from within. Its descent into chaos should serve as just the latest cautionary tale to other countries that are willing to risk stability and prosperity for even more socialism.

Join Me in San Francisco

In mid-November, I will be in beautiful San Francisco, presenting at the Silver & Gold Summit, hosted by Cambridge House. I’ll be joined by many other prestigious figures in the metals and mining industry, from top analysts to mining executives to respected newsletter writers. The conference, will be held November 14 and 15. I hope to see you there!

Join Frank Holmes at The Silver & Gold Summit

 

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.

Share “Forget Everything You Know About Presidential Elections”

Manufacturing Activity in Europe Surprises to the Upside
October 26, 2016

Manufacturing activity in the eurozone strengthened sharply in October, beating expectations, according to “flash,” or preliminary, purchasing manager’s index (PMI) data. The region is growing at its fastest pace so far this year, having climbed to its highest reading since April 2014.

Premilimary Eurozone Manufacturing PMI
click to enlarge

The news follows positive September readings in emerging European countries that we track closely, an encouraging sign that the continent’s economy might finally be picking up steam after an extended period of sluggish growth.

Hungary, volatile as always, was the largest gainer last month, leaping ahead 5.3 points to a nearly three-year high. Historically, the Central European country has bumped up when the transport sector, which represents a big share of production, gets a new large order.

Hungary Manufacturing PMI
click to enlarge

I’ve written numerous times on why we monitor PMI. Unlike gross domestic product (GDP), which is a backward-looking indicator, PMI gives us a foreshadowing of manufacturing activity three and six months out. This is important for investors because as manufacturing accelerates, so too does demand for commodities and natural resources, helping to support prices.

Poland Manufacturing PMI
click to enlarge

Czech Republic Manufacturing PMI
click to enlarge

Czech Republic Manufacturing PMI
click to enlarge

Not only do we like to see the monthly reading come in above 50—the threshold separating industry expansion from contraction—but it’s exceptionally positive when the reading appears above its three-month moving average.

This was the case for all countries except Greece and Turkey, both of which shrank slightly in September.

Greece Manufacturing PMI
click to enlarge

Turkey Manufacturing PMI
click to enlarge

All in all, I’m encouraged by the eurozone’s positive October PMI, even if it is preliminary. Whether you like it or not, ours is a global economy, and it’s impossible for any country, even one as strong as the U.S., to do all the heavy lifting alone. What we need now is synchronized global growth, and this is definitely a step in the right direction.

 

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

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.

Share “Manufacturing Activity in Europe Surprises to the Upside”

Is Weak Productivity to Blame for Sluggish Consumer Spending?
October 24, 2016

Hillary Clinton plans to raise your taxes. are you invested in tax-free munis?

Last week I presented at the MoneyShow in Dallas, where sentiment toward gold was a bit muted compared to other recent conferences I’ve attended. The yellow metal has certainly taken a breather following its phenomenal first half of the year, but the drivers are still firmly in place for another rally: low to negative government bond yields; economic and geopolitical uncertainty; and a lack of faith in global monetary policy.

I want to thank my friend Kim Githler for hosting the MoneyShow. Every year since she founded the event in 1981, she’s captivated audiences with her intelligence, sharp wit and honesty.

One of the highlights of the event was listening to American economist Art Laffer, whose “Laffer curve” shows that the government can actually bring in more revenue if tax rates are kept low. Art’s theory was used as the basis for President Ronald Reagan’s free-trade, low-tax policies. Later, Art actually supported Bill Clinton because he was willing to streamline taxes and regulations.

The same cannot, I’m afraid, be said of his wife Hillary, who plans to raise taxes at nearly every level.

Hillary Clinton vs. Donald Trump's Tax Plans
click to enlarge

Although bad for your pocketbook and savings, the possibility of higher taxes is expected to increase interest in tax-free municipal bonds, especially among top earners. For over a year now, muni bond funds have seen positive weekly inflows, with $147 million going in during the week ended October 17. I expect this trend to continue as we head closer to the election, and beyond.

The Republicans at the event, meanwhile, were almost unanimously disappointed in their candidate Donald Trump. Many of the grievances had to do with his inability to stay on message. If he would simply stick to key issues such as public safety, immigration and minimizing taxes and regulations, he might have a clear shot at the presidency. Instead, he too easily walks into personal traps set by the media and the Clinton campaign.

 

Where’s the Retail Spending?

 

Maybe you haven’t heard yet, but you got a raise in 2015 without even realizing it. At least, that’s what the Census Bureau revealed last month. U.S. household income rose 5.2 percent, the fastest on record.

U.S. Middle-Class Households Got a Huge Raise in 2015
click to enlarge

This falls in line with other recent news that appears to show that the U.S. economy is humming once again, nearly a decade after the 2007-2008 financial crisis.

With unemployment at 5 percent, initial jobless claims fell to a four-decade low this month, while the labor-force participation rate—the share of working-age Americans who are working or actively seeking work—has finally begun to perk up. Also improving is the voluntary quits rate, which indicates workers now have enough confidence in the labor market to walk away from their current jobs and quickly find new ones.

As encouraging as this all is, I have to look at the consumer discretionary sector and wonder why we’re not seeing healthier consumption. (This is important, as spending accounts for roughly two-thirds of gross domestic product.) If more Americans have better-paying jobs, as the data seem to indicate, and they’re feeling good about parting with their money, why aren’t retail sales surging?

Instead, sales growth, excluding food services, has steadily been weakening. E-commerce sales growth looks strong, but the entire industry can’t be propped up by Amazon alone.

U.S. Retail Sales Growth Has Stagnated
click to enlarge

Confirming this is Bank of America Merrill Lynch’s latest report on debit and credit card spending, which showed a “substantial slowdown” in retail sales, ex-autos, in September, according to Zero Hedge.

Despite the release of the iPhone 7 in September, BofAML didn’t see “a spike in electronic store sales akin to prior releases of Apple devices. It may be a reflection of the iPhone 7 or perhaps the trend in electronic store sales ex-iPhone is sluggish.”

The bank raises a couple of good points here. Apple’s latest smartphone was met with criticism stemming from its lack of a headphone jack, which might have dissuaded some consumers from upgrading.

And as many others have pointed out, it’s possible we’ve finally reached “iPhone fatigue.” Most everyone now owns a satisfactory smartphone—so long as it doesn’t explode—so consumers could simply be holding out for the next must-have gadget. Maybe they’ll find it in Facebook’s virtual reality Oculus Rift headset, but with its price tag still hovering above $800, it might take some time before consumers feel comfortable enough to buy it.

Automobiles and Housing Affected, Too

This goes far beyond smartphones. Big-ticket items such as automobiles and homes are also seeing sluggish, or even negative, growth. The S&P Global Ratings recently cut its automobile sales estimate for the year to 17.5 million from 17.8 million.

Facing inventory build-up, Ford Motor announced it would temporarily halt production at four of its factories both here in the U.S. and Mexico, Bloomberg reports. One of these factories, in Kansas City, builds the bestselling F-150 pickup.

Meanwhile, the momentum of new housing starts and permits has also slowed, with starts falling in September for the second straight month. Despite improvement since the housing bubble, we still aren’t close to where we were pre-recession, let alone the 1990s average.  

U.S. Housing Starts and Permits Haven't Reached 1990s Average
click to enlarge

The Slowest Recovery Since the Great Depression

Household income is up, unemployment is down—and yet sales are stagnant. It’s a paradox.

A paradox, that is, until we examine another economic indicator: labor productivity.

In simple terms, productivity means labor efficiency—producing more goods and services without working longer hours. And when productivity rises, it increases our standards of living.

Since the end of World War II, productivity rose pretty steadily. But growth has been near-anemic for close to a decade now and is currently running lower than it’s ever been.

Consider the following chart. Each bar represents a new business cycle following a recession. Crawling along at 1 percent annually, today’s productivity growth is weaker than the previous 10 cycles. In the September quarter, it actually fell 0.6 percent.

Annual Percent Change in U.S. Productivity During Each Business Cycle
click to enlarge

The big question is: Why is this happening?

The answer depends on who or which economist you ask.

Possible factors that have been tossed around include the aging of the workforce, the strong dollar (which reduces the competitiveness of U.S. companies) and a slowdown in capital spending by businesses since the recession.

One of the leading theories, presented by economist Robert J. Gordon in his recent book “The Rise and Fall of American Growth,” argues that 19th and 20th-century innovations—air conditioning, indoor plumbing, the microwave, the automobile—were much more impactful on workers’ productivity than modern inventions such as the internet, cloud computing and smartphone apps. (Indeed, we’d probably all agree that these things often waste, instead of enhance, our time and energy.)

$740 Billion in New Compliance Costs

We can add to the list the growing mountain of regulations, a topic I’ve discussed many times before. According to the American Action Forum, there’s been, on average, one costly regulation—or “hidden” tax—implemented every day of the Obama administration. This has added about $740 billion and 194 million paperwork hours to the burden. Although designed with good intentions, these regulations, and the compliance costs associated with them, often stand in the way of efficiency.

Also increasing are the number of government jobs, which aren’t exactly known to drive innovation. Although we’ve seen an uptick in new manufacturing positions during the last decade, jobs have over the long-run been on the decline.

More Americans Work for the Government than in Manufacturing
click to enlarge

To get productivity back on track, and therefore consumer spending, the U.S. should strongly consider regulation reform.

 

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 6/30/2016: Ford Motor Co. 

Share “Is Weak Productivity to Blame for Sluggish Consumer Spending?”

Net Asset Value
as of 05/19/2017

Global Resources Fund PSPFX $5.38 0.03 Gold and Precious Metals Fund USERX $7.10 -0.02 World Precious Minerals Fund UNWPX $6.27 No Change China Region Fund USCOX $8.75 0.06 Emerging Europe Fund EUROX $6.38 0.11 All American Equity Fund GBTFX $24.02 0.14 Holmes Macro Trends Fund MEGAX $19.07 0.13 Near-Term Tax Free Fund NEARX $2.23 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change