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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.

Russia Collusion Story: A Big “Nothing Burger” or a Case for Gold?
July 17, 2017

Russia Collusion Story: A Big “Nothing Burger” or a Case for Gold?

Gold got a boost Friday on weaker-than-expected inflation and retail sales figures, casting doubt on the Federal Reserve’s ability to continue normalizing interest rates this year.

Consumer prices rose slightly in June, at their slowest pace so far this year. The consumer price index (CPI), released on Friday, showed the cost of living in America rising only 1.6 percent compared to the same month last year, significantly down from the most recent high of 2.8 percent in February and below the Fed’s target of 2 percent. Much of the decline was due to energy prices, which fell 1.6 percent from May.

consumer prices continued to expand in june yet at a slower pace
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As I’ve explained elsewhere, CPI is an important economic indicator for gold investors to track. The yellow metal has historically responded positively when inflation rises—and especially when it pushes the yield on a government bond into negative territory. Why lock your money up in a 2-year or 5-year Treasury that’s guaranteed to give you a negative yield?

portfolio manager samuel paleaz poses near equipment in macraes the largest gold mine in new zealand

But right now the gold Fear Trade is being supported by what some are calling turmoil in the Trump administration. Last week the Russia collusion story took a new twist, with emails surfacing showing that Donald Trump Jr.; Jared Kushner, the president’s son-in-law and now-senior advisor; and former Trump campaign manager Paul Manafort all agreed to meet with a Russian lawyer last summer under the pretext that she had dirt on Hillary Clinton.

Whether or not this meeting is “collusion” is not for me to say, but the optics of it certainly look bad, and it threatens to undermine the president’s agenda even more. For the first time last week, an article of impeachment was formally introduced on the House floor that accuses Trump of obstructing justice. The article is unlikely to go very far in the Republican-controlled House, but it adds further uncertainty to Trump’s ability to achieve some of his goals, including tax reform and infrastructure spending. I’ll have more to say on this later

A Contrarian View of China

A new report from CLSA shows that Asian markets and Europe were the top performers during the first six months of the year. Korea took the top spot, surging more than 25 percent, followed closely by China.

asia and europe are the top market drivers so far this year
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Despite persistent negative “news” about China in the mainstream media, conditions in the world’s second-largest economy are improving. Consumption is up and household income remains strong. The number of high net worth individuals (HNWIs) in China—those with at least 10 million renminbi ($1.5 million) in investable income—rose to 1.6 million last year, about nine times the number only 10 years ago. It’s estimated we could see as many as 1.87 million Chinese HNWIs by the end of 2017.

According to CLSA, global trade is robust, with emerging markets, and particularly China, driving most of the acceleration this year. In the first three months of 2017, global trade grew 4 percent compared to the same period last year, its fastest pace since 2011.

“Indeed the early months of 2017 have seen China become easily the biggest single country driver of Asian trade growth,” writes Eric Fishwick, head of economic research at CLSA.

A lot of this growth can be attributed to Beijing’s monumental One Belt, One Road infrastructure project, which I’ve highlighted many times before. But according to Alexious Lee, CLSA’s head of China industrial research, a “more nationalist America” in the first six months of the year has likely given China more leverage to assume “a larger global, and especially regional, leadership role.”

This comports with what I said back in January, in a Frank Talk titled “China Sets the Stage to Replace the U.S. as Global Trade Leader.” With President Donald Trump having already withdrawn the U.S. from the Trans-Pacific Partnership (TPP) and promising to renegotiate or tear up other trade agreements—he recently tweeted that the U.S. has “made some of the worst Trade Deals in world history”—China has emerged, amazingly, as a champion of free trade, a position of power it will likely continue to capitalize on.

The country’s overseas construction orders have continued to expand, with agreements signed since 2013 valued at more than $600 billion.

business is booming for china
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Emerging Europe Expected to Remain Strong

Another recent report, this one from Capital Economics, shows that the investment case for emerging Europe remains strong in 2017. Russia is expected to strengthen over the next 12 months, while Poland, Hungary, the Czech Republic and Slovakia are likely to remain attractive.

“Russia’s economy has pulled out of recession and growth in the coming quarters will be stronger than most anticipate,” the research firm writes, adding that its central bank’s loosening of monetary policy should support the recovery even further.

To be sure, the region faces strong headwinds, including a rapidly aging population and the loss of an estimated 20 million skilled workers to foreign markets over the past 25 years, according to a July 11 presentation from the International Monetary Fund (IMF).

But I believe that as conditions in central emerging Europe countries continue to improve, many of those workers will be returning home. Life in the region is not the same as it was 10 or 20 years ago, when good jobs might have been scarce. Firms are now growing at a healthy rate and hiring more workers. As you can see below, unemployment rates in Poland, Hungary and the Czech Republic have been falling steadily since at least 2012 and are now lower than the broader European Union.    

emerging europe countries hard at work
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This strength is reflected in emerging Europe’s capital markets. For the 12-month period as of July 12, Hungary’s Budapest Stock Exchange is up 38 percent. Poland’s WIG20 is up more than 43 percent. Meanwhile, the STOXX Europe 600 Index—which includes some of the largest Western European companies—has made gains of only 17 percent over the same period.

 

Markets Still Believe in Trump

As we all know, the mainstream media’s criticism and ire aren’t reserved for China alone. Ninety-nine percent of the media right now is against President Trump, for a number of reasons—some of them deserved, some of them not.

Markets, however, seem not to care what the media or polls have to say. The Dow Jones Industrial Average continues to hit new all-time highs. Even though it’s stalled a few times, the “Trump rally” appears to be in full-speed-ahead mode, more than eight months after the election.

Back in November, I wrote about one of my favorite books, James Surowiecki’s The Wisdom of Crowds, which argues that large groups of people will nearly always be smarter and better at making predictions than an “elite” few. Surowiecki’s ideas were vindicated last year when investors accurately predicted Trump’s election, with markets turning negative between July 31 and October 31.

For the same reason, I think it’s important we pay close attention to what markets are forecasting today.

The White House is under siege on multiple fronts, which, as I said, has been positive for gold’s Fear Trade. But equity investors also seem to like the direction Trump is taking, whether it’s pushing for tax reform and deregulation or shaking up the “beltway party,” composed of deeply entrenched D.C. lobbyists and career bureaucrats. Just last week, the president made waves for firing a number of bureaucrats at the Department of Veteran Affairs (VA), long plagued by scandal and controversy. Since he took office in January, Trump has told more than 500 VA workers “You’re fired!”   

The Fundamentals of “Quantamental”

Of course, we look at so much more than government policy when making investment decisions. We take a blended approach of not only assessing fundamentals such as market share and returns on capital but also conducting quantitative analysis.

It’s this combination that some in the industry are calling “quantamental” investing. At first glance, “quantamental” might sound like nothing more than cute wordplay—not unlike “labsky,” “bullmation” and other clever names we give mixed-breed dogs—but it’s rapidly replacing traditional investment strategies at the institutional level.

Business Insider puts it in simple terms: “Quantamental managers combine the bottom-up stock-picking skills of fundamental investors with the use of computing power and big-data sets to test their hypotheses.”

See my Vancouver Investment Conference presentation, “What’s Driving Gold: The Invasion of the Quants,” to learn more about how we use quantitative analysis, machine learning and data mining.

Wall Street: The Birthplace of American Capitalism and Government

moments after closing bell june 29

The concept of quantamentals helps explain our entry into smart-factor ETFs. As most of you already know, members of my team and I visited the New York Stock Exchange (NYSE) three weeks ago to mark the launch of our latest ETF.

While there, Doug Yones, head of exchange-traded products at the NYSE, gave us a short history lesson about the exchange and surrounding area.

Most investors are aware that the NYSE, which is celebrating its 225th anniversary this year, is the epicenter of capitalism—not just in the U.S. but also globally.

moments after closing bell june 29

What many people might not realize is that on the site where the exchange now stands, Alexander Hamilton, the first U.S. treasury secretary, floated bonds to replace the debt the nascent country had incurred during the Revolutionary War.

Right next door to the NYSE is Federal Hall, where George Washington took his first oath of office in April 1789. The building today serves as a museum and memorial to the first U.S. president, whose statue now looks out over Wall Street and its passersby.

In this one single block of Wall Street, therefore, American capitalism and government were born. Here you can find the essential DNA of the American experiment, which, over the many years, has fostered our entrepreneurial spirit to form capital and to create new businesses and jobs. Growth, innovation and competition run through our veins, and that’s largely because of the events that unfolded centuries ago at the NYSE and Federal Hall.

For more insight and commentary like this, subscribe to my award-winning CEO blog, Frank Talk.

 

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 Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals.  The weights of components are based on consumer spending patterns.

The Budapest Stock Exchange Index is a capitalization-weighted index adjusted for free float. The index tracks the daily price-only performance of large, actively traded shares on the Budapest Stock Exchange. The WIG20 Index is a modified capitalization-weighted index of 20 Polish stocks which are listed on the main market. The STOXX Europe 600 Index is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. With a fixed number of 600 components, the STOXX Europe 600 Index represents large, mid and small capitalization companies across 18 countries of the European region: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.

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One Easy Way to Invest in the “Asian Century”
June 15, 2017

One Easy Way to Invest in the “Asian Century”

The 19th century belonged to the United Kingdom, the 20th century to the United States. Many market experts and analysts now speculate that the 21st century will be remembered as the “Asian Century,” dominated by rising superpowers such as Indonesia, India and China.

It’s those last two countries, India and China—home to nearly 40 percent of the world’s population—that I want to focus on. Both emerging markets offer attractive investment opportunities, especially for growth investors who seek to derisk from American equities.

Look at how dramatically the two have expanded in the last half century. As recently as 1970, neither country controlled a significant share of world gross domestic product (GDP). As of June of this year, however, China represents more than 15 percent of world GDP, India more than 3 percent. This has displaced Russia and Spain, itself the world’s wealthiest economy in the 16th century.

China and India Cracked the Top 10 List of World Economies
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And the expansion is expected to continue. Back in February, I shared with you research from PricewaterhouseCoopers (PwC), which predicts that by 2050, China and India will become the world’s number one and number two largest economies based on purchasing power parity (PPP). (PPP, if you’re unfamiliar, is a theory that states that exchange rates between two nations are equal when price levels of a fixed basket of goods and services are the same.)

top 10 economies expected to be dominated by 7 largest markets in 2050
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Also note Indonesia, which is expected to replace Japan as the fourth-largest economy by midcentury.

A Surge in Middle Class Spenders

What should excite investors the most is the growing size of the middle class in China and India. More middle class consumers means more spending on goods and services and more investing.

Remember, China’s middle class is already larger than that found here in the U.S., according to Credit Suisse. In October 2015, the investment bank reported that, for the first time, the size of China’s middle class had exceeded that of America’s middle class, 109 million to 92 million. As incomes rise, so too does demand for durables, luxury goods, vehicles, air travel, energy and more.

109 million for the first time, the size of china's middle class has overtaken the U.S. 109 million compared to 92 million

Living standards have risen dramatically in China. According to Dr. Ira Kalish, a specialist in global economic issues for Deloitte, hourly wages for manufacturing jobs in China are now higher than those found in Latin American countries except for Chile. They’re even nearing wages found in lower-income European countries such as Greece and Portugal.  

Looking ahead to 2030, China is expected to have a mind-boggling 1 billion people—more than three times the current U.S. population—enjoying a middle class lifestyle filled with middle class things, from cars to designer clothes to electronics and appliances.

Asia's Growing Middle Class
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India, meanwhile, will have an estimated 475 million people among its middle class ranks. The South Asian country is currently the fastest-growing G20 economy, with Morgan Stanley analysts estimating year-over-year growth to hit 7.9 percent in December. Driving this growth is a steady increase in wages and pensions, which will support consumption of goods and services.

Demographic trends in India make the country look especially favorable. As I’ve shared with you before, India has a young population, with an average age of 29. (The average age in China, by comparison, is around 37, while Japan’s is 48.) By 2020, more than 64 percent of Indians will be under the age of 35. For many years to come, therefore, India will have a much larger group of working-age individuals than any other country on earth.

In fact, India’s total population could now be larger than China’s, according to new estimates. Yi Fuxian, a researcher at the University of Wisconsin-Madison, believes China’s population is much smaller than official statistics, owing to years of slower population growth under the one-child policy. Yi insists that about 90 million fewer people reside in China than previously thought, meaning its 2017 population could be closer to 1.29 billion people. That would narrowly make India, home to 1.31 billion people, the world’s most populous country.

Investing in 40 Percent of Humanity

So how can investors take advantage of this rapid growth in spending power?

One of the best ways, I believe, is with our China Region Fund (USCOX), which invests in securities in the authorized China securities markets (Hong Kong, Shenzhen and Shanghai) as well as the surrounding countries, including India.

The fund, which seeks to achieve long-term capital appreciation, focuses on companies that we believe are poised to benefit the most from an increase in middle class consumption. That includes automotive firms (Geely Automotive, Great Wall Motor), pharmaceuticals (CSPC Pharmaceutical, Sinopharm), information technology (Tencent, NetEase), consumer discretionary (Anta Sports) and much more.

For the one-year period as of June 12, USCOX was up more than 35 percent, well ahead of its 50-day and 200-day moving averages.

U.S. Global Investors China Region Fund (USCOX)
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Click here to see the fund’s performance.

To learn more about investment opportunities in the “Asian Century,” visit the USCOX fund page!

 

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Foreside Fund Services, LLC, Distributor. U.S. Global Investors is the investment adviser.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less conc entrated portfolio.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the China Region Fund as a percentage of net assets as of 3/31/2017: Geely Automobile Holdings Ltd. 7.00%, Great Wall Motor Co. Ltd. 0.54%, CSPC Pharmaceutical Group Ltd. 3.48%, Sinopharm Group Co. Ltd. 1.84%, Tencent Holdings Ltd. 5.47%, NetEase Inc. 0.75%, ANTA Sports Products Ltd. 2.36%.

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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An Unexpected Change in Gold’s Seasonal Trading Pattern
May 15, 2017

an unexpected change in gold's seasonal trade pattern

Here at the outset, I want to share with you an interesting observation we made last week of gold’s seasonal trading pattern. As you can see in the chart below, based on data provided by Moore Research Center, the five-year pattern, represented by the orange line, is diverging from the longer-term trends. Note that the index on the left measures the greatest tendency for the asset to make a seasonal high (100) or low (0) at a given time.

Gold Historical Patterns
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The data show that lows are now reached late in the year, not in January (according to the 15-year period, represented by the dark blue line) or August (according to the 30-year pattern, represented by the light blue line). Historically, September has seen the highest returns on gold as Indians make huge purchases in preparation for Diwali and the fourth-quarter wedding season, but lately we’ve seen changes. When we calculate the average monthly returns of the past five years, from January 2012 to December 2016, we find that January is the strongest month, returning 5.3 percent, followed by August with 2.3 percent. September actually returns negative 1.3 percent.

There could be a number of reasons why this is, but it’s important to recognize that the five-year period captures the bear market that dragged gold from its high of $1,900 an ounce in August 2011 to a recent low of $1,050 in December 2015. The years 2013, 2014 and 2015 all saw negative returns, so it’s little wonder why the orange line trends down from February-March to December. 

Inflation Props Up Gold

Consumer and producer prices rose in April compared to the same time last year, favoring gold prices going forward. Consumer goods climbed 2.2 percent, down slightly from March’s 2.4 percent. Wholesale goods, meanwhile, flew up 5.3 percent, higher than economists’ expectations and the strongest year-over-year increase in nearly six years. 

U.S. Inflation's Gonna Get You
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On numerous occasions I’ve shown that higher inflation supports demand for gold, which has often been seen as a safe haven investment. The money you have sitting in the bank right now is guaranteed to lose value over time. The five-year Treasury bond is currently yielding a negative return. Diversiying a part of your portfolio into gold and gold stocks could help mitigate the effects of inflation on your household wealth. I’ve always recommended a 10 percent weighting with annual rebalances.   

Chindia Demand Was Strong in the First Quarter

Chindia Demand was strong in the first quarter

In India, no one questions this. Aside from property, gold is seen as the most reliable store of value, which is why it’s routinely given as a gift during weddings, graduations, births and other important life events.

Indians’ demand for gold jewelry jumped 16 percent year-over-year in the first quarter, according to the World Gold Council (WGC), as the country slowly recovers from the economic shock of Prime Minister Narendra Modi’s demonetization scheme in November.

Demand in China for gold bars and coins had an unusually strong start to the year, fueled by concerns over a weakening renminbi and uncertainty over the country’s real estate market. The first quarter has historically been a good time for Chinese demand, as that’s when the Lunar New Year falls. This year, though, demand was up an amazing 30 percent, with 105.9 metric tons (tonnes) purchased during the three-month period. According to the WGC, this was the fourth-strongest quarter on record.

Looking ahead, gold prices could be supported by steadily declining mine production. Over the next five to 10 years, output from currently-operational mines is expected to drop off steeply as a consequence of deep spending cuts for project development as well as a lack of significant new deposit discoveries.

Mine Production Likely to drop beyond 2018 as the project pipeline is squeezed
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Between 2012 and 2016, capital expenditure for companies in the NYSE Arca Gold BUGS Index contracted 65 percent, the WGC reports. This will inevitably squeeze the supply chain and help prices firm up.

Stock Investors Have No Fear

In the near term, gold faces a number of headwinds, including a strong U.S. dollar, rising nominal interest rates and a still-robust stock market. Despite recent geopolitical shockwaves such as President Donald Trump’s surprise firing of FBI director James Comey, investors still see stocks as a good place to be, with the CBOE Volatility Index, or VIX, trading at lows last seen in 1993.

investor fear at near-record lows: headwind for gold?
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Popularly known as the “fear gauge,” the VIX measures expected volatility in the S&P 500 Index over the next month. That it’s trading so low suggests that geopolitical uncertainty doesn’t always translate into investor uncertainty. Evidently Wall Street doesn’t share the same sense of impending doom as some voters and media figures appear to have right now concerning Comey’s termination and the ongoing investigation into possible collusion between the Trump campaign and the Russian government.

This matters because gold has historically benefited in times of crisis and uncertainty, whether real or perceived. But with the VIX signaling near-record-low fear in the marketplace, some investors might see this as weakening the case for gold.

Where We See the Gold Opportunities

In this environment, we seek high-quality producers that are profitable and show improvements in revenue and cash flow. This yields junior companies such as Klondex and Wesdome, both of which have demonstrated strong fundamentals, low SG&A (selling, general and administrative expenses),  cost-conscientious management and higher-grade ore.

The recent bubble in gold stocks unwound, which was harmful to some quality gold names that were affected by the issues involving the VanEck Vectors Junior Gold Miners ETF (GDXJ), which I wrote about last week. Since the GDXJ methodology update was announced, the ETF has recorded large redemptions, with assets plunging as much as 25 percent.

The GDXJ doesn’t have any smart beta attributes—instead, it relies on market cap. As portfolio manager Ralph Aldis put it, this means “we find a lot of high-quality companies being indiscriminately sold down.” We see this as an opportunity to nibble at some attractive small-cap growth names.

 

 

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 Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals.  The weights of components are based on consumer spending patterns. The Producer Price Index (PPI) measures prices received by producers at the first commercial sale.  The index measures goods at three stages of production:  finished, intermediate and crude.

The NYSE Arca Gold BUGS (Basket of Unhedged Gold Stocks) Index (HUI) is a modified equal dollar weighted index of companies involved in gold mining. The HUI Index was designed to provide significant exposure to near term movements in gold prices by including companies that do not hedge their gold production beyond 1.5 years.

Chicago Board Options Exchange (CBOE) Volatility Index (VIX) shows the market's expectation of 30-day volatility.

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

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.

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 3/31/2017: Klondex Mines Ltd., Wesdome Gold Mines Ltd., VanEck Vectors Junior Gold Miners ETF.

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Nearly 100 Days In, Is Trump Any Closer to Fiscal Reform?
April 24, 2017

I will be visiting the White House next week for the Energy Policy & Geopolitics Conference

This week I will be in Washington, D.C., attending Evercore ISI’s Energy Policy & Geopolitics Conference, where I will be visiting senior staff from the White House infrastructure team and House Energy and Commerce Committee. I will also be meeting with John Fagan, head of the Treasury Department’s Markets Room, and Robin Dunnigan, the Bureau of Energy Resource’s Deputy Assistant Secretary for Energy Diplomacy. Among the topics of discussion will include energy independence, legal and policy issues impacting the energy sector, tax reform and geopolitical risks in Syria, Russia and Iran.

I want to extend my gratitude for this opportunity to Evercore ISI chairman Ed Hyman, who was ranked as the top economist by Institutional Investor magazine for 35 straight years, from 1980 to 2014. I’ll have much to share with our investment team when I return.

Let’s Get Fiscal

Last FridayPresident Donald Trump tweeted his frustration with the “ridiculous standard of the first 100 days,” claiming that no matter what he accomplishes during this period, the “media will kill” it.

There’s some truth here. No U.S. president in modern history has been so vehemently and routinely lambasted by a hostile press corps as Trump has. Harsh jabs have even been thrown by business news sources such as the Wall Street Journal and Bloomberg, which are normally pretty centrist. 

But for those keeping score, Trump’s 100th day arrives this Sunday, April 29, and it would be disingenuous to describe his tenure so far as smooth sailing. He’s faced a number of significant setbacks and distractions, including federal judges’ smackdown of his two travel bans, a failure to repeal and replace Obamacare and an ongoing investigation into his administration’s possible collusion with the Russian government in the months leading up to the November election.

Although consumer confidence remains at scorching-hot levels, markets are beginning to express doubt in Trump’s ability to streamline corporate tax and regulation reform. From their all-time high in mid-March, blue chip stocks have given back more than 1 percent, while the U.S. dollar has contracted more than 3.4 percent since late December.

Are markets pricing in a longer-than expected delay in tax reform?
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I believe this response is way overdone. BCA geopolitical strategist Marko Papic said as much during his visit to our office last month. Marko insisted that tax reform is still on its way, despite Congress’ earlier failure to repeal Obamacare. Just last week, House Speaker Paul Ryan said lawmakers were putting the “finishing touches” on a new health care bill—one that reportedly might scrap protections for people with preexisting conditions—while Treasury Secretary Steven Mnuchin reassured Americans they can soon expect to see proposals for “the most significant change to the tax code since Reagan.”

Trump himself says a “massive” tax reform package could be unveiled as early this Wednesday.

Treasury Secretary Steven Mnuchin: This will be the most significant change to the tax code since Reagan.

Such change can’t come soon enough. Since 1993, the U.S. has had a top statutory corporate tax rate of 35 percent, the highest of any other economy in the Organization for Economic Cooperation and Development (OECD). Trump expressly prefers to lower the rate to 15 percent, but I wouldn’t be surprised if it ends up between 20 and 25 percent. Regardless, tax relief would be a major win for small and mid-cap firms especially and encourage large multinational companies to repatriate foreign cash. According to one recent estimate, the top 50 largest American corporations stashed as much as $1.6 trillion overseas in 2015. It’s time we give them an incentive to bring some of that cash back home.

It’s worth pointing out that Trump is not yet lagging his predecessors in terms of delivering fiscal reform. Going back to the Kennedy administration, the average number of months into a new presidential term for fiscal legislation to be enacted is six months, according to LPL Research. It took nearly a year for the Tax Reform Act of 1969 to reach President Nixon’s desk. Last week marked Trump’s third month in office, so I see no cause for alarm just yet.

When Will Trump Sign Fiscal Legislation?
President Action Date Passed Months into New Term
Kennedy Spending Increases June 1961 5
Nixon Tax Cut December 1969 11
Ford Tax Cut March 1975 7
Reagan Tax Cut August 1981 7
Clinton Tax Increase August 1993 7
George W. Bush Tax Cut June 2001 5
Obama Tax Cut and Spending February 2009 1
Average: 6 Months
Source: LPL Research, U.S. Global Investors

As for the American Recovery and Reinvestment Act of 2009, signed by President Obama not 30 days into his first term, it had already been in the works before he took office.

There are other obvious reasons for lowering the corporate tax rate. Just take a look at Singapore and Hong Kong, both of which enjoy a top tax rate of between 16 and 17 percent. Consequently, they stand as glittering marvels of the modern world.

In the World Bank’s 14th annual “Doing Business 2017” report, Singapore ranked second in the world in ease of doing business, Hong Kong fourth. The U.S., meanwhile, came in at number eight. Tax reform could have the potential of moving the country up the scale.

Banks Awaiting Deregulation

Besides tax reform, hearings are expected to take place this week on how best to loosen Wall Street regulations. At the top of the docket is the 2010 Dodd-Frank Act, for which Rep. Jeb Hensarling of Texas has drafted a 600-page replacement called the Financial Choice Act 2.0. If passed, the legislation would relax some of Dodd-Frank’s more restrictive rules and limit the powers of the Consumer Financial Protection Bureau (CFPB) and Securities and Exchange Commission (SEC). It would also roll back the so-called Volcker Rule, named for former Federal Reserve Chair Paul Volcker, which effectively bans banks from making speculative investments that don’t directly benefit their customers.

In Hensarling’s words, the Financial Choice Act “holds Wall Street and Washington accountable, ends taxpayer-funded bank bailouts and unleashes America’s economic potential.”

Also facing a questionable future is the Labor Department’s Fiduciary Rule, which regulates how financial advisors service their clients, specifically by eliminating conflicts of interest. Originally scheduled to go into effect April 10, the Trump administration has delayed it until June 9, pending review.

As I wrote back in January, the Fiduciary Rule, though well-intentioned, would inevitably limit the number of investment products available to retail investors. In an effort to remain compliant with the rule, well-meaning financial professionals would recommend only the least expensive products, regardless of whether they’re a good fit. As a result, many mutual funds—which might be better performing but have higher expenses than other investment vehicles—would fall off of brokerage firms’ platforms.

In all fairness, there’s definitely demand for improved investor service among financial professionals. In a recent survey conducted by advisory firm Financial Engines, 93 percent of respondents said they felt financial advisors should legally be required to put investors’ interests first. 

Nine out of 10 Investors Favor the Fiduciary Rule
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However, the same survey found that nearly 70 percent of respondents had not heard of the DOL’s Fiduciary Rule. This tells me they might not have considered all the ramifications, including the good and the bad, of holding advisors to such strict standards.

A Modest Proposal

To be clear, I’m not in favor of scrapping every banking regulation that’s been introduced post-financial crisis. I am in favor of reviewing them, as Trump has ordered, and streamlining them to make them work for the financial sector and consumers rather than against them. This week Federal Reserve Governor Jerome Powell made a similar statement, cautioning policymakers against rolling back “core reforms” that in many ways have strengthened our financial system.

In addition, the International Monetary Fund (IMF), in its Global Financial Stability Report, warned that a “wholesale dilution or backtracking” of existing regulations in the U.S., coupled with deep tax cuts, could lead to dangerously high financial risk-taking such as we saw pre-2008.

“Many nonfinancial firms do have the balance sheet capacity to expand investment, and reductions in corporate tax burdens could have a positive impact on their cash flow,” the IMF writes. “But reforms could also spur increased financial risk-taking and, in some scenarios, could raise leverage from already-elevated levels.”

Indeed, as you can see below, median corporate leverage among the largest U.S. companies is nearing a record high as measured by debt-to EBITDA (earnings before interest, taxes, depreciation and amortization).

Median corporate leverage among big U.S. firms is close to an historic high
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Aux yeux de tous

The world was watching France this past weekend as voters headed to the polls in the first round of the country’s presidential election. It was currently a four-way race, with political novice  and social liberal Emmanuel Macron polling slightly ahead of the far-right candidate Marine Le Pen. Radical socialist candidate Jean-Luc Mélenchon had gained impressive ground, closing in on center-right François Fillon, the former prime minister of France.

Likely influencing voters’ decisions was last week’s attack on Paris’ iconic Champs-Élysées boulevard—just a few blocks from the presidential palace—which left one police officer dead. ISIS has already claimed responsibility. The incident is eerily reminiscent of a 2012 French thriller film titled “Aux yeux de tous,” about a terrorist attack in Paris that occurs mere days before a presidential election.

In the end, voters gave centrist Macron a slight edge over Le Pen, prompting global stocks to soar. Nevertheless, the outcome is a sharp rebuke of France’s more traditional parties. Macron and Le Pen will face off in the second round of voting on May 7.

 

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

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

The Doing Business Report (DB) is a study elaborated by the World Bank Group since 2003 every year that is aimed to measure the costs to firms of business regulations in 185 countries.

The Global Financial Stability Report is a semiannual report by the International Monetary Fund (IMF) that assesses the stability of global financial markets and emerging market financing.

The net debt to earnings before interest, depreciation, and amortization (EBITDA) ratio is a measurement of leverage, calculated as a company's interest-bearing liabilities minus cash or cash equivalents, divided by its EBITDA.

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China’s New Special Economic Zone Evokes Memories of Shenzhen
April 19, 2017

Shenzhen then and now.

Forty years ago, Shenzhen, China, was a sleepy fishing village of 30,000. But in 1980, then-Communist Party leader Deng Xiaoping designated the southern town as one of four special economic zones (SEZs), thereby giving it special tax benefits and preferential treatment to foreign investment. In the years that followed, Shenzhen expanded at an alarming pace. Its GDP per capita grew a jaw-dropping 24,569 percent between 1978 and 2014, and by 2016 its population stood at nearly 12 million.

Today Shenzhen is universally held up as one of capitalism’s great success stories. Because of Deng’s willingness to liberate its economy and open Shenzhen up to foreign investment, the once-poor, now-thriving megacity is known as a world-class tech hub, home to the Shenzhen Stock Exchange and one of the busiest financial centers in the world.

 

Now it looks as if China aims to catch lightning in a bottle once again by designating a brand new region as a SEZ. On April 1, President Xi Jinping announced plans to transform a little-known farmland called Xiongan into a glittering technology and innovation hub, complete with new businesses, universities and state-of-the-art transportation.  

China creates new economic zone

The Xiongan New Area, which will eventually cover 2,000 square kilometers—more than twice the size of New York City—is intended to relieve congestion in the capital of Beijing and nearby Tianjin. Among other potential consequences include spreading the country’s economy northwest, away from the bustling coastal cities, and boosting gross domestic product (GDP) growth, which has been trending down for the past several quarters. In the first quarter of 2017, China beat market expectations by expanding 6.9 percent year-over-year—a far cry from the double digit growth in years past, but impressive nonetheless. 

China First-Quarter GDP Grows at Fastest Pace Since 2015
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Potential Investment Opportunities Expected

Like Shenzhen before it, Xiongan is expected to offer phenomenal investment opportunities. Remember, we’re talking about a brand new megacity literally built from the ground up. According to UBS estimates, the project will require as much as $580 billion over the next 20 years. As you might imagine, massive amounts of raw materials and resources will be needed, including steel, glass, cement and more. Steel demand alone should increase imports of the metal between 12 and 14 million metric tons per year if mass construction begins in the next 10 years, according to Citi Research analysts.

China First-Quarter GDP Grows at Fastest Pace Since 2015Shares of several Chinese construction, infrastructure, utilities and transportation companies immediately spiked following the announcement. China Railway Group has gained close to 5 percent since the announcement. China Shipbuilding Industry Corp., which recently said it will move its headquarters to Xiongan, has risen nearly 3.5 percent. Huge moves have also been made by Tianjin Port Development Holdings and China National Building Material Co. Perhaps the biggest gainer was building materials supplier BBMG, which soared more than 34 percent April 3, then an additional 10.5 percent the following day.

Cement prices in China are already having one of their best starts in years and are positioned to exceed 2013 levels, which would benefit materials companies such as China National Building Material Co. and BBMG.

Chinese cement prices poised to be highest in years
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Chinese Real Estate on Fire

Even before the Xiongan announcement, Chinese real estate and home valuations were soaring, with home prices in 70 major cities rising 11.3 percent year-over-year in March. Nine out of the 10 best performers this year in the Bloomberg World Real Estate Index are Chinese firms. Since the start of the month, land developer China Resources Land is up 3.6 percent. Developers Evergrande, Sunac and Country Garden—all of which have exposure to Xiongan New Area and the surrounding regions—are up close to 80 percent so far this year.


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Real estate speculators have reportedly descended on the new economic zone, gobbling up property at such a dizzying rate that the local government has had to step in and temporarily restrict transactions. It’s possible a real estate bubble could be forming, but with memories of Shenzhen’s grandeur swimming in investors’ minds, expectations are understandably sky high.

 

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

The Bloomberg World Real Estate Index is a capitalization-weighted index of the leading real estate stocks in the world.

The MSCI China Index captures large and mid-cap representation across China H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). With 150 constituents, the index covers about 85% of this China equity universe.

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 3/31/2017: China Railway Group Ltd., China Resources Land Ltd.

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Net Asset Value
as of 07/21/2017

Global Resources Fund PSPFX $5.60 -0.01 Gold and Precious Metals Fund USERX $7.24 0.05 World Precious Minerals Fund UNWPX $6.42 0.04 China Region Fund USCOX $10.07 -0.14 Emerging Europe Fund EUROX $6.64 -0.05 All American Equity Fund GBTFX $24.60 -0.06 Holmes Macro Trends Fund MEGAX $20.11 -0.03 Near-Term Tax Free Fund NEARX $2.23 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change