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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.

Take a Peek at What the Top 1 Percent Have in Savings
October 17, 2018

take a peek at what the top 1 percent in savings

You’ve likely seen the reports: A whopping 44 percent of Americans wouldn’t be able to afford a $400 emergency expense without borrowing it or selling something. That’s according to the Federal Reserve’s findings in 2017. And earlier this year, financial services firm Bankrate reported that only 39 percent of Americans would be able to pay off an unexpected expense of $1,000 from their savings alone.

These figures have long-term implications. When someone doesn’t have enough in their savings account to cover an unexpected $400 to $1,000 emergency, it raises questions about how prepared they are for retirement.

So how does your savings account stack up to the average American’s? How about the top 1 percent’s? And just as a reminder, the entry point to the highest of earnings brackets is “only” $480,930 a year, according to 2015 income tax data.

How Does Your Savings Account Stack Up?

Personal finance firm MagnifyMoney recently looked at how much Americans have in savings, based on income level. As of June 2018, the average U.S. household has $175,510 in savings, including bank and retirement accounts. Compare that to the average household in the top 1 percent, which has close to $2.5 million in savings.

These are averages, remember. If we look at medians, or the middle values of savings accounts, these numbers change dramatically. According to MagnifyMoney, the median American household has only $11,700 in the bank. This means that half of the approximately 126 million U.S. households have more than this, while the other half has less. The median top 1 percent savings account, by comparison, holds just under $1.2 million.

It’s clear that too few working-age Americans are preparing for retirement adequately, and many who are retired worry that they won’t be able to maintain the lifestyle they desire. According to the most recent Employee Benefit Research Institute (EBRI) survey on retirement confidence, only 32 percent of retirees—nearly a third—said they felt “very confident” in their ability to live comfortably during their years outside the workforce.

Not Your Father’s CDs

Besides not having enough in savings, many Americans aren’t doing enough to grow their wealth. Back when interest rates were close to 20 percent, thanks to former Federal Reserve Chairman Paul Volcker, yields on certificates of deposit (CDs) were attractive enough that many households favored them over riskier assets such as stocks.

Today, however, CDs—though protected by the Federal Deposit Insurance Corporation (FDIC)—just don’t yield enough to justify locking your money up for any period of time.

certificates of deposit rates have been slow to recover
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Now let’s take a look at the stock market. The S&P 500 Index is up almost 200 percent from 10 years ago. The compound annual growth rate (CAGR), then, is 11.6 percent. With dividends reinvested, the CAGR becomes 13.9 percent.

There’s a reason why Albert Einstein allegedly called compound interest the greatest invention in human history.

Too Few People Are Participating

The problem is that too few Americans have participated in this bull market. Of the bottom half of U.S. earners, only about a third own stocks, according to Fed estimates. Perhaps not surprisingly, the more a household earns, the more likely it is to invest in the stock market.

percent of US households owning $10,000 or more in stock by wealth class
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Take a look at the chart above, based on data produced by American economist Edward Wolff. Of U.S. households that rank in the top 1 percent, nearly 94 percent own $10,000 or more in equities. From there, the ownership rate drops off. Less than 5 percent of the bottom 20 percent of earners have $10,000 or more invested in the stock market, either directly or indirectly. Only 35 percent of all American households do.

If you ask someone why they’re not invested, chances are they’ll say that it’s too risky. It’s easy to see why they might feel this way, especially after the huge selloff last week.

Stocks Have Been Up for the 10-Year Period

But when you have a long-term view—10 years or more, for instance—investing in the stock market looks very attractive. As my friend Marc Lichtenfeld put it during an interview back in August, stocks have historically been up for the 10-year period.

In fact, the only two times when stocks weren’t up for the 10-year period, according to Marc, were “the middle of the Great Depression and in 2008-2009 during the Great Recession. You would literally need to cash out in the middle of historic downturn not to make money over 10 years, and that’s if you sold right at the bottom. If you had waited another year or two, you might have come out at least breaking even, if not better.”

Cost is another reason some people aren’t invested—but it doesn’t have to be a barrier. With the ABC Investment Plan, investors can invest a fixed amount in a specific investment at regular intervals. The minimum investment with the ABC Investment Plan is just $1,000 initially and then $100 per month.

Learn more about the ABC Investment Plan by clicking here.

 

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

The CD interest rate is typically fixed and payable on a set maturity date. The CD rate and principal are typically insured up to $250K.

The Retirement Confidence Survey (RCS) is the longest-running survey of its kind, measuring worker and retiree confidence about retirement, and is conducted by the Employee Benefit Research Institute (EBRI) and independent research firm Greenwald & Associates.

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

The ABC Investment Plan doesn’t assure a profit or protect against loss in a declining market. You should evaluate your ability to continue in such a program in view of the possibility that you may have to redeem fund shares in periods of declining share prices as well as in periods of rising prices.

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October Doesn't Disappoint: Volatility Is Back After a Tranquil Third Quarter
October 15, 2018

october doesn't disappoint volatility is back after a tranquil third quarter

According to the 2018 edition of the Stock Trader’s Almanac, October has been a “great” time to buy. Once ranked last in terms of stock performance, the 10th month has delivered relatively average returns since 1950. What makes it so attractive is that it’s followed by November and December, historically among the very best months for stocks. We’re also entering the three most bullish quarters of the four-year presidential cycle, based on 120 years of stock market data.

average monthly s and p 500 index returns
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At the same time, October is sometimes known as the “jinx month” because an inordinate number of huge selloffs have occurred in the month, including those in 1929 and 1987. The worst month of the global financial meltdown was October 2008, when stocks gave up close to 17 percent.

There have been only six trading days in S&P 500 Index history in which stocks sold off by eight or more standard deviations, according to a report last week by Goldman Sachs. Last Wednesday was one of those six days, the fifth largest in history, following trading days in September 1955, October 1989, October 1987 and February 2007. The selloff in 1955, interestingly enough, was prompted by news that President Dwight Eisenhower had suffered a heart attack.

If you’ve read my whitepaper “Managing Expectations,” you should know that eight standard deviations (or more) represents a massive, exceedingly rare variance from the mean. Days like last Wednesday remind us of the importance of diversification into assets that have little to no correlation with stocks—assets such as municipal bonds and gold.

Gold Helped Investors Stanch the Losses

I was impressed with how well gold did last week. The yellow metal behaved exactly as you would expect it to, edging up slightly on safe haven demand Wednesday as stocks—large and small, domestic and foreign—tumbled.

gold price stood up against the rout
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On Thursday, the spread between gold and equities was even more pronounced, with gold closing almost 3 percent higher and the S&P 500 ending down more than 2 percent, below its 200-day moving average.

Wednesday’s laggards included big-name tech firms such as Apple, Amazon and Netflix. Combined, these three companies lost nearly $120 billion in market value on that day alone.

technology stocks had their worst day since august 2011
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As I shared with you last month, e-commerce is the second largest equity bubble of the last four decades following housing. E-commerce is also vastly overpresented in indexes, meaning extraordinary amounts of money have flowed into a very small number of stocks by way of passive index funds that track them.

Apple alone is featured in almost 210 indexes. Consequentially, when the iPhone-maker’s stock plummets 4.5 percent or more, as it did last Wednesday, a huge percentage of investors are affected.

Again, this is one of the reasons why I advocate the Golden Rule—a 10 percent weighting in the yellow metal, with 5 percent in bullion and gold jewelry, the other 5 percent in high-quality gold stocks, mutual funds and ETFs.

The Return of Volatility

Last week the CBOE Volatiliy Index (VIX), sometimes called the “fear gauge,” had its biggest one-day surge since February. But after such a tranquil third quarter, a substantial move in either direction might have been anticipated. LPL Financial Research reports that this year was the first time since 1963 that the normally volatile third quarter didn’t  have a single one-day jump of more than 1 percent, up or down.

“Volatility is back and it may require more active strategies on the part of investors to pursue their long-term goals,” LPL Financial’s chief investment strategist, John Lynch, said.

Higher Rates Reflective of a Strong Economy

In response to the selloff, President Donald Trump put the blame squarely at the feet of the Federal Reserve, saying it’s “ridiculous what they’re doing” and calling monetary policy “too tight.”

The Fed is indeed tightening, and I’ve pointed out before that rate hike cycles in the past have preceded market downturns. But calling policy “too tight” at the moment might be a stretch. After being hiked yet again last month, the federal funds rate stands at 2.25 percent. That’s up considerably from near-zero—which is where it remained during much of Barack Obama’s two terms as president—but it’s still historically low, not yet having reached the long-term average of 4.82 percent.

Fed funds rate still at an historically low level
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It must also be said that higher rates are reflective of a strong economy—something Trump has fought hard for. In the second quarter, U.S. gross domestic product (GDP) grew 4.2 percent, its fastest pace since 2014, and the Atlanta Fed is now forecasting the same for the third quarter. Unemployment is currently at a multi-decade low, wage growth hit a nine-year high of 2.9 percent in August and median household income in 2017 climbed to $61,372, the most on record. U.S. consumer confidence, as measured by the Conference Board, reached an 18-year high in September.

The private sector is also seeing healthy expansion. S&P 500 companies are expected to report earnings growth above 20 percent for the third straight quarter, according to FactSet. Stocks rebounded Friday morning after a number of companies reported earnings that surprised to the upside. Delta Air Lines, for example, beat expectations, with net income in the third quarter coming in at $1.31 billion, or $1.91 a share, up from $1.16 billion, or $1.61 a share, in the same three months last year.

Although stocks appear to be stabilizing somewhat, I think the two-day selloff last week should be enough to convince investors to make sure they have a 10 percent weighting in gold and gold stocks, with allocations to municipal bonds and ultrashort government bonds.

Find out why so many investors are flocking to U.S. Treasuries. Watch the video by clicking here!

 

The S&P 500 is a stock market index that tracks the stocks of 500 large-cap U.S. companies. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. The Bloomberg Commodity Index (BCOM) is a highly liquid and diversified benchmark for commodity investments. The MSCI Emerging Markets Index captures large and mid-cap representation across 24 Emerging Markets (EM) countries. The U.S. Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Dow Jones U.S. Technology Index measures the performance of the technology sector of the U.S. equity market. The CBOE Volatility Index, known by its ticker symbol lVIX, is a popular measure of the stock market's expectation of volatility implied by S&P 500 index options, calculated and published by the Chicago Board Options Exchange (CBOE). The Consumer Confidence Index (CCI) Survey is an index by The Conference Board that measures how optimistic or pessimistic consumers are with respect to the economy in the near future.

Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.

Diversification does not protect an investor from market risks and does not assure a profit.

Fund portfolios are actively managed, and 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 of U.S. Global Investors Funds as of 9/30/2018: Delta Air Lines Inc.

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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Two Big Reasons Why I Believe China Looks Attractive Right Now
September 25, 2018

emerging markets look like a buy after decoupling from the U.S. market

Emerging markets continue to decouple from the U.S. market, making them look attractive as a value play—particularly distressed Chinese equities. Below I’ll share with you two big reasons why I think China is well-positioned to outperform over the long term.

So far this year, the MSCI Emerging Markets Index has given up about 10 percent, mostly on currency weakness and global trade fears. The S&P 500 Index, meanwhile, has advanced roughly 9 percent as a flood of passive index buying pushes valuations up and companies buy back their own stock at a record pace.

emerging markets look like a buy after decoupling from the U.S. market
click to enlarge

S&P Dow Jones Indices reported this week that buybacks in the second quarter increased almost 60 percent from the same three months a year ago to a record $190.6 billion. For the 12 months ended June 30, S&P 500 companies, flush with cash thanks to corporate tax reform, spent an unprecedented $645.8 billion shrinking their float. In the first half of 2018, in fact, companies spent more on buybacks than they did on capital expenditures.

As I told CNBC recently, this, combined with fewer stocks available for fundamental investing, could contribute toward a massive selloff when it comes time for multibillion-dollar index funds to rebalance at year’s end.

But let’s get back to emerging markets.

The Selloff Is Overdone, According to Experts

Again, China in particular looks like a buying opportunity with stocks down near a four-year low. Speaking with CNBC last week, chief executive of J.P. Morgan Chase’s China business, Mark Leung, said that the emerging market selloff is largely overdone. “If you look at the positioning and also the fundamentals side, we think there are reasons to start going into emerging markets for the medium and long term,” Leung said, adding, “China is a big piece.”

This view was echoed by Catherine Cai, chairman of UBS’s Greater China investment banking arm, who told CNBC that she believes “among all the emerging markets, China’s still representing the most attractive market.”

The U.S. just imposed tariffs on as much as $200 billion worth of Chinese imports, which will have the effect of raising consumer prices. Among the retailers and brands that have already announced they will be passing costs on to consumers are Walmart, General Motors, Toyota, Coca-Cola and MillerCoors. China plans to retaliate with tariffs of its own on $60 billion in U.S. exports. 

Despite this, the tariffs’ impact on the Chinese economy will be “very small,” Cai said, as the country’s government is now “prepared” to handle the additional pressure.

The Power of 600 Million Millennials

The two reasons I find China so compelling right now are 1) promising demographics, and 2) financial reform.

As for the first reason, there’s really no arguing against the sheer math of Asia’s exploding population. You’ve heard the expression “There is strength in numbers,” and nowhere is that more apparent than in China and India, affectionately known as “Chindia,” where 40 percent of all humans live.

But there’s more. According to a recent report from CLSA, the entire continent of Asia is now home to nearly one billion millennials, or people aged 20 to 34. China and India alone contribute more than 600 million millennials, the youngest of whom will “start to hit their ‘peak’ earning capacity” over the next 10 years, says CLSA.

Asian millennials are changing global consumption
click to enlarge

“Millennials are more affluent, better educated with difference perspectives and priorities than their parents’ generation, which tends to sacrifice present consumption for the future,” CLSA writes. “Millennials care less about saving.”

This translates into not only the largest consumer class the world has ever seen, but also the most eager to spend their money on goods and services their parents and grandparents could never have imagined.

Consumption, in fact, now accounts for nearly 80 percent of China’s gross domestic product (GDP) growth, helping the country become less dependent on capital input and foreign trade.

China’s Capital Markets Continue to Mature

chinese premiere li keqiang: the pool is full of water and the challenge is to unblock the channels. As for my second reason, financial reform, Premier Li Keqiang recently pledged to give equal treatment to foreign investors in capital markets, all in the name of bolstering confidence among investors who may have been rattled lately by the U.S.-China trade dispute.

“The pool is full of water,” Li said, “and the challenge is to unblock the channels.”

China A-shares, those traded in the Shanghai and Shenzhen stock exchanges, were once available only to Chinese citizens living on the mainland. But as a sign of the financial market’s maturation, last week marked the first time that foreign investors living in mainland China, as well as employees of listed Chinese firms living overseas, could freely trade A-shares.

Many A-shares have already been added to indexes provided by MSCI, and FTSE Russell said it will decide soon whether to do the same.

As we’ve seen in the U.S. market and elsewhere, a stock’s inclusion in a major index has meant, for better or worse, that it automatically gets an infusion of investors’ money, regardless of fundamentals.

That Premier Li plans to open China’s market up even further is exciting, and makes its investment case even stronger.

To learn more about investment opportunities in China and the surrounding region, watch our short video by clicking here.

 

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

The MSCI Emerging Markets Index captures large and mid-cap representation across 24 Emerging Markets (EM) countries. The S&P 500 index is a basket of 500 of the largest U.S. stocks, weighted by market capitalization. 

Gross domestic product (GDP) is the total value of goods produced and services provided in a country during one year.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 6/30/2018: Coca-Cola Bottling Co. Consolidated.

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The Best Time to Prepare Is While the Bull Runs
September 24, 2018

how to manage your risk

In case you couldn’t tell from the ubiquitous political ads and yard signs, midterm elections are right around the corner. Historically, volatility has increased and markets have dipped leading up to midterms on uncertainty, but afterward they’ve outperformed.

Of especially good news is that we’re entering the three most bullish quarters in the four-year presidential cycle, according to LPL Financial Research. The fourth quarter of the president’s second year in office, which begins next month, and the first and second quarters of the third year have collectively been the best nine months for returns, based on 120 years of data.

the next three quarters have historically been bullish for stocks
click to enlarge

It makes sense why this has been the case. Following midterms, the president has been motivated to “boost the economy with pro-growth policies ahead of the election in year four,” writes LPL Financial.

Government Policy Is a Precursor to Change

Should Republicans manage to hold on to both the House and Senate—which Wells Fargo analysts Craig Holke and Paul Christopher estimate has a 30 percent probability—it’s likely they’ll try to pass “Tax Reform 2.0,” with an emphasis on the individual tax side. We can also probably expect to see additional financial deregulation.

Cornerstone Macro is in agreement, writing that “the better Republicans do in the election, the more confidence investors will have that [President Donald] Trump could be reelected and the business-friendly regulatory practices will remain in place.” A GOP Congress, the research firm adds, would be supportive of banks and energy, specifically oil, gas and coal. Since Trump’s inauguration, the Dow Jones U.S. Coal Index has climbed nearly 60 percent, double the S&P 500’s performance.

Back from the dead: coal stocks have risen since inauguration day
click to enlarge

The more likely outcome, according to Holke and Christopher, is a divided Congress, with Democrats taking control of the House. In such a scenario, financial deregulation would slow, but Trump, who’s pushed hard for aggressive infrastructure spending, might find the support he needs for a bill from Democrats. This would help increase demand for commodities and raw materials, but “additional stimulus in an economy already near capacity may result in higher inflation, negatively affecting fixed income,” Holke and Christopher write.

On the other hand, higher inflation has historically meant higher gold prices. After climbing for 12 months, year-over-year change in consumer prices cooled in August to 2.7 percent, from July’s 2.9 percent.

Government policy is a precursor to change, as I often say. It’s not the party that matters but the policies, and there are ways for investors to make money however the midterms unfold.

Money Managers and Banks Are Adding Safe Havens at a Faster Pace

With the bull run now the longest in U.S. stock market history, there’s a lot of talk and speculation about when the next major pullback will happen. I’ve discussed a number of possible catalysts with you already, from record levels of global debt to the flattening yield curve. Recently I shared with you that Goldman’s bull/bear indicator hit its highest level in nearly 50 years.

Even as markets closed at fresh all-time highs, essentially ignoring the intensifying U.S.-China trade war, Bank of America Merrill Lynch (BofAML) called the bull run “dead” last week, due to slowing global economic growth and the end of monetary stimulus. “The Fed is now in the midst of a tightening cycle, ignoring structural deflation, focusing on cyclical inflation,” writes BofAML chief strategist Michal Hartnett.

Against this backdrop, a growing number of money managers hold a dim view of continued economic growth. September’s Bank of America Merrill Lynch Fund Manager Survey found that a net 24 percent of fund managers believe global growth will slow over the next 12 months. That’s the highest percentage of managers with such a view since December 2011, the height of the European debt crisis. Reasons given for this bearishness are the U.S.-China trade tensions and, again, the end of central bank accommodation.

Fund managers are raising their cash levels, Hartnett says, as well as their exposure to fixed income, which has traditionally been used as a safe haven in times of uncertainty. In July, the most recent month of Morningstar data, bond funds attracted the greatest amount of any asset class in the U.S., with taxable and municipal bonds seeing a collective $28.5 billion in inflows. U.S. equity funds, meanwhile, collected a little under $3 billion, and in fact have seen $11 billion in outflows in the 12 months through July 31.

Getting even more specific, U.S. actively-managed ultrashort bond funds were the biggest winner, attracting over $6 billion in July, according to Morningstar.

You can read more about short-term bond funds by clicking here.

Central banks added gold in first half at fastest pace since 2015
click to enlarge

Gold demand among central banks has also accelerated this year. According to the World Gold Council (WGC), banks added a net 193.3 metric tons of gold to their reserves in the first half of the year, an 8 percent increase from 2017. This was the most purchased in the first six months since 2015.

Watch my interview with Kitco News to learn why now might be a good time to follow the “Golden Rule.”

The Next Crisis Could Be Triggered by Passive Indexing

One of the biggest risks right now, I believe, is the explosion in passive, “dumb beta” indexing. Trillions of dollars have poured into products that track indices built not on fundamental factors like revenue, cash flow and return on invested capital (ROIC), but on simple market capitalization. A piling on effect has occurred, whereby multibillion-dollar funds are buying more and more of the most expensive stocks. This has resulted in overinflated valuations.

The big risk is when these funds rebalance, which could happen as early as the beginning of next year. Last year, junior mining stocks got crushed after the VanEck Vectors Junior Gold Miners ETF (GDXJ) restructured its portfolio. Imagine what could happen if all passive index funds did the same simultaneously.

Last week I wrote more in depth about the risks passive indexing poses. If you didn’t get a chance to read it, I invite you to do so by clicking here.

 

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

The Dow Jones Industrial Average (DJIA), or simply the Dow, is a stock market index that shows how 30 large, publicly owned companies based in the United States have traded during a standard trading session in the stock market. The S&P 500 index is a basket of 500 of the largest U.S. stocks, weighted by market capitalization. The Dow Jones U.S. Coal index is a subindex of the Dow Jones U.S. Indices and seeks to track all stocks classified in the coal subsector (1771) of the Dow Jones Sector Classification Standard traded on major U.S. stock exchanges.

Cash flow is the total amount of money being transferred into and out of a business, especially as affecting liquidity. Return on invested capital (ROIC) is a calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. 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. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 6/30/2018.

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

Hurricane Florence

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

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

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

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

Could this just be the calm before the storm?

Consumers and Small Business Owners Are Feeling Good

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

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

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

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

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

Time to Get Defensive?

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

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

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

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

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

Frank and Liz on Fox Business

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

What Caused the Lehman Brothers Bankruptcy: A New Accounting Rule

Lehman Brothers headquarters at Rockefeller Center in August 2007

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

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

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

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

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

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

Government policy is a precursor to change
click to enlarge

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

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

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

The Short End Is Your Friend

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

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

 

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

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

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

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

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

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 06/30/2018: The Homes Depot Inc.

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Net Asset Value
as of 10/19/2018

Global Resources Fund PSPFX $5.03 0.01 Gold and Precious Metals Fund USERX $6.95 0.07 World Precious Minerals Fund UNWPX $3.51 0.01 China Region Fund USCOX $8.08 0.12 Emerging Europe Fund EUROX $6.32 -0.01 All American Equity Fund GBTFX $25.37 -0.09 Holmes Macro Trends Fund MEGAX $18.05 -0.07 Near-Term Tax Free Fund NEARX $2.19 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change