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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.

Don't Be Fooled by the Politics of Envy
March 11, 2019

AI Will Add $15 Trillion to the Global Economy by 2030

Here at U.S. Global Investors, we’re politically agnostic. We believe there’s money to be made no matter which party is calling the shots. That’s why we focus on government policy instead of partisan politics.

Having said that, I think most of you would agree that there’s lately been a change in some American voters’ appetite for socialist-leaning policies.

the rise of millennial socialism

Need proof? A Gallup poll from August of last year found that, for the first time in modern memory, Americans aged 18 to 29 are more positive about socialism than they are about capitalism. Fifty-one percent preferred the former compared to 45 percent for the latter.

I don’t need to remind you that socialist policies are naturally anti-business and anti-private property, and they create all sorts of friction in the formation of new capital. A “threat to U.S. equity valuations is emerging in the form of left-wing populism in America,” writes Christopher Wood in his widely read GREED & fear newsletter.

Again, we believe extremism at either end can raise huge obstacles for business and investors. The difference, though, is that hard-left legislation seeks to punish wealth and prosperity through politics of envy. Amazon, one of the world’s most valuable companies, was driven out of New York as if it were the plague. The online retail company came under additional fire last week when Massachusetts senator Elizabeth Warren said she would break up giant tech firms if she were elected president.

At their worst, socialist policies can destroy entire economies. Just look at Venezuela. It’s hard to believe now that the beleaguered country was once the wealthiest in South America.

“There is the dark side of it,” Canadian psychologist Jordan Peterson once said of socialism, “which means everyone who has more than you got it by stealing it from you… ‘Everyone who has more than me got it in a manner that was corrupt, and that justifies not only my envy but my actions to level the field,’ so to speak... There is a tremendous philosophy of resentment that I think is driven now by a very pathological anti-human ethos.”

Still Strong Pushback Against Socialism in the U.S.

“America will never be a socialist country,” President Donald Trump proclaimed during last month’s State of the Union address. The remark appeared to have been directed squarely at the raft of newly elected lawmakers who seem to be cut from the same cloth as “democratic socialist” Bernie Sanders.
The 77-year-old Vermont senator, by the way, just announced that he would be seeking the White House for a second time—and raised a whopping $6 million within the first 24 hours.

Despite his success in 2016, Sanders’ candidacy might be a hard sell for most Americans this year, as a recent NBC News/Wall Street Journal Survey showed that a majority of voters wouldn’t be too keen on having a socialist president or one who was over the age of 75. Close to three quarters of respondents either had “total reservations” or were “very uncomfortable” about the idea of voting for someone who self-identified as a socialist, as Sanders does. 

a socialist or someone over 75 are least desirable for a presidential candidate
click to enlarge

At the same time, Sanders’ highly publicized bid for the White House during the last cycle appears to have galvanized some lawmakers and encouraged them to creep even further left. The Green New Deal (GND) is one such example.

The $93 Trillion Green New Deal

The GND resolution, if passed and signed into law, would radically transform day-to-day life here in the U.S. Reforms include “zero-emission” transportation, universal health care, guaranteed jobs and guaranteed “green” housing.

the rise of millennial socialism
Photo: Dimitri Rodriguez /flickr | Creative Commons Attribution 2.0 Generic (CC by 2.0)

These goodies might sound appealing to some, but they won’t come cheap. Universal health care alone would cost the U.S. government as much as $36 trillion between 2020 and 2029, according to calculations made by the American Action Forum (AAF). That amounts to $260,000 per household.
And the price tag for the entire package? An unfathomable, eye-watering $93 trillion.

Many of you are no doubt aware that the GND is co-sponsored by Alexandria Ocasio-Cortez, the 29-year-old freshman representative from New York’s 14th district who was among the most vocal critics of Amazon moving into her neighborhood.

Like Sanders, she identifies as a democratic socialist.

As some people have pointed out, “AOC,” as she’s often called, has no financial licenses or MBA. She’s not a fiduciary. And yet if she and other socialist-minded lawmakers get their way, the American taxpayer could be saddled with the single largest spending package the world has ever seen.

Further, did you know that AOC recently won a seat on the powerful House Financial Services Committee? The committee, chaired by Representative from California Maxine Waters, has oversight over all things Wall Street—from banks to insurance, from money to credit, from securities to exchanges.

Private Equity Has Grown Twice as Fast as Public Markets

According to the AAF, the regulatory cost of the GND would be at least $1 trillion. And that’s on top of the trillions that already-in-place rules and regulations sap from American companies every year.

It’s little wonder, then, that more and more companies are choosing not to list on public markets. I’ve written about this a number of times before. Simply put, tougher and costlier regulations have largely contributed to the boom in private equity (PE)—not just in the U.S. but across the globe. According to a recent McKinsey report, private markets have grown 7.5 times so far this century, or twice as fast as public market capitalization.

Global private equity value has dramatically outpaced that of public markets
click to enlarge

Here in the U.S. and Canada, the number of companies that publicly listed rose to an 11-year high in 2018, thanks to more business-friendly policies. The initial public offering (IPO) market looks as if it might do just as well this year, if not better, with huge tech unicorns such as Uber, Lyft, Airbnb and Pinterest expected to list.

number of initial public offerings (IPOs) was highest since 2007 last year
click to enlarge

But the overall trend has been down, and that’s really hurt small investors who don’t generally have access to private equity. 

Is Gold the Solution?

10% golden rule

All of this is ample reason to ensure that you have some gold in your portfolio. I always advocate the 10 percent Golden Rule. That means I think you should have half of that 10 percent in gold coins, bars and 24-karat jewelry. The other half should be in high-quality gold mining stocks and funds. Make sure you rebalance at least once a year.

One of the biggest proponents of gold is the Austrian school of economics, which emphasizes self-reliance and individualism. Because fiat currencies are solely based on the faith and credit of the economy, they have no intrinsic value and are prone to huge swings, according to Austrian economic thought.

Gold, on the other hand, is nobody’s liability. As destructive as socialist policies can be to business and capital, they can’t reduce the value of your gold. In fact, the inverse is true. Historically, the more debt that the government accrues, and the higher inflation gets, the more valuable the yellow metal has become.

Did you miss it? Last week I spoke with Small Cap Power’s Jim Gordan on a range of topics, from newcomer GoldSpot Discoveries to the U.S.-China trade war. Watch it now 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.

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 12/31/2018.

Frank Holmes was appointed chairman of the Board of Directors of GoldSpot Discoveries. Both Mr. Holmes and U.S. Global Investors own shares of GoldSpot.

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Can the Bull Market Run for Another 10 Years?
March 6, 2019

Would You Do This to Pay Zero Income Taxes for Life?

The current stock bull market, already the longest in U.S. history, turns 10 years old this month. It’s been a phenomenally profitable time to participate, especially if you’ve stuck to an investment strategy that favors dividend-paying stocks.

As you can see in the chart below, the amount of cash that S&P 500 Index companies have returned to shareholders has grown each year since 2009. In the final three months of 2018 alone, S&P companies paid out $119.8 billion, a quarterly record. Total dividends for the full year stood at $456.3 billion, up 9 percent from the previous year—another new record.

Stock buybacks topped capital expenditures for first time since 2008
click to enlarge

Thanks to corporate tax reform, stock buybacks also shot up to an all-time high of more than $800 billion in 2018. For the first time since 2008, this amount topped what S&P companies spent to replace or upgrade offices and equipment.

While I’m on this topic, a lot of noise has been made lately about how much companies spent last year repurchasing shares of their own stock. Many critics of President Donald Trump’s tax overhaul suggest that buybacks have been made at the expense of investing and giving workers raises. This is misleading to say the least. Capital expenditures grew substantially from 2017 to 2018—at their fastest pace since 2011, in fact—and often, the same companies that were buying back their stock also increased their investments in their own business and workers.

Moving on…

Buffett Says He’d Buy the S&P Today

For a while now, some financial analysts and pundits have been predicting the end of the business cycle, and the bull market’s 10-year anniversary is only likely to intensify those calls.

The truth is that business cycles do not die from old age alone. In the past, they’ve unraveled as a result of economic shocks, debt crises, wars, changes in monetary policy—but never simply because investors believed they overstayed their welcome.

In other words, I don’t think there’s any reason why this bull run can’t last another 10 years.

Legendary investor Warren Buffett told CNBC just last week that he thinks the aging bull still looks attractive, and if given the choice right now between investing in S&P 500 Index companies and a 10-year bond, he’d go with the former.

“If I had a choice today for a 10-year purchase of a 10-year bond… or buying the S&P 500 and holding it for 10 years, I’d buy the S&P in a second,” Buffett said.

A couple of caveats here: One, you can’t invest directly in an index. And two, Buffett is a billionaire many times over, and so his threshold for risk, even at 88 years old, is probably somewhere in the upper stratosphere.

Be that as it may, there’s research available to support Buffett’s rosy 10-year outlook. Below is a brief excerpt from Oxford Club Chief Income Strategist Marc Lichtenfeld’s 2012 bestseller “Get Rich With Dividends”:

Investing in the stock market works. Since 1937, if you invested in the broad market index, you made money in 69 out of 76 rolling 10-year periods, for a 91 percent win rate. That includes reinvesting dividends.

Past performance does not guarantee future results.

A 91 percent win rate. Put another way, it’s historically been very rare for a portfolio of S&P stocks not to have generated positive returns on a rolling 10-year basis.

10-Year Rolling Returns
S&P 500 Total Return Index
2018 259.63% 2008 -13.09%
2017 122.59% 2007 79.48%
2016 95.72% 2006 122.45%
2015 100.16% 2005 140.55%
2014 110.06% 2004 210.94%
2013 104.53% 2003 176.88%
2012 92.78% 2002 149.02%
2011 31.74% 2001 260.37%
2010 12.48% 2000 404.60%
2009 -7.03% 1999 422.84%
Past performance deos not guarantee future results. Source: DQYDJ.com, U.S. Global Investors

According to Marc, only two out of the past 20 years—2008 and 2009—were losers for the 10-year period with dividends reinvested, thanks to the financial crisis. And that’s only if you had cashed out at the worst possible time. Even the tech bubble of the late 1990s and early 2000s wasn’t enough to prevent most investors from losing their principal investments made a decade earlier.

What does all of this mean? It means investors have historically been rewarded when they’ve taken a longer-term outlook and stayed disciplined—and, I might add, focused on companies that were raising their dividends and then reinvested those dividends.

Expecting a Recession? It Might Pay to Stay Invested

If you believe that a recession or bear market will strike later this year or next, it still might not be time to get out of stocks altogether. That’s because returns have tended to be strongest 12 months or so before the start of a recession, as opposed to two or three years before.

Take a look at the chart below. Based on Morningstar data compiled by Wells Fargo, average returns for large-cap stocks have been highest at almost 25 percent for investors who sold 12 months before an economic downturn. Small-cap stock returns have been even higher at 36.4 percent. In both cases, profits have been much smaller for investors who got out two or three years prior to a recession. As I’ve noted already, past performance is no guarantee of future results.

Some of the best returns have come before a bear market
click to enlarge

Also note the returns for intermediate-term government bonds. As you might expect, they were much smaller than those of large-cap or small-cap stocks, no matter when you cashed out. But don’t let that deter you. There’s a place in most people’s portfolios for fixed income, as it can help counter potential equity volatility that has tended to arise late in the business cycle.

Active Management Late in the Cycle

Ten years is a long time, but again, I don’t necessarily think investors should rotate completely out of stocks just yet. I do, however, believe that if you’re going to stay invested, you might want to consider an actively managed fund. Passive ETFs are inexpensive and can give you broad exposure to the U.S. market, but they’re generally not as nimble as a fund managed by an investment professional.

And nimbleness is what you should be seeking if you’re worried about a downturn. Most ETFs rebalance on a quarterly or sometimes monthly basis. That’s perfectly fine for many investors, but if you’re interested in a fund that can respond more quickly to unexpected market hiccups or rallies, an actively managed mutual fund might be a better fit.   

I believe our All American Equity Fund (GBTFX) is an excellent way to stay invested in domestic stocks. The fund uses a number of factors to select companies that we believe have not just the biggest market caps but the potential for superior growth, profitability and quality relative to other companies in the same industry.

GBTFX emphasizes companies that have a history of growing dividends and announced stock repurchase programs. Its management team has over 60 combined years’ worth of experience in the capital markets.

Interested in learning more about the All American Equity Fund (GBTFX)? Watch our brief intro video by clicking here!

 

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.

Past performance does not guarantee future results.

Stock markets can be volatile and share prices can fluctuate in response to sector-related and other risks as described in the fund prospectus.

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

The S&P 500 index is a basket of 500 of the largest U.S. stocks, weighted by market capitalization. The index is widely considered to be the best indicator of how large U.S. stocks are performing on a day-to-day basis. The Total Return Index calculates the results when cash payouts are automatically reinvested. The S&P Municipal Bond Intermediate Index consists of bonds in the S&P Municipal Bond Index with a minimum maturity of 3 years and a maximum maturity of 15 years. The Dow Jones U.S. Large-Cap Total Stock Market Index is a subset of the Dow Jones U.S. Total Stock Market Index, which measures all U.S. equity securities with readily available prices. The index represents the largest 750stocks and is float-adjusted market cap weighted. The Dow Jones U.S. Small-Cap Total Stock Market Index is a subset of the Dow Jones U.S. Total Stock Market Index, which measures all U.S. equity securities with readily available prices. The index represents the stocks ranked 751-2,500 by full market capitalization and is float-adjusted market cap weighted.

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

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Getting In on the Ground Floor With World-Class Companies
March 4, 2019

AI Will Add $15 Trillion to the Global Economy by 2030

Last week I had the privilege of attending BMO's 28th Annual Global Metals & Mining Conference in Hollywood, Florida, along with portfolio manager and precious metals expert Ralph Aldis. The BMO conference is an epic event that brings together the “who’s who” of mining and natural resources—think Pierre Lassonde, Robert Friedland, Marin Katusa and many, many more.

Sentiment was cautiously bullish on gold and precious metals, while mega-mergers and takeovers were top of mind for many attendees and presenters. I’m not exaggerating when I say that the news of Barrick Gold’s bid for rival Newmont Mining dominated the buzz. In case you’re not aware, Barrick is currently seeking to persuade shareholders to support its $18 billion hostile takeover of the Colorado-based miner.

Top 10 Patent Applications in the AI Field

This latest round of industry consolidation follows the Barrick-Randgold Resources merger, announced back in September, as well as Newmont’s own deal with Goldcorp in January. If Barrick is successful in its bid, however, Newmont must break off the $10 billion deal with Goldcorp.

Even before all of this began, Barrick was the world’s largest gold producer, with a market cap of nearly $21 billion. If it manages to acquire Newmont, it would become an untouchable behemoth.

Here’s an illustration of just how big the resultant company would be: World gold output stood at 158 million ounces last year, and of that, Barrick, Randgold and Newmont produced a combined 10.85 million ounces. Those three companies alone, then, were responsible for one out of every 14 ounces or so worldwide.

I have so much more to say on this, but for now, I invite you to watch my interview with Kitco News’ Daniela Cambone, direct from the BMO conference. Click here to see it!

A Record of Early-Stage Investing

The metals and mining industry could be undergoing some dramatic changes in the near future. It’s important for investors to get in on the ground floor when this happens.

Back in 2017, we were seed investors in HIVE Blockchain Technologies, the world’s first publicly traded cryptocurrency mining firm. We also recognized the value of the disruptive jewelry manufacturer Mene, and were able to make a private investment months before it was listed on the TSX Venture Exchange. More recently, I introduced you to GoldSpot Discoveries, the very first company to harness the power of artificial intelligence (AI) in the mineral exploration process. We made a sizeable allocation in the company, and I was named chairman of the board.

Goldspot Discoveries tweet

We’re not new to any of this, of course. I’m proud of our track record of getting in early with a number of now-phenomenally successful companies. We were among the original financers of American Barrick Resources, before it changed its name to Barrick Gold in 1995. Ditto for Wheaton River Minerals, now known as Wheaton Precious Metals—one of our favorite royalty and streaming companies.

This is just one among many reasons why I believe active management still plays an essential role in investors’ portfolios. It also brings to mind the concept of “synchronicity.”

Be Mindful of Meaningful Connections

The word “synchronicity” was first coined by the Swiss psychoanalyst Carl Jung, a disciple of Sigmund Freud. It says that events are meaningful coincidences if they occur with no causal connection yet seem to be meaningfully related.

Jung conceived of synchronicity after he observed a curious incident. A client described to him a dream she had the previous night of a golden scarab—a very expensive piece of jewelry. The very next day, while meeting with the same client, an insect struck his office window. Upon closer inspection, Jung saw that it was a scarab beetle, which closely resembled the piece of jewelry from his client’s dream. The insect is very rare in Jung’s native Switzerland. “Here is your scarab,” he reportedly told her.

Goldspot Discoveries tweet

Photo by: Chrumps, CC BY-SA 3.0

The two events—the dream and the insect encounter—cannot reasonably be called causally connected. But they’re meaningfully related.

Synchronicity was one of many topics we discussed this year at Harvard Business School, where I go every year along with as many as 150 CEOs from dozens of different countries.

The theme really rang true for me and many of my fellow CEOs. Many of us believe that luck, ambition and positive thinking all play a role in our lives and business decisions, and have helped us get where we are today.

I feel grateful and blessed every day that I’m in a position to find solutions, to stay curious to learn and improve and to find opportunities—opportunities such as HIVE, Mene, GoldSpot and many more.

Feeling left out? Make sure you subscribe to the U.S. Global Investors YouTube channel 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.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 12/31/2018: Barrick Gold Corp., Newmont Mining Corp., Mene Inc., Wheaton Precious Metals Corp.

Frank Holmes was appointed non-executive chairman of the Board of Directors of HIVE Blockchain Technologies. Both Mr. Holmes and U.S. Global Investors own shares of HIVE, directly and indirectly. Investing in crypto-coins or tokens is HIGHLY SPECULATIVE and the market is largely unregulated.

Frank Holmes was appointed chairman of the Board of Directors of GoldSpot Discoveries. Both Mr. Holmes and U.S. Global Investors own shares of GoldSpot.

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AI Will Add $15 Trillion to the World Economy by 2030
February 25, 2019

AI Will Add $15 Trillion to the Global Economy by 2030
Photo: bagogames/flickr | Creative Commons Attribution 2.0 Generic (CC by 2.0)

A couple of weeks ago, I introduced you to an exciting new company called GoldSpot Discoveries, conceived and headed by mining visionary Denis Laviolette. GoldSpot is the world’s first exploration company to use artificial intelligence (AI) and machine learning in the discovery process for precious metals and other natural resources. Not yet three years old, it’s already had a number of successes locating optimal target zones.

I’m pleased to inform you now that GoldSpot began trading last week on the TSX Venture Exchange under the ticker SPOT. This is a giant leap forward not just for the company and its team but also AI in general.

I’m also thrilled to have been named chairman of GoldSpot’s board of directors, effective today.

It’s important for readers to realize that AI is no longer the stuff of science fiction. The technology is already disrupting multiple industries, many of which impact you on a daily basis. Own an iPhone X? Its facial recognition system is powered by AI. Ever been redirected by Google Maps because of an accident or construction ahead? You guessed it: AI.

And those are just a couple of small examples. By one estimate, AI contributed a whopping $2 trillion to global GDP last year. By 2030, it could be as much as $15.7 trillion, “making it the biggest commercial opportunity in today’s fast changing economy,” according to a recent report by PwC.

Artificial Intelligence Projected Impact on Global GDP
click to enlarge

AI: The “New Electricity”

Not every industry and sector will be affected equally, but none will go untouched.

“AI is the new electricity,” says Chinese-English computer scientist and entrepreneur Andrew Ng. “I can hardly imagine an industry which is not going to be transformed by AI.”

Among the industries that have been fastest to adopt AI, according to PwC, are health care, automotive and financial services. Earlier and more accurate diagnostics, powered by AI, means earlier treatment of life-threatening diseases. Once on the market, self-driving cars will free up an estimated 300 hours the typical American spends driving every year. And more and more people are putting their trust in robo-advisors to manage their wealth.

Robo-Advisor Platforms Forecast to Continue Growing Around the World
click to enlarge

AI patents have surged in the past five years alone, according to the World Intellectual Property Organization (WIPO). From 2013 to the end of 2017, the number of patents grew nearly three times, from 19,000 to more than 55,600.

The massive increase in patenting “means we can expect a very significant number of new AI-based products, applications and techniques that will alter our daily lives—and also shape future human interaction with the machines we created,” comments WIPO Director-General Francis Gurry.

A majority of the top 500 applicants are from China, the U.S. and South Korea. Only four are from Europe. At the top of the list sits IBM, with an incredible 8,290 inventions (so far), followed by Microsoft, which has 5,930 patents to its name.

Top 10 Patent Applications in the AI Field
click to enlarge

As you might imagine, the U.S. government wants to ensure that the country remain competitive against Asia. This very month, President Donald Trump signed an executive order urging federal agencies to prioritize AI investments in research and development. The American AI Initiative, as it’s called, says that these measures  are “critical to creating the industries of the future, like autonomous cars, industrial robots, algorithms for disease diagnosis and more.”

“I want 5G, and even 6G, technology in the United States as soon as possible,” Trump tweeted last week, presumably in response to news that Chinese telecommunications firm ZTE could be first to bring fifth-generation cellular technology to market. “American companies must step up their efforts or get left behind. There is no reason that we should be lagging behind on… something that is so obviously the future.” 

Bringing AI to the Miners

Interestingly enough, the industry that’s been slowest to adopt AI is manufacturing, including industrial products and raw materials, according to PwC.

The metals and mining industry has been especially resistant to adoption, with spending on innovation far below that of other industries.

To be fair, not every miner has been behind the curve. For more than 10 years now, Rio Tinto has been using AI-powered autonomous trucks to haul materials, reducing fuel consumption and increasing safety in the process. The London-based producer also uses autonomous loaders and drills, and its highly anticipated “intelligent mine” in Western Australia is slated to begin operations in 2021.

But much more could be done, Denis says, especially when it comes to utilizing the mountains of data already at our fingertips. Miners were “paying for all this data, but no one was really doing anything with it,” he told me earlier this month.

Speaking to the Wall Street Journal in December, Denis commented that he had seen “an awful lot of posturing” when it came to miners claiming to be interested in modernizing operations and integrating AI. “They say they are working on this internally, then you find out they haven’t got anywhere.”

This is precisely why he conceived of GoldSpot Discoveries. I’m fully convinced that mining’s future belongs to AI, with Denis and GoldSpot leading the way. I invite you to learn more by visiting the company’s website 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.

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 12/31/2018.

Frank Holmes has been appointed chairman of the Board of Directors of GoldSpot Discoveries. U.S. Global Investors owns shares of GoldSpot.

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Would You Do This to Pay Zero Income Taxes for Life?
February 21, 2019

Would You Do This to Pay Zero Income Taxes for Life?
Photo: Chris Tolworthy | Creative Commons Attribution 2.0 Generic (CC by 2.0)

Hungary has a problem. Like many Eastern European and former Soviet countries, its population is shrinking thanks to a plunging birthrate and outmigration as young workers seek better opportunities and fatter salaries elsewhere in the European Union (EU). In 2017, the most recent year of data, Hungary had a low fertility rate of only around 1.4 live births per woman, significantly lower than what is considered the replacement rate. If nothing changes, the country’s population is projected to shrink 15 percent by 2050, from almost 10 million strong today to 8.28 million, according to the United Nations (UN).

Hungary has one of the lowest fertility rates in the world
click to enlarge

This could have a number of negative economic and financial consequences. For one, the country could face serious demographic risk as its workforce is squeezed and the share of elderly, non-working citizens surges.

To be fair, Hungary isn’t alone. And it’s not even in the worst shape. According to UN data, the world’s top 10 countries with the fastest shrinking populations are disproportionately found in Eastern Europe. Bulgaria, the poorest EU member state, also has the ignoble distinction of ranking first in shrinkage velocity. By 2050, its population could contract as much as 23 percent—nearly a full quarter—followed closely by Latvia (22 percent) and Moldova (19 percent).

The reason why I’m focusing on Hungary is because I think policymakers there may have come up with an ingenious way to encourage young people to stay in the country, produce more children and grow the country’s labor workforce.

Interested in Paying No Income Taxes For Life? Start Making Babies

Hungarian Prime Minister Viktor OrbanPhoto: People's Party/Flickr | Creative Commons Attribution 2.0 Generic

The plan I’m referring to, dubbed the “Family Protection Action Plan,” was unveiled last week by Hungarian Prime Minister Viktor Orbán. Among its incentives is a waiver on personal income taxes for life for married women who give birth to and raise four or more children.

This could be huge.

Let’s look at what some eligible women could stand to save. Since 2016, Hungary has had a flat income tax rate of 15 percent. Admittedly, that’s lower than the 22 percent a single American making between $38,700 and $82,500 is obligated to pay in federal taxes. But as recently as 2010, all Hungarians were on the hook for as much as 40.6 percent—and there’s always the possibility that they could return to that level (or higher) at some later point.

For many women, a guarantee that they’ll never again have to pay income taxes in Hungary, at any rate, could be incentive enough to have that fourth child.

Other parts of the action plan include subsidies for some families to buy larger cars (presumably to carry all those extra children), a new loan program to help families with two or more children to buy homes, and childcare payments for grandparents who offer to look after grandkids during work hours.

“There are fewer and fewer children born in Europe. For the West, the solution is immigration,” Orbán, a nationalist, was reported as saying. “For every missing child, there should be one coming in and then the numbers will be fine.”

“But we do not need ‘numbers,’” he added. “We need Hungarian children.”

Hungary has been more resilient than the rest of emerging Europe
click to enlarge

Other European Nations Are Facing the Same Potential Crisis

You may disagree with Orbán’s solution to his country’s low birthrate—one Swedish minister has compared the policy to Nazi Germany—but he’s right in drawing attention to the fact that Europe, with few exceptions, is not producing enough children. In 2017, the EU had more deaths than births—5.3 million compared to 5.1 million, a deficit of around 200,000 people. The only reason the EU’s total population increased during the year, by 1.1 million people, was because of immigration.

Like Hungary, some EU members are looking at ways to encourage couples to start making more babies. In Italy—where only 464,000 births were registered in 2017, the lowest amount on record—policymakers are working on a plan to grant parcels of agricultural land to parents who have a third child between now and 2021. Poland’s government launched a multimedia campaign urging couples to “breed like rabbits.” And Spain appointed its own “sex tsar” to help give the country’s declining population a jolt.

Only time will tell whether these efforts can reverse the trend.

Finally, I invite you to take the quick poll below. Thanks in advance!

 

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

The Budapest Stock Exchange Index (BUX) 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 MSCI Emerging Markets Europe Index captures large and mid-cap representation across 6 Emerging Markets (EM) countries in Europe. With 73 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

Share “Would You Do This to Pay Zero Income Taxes for Life?”

Net Asset Value
as of 05/24/2019

Global Resources Fund PSPFX $4.31 0.05 Gold and Precious Metals Fund USERX $6.53 0.04 World Precious Minerals Fund UNWPX $2.51 0.01 China Region Fund USCOX $7.91 0.05 Emerging Europe Fund EUROX $6.53 0.05 All American Equity Fund GBTFX $23.95 -0.02 Holmes Macro Trends Fund MEGAX $16.43 0.14 Near-Term Tax Free Fund NEARX $2.21 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change