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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.

Which Has the Bigger Economy: Texas or Russia?
April 16, 2018

Everything is bigger in Texas

You’ve no doubt heard that everything’s bigger in Texas. That’s more than just a trite expression, and I’m not just saying that because Texas is home to U.S. Global Investors.

Want to know how big Texas really is? Let’s compare its economy with that of Russia, the world’s largest country by area. As you probably know, Russia’s been in the news a lot lately, so the timing of this comparison makes sense. The U.S. just levied fresh sanctions against the Eastern European country for its alleged meddling in the 2016 presidential election, and early last week President Donald Trump warned Russia that the U.S. military could soon strike its ally Syria in response to its use of chemical weapons—a promise he kept Friday evening.

The Russian ruble traded sharply down following the news, decoupling from Brent crude oil, the country’s number one export.

Russian ruble decoupled from Brent crude following US snactions
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But back to the comparison. Even though Russia has nearly five times as many residents as Texas, the Lone Star State's economy is more than $400 billion larger. Texans, therefore, enjoy a gross domestic product (GDP) per capita of around $58,000, whereas Russians have one closer to $8,700.

Texas Is So Much More than Oil Country

The Russian Federation is the largest single producer of crude in the world, pumping out 10.95 million barrels per day (bpd) in January, according to the country’s energy minister. Texas is no slouch, though, as its output came close to 4 million bpd in January. That’s the most ever for a January since at least 1981. And from December 2017 to February 2018, its oil and gas industry accounted for nearly 30 percent of the state’s employment growth, according to the Federal Reserve Bank of Dallas.

But whereas Russia’s economy is highly dependent on exports of oil and petroleum products, the Texas economy is broadly diversified. The state ranks first in the U.S. for not only oil production but also wind energy. It has a robust agricultural sector, and it’s a leading hub for advanced technology and manufacturing, aeronautics, biotechnology and life sciences. Austin, the state capital, is steadily emerging as the most dynamic U.S. filmmaking city outside of Hollywood.

Texas exports

All of this has helped contribute to Texas being among the fastest growing states in the U.S. In 2017, it grew by more than 1,000 new residents per day.

Meanwhile, Russia’s population is slowly shrinking because of low birth rates and low immigration. Its population peaked at 148 million in the early 1990s—right around when the Soviet Union fell—and by 2050, it’s estimated to sink to 111 million. 

Can Russia Root Out Its Corruption?

One area where Russia trumps Texas is in corruption. If you think Texas—or any other state—has a corruption problem, Russia takes it to a whole new level.

But Russia takes it to a whole new level. Last year, it ranked 135 out of 180 countries on Transparency International’s Corruption Perceptions Index (CPI), released in February. Among Eastern European countries, only Uzbekistan, Tajikistan and Turkmenistan ranked lower. Watchdog group Freedom House was similarly critical in its most recent analysis, giving the country an overall democracy score of 6.61 out of 7, with 7 being “least democratic.”

So notorious and widespread is Russia’s mafia that a number of movies have been made about it. One of the best among them is David Cronenberg’s excellent Eastern Promises (2007).

Having said all that, I believe it’s prudent for investors to underweight Russian stocks for the time being and overweight Western Europe. Because of U.S. sanctions, Americans have until May 7 to divest completely from a number of Russian names, including Rusal, En+ Group and GAZ (Gorkovsky Avtomobilny Zavod), all of which saw serious outflows last past week. The MSCI Russia Index, which covers about 85 percent of Russian equities’ total market cap, plunged below its 200-day moving average, but last Thursday it jumped more than 4 percent, its best one-day move in two years.

Click here to learn more about underweighting Russian stocks.

Weaker Greenback and $1 Trillion Deficit Helps Gold Glitter

Gold is rallying right now, but as I told Daniela Cambone in last week’s “Gold Game Film,” it has little to do with Russian geopolitics, or even trade war fears, which have subsided somewhat in the past couple of weeks. Instead, the price of gold is responding primarily to a weaker U.S. dollar. For the 30-day period, the greenback has dipped close to 20 basis points—for the year, more than 11 percent.

I think what’s also driving the yellow metal right now are concerns over the U.S. budget deficit and ballooning government debt. This week the Congressional Budget Office (CBO) said it estimated the deficit to surge over $1 trillion this year and average $1.2 trillion each subsequent year between 2019 and 2028, for a total of $12.4 trillion. By the end of the next decade, then, debt held by the public is expected to approach 100 percent of U.S. GDP.   

US deficits projected to be larger than previously estimated
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According to the U.S. National Debt Clock, government debt now stands at over $21 trillion—or, put another way, $174,000 per taxpayer. Imagine what the interest payments on that must be.

The CBO, in fact, commented on this. Believe it or not, the government’s annual payments on interest alone, made even more burdensome by rising rates, are expected to exceed what it spends on the military by 2023. And remember, defense is one of the country’s top expenditures, alongside Medicare, Medicaid and other entitlement programs.

US government is expected to start spending more on interest than defense in 2023
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There was even more news last week on debt and the deficit, as Congress tried, and failed, once again to amend the Constitution by requiring a balanced budget. The amendment could not get the two-thirds support it needed.

You can probably tell where I’m headed with all of this. Savvy investors and savers might very well see this as a sign to allocate a part of their portfolios in “safe haven” assets that have historically held their value in times of economic contraction.

Gold is one such asset that’s been a good store of value in such times. As I’ve shown before, gold has tracked U.S. government debt up since 1971, when President Richard Nixon ended the gold standard. I always recommend a 10 percent weighting in gold—5 percent in bars and coins; 5 percent in high-quality gold stocks, mutual funds or ETFs.

Asset Allocation Works

On a final note, I think it’s important that investors remember to stay diversified, especially now with volatility hitting stocks and geopolitical uncertainty on the rise. I’ve discussed Roger Gibson’s thoughts on asset allocation with you before, and I believe his strategy still holds up well today to capture favorable risk-adjusted returns.

Asset allocation works
click to enlarge

In the chart above, based on Gibson’s research, you can see that a portfolio composed of U.S. stocks, international stocks, real estate securities and commodity securities gave investors an attractive risk-reward profile between 1972 and 2015. This diversified portfolio, represented above by the orange circle, delivered good returns with a digestible amount of volatility, compared to portfolios that contained only one, two or three asset classes. Concentrating in only one or two asset classes could possibly give you higher returns, but you’d also likely see much greater risk, which many investors aren’t willing to accept.

I believe adding fixed-income—specifically short-term, tax-free municipal bonds—could improve these results. Munis with a shorter duration, as I’ve explained in the past, have a history of being steady growers not just in times of rising rates but also during market downturns. In the past 20 years, the stock market has undergone two massive declines, and in both cases, short-term, investment-grade munis—those carrying an A rating or higher—helped investors stanch the losses.

Learn more about the $3.8 trillion municipal bond market 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 Corruption Perceptions Index (CPI) scores countries on how corrupt their governments are believed to be. A country's score can range from zero to 100, with zero indicating high levels of corruption and 100 indicating low levels.

The MSCI Russia Index is designed to measure the performance of the large and mid-cap segments of the Russian market. With 22 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in Russia.

The MSCI EAFE Index is an equity index which captures large and mid-cap representation across Developed Markets countries around the world, excluding the US and Canada. With 927 constituents, the index covers approximately 85% of the free float-adjusted market.

The FTSE Nareit All Equity REITs Index is a free-float adjusted, market capitalization-weighted index of U.S. equity REITs. Constituents of the index include all tax-qualified REITs with more than 50 percent of total assets in qualifying real estate assets other than mortgages secured by real property.

The Bloomberg Commodity Index, formerly the DJ-UBS Commodity Index, is a broadly diversified index that tracks the commodities markets through commodity futures contracts. Since its launch in 1998, it has emerged as a leading benchmark of commodity markets.

A basis point, or bp, is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001).

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

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 3/31/2018.

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The 6 Fastest Growing Countries in Emerging Europe
April 3, 2018

american energy dominance

With volatility returning to domestic equities, it might be time for investors to consider increasing their exposure to foreign markets, specifically emerging Europe. As I shared with you in January, emerging Europe countries, as measured by the MSCI EM Europe 10/40 Index, finished last year up more than 20 percent, and so far in 2018, they’ve returned 1.17 percent, compared to the S&P 500 Index, which is down more than 3 percent.

One of our favorite ways to measure growth, whether on a macro scale or in individual markets, is by using the manufacturing purchasing manager’s index (PMI). Whereas gross domestic product (GDP) is backward-looking, PMI is a forward-looking economic indicator. We’ve found that it can forecast productivity and manufacturing activity three and six months out with a satisfactory level of accuracy.

With that in mind, I’d like to share with you the top six fastest-growing countries in emerging Europe, based on their just-released manufacturing PMIs for the month of March. Each market’s reading is currently above 50, indicating expansion, which is very good news indeed for the group as a whole. The higher the number, the faster the expansion.

We’ll start with the country with the lowest PMI in the group and work our way up.

Rank Country March PMI February PMI Percent Change
#6 Russia 50.6 50.2 0.8%

 

US net energy imports in 2017 fell to lowest levels since 1982
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Russia’s manufacturing sector improved a shade better in March compared to February, when it came close to giving up all momentum for the first time since August 2016. Geopolitical headwinds now threaten continued expansion, including additional international sanctions and rising tensions between the country and North Atlantic Treaty Organization (NATO) ally nations. At the same time, BCA Research recently took a positive view of Russia, saying the country’s conservative fiscal policy has allowed expenditures to grow only slightly since the oil crash in 2014. Overall spending has fallen considerably, improving the deficit.

Rank Country March PMI February PMI Percent Change
#5 Turkey 51.8 55.6 -6.8%

 

US now the number two oil producer expected to overtake russia by 2019
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Turkey isn’t just one of the fastest growing economies in Central and Eastern Europe (CEE)—it’s among the fastest in the world. Last year it defied skeptics by growing its GDP an estimated 7.3 percent year-over-year, more than China and India, thanks to a surge in household and government spending. Although the country’s March PMI came in lower than expected, its rate of growth is still above the historical trend, supported by greater volumes of new orders and rising output.

Rank Country March PMI February PMI Percent Change
#4 Poland 53.7 53.7 0%

 

big oil is generating as much profit at 60 dollar oil as it was at 100 dollar
click to enlarge

Poland is one of the world economy’s great success stories right now. A communist nation as recently as 1989, Poland has since transformed itself into one of the fastest growing free-market economies in the euro area. This September, in fact, the Eastern European country will officially be upgraded from the “advanced emerging” category to “developed” by FTSE Russell, placing it in the same company as other high-income nations such as the U.S., U.K., Japan, Germany, and others. In March, Poland’s PMI came in at a healthy 53.7, unchanged from its February reading. The manufacturing sector has now expanded for 42 straight months, a record since the series began in June 1998.

Rank Country March PMI February PMI Percent Change
#3 Greece 55 56.1 -1.9%

 

chinese huan has a long way to go as a reserve currency
click to enlarge

After nearly a decade of debt woes and government mismanagement, it finally looks as though Greece is catching a break, thanks in large part to massive amounts of foreign investment. Unemployment is falling rapidly, GDP growth has been positive for the past four quarters and its manufacturing sector is in expansion mode. The PMI for the Mediterranean country posted an incredible 55 in March, with business confidence and employment growth both hitting record series highs.

Rank Country March PMI February PMI Percent Change
#2 Hungary 57 57.4 -0.7%

 

chinese huan has a long way to go as a reserve currency
click to enlarge

Believe it or not, Hungary’s economy could be the crown jewel among CEE nations in 2018. According to Italian investment bank UniCredit, Hungary could potentially grow its GDP 4.5 percent this year on fast net wage growth and deleveraging, which is expected to support consumption and private investment. As for its manufacturing sector, the PMI reading for March came in at 57, down a hair from its February reading of 57.4. That leads us to the fastest growing CEE nation…

Rank Country March PMI February PMI Percent Change
#1 Czech Republic 57.3 58.8 -2.5%

 

chinese huan has a long way to go as a reserve currency
click to enlarge

Having posted a 57.3 PMI reading in March, the Czech Republic is currently the fastest growing nation in Central and Eastern Europe. Although the overall PMI slipped from 58.8 in February, the country is benefiting from sharp improvements in operating conditions across the value chain, including new orders and output. What’s more, growth is projected to improve even more over the next 12 months. In his monthly commentary, IHS Markit economist Sian Jones says that Czech business owners are “largely optimistic in regard to the year-ahead outlook, with over half of survey respondents expecting a rise in output.”

Interested in learning more? Watch this brief video on how you can take advantage of investment opportunities in emerging Europe!

 

The MSCI Emerging Markets (EM) Europe 10/40 Index is designed to measure the performance of the large and mid-cap representation across 6 Emerging Markets (EM) countries in Europe. The MSCI 10/40 equity indexes are designed and maintained on a daily basis to take into consideration the 10% and 40% concentration constraints on funds subject to the UCITS III Directive. With 86 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. The S&P 500 Index is a diverse index that includes 500 American companies that represent over 70% of the total market capitalization of the U.S. stock market.

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

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

 

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2018 Could be Another Knockout Year for Emerging Europe
January 9, 2018

A market square in Warsaw Poland

Domestic stocks were a great place to invest in 2017, but hopefully you didn’t overlook opportunities overseas. Emerging markets had a gangbusters year, surging more than 37.5 percent with dividends reinvested, as measured by the MSCI Emerging Markets Index. A combination of rising PMIs—or the purchasing manager’s index I talk so often about—and a steadily declining U.S. dollar helped emerging economies in Asia, Latin America, Europe and elsewhere eke out their best year since 2010.

Will there be a fed rally in 2018
click to enlarge

This was a boon for our Emerging Europe Fund (EUROX), which crushed its benchmark in 2017.

EUROX, which invests in companies domiciled in Central and Eastern Europe (CEE) economies, beat its benchmark, the MSCI EM Europe 10/40 Index, by 2.4 percent and outperformed its main competitor, the T. Rowe Price Emerging Europe Fund (TREMX), by 4.7 percent. Throughout 2017, the fund traded consistently above its 200-day moving averages and ended the year at a three-year high.

Will there be a fed rally in 2018
click to enlarge

I’m optimistic this upswing can be sustained this year, supported by low unemployment, low inflation and record manufacturing growth. The European Central Bank (ECB) has indicated that it will continue its accommodative monetary policy by keeping rates low and expanding its balance sheet some 270 billion euros ($326 billion) through the first three quarters of 2018.

EUROX Outperformed, Thanks Largely to Active Management

I can’t stress enough the role active management played here. Using financial indicators such as cash flow return on invested capital (CFROIC) and low debt-to-equity, we managed to outperform the fund’s benchmark and its main competitor.  

Two positive contributors to fund performance last year were an overweight in Turkish stocks and underweight in Russian stocks. When screening for CFROIC, our model pointed to Turkey as having the most attractive companies on a relative basis. Our allocation was well-made, as Turkey far outperformed its CEE peers. The Borsa Istanbul 100 Index ended the year up close to 48 percent in local currency, followed by Poland’s  WIG20, which advanced more than 26 percent.

Will there be a fed rally in 2018
click to enlarge

Again, we underweighted Russia based on our model and after factoring in overall negative investor sentiment, which really began in earnest in 2014 after the country annexed Crimea, inviting international sanctions. The ill will only intensified during and after the 2016 U.S. presidential election, and today, we see Russian stocks, as measured by the MOEX Russia Index, decoupling from Brent crude oil prices.

Will there be a fed rally in 2018
click to enlarge

Historically, Russian stocks have closely tracked Brent prices, which accounted for nearly 50 percent of the federation’s exports in 2016. But it seems now as if a selloff is underway as new details continue to emerge from the investigation into Russia’s meddling in the U.S. election. It appears markets have mostly soured on Vladimir Putin, with the MOEC ending the year down 5.5 percent.

A good illustration of our attentive stock selection in Russian equities was our exit out of Magnit, the country’s largest retailer. We dumped the stock in April after it had lost around 9 percent for the year. By the end of 2017, it had fallen a further 25 percent.

Meanwhile, we remained long Sberbank, the number one holding in EUROX. In the third quarter of 2017, the Russian bank posted a record 224.1 billion rubles (approximately $4 billion) in net profit, an amazing 64 percent increase from the same three-month period in 2016. Sberbank ended the year up more than 46 percent.

A European Manufacturing Boom Could Be Constructive in 2018

Besides a weak U.S. dollar, the real catalyst for growth in emerging European markets last year was a reenergized manufacturing sector. Take a look at the PMIs in the CEE area. All of the major economies that EUROX invests in saw manufacturing expand strongly throughout most of 2017—and that includes debt-ridden Greece, which had been a laggard in this area until recently. In December, the Mediterranean country’s manufacturing sector rose the fastest since 2008. (Anything above 50 indicates expansion; anything below, deterioration.)

Will there be a fed rally in 2018
click to enlarge

The PMI, unlike gross domestic product (GDP), is a forward-looking indicator. That all CEE countries are in expansion mode is good news, I believe, for the next six months at least, if not the rest of 2018.

The eurozone as a whole knocked it out of the park in December, posting a 60.6, the highest PMI reading ever in the series’ two-decade history. Germany, Austria, the Netherlands and Ireland all ended the year at record-high levels, while Italy and France had their best showing since 2000.

As I’ve shared with you before, CEE countries have tended to benefit greatly from strong economic growth in its western neighbors, and last year was no exception. The Czech Republic and Hungary were standouts, their manufacturing sectors growing at the fastest rates on improved output, new orders and job creation. Brexit has also been a windfall for the CEE regions, as companies have moved high-quality jobs out of the United Kingdom and into Poland and other central and eastern European Union nations.

Poland Now a “Developed Economy”

On a final note, Poland was recently upgraded from the “advanced emerging” category to “developed” by FTSE Russell, effective September of this year. This will place Poland in the same company as, among others, the U.S., U.K., Japan, Germany and Singapore. The country is the first in the CEE region to receive “developed” status, and I believe the news will attract even more inflows from foreign investors.

Among the decisive factors behind the upgrade were the country’s advanced infrastructure, secure trading and a high gross national income (GNI) per capita. The World Bank forecasts its economy in 2018 to grow 3.3 percent, up significantly from 2.7 percent in 2016, on the back of a strong labor market, improved consumption and the child benefit program Family 500+.

Economists aren’t the only ones noticing the improvement. Young Polish expats who had formerly sought work in the U.K. and elsewhere are now returning home in large numbers to participate in the booming economy. Banks and other companies, including JPMorgan Chase and Goldman Sachs, are similarly considering opening branches in Poland and hiring local talent.

This represents quite an about-face for a country that, as recently as 1990, was languishing under communist rule.

 

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.

 

Total Annualized Returns as of 9/30/2017:
Fund One-Year Five-year Ten-Year Gross Expense Ratio
Emerging Europe Fund (EUROX) 26.83% -3.85% -6.96% 2.33%
MSCI EM Europe 10/40 Index 25.42% -11.03% -34.91% n/a
T. Rowe Price Emerging Europe Fund 22.59% -2.21% -6.00% 1.75%

Expense ratio as stated in the most recent prospectus. Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. For a portion of periods, the fund had expense limitations, without which returns would have been lower. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance does not include the effect of any direct fees described in the fund’s prospectus which, if applicable, would lower your total returns. Performance quoted for periods of one year or less is cumulative and not annualized. Obtain performance data current to the most recent month-end at www.usfunds.com or 1-800-US-FUNDS.

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 concentrated portfolio. The Emerging Europe Fund invests more than 25% of its investments in companies principally engaged in the oil & gas or banking industries.  The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile.

The Standard & Poor's 500, often abbreviated as the S&P 500, or just the S&P, is an American stock market index based on the market capitalizations of 500large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices. The MSCI Emerging Markets (EM) Europe 10/40 Index is designed to measure the performance of the large and mid-cap representation across 6 Emerging Markets (EM) countries in Europe. The MSCI Emerging Markets Index is an index created by Morgan Stanley Capital International (MSCI) designed to measure equity market performance in global emerging markets. The Borsa Istanbul 100 Index is a capitalization-weighted index composed of National Market companies except investment trusts. The WIG20 is a capitalization-weighted stock market index of the twenty largest companies on the Warsaw Stock Exchange. The Athens Stock Exchange General Index is a capitalization-weighted index of Greek stocks listed on the Athens Stock Exchange. The index was developed with a base value of 100 as of December 31, 1980. 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 index has a base value of 1000 points as of January 2, 1991 and is a Total Return index. The PX index is the official price index of the Prague Stock Exchange. It is a free float weighted price index made up of the most liquid stocks and it is calculated in real time. The MOEX Russia Index (formerly MICEX Index) is the main ruble-denominated benchmark of the Russian stock market. 

The Purchasing Managers' Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

Cash flow return on invested capital (CFROIC) is a calculation used to assess a company’s efficiency at allocating the capital under its control to profitable investments.

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.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Emerging Europe Fund as a percentage of net assets as of 9/30/2017: Magnit 0.00%, Sberbank of Russia PJSC 10.71%. Holdings by region in the Emerging Europe Fund as a percentage of net assets as of 9/30/2017: Russian Federation 34.55%, Turkey 15.37%, Poland 14.5%, Greece 6.98%, Austria 4.6%, Hungary 3.3%, Germany 2.7%, Cyprus 2.25%, Czech Republic 1.38%, Canada 1.25%.

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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5 Agents of Change Investors Need to Know About Now
November 6, 2017

the world is running out of gold mines, here's how investors can play it

The world is changing fast right now in ways that many investors might not easily recognize or want to admit. This could end up being a costly mistake. If you’re not paying attention, you could be letting opportunities pass you by without even realizing it.

With that in mind, I’ve put together a list of five agents of change that I think investors need to be aware of and possibly factor into their decision-making process. 

1. Xi Jinping

October cover of The Economist

At China’s 19th National Party Congress two weeks ago, Xi Jinping’s political thought was enshrined into the country’s constitution, an honor that, before now, had been reserved only for Mao Zedong, founder of the People’s Republic of China, and Deng Xiaoping. It was Deng, if you recall, who in 1980 established special economic zones (SEZs) that helped turn China into the economic powerhouse it is today.

But back to Xi. His elevation to Chairman Mao-status not only cements his place in the annals of Chinese history but also makes him peerless among other world leaders in terms of political and militaristic might, with the obvious exception of U.S. President Donald J. Trump.

But whereas Trump has been criticized by some for setting the U.S. on a more isolationist path—shrinking the size of the State Department, just to name one example—Xi sees China emerging as the de facto global leader by 2050. To get there, his country is spending billions on the “Belt and Road Initiative” and other massive infrastructure projects, opening its doors to foreign investors, reforming state-run enterprises, weeding out corruption, investing heavily in clean energy and public transportation and expanding its middle class. And let’s not forget that the Chinese yuan, also known as the renminbi, was included in the International Monetary Fund’s (IMF) basket of reserve currencies in 2015, placing it in the same league as the U.S. dollar, British pound, Japanese yen and euro.

During his three-hour speech before the congress, Xi made reference to the “Chinese dream,” adding that the “Chinese people will enjoy greater happiness and well-being, and the Chinese nation will stand taller and firmer in the world.”

Xi has his own detractors, of course, who see China’s rise as a threat to established world order. But if his vision is to be realized, it might be prudent to recognize and prepare for it now. China’s economy grew a healthy 6.8 percent in the third quarter year-over-year, helping it get closer to meeting economists’ target of 6.5 percent for 2017. And although manufacturing expansion slowed in October, falling from 52.4 in September to 51.6, it was still well above the 50 threshold.  

China manufacturing power expanded at slightly lower pace in October
click to enlarge

Citing these indicators as well as strong medium and long-term bank lending to nonfinancial corporations, research firm BCA recommended that investors overweight Chinese stocks relative to the emerging market aggregate.

 

 

2. Poland

Besides China, another region I’m keeping my eye on is Poland. Already one of the fastest growing economies in Europe, the country was just upgraded from the “advanced emerging” category to “developed” by FTSE Russell, effective September 2018. This will place Poland in the same company as, among others, the U.S., U.K., Japan, Germany, Singapore and South Korea, the last country to have joined the club of top-ranking economies. Poland is the first Central and Eastern European (CEE) country to receive “developed” status.

Among the decisive factors behind the upgrade were the country’s advanced infrastructure, secure trading and a high gross national income (GNI) per capita. The World Bank expects Poland’s economic growth in 2017 to reach 4 percent, up significantly from 2.7 percent in 2016, on the back of a strong labor market, improved consumption and the child benefit program Family 500+.

Poland one of the fastest growing economies in th eEuro area
click to enlarge

Economists aren’t the only ones noticing the improvement. Young Polish expats who had formerly sought work in the U.K. and elsewhere are now returning home in large numbers to participate in the booming economy, according to the Financial Times. Banks and other companies, including JPMorgan Chase and Goldman Sachs, are similarly considering opening branches in Poland and hiring local talent.

This represents quite an about-face for a country that, as recently as 1990, was languishing under communist rule.

One of U.S. Global’s analysts, Joanna Sawicka, has seen the dramatic transformation firsthand. A native of Bialystok, Poland, Joanna has vivid memories of waiting in line for hours just to buy food and school supplies. After returning to the U.S. from a visit to her hometown in 2015, though, she was singing its praises:

“I saw big changes. There’s now a small business on every street corner. A lot of my old friends own businesses now. Poland is the largest beneficiary of European Union funds, and people are clearly taking advantage of having more money and better opportunities.”

 

 

3. Bitcoin

One of the most influential agents of change right now is bitcoin, and indeed the entire digital currency market. Cryptocurrencies are challenging underlying notions of the global monetary framework, upending the way many companies raise funds and disrupting the investment world.

All this from an asset class nobody even knew about 10 years ago.

For the first time last week, bitcoin traded above $7,000 a coin, bringing its 2017 gains to around 650 percent. Some are calling this a bubble, but I recently shared with you a chart that shows that, when placed on a logarithmic scale, bitcoin doesn’t appear to have found its peak yet.

Bitcoin broke above 7000
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Bitcoin can no longer be called a curiosity or niche investment. Large brokerage firms and financial institutions, including Fidelity and USAA, now allow clients to use their websites to check their holdings of bitcoin and other digital currencies alongside their more traditional assets. And just last week, the Chicago Mercantile Exchange (CME) announced it will be offering a bitcoin futures contract by the end of the year, giving investors an easier way to trade cryptos.

Following the announcement, Coinbase, a leading digital currency broker, saw a record number of people opening new accounts on its platform. Within a single 24-hour period, as many as 100,000 new users opened accounts, helping to double the number of Coinbase clients since the beginning of the year.

This explosion in interest hasn’t come without consequences in other markets, however. The U.S. Mint reported that this year’s sales of American Eagles, the popular gold coins, have fallen to their lowest level since 2007, presumably as investors who otherwise would have bought bullion have instead put money in bitcoin as a store of value.

4. U.S. Tax Reform

It’s been at least a generation at least since the U.S. has had meaningful tax reform. That might be about to change, though, as Congress and the president last week unveiled their plans to overhaul the tax code and deliver the “biggest tax cut in U.S. history,” according to Trump.

If passed and signed, the plan would consolidate the number of income brackets, currently at seven, down to only four, while also eliminating a number of tax credits and exemptions, including the alternative minimum tax (AMT). The fourth bracket, with a rate of 39.6 percent for the nation’s top earners, was added at the last minute to address concerns the new code would blow up the deficit. Many savers are no doubt relieved to learn that 401(k)s will be left alone, ending rumors that annual contribution caps would be lowered.

As for corporate taxes, the plan is to slash them from 35 percent—the highest among any country in the Organization for Economic Cooperation and Development (OECD)—to a much more competitive 20 percent. This change would be both immediate and permanent.

Right now, as much as $2.5 trillion or more in cash is estimated to be held overseas by multinational corporations to avoid having to pay the steep rate. Lowering it would allow these firms to bring profits home and reinvest them in workers, new equipment and more. It would also encourage American companies to relocate operations back to the U.S., as we saw last week with semiconductor manufacturer Broadcom.

After failing to repeal and replace Obamacare, both Congress and the president need this win if they expect voters to give them another term.

5. Jerome Powell

For the final agent of change, I’m picking someone whom some readers might not agree reflects real change. Jerome “Jay” Powell, the person Trump has tapped to replace Federal Reserve Chair Janet Yellen—assuming he gets Senate confirmation—is being described as someone who’ll mostly hold to the status quo established by his two immediate predecessors, Yellen and Ben Bernanke. Powell appears to be dovish and supportive of the cautious interest rate hikes we’ve seen during Yellen’s tenure, which will come to an end in February 2018. 

Federal reserve chair Janet Yellens tenure
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There’s one huge difference, however—one that likely convinced Trump a change was needed, despite his previous acclaim for Yellen’s handling of the job. Whereas Yellen has expressed support for the raft of financial regulations that were introduced in the wake of the financial crisis, Powell generally seems to be in favor of deregulation, in line with Trump’s own agenda. On numerous occasions I’ve written that our industry needs more streamlined rules and laws, so I see this as very constructive. Although Powell, as head of the Fed, won’t have any policymaking authority to alter or reverse such rules, at least he’ll serve as an ideological ally of Trump’s.

On top of all this, Powell’s appointment will set new precedent. He’ll be the first Fed chair in decades not to hold an advanced degree in economics—he’s a former investment banker with the Carlyle Group—and he’ll also be the first in nearly as many years to replace someone before the end of their full 14 years.

In any case, I speak for everyone at U.S. Global by wishing Powell the best, once confirmed, and hope his policies can help the U.S. economy continue moving in the right direction.

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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 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.

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 9/30/2017.

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Are ICOs Replacing IPOs?
October 23, 2017

Last week I was in Barcelona speaking at the LBMA/LPPM Precious Metals Conference, which was attended by approximately 700 metals and mining firms from all over the globe. I found the event energizing and stimulating, full of contrary views on topics ranging from macroeconomics to physical investment markets to cryptocurrencies.

My keynote address focused on quant investing in gold mining and the booming initial coin offering (ICO) market. I’m thrilled to share with you that the presentation was voted the best, for which I was awarded an ounce of gold. I want to thank the London Bullion Market Association, its members and conference attendees for this honor.

Speaking of gold and cryptocurrencies, the LBMA conducted several interesting polls on which of the two assets would benefit the most in certain scenarios. In one such poll, attendees overwhelmingly said the gold price would skyrocket in the event of a conflict involving nuclear weapons. Bitcoin, meanwhile, would plummet, according to participants—which makes some sense. As I pointed out before, trading bitcoin and other cryptos is dependent on electricity and WiFi, both of which could easily be knocked out by a nuclear strike. Gold, however, would still be available to convert into cash.

It’s a horrific thought, but the poll results show that the investment case for gold as a store of value remains favorable. Goldman Sachs echoed the idea last week, writing in a note to investors that “precious metals remain a relevant asset class in modern portfolios, despite their lack of yield.” The investment bank added that precious metals “are still the best long-term store of value out of the known elements.”

Metcalfe’s Law Suggests Crypto Prices Could Keep Rising

This isn’t meant to knock bitcoin and other virtual currencies. Because they’re decentralized and therefore less prone to manipulation by governments and banks—unlike paper money and even gold—I think they could also have a place in portfolios.

Even those who criticize cryptocurrencies the loudest seem to agree. JPMorgan Chase CEO Jaime Dimon, if you remember, called bitcoin “stupid” and a “fraud,” and yet his firm is a member of the pro-blockchain Enterprise Ethereum Alliance (EEA). Russian president Vladimir Putin publicly said cryptocurrencies had “serious risks,” and yet he just called for the development of a new digital currency, the “cryptoruble,” which will be used as legal tender throughout the federation.

Follow the money.

Metcalfe’s law states that the bigger the network of users, the greater that network’s value becomes. Robert Metcalfe, distinguished electrical engineer, was speaking specifically about Ethernet, but it also applies to cryptos. Bitcoin might look like a bubble on a simple price chart, but when we place it on a logarithmic scale, we see that a peak has not been reached yet.

Bitcoin still has room to run
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Bitcoin adoption could multiply the more people become aware of how much of their wealth is controlled by governments and the big banks. This was among the hallway chatter I overheard at the Precious Metals Conference, with one person commenting that what’s said in private during International Monetary Fund (IMF) meetings is far more important than what’s said officially.

I have a similar view of the G20, whose mission was once to keep global trade strong. Since at least 2008, though, the G20 has been all about synchronized taxation to grow not the economy but the role government plays in our lives. Trading virtual currencies is one significant way to get around that.

The Incredible Shrinking IPO Market

Just as water takes the path of least resistance, money flows where it’s respected most.

You need only look at the mountain of cash U.S. multinationals have stashed overseas, currently standing at an estimated $2.6 trillion. The steep 39 percent U.S. corporate tax rate—the highest among any country in the Organization for Economic Cooperation and Development (OECD)— discourages companies from bringing their profits back home and reinvesting them in new equipment and employees.

Of course, taxes aren’t the only type of friction money can run up against. More and more stringent financial rules and regulations have been one of the top destroyers of capital and business growth over the past 20 to 30 years. The Sarbanes-Oxley Act, signed in 2002, is widely blamed for limiting the number of initial public offerings (IPOs) that occur in the U.S. The legislation has made it prohibitively expensive for many smaller firms to get listed on an exchange. Between 1996 and 2016, the number of investable U.S. companies was cut in half, falling from 7,322 to 3,671.

Number of listed US companies continues to drop
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This has ultimately hurt everyday retail investors who not only have fewer stocks to invest in now but also lack access to many of the same potentially profitable opportunities enjoyed by angel investors, venture capitalists and other institutional investors. Private equity and venture capital can be much higher-yielding investments than common asset classes such as Treasuries and equities, but for the most part, only accredited investors can participate.

Bracing for MiFID

IPOs could be squeezed even further after the implementation of the European Union’s (EU) revised Markets in Financial Instruments Directive (MiFID), set to go into full effect January 3. The directive, initially passed in response to the financial crisis, acts as a sweeping reformation of existing trading rules that affect everything from stocks to bonds to commodities. All 28 EU nations must have laws in place to comply with MiFID by the January deadline—or face litigation and fines.

With less than two months left on the clock, 17 countries, including Spain, Portugal and the Netherlands, are still scrambling to convert MiFID into national law, according to Bloomberg. This is creating all sorts of financial uncertainty for banks, insurers and money managers on both sides of the Atlantic.

Half of the EU still scrambling to meet the January 3rd MiFID compliance deadline
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One rule in particular could threaten U.S. IPOs. It states that, to be more transparent, banks must now “unbundle” the costs of investment research from that of executing trades, a practice that’s been routine for decades. To produce stand-alone research, banks must register as investment advisers, a costly process that might prompt some firms to avoid it altogether. This would limit investors’ exposure to only the largest companies and, in turn, discourage smaller U.S. firms from pursuing an IPO, according to Cowen & Co. analysis and reported by Bloomberg.

MiFID is just the latest in a long string of regulations that, while conceived with good intentions, carry unintended consequences. It’s doubly unfortunate that an EU rule could so impact U.S. companies’ ability to gain the publicity necessary to go public.

But hasn’t this been the trend for years now? In many ways, doing business in the EU has only gotten more challenging, and bureaucrats seem determined to take punitive steps against successful American firms.
Look at how Facebook, Google and other large tech companies have been treated in Europe. Back in June, the search giant was slapped with a record $2.8 billion antitrust fine and has since been strongarmed into changing its online shopping service.

A restrictive regulatory backdrop is largely responsible for this. Because rules are so tight, European companies have a hard time innovating and staying competitive. So instead of building its own Facebook or Google, the EU’s only other recourse is to take a protectionist approach and wrap the 28-member bloc in more and more red tape.     

For Many Startups, ICOs Are a Solution

I believe this is part of the reason why we’re seeing such a massive surge in ICOs, which, at the moment, are nearly unregulated in the U.S. and Europe. In an effort to bypass the rules and costs associated with getting listed on an exchange, many startups now are opting to raise funds by issuing their own digital currency based on blockchain technology. And unlike with private equity, smaller retail investors can participate.

Again, money flows where it’s respected most.

Bitcoin and Ethereum are the best known cryptocurrencies, but there are more than 1,000 being traded around the world, with a combined market cap of around $150 billion, according to Bank of America Merrill Lynch (BoAML).

As of this month, IPOs have raised over $3 billion in 2017, more than seven times the amount generated in all years prior to 2017 and far surpassing expectations of around $1.7 billion for the year.

ICO market has raised more than 3 million so far in 2017
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To give you some perspective, the U.S. IPO market raised $4.1 billion from 29 deals in the September quarter alone, according to Renaissance Capital. Although this dwarfs the ICO market in dollar terms, both the number of IPOs and the amount raised are significantly lower than the same quarter in 2014, which saw an impressive $37.6 billion raised from 60 deals.

As long as the barriers to getting listed remain high, I expect we’ll see this trend of fewer IPOs and more ICOs continue.  

Bitcoin Now Bigger than Goldman Sachs

Not all cryptocurrencies will survive, obviously, and we’ll likely see huge transformations in the space before clear leaders pull away from the pack. Remember, no one knew in 1997 which internet companies would eventually dominant  the others.

But for now, it’s an exciting time for an asset class that didn’t even exist 10 years ago. Trading above $6,000 for the first time last week, bitcoin reached a market cap of $96.7 billion. Amazingly, that’s more than Goldman Sachs’ market caps of $92.9 billion.    

Cryptocurrencies off their 2017 highs
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It’s important for investors to know that cryptos do face potential regulation risk. What kind of risk, though, is currently up in the air as U.S. regulators debate whether digital currency is a security or commodity. One would place it within the jurisdiction of the Securities and Exchange Commission (SEC), the other within the jurisdiction of the Commodity Futures Trading Commission (CFTC). Unsurprisingly, both agencies see cryptos as their own.

Last week also highlighted a new risk in the fledgling market. Tezos, the firm behind what was at the time the largest ICO in history, revealed a significant slowdown in the progress of its virtual coin, the “tezzie.” Back in July, Tezos made headlines for raising a then-unprecedented $232 million. But today, the group, headed by a husband-and-wife duo, is faced with a number of setbacks including a lack of developers and a highly-publicized management dispute.

According to the Wall Street Journal’s Paul Vigna, this has “put trading of Tezos tokens held by investors in limbo while also putting some of the technology on hold as well.”

Diwali Fails to Light Up Gold

U.S. Global Investors wishes our friendss & followers a Happy Diwali filled with light and prosperity

Turning to gold, the yellow metal made healthy gains the week before last, climbing more than 2.3 percent as we headed closer to the first day of Diwali. As I’ve explained numerous times before, it’s considered auspicious to give gifts of gold bullion and jewelry during the Hindu Festival of Lights, and in years past we’ve seen some price appreciation in the days and weeks leading up to the celebration.

Last week, though, the gold price fell below $1,300 an ounce as stocks continued their record-setting bull run.

But as the LBMA poll shows, it’s prudent to have some gold in your portfolio, as it’s negatively correlated with other assets. As always, I recommend a 10 percent weighting, with 5 percent in physical gold and 5 percent in gold stocks, and remember rebalance every year.

 

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 9/30/2017.

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Net Asset Value
as of 04/19/2018

Global Resources Fund PSPFX $6.09 No Change Gold and Precious Metals Fund USERX $7.65 -0.03 World Precious Minerals Fund UNWPX $4.42 0.02 China Region Fund USCOX $11.45 0.08 Emerging Europe Fund EUROX $7.35 -0.03 All American Equity Fund GBTFX $25.19 -0.04 Holmes Macro Trends Fund MEGAX $19.72 -0.33 Near-Term Tax Free Fund NEARX $2.19 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $1.99 No Change