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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.

We Looked into the Effects of Hurricane Harvey and Here’s What We Found
September 5, 2017

Hurricane Harvey named a 1000 year flood event

Unless you’ve been away from a TV, computer or smartphone for the past week, you’ve likely seen scores of pictures and videos of the unprecedented devastation that Hurricane Harvey has brought to South Texas and Louisiana. As a Texan by way of Canada, I’d like to take a moment to reflect on the human and economic impact of this storm, one of the worst natural disasters to strike the U.S. in recorded history.

Below are some key data points and estimates that help contextualize the severity of Harvey and its aftermath.

$503 Billion

In a previous Frank Talk, “11 Reasons Why Everyone Wants to Move to Texas,” I shared with you that the Lone Star State would be the 12th-largest economy in the world if it were its own country—which it initially was before joining the Union in 1845. Following California, it’s the second-largest economy in the U.S. A huge contributor to the state economy is the Houston-Woodlands-Sugar Land area, which had a gross domestic product (GDP) of $503 billion in 2015, according to the U.S. Bureau of Economic Analysis. Not only does this make it the fourth-largest metropolitan area by GDP in the U.S., but its economy is equivalent to that of Sweden, which had a GDP of $511 billion in 2016.

Hurricane Harvey

1-in-1,000 Years

The amount of rain that was dumped on parts of Southeast Texas set a new record of 51.88 inches, breaking the former record of 48 inches set in 1978. But now we believe it exceeds that of any other flood event in the continental U.S. of the past 1,000 years. That’s according to a new analysis by the Cooperative Institute for Meteorological Satellite Studies and Dr. Shane Hubbard, a researcher with the University of Wisconsin-Madison. Hubbard’s conclusion required the use of statistical metrics since rainfall and flood data go back only 100 years or so, but the visual below might help give you a better idea of just how rare and exceptional Harvey really is.

Hurricane Harvey named a 1000 year flood event

$190 Billion

According to one estimate, Hurricane Harvey could end up being the costliest natural disaster in U.S. history. Analysts with Risk Management Solutions (RMS) believe economic losses could run between $70 billion and $90 billion, with a majority of the losses due to uninsured property. This is a conservative estimate compared to AccuWeather, which sees costs running as high as $190 billion, or the combined dollar amounts of Hurricanes Katrina and Sandy. If so, this would represent a negative 1 percent impact on the nation’s economy.

500,000 Cars and Trucks

The wind and rains damaged more than just houses, schools, refineries and factories. According to Cox Automotive, which controls Kelley Blue Book, Autotrader.com and other automotive businesses, as many as half a million cars and trucks could have been rendered inoperable because of the flooding. That figure’s double the number of vehicles that were destroyed during Hurricane Sandy in 2012. What this means, of course, is that auto dealerships are going to have their work cut out for them once the waters recede and insurers start cutting some checks. Buyers can likely expect to see a huge premium on used cars.

24%

Most people know that Texas is oil country. What they might not know is that it’s also the nation’s number one gasoline-producing state, accounting for nearly a quarter of U.S. output, as of August. In addition, the Lone Star State leads the nation in wind-powered generation capacity, natural gas production and lignite coal production, according to the Energy Information Administration (EIA).

600,000 Barrels a Day

The largest oil refinery in the U.S. belongs to Motiva Enterprises, wholly controlled by Saudi Aramco, the biggest energy company in the world. Located in Port Arthur, about 110 miles east of Houston, Motiva is capable of refining up to 603,000 barrels of crude a day. As floodwaters gradually filled the facility, the decision was made last Wednesday to shut it down completely, and as of Friday morning, there was no official timetable as to when operations might begin again, according to the Houston Business Journal. The consequences will likely reverberate throughout the energy sector for some time.

5 largest oil refineries impacted by hurricane Harvey
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Motiva isn’t the only refinery that was affected, of course. As much as 31 percent of total U.S. refining capacity has either been taken offline or reduced dramatically because of Harvey, according to CNBC. The Houston area alone, known as the energy capital of the world, is capable of refining about 2.7 million barrels of crude a day, or 14 percent of the nation’s capacity.

$2.50 a Gallon

As of last Friday morning, gas prices in Texas had surged to $2.33 a gallon on average, more than a two-year high, according to GasBuddy.com. In the Dallas-Ft. Worth area, prices at some pumps are reportedly near $5 a gallon. By Monday, prices had spiked even more, to $2.50 a gallon.

US dollar tracks trumps favorability down
click to enlarge

With concerns that a gas shortage might hit the state, panicked Texas consumers lined up outside numerous stations, sometimes for miles, to drain them dry. By 5:00 on Thursday, the 7-Eleven next door to U.S. Global headquarters was serving diesel only.

54 Million Passengers

The Houston Airport System is one of the busiest in the world, with the total number of passengers enplaned and deplaned standing at roughly 54 million, as of April 2017. Flights at the city’s two largest airports, Bush Intercontinental and Hobby, were suspended Sunday, September 27, with more than 900 passengers stranded between the two. Commercial traffic resumed on Wednesday, though service was limited. According to Bloomberg, United Airlines, which has a major hub at Bush Intercontinental, was scheduling only three arrivals and three departures a day.

US dollar tracks trumps favorability down
click to enlarge

The International Business Times reports that several major airlines are offering frequent flyer miles in exchange for donations to Hurricane Harvey disaster relief. American Airlines, for example, will provide 10 miles for every dollar donated to the American Red Cross after a minimum $25 contribution. Other carriers have similar programs, including United, Delta Air Lines, Southwest Airlines and JetBlue Airways.

The Kindness of Strangers

For all the talk of economic impact and barrels of oil, it’s important we keep in mind that Hurricane Harvey has had real consequences on individuals, families and businesses. Many of them have lost everything.

I might not have been born in the U.S., but I’ve always been moved and inspired by how selflessly Americans rally together and rush to each other’s aid in times of dire need.

This, of course, is one of those times, and I urge everyone reading this to consider donating to a reputable charity of your choice. For our part, U.S. Global Investors will be donating money, food, clothing and other necessities to one of our favorite local charities, the San Antonio Food Bank.

Please keep the people of South Texas and Louisiana in your thoughts and prayers!

 

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

Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 6/30/2017: American Airlines Group Inc., Delta Air Lines Inc., United Continental Holdings Inc., Southwest Airlines Co., JetBlue Airways Corp.

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America’s Infrastructure Shortfall Could Be an Investor’s Best Friend
March 15, 2017

America's infrastructure shortfall could be an investor's best friend

Every four years, the American Society of Civil Engineers (ASCE) releases its report card on the condition of America’s infrastructure, and for the second time since 2013, our nation’s roads, bridges, waterways, airports and more scored a barely-passing D+.

As disconcerting as this might be to American taxpayers who expect and depend on quality infrastructure, it could be a huge opportunity for investors in companies that stand to benefit from President Donald Trump’s $1 trillion infrastructure spending proposal.

Although the plan will likely include public funding, private investment is expected to play an exceptionally large role. House Speaker Paul Ryan recently commented that for every $1 of public funds earmarked for infrastructure, there should be at least $40 in private sector spending. This is investment that will be much-needed.

Failure to Act

According to the ASCE, the U.S. is facing a “yuge” spending gap in both the near term and long term. Between 2016 and 2025, the nation will be short nearly $3 trillion for surface transportation, water, electricity and more. Between 2016 and 2040, the spending gap pushes closer to $10 trillion.

Public Spending on Transportation and Water Infrastructure Has Dropped in Recent Years
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This gap has “a cascading impact on our nation’s economy,” as the ASCE puts it. If nothing changes in terms of infrastructure spending, U.S. gross domestic product (GDP) could lose up to $4 trillion by 2025. Business sales could fall $7 trillion, and 5 million American jobs could be lost.

Take a look at the cost of congested roads alone. In 2014, the most recent year of available data, an estimated 3.1 billion gallons of fuel were wasted while we sat idly in traffic. Combined with lost time and productivity, this amounted to approximately $160 billion—all because of clogged roads and highways.

Total cost of vehicle congestion is rising
click to enlarge

Without the proper funding for surface repairs and expansion, this figure could easily continue to surge in the coming years as more and more Americans use public roads. In 2016, Americans drove over a jaw-dropping 3 trillion miles, equivalent to more than 300 round trips between Earth and Pluto.

More and more americans make use of public road and aviation infrastructure
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They’re also flying more than ever before, as you can see in the chart above. With U.S. airports serving more than 2 million passengers every day, congestion is growing. During one of the presidential debates in September, Trump compared U.S. airports  to “a third world country,” specifically calling out Los Angeles International, LaGuardia, John F. Kennedy and Newark. In their efforts to address these capacity issues, airports are facing a $42 billion funding gap between last year and 2025.

America's Bridges by AgeTransit, which includes commuter rail, is also grossly underfunded, according to the ASCE. Like roads and airports, transit is increasingly depended on by millions of Americans, who took a whopping 10.5 billion trips on light rail in 2015. Despite growing demand, transit faces a $90 billion rehabilitation shortfall.

Perhaps no U.S. infrastructure has aged more than bridges, with nearly four in 10 of them older than 50 years. Of the more than 614,000 bridges in the U.S., 56,000, or 9 percent, were considered “structurally deficient” last year. According to the ASCE, our nation’s bridges are in need of $123 billion to rehabilitate them.

And as I told you last week, about 70 percent of America’s 90,000 dams will be at least 50 years old by 2025, according to E&E News.

Help Wanted/Needed

In a 2015 study, Standard & Poor’s found that government spending on infrastructure as a percentage of GDP had fallen to a two-decade low of 1.7 percent. This is precisely what Trump wants to remedy with his pledge to inject $1 trillion into the system, as it will not only rejuvenate our roads and airports but could also have a huge multiplier effect. S&P estimates that for every $1 allocated to public-sector infrastructure, about $1.70 is generated and added to real GDP.

But to close the gap described by ASCE, private investment will be needed. I believe this infrastructure buildout—which aspires to be as massive and consequential as President Eisenhower’s in the 1950s—presents some attractive opportunities for commodities and materials investors.  

 

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.

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Time to Take Trump Seriously on Infrastructure Spending?
December 8, 2016

Cancellation new Air Force One project

Earlier I shared with you that when it comes to President-elect Donald Trump, the media takes him literally but not seriously. His supporters, on the other hand, take him seriously but not always literally.

We saw an example of this polarity Tuesday morning when Trump took a shot at Boeing, tweeting to his nearly 17 million Twitter followers that the jet-manufacturer “is building a brand new 747 Air Force One for future presidents, but costs are out of control, more than $4 billion. Cancel order!”

When journalists sought clarification, Trump said he wants Boeing to make money, “but not that much money.”

As the Wall Street Journal pointed out, the current Air Force One has been in use for 30 years—since Ronald Reagan’s administration—and includes many cutting-edge modifications for communications and defense. It’s designed to withstand a nuclear blast. For the value we get out of the president’s main ride, in other words, the exorbinant sticker price might not be so exorbinant as it initially appears.

But then, the $4 billion Trump refers to couldn’t be confirmed. Boeing responded by saying it’s currently under contract to build the jet for only $170 million, and production hasn’t even begun yet.

Again, in questioning the details of Trump’s tweet, the media might be missing the forest for the trees. It’s possible the president-elect means simply that we need to keep government cost overruns in check—not literally cancel the Air Force One order—something we can all agree with.

Investors Take Trump Seriously—and Somewhat Literally

Investors have so far managed to find the right balance between taking Trump seriously and literally, to a certain extent. Since Election Day, small-cap stocks have rallied more than 12 percent, suggesting the market sees Trump’s “America First” policies benefiting them the most. Because they have less exposure to foreign markets than blue-chip companies, small caps are in an attractive position to take advantage of lower corporate taxes, streamlined regulations and a stronger U.S. dollar.

The market’s also betting big on Trump’s proposal to spend $1 trillion on infrastructure over the next 10 years. For the one-year and three-month periods, the energy and materials sectors were among the best performers in the S&P 500 Index. Both landed in the “leading and gaining” quadrant in the chart below. 

energy and materials among the best sp 500 sectors
click to enlarge

We see similar results in the small-cap Russell 2000 Index. Materials and processing was the best performer for the one-year period while energy led over the past three months.

energy and materials among the best russell 2000 sectors
click to enlarge

Granted, a lot of the growth in energy can be attributed to OPEC’s recent announcement that it would trim production for the first time since 2008. Such an agreement was rumored back in October. Oil rallied sharply following the announcement but has retreated slightly on news that the cartel raised production to more than 34 million barrels a day in November. Speculation is also high on whether non-OPEC countries such as Russia will join the coordinated effort to help prices recover.

But like small-cap stocks, energy and materials appear to be getting a boost on hopes that Trump will make good on his commitment to opening the fiscal valves. If he succeeds at getting what he wants from Congress, we could very well see another major infrastructure boom and commodities bull market similar to the one led by China a decade ago.

No Better Time Than Now

Construction Californias Shasta Dam

It’s worth noting that Trump will likely face some tough opposition from Congress. Even though most of the $1 trillion will allegedly come from private investment, the same fiscal conservatives who said no to President Obama’s 2009 stimulus package, worth over $800 billion, might also balk at Trump’s request.

But if the government is serious about rolling out such a monumental spending package, there’s really no better time than now, with borrowing costs still at near-historic lows.

As Steve Bannon, Trump’s controversial advisor, told the Hollywood Reporter: “With negative interest rates throughout the world, it’s the greatest opportunity to rebuild everything. Shipyards, ironworks—get them all jacked up. We’re just going to throw it up against the wall and see if it sticks.”

I don’t know if I’d be so flippant about $1 trillion, but most everyone agrees that more needs to be done about our nation’s infrastructure. According to the American Society of Civil Engineers (ASCE), each American household could lose as much as $3,400 per year if roads, bridges and tunnels never see an upgrade. The longer we put off repairing our infrastructure, the more expensive it might get.

In a report this week, Deutsche Bank agreed that the U.S. should dream big or go home:

To drive strong infrastructure spending growth, the country will need to get much more aggressive in building new (or replacing) major transport bridges and tunnels, and to reach for Earth-altering infrastructure that addresses national risks like floods, droughts… If the U.S. is to meaningfully stimulate its economy via infrastructure, it must think bigger and act quicker.

Besides roads and bridges, Deutsche writes, the U.S. should pursue “ten-figure projects” such as levee systems, storm protection systems, water tunnels and river dredging, not to mention “new science and technology super structures like new rocket building and launch facilities, biotech labs,” and “next-generation communication and air traffic control.”

Such projects would benefit many more people than those using them. According to BCA Research, public spending on infrastructure has one of the highest multiplier effects, making it more effective at stimulating the economy than tax cuts.

Not All Stimulus Is Created Equal

 

Estimated Multipliers

Type of Activity

Low Estimate

High Estimate

Purchases of goods and services by the federal government

0.5x

2.5x

Transfer payments to state and local governments for infrastructure

0.4x

2.2x

Two-year tax cuts for lower and middle-income people

0.3x

1.5x

One-year tax cut for higher-income people

0.1x

0.6x

Finally, the U.S. is due for another major infrastructure build. Under Obama, total public construction spending dropped relative to spending during his two predecessors’ administrations

total public u.s. construction spending fell under president obama
click to enlarge

Global Economy at Point of Inflection: OECD

Increasing infrastructure investment would be good not just for the U.S. but also the world economy, which has struggled to gain traction for the past couple of years. In its just-released Global Economic Outlook, the Organization for Economic Cooperation and Development (OECD) strongly endorsed the idea of “using the fiscal levers to escape the low-growth trap”—similar to what Trump has proposed.

With the U.S. and China both planning sweeping stimulus efforts in the next one to two years, the Paris-based group sees global GDP growing 3.6 percent in 2018, the fastest pace since 2011. The OECD also revised its earlier 2017 growth estimate to 3.3 percent, up from 3.2 percent.

increased government spending could help global growth pick up speed
click to enlarge

Speaking in Paris last month, OECD Secretary-General Ángel Gurría commented that “there is reason to hope that the global economy may be at a point of inflection.”

I agree. Although I have my differences with Trump, I’m optimistic he can negotiate an infrastructure deal that will jumpstart growth, both here and abroad.

Explore investment opportunities in commodities and natural resources!

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

The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The Russell 2000 Index is a U.S. equity index measuring the performance of the 2,000 smallest companies in the Russell 3000. The Russell 3000 Index consists of the 3,000 largest U.S. companies as determined by total market capitalization.

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 9/30/2016: The Boeing Co.

 
 

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Muni Bonds a Key to Making America Great Again
November 16, 2016


Ever since he made his presidential bid in June 2015, Donald Trump has vowed to “make America great again.” Part of that promise includes rebuilding the nation’s infrastructure, a monumental task that will require the financial backing of tax-free municipal bonds.

“We are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools, hospitals,” the president-elect told reporters the day after his historic victory. “We’re going to rebuild our infrastructure, which will become, by the way, second to none.”

To accomplish this, Trump has proposed a spending package as high as $1 trillion over the next 10 years. Although the private sector will be expected to finance a large portion of the work, massive amounts of public debt will be necessary.

This could be a “very big item for the muni market in the coming years,” according to John Vahey, managing director of federal policy for Bond Dealers of America, a trade association for  fixed-income dealers.

Americans already appear eager to get started repairing their infrastructure, which is facing a $3.6 trillion shortfall, according to the American Society of Civil Engineers (ASCE).

So far this year, state and local governments have issued nearly $150 billion in municipal bonds for new infrastructure projects, putting 2016 borrowing on a path to exceed levels in each of the last five years. And on Election Day, U.S. voters approved $55.7 billion in debt, the most since 2008.

Stay the Course

A possible headwind for munis is Trump’s proposal to reduce the top marginal income tax rate, from 39.6 percent to 33 percent. Although good for your pocketbook, such a move could limit the appeal of munis’ tax-exempt status among some top-earning investors.

Individual Income Tax Brackets Under the Trump Plan
Ordinary Income Rate Capital Gains Rate Single Filers Married Joint Filers
12% 0% $0 to $37,500 $0 to $75,000
25% 15% $37,500 to $112,500 $75,000 to $225,000
33% 20% $112,500+ $225,000+
Source: Tax Foundation, U.S. Global Investors

Other investors might be dazzled by what the media are calling the “Trump rally.” With the Dow Jones Industrial Average ending at a record high on Monday and Tuesday, munis could lose favor as investors increase their exposure to equities.

However, it’s important that we don’t overreact to market swings. A well-structured, diversified portfolio—one that also includes munis—is still the most prudent strategy going forward.

Reduce Volatility with Short-Term, Investment-Grade Munis

Something else to keep in mind are interest rates. It’s highly expected that the Federal Reserve will raise them next month, the first time it would do so since December of last year.

Even though rates will likely be lifted as little as 0.25 percent, it’s important to be aware that when rates rise, bond prices fall. At first glance, this inverse relationship might seem illogical, but it makes sense. If newly-issued bonds carry a higher yield, the value of existing bonds with lower rates declines.

That’s why investors should consider taking advantage of shorter-duration, investment-grade munis, which are less sensitive to rate increases than longer-term bonds whose maturities are further out.

Our Near-Term Tax Free Fund (NEARX) invests primarily in high-quality, investment-grade muni bonds in attractive jurisdictions. This strategy has led to more than two decades of positive annual returns, regardless of where interest rates were, what equity markets were doing or who occupied the White House.

Near-Germ Tax Free Fund Annual total Return
click to enlarge

I invite you to explore NEARX, which has delivered a phenomenal 21 straight years of positive returns. That’s a rare accomplishment that has been achieved by only 39 out of 31,306 equity and bond funds—around 0.12 percent—according to Morningstar data.

 

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.

Total Annualized Returns as of 9/30/2016
Fund One- Year Five-Year Ten-Year Gross
Expense
Ratio
Near-Term Tax Free Fund (NEARX) 1.26% 1.80% 2.88% 1.09%

Expense ratios as stated in the most recent prospectus. The Adviser of the Near-Term Tax Free Fund has contractually limited, through April 30, 2017, the total fund operating expenses (exclusive of acquired fund fees and expenses, extraordinary expenses, taxes, brokerage commissions and interest) to not exceed 0.45%. Total annual expenses after the waiver of 0.64% were 0.45%. 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.

Bond funds are subject to interest-rate risk; their value declines as interest rates rise. Though the Near-Term Tax Free Fund seeks minimal fluctuations in share price, it is subject to the risk that the credit quality of a portfolio holding could decline, as well as risk related to changes in the economic conditions of a state, region or issuer. These risks could cause the fund’s share price to decline. Tax-exempt income is federal income tax free. A portion of this income may be subject to state and local taxes and at times the alternative minimum tax. The Near-Term Tax Free Fund may invest up to 20% of its assets in securities that pay taxable interest. Income or fund distributions attributable to capital gains are usually subject to both state and federal income taxes.

The Near-Term Tax Free Fund invests at least 80 percent of its net assets investment-grade municipal securities. At the time of purchase for the fund’s portfolio, the ratings on the bonds must be one of the four highest ratings by Moody’s Investors Services (Aaa, Aa, A, Baa) or Standard & Poor’s Corporation (AAA, AA, A, BBB). Credit quality designations range from high (AAA to AA) to medium (A to BBB) to low (BB, B, CCC, CC to C). In the event a bond is rated by more than one of the ratings organizations, the highest rating is shown.

The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.

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

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

Nanpu Bridge  

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

Chinese Manufacturing Beats Expectations
click to enlarge

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

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

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

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

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

China Expected Surpass North America Automobile Sales
click to enlarge

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

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

China Attracting Assets

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

Chinas Golden Cross
click to enlarge

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

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

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

Who Will Lead the SEC in a Clinton Administration?

SEC Chair Elizabeth Warren

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

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

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

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

Although pure speculation, the scenario is worth pondering.

Another Infrastructure Boom Ahead?

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

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

China Imported Record Volumes Crude September
click to enlarge

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

China Leads World Electricity Generation
click to enlarge

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

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

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

Chinas multi trillion dollar belt and road initiative
click to enlarge

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

HSBC: Your Candidate’s Win Could Reward Gold Investors

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

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

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

 

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

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

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

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