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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.

Here's Why the Price of Palladium Just Zoomed Past Gold
January 22, 2019

EPalladium Strengthens on increased demand from automobile manufactures

Palladium might not fill headlines the way gold does, but it’s been on fire lately. Not only has the precious metal been the best performing commodity for two years straight, but its price also just shot past gold for the first time since 2001. For the first time ever, it broke through $1,400 an ounce last week before pulling back somewhat. From its 52-week low set in August, palladium has climbed almost 70 percent. It’s added about 16 percent in the past 30 trading days alone.

Shares of North American Palladium have surged on greater demand
click to enlarge

Supply is tight, but like many other things, we largely have government policy to thank for the palladium rally. In this case, I’m talking specifically about governments in Europe, which have recently strengthened their vehicle emission standards. The “Euro standard,” as it’s called, classifies vehicles on a scale from one to six, with one being the most polluting and six being the least polluting.

Some European cities have already banned the dirtiest “Euro 1” vehicles from their streets. Old diesel cars and trucks were outlawed in Brussels effective January 2018. In May 2018, Hamburg became the first German city to do the same.

Diesel Engines in the Crosshairs

But now that it’s a new year, some city governments are escalating the ban to include Euro 2 automobiles that run on diesel. Next month, Frankfurt—Germany’s financial hub—will go so far as to ban all Euro 4-and-worse diesel vehicles, and all Euro 1 and 2 gasoline-burning vehicles.

I believe this escalation was prompted in part by a comment made by Elzbieta Bienkowska, a European commissioner whose responsibilities include oversight of industry and entrepreneurship. Speaking to Bloomberg in May, she said that “diesel cars are finished.”

Diesel vehicle sales continue to plunge in Europe

And then, as if to hasten Bienkowska’s prediction, a damning study on diesel engines was issued in June by the very same group that blew the whistle on Volkswagen’s emissions scandal back in 2015. According to the study, conducted by the International Council on Clean Transportation (ICCT), even the newest, cleanest diesel vehicles failed to meet Europe’s strict emission standards in “real world” driving conditions. Peter Mock, the ICCT’s managing director, defended the report, saying that “pretty much all Euro 6 diesels on the market are not clean.”

European sentiment of diesel was already in freefall, but momentum is increasing. In the first half of 2018, sales of diesel vehicles within the European Union (EU) and European Free Trade Association (EFTA) fell more than 16 percent compared to the same period in 2017. For all of 2018, British sales of diesels were down nearly 30 percent, according to the Society of Motor Manufacturers and Traders (SMMT). Between 2016 to 2018, diesel’s share of new vehicle sales in the EU plunged dramatically, from nearly half of all sales to just under a third.

Palladium Has Been the Beneficiary

So what does all of this have to do with palladium? The metal, as you probably know, is used in the production of catalytic converters, which “scrub” pollutants from the exhaust of internal combustion engines. And because of Europe’s enforcement of strict new standards, demand for these devices is surging, along with palladium itself.

Demand is so high, in fact, that there are now reports, in the U.K. and U.S., of thieves stealing catalytic converters, sometimes in broad daylight, to extract the precious metal. On Thursday, it traded as high as $1,434.50, according to CNBC.

Supply Worries Have Remained High

There’s more to the story of palladium’s bull run. For the past several years, supply has been in deficit. That’s mostly because around 80 percent of all palladium (and platinum) production is concentrated in two countries—South Africa and Russia. The geopolitical risks are high. When South African laborers went on strike in 2014, all production of the platinum metals, including palladium, grinded to a halt. 

Where is palladium mined
click to enlarge

Besides supply issues, the biggest risk facing palladium right now is substitution risk. With palladium trading above $1,400 an ounce, how long will it be before auto manufacturers switch to its sister metal, platinum, which is currently trading at around $800 an ounce?

In the meantime, there could be money to be made.

A Palladium Miner With Incredible 87 Percent Income Growth

One of our favorite ways to play the rally is North American Palladium. The company, headquartered in Toronto, mines both palladium and gold (and other metals as a byproduct), and has seen quite a rally itself on higher metal prices. For the 24-month period, its shares are up a remarkable 120 percent.

Trading places palladium overtook gold again
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North American Palladium had a phenomenal third quarter in 2018. According to results, income after taxes and expenses was $22.9 million, up a whopping 87.7 percent from $12.2 million during the same period the previous year. That translated to earnings per share (EPS) of $0.39, up from $0.21 in 2017. I’m eagerly awaiting the company’s results for the fourth quarter!

Stay up-to-date on this potential trend by subscribing to our FREE, award-winning Investor Alert!

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 12/31/2018: North American Palladium Ltd.

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The Newmont-Goldcorp Deal Is Positive News for Gold Mining
January 15, 2019

The Newmont-Goldcorp Deal Is Positive News for Gold Mining

Consolidation season has finally arrived in the goldfields, just as many experts and analysts have been predicting for some time now. With exploration budgets having been slashed since their 2012 peak, and because there are today fewer and fewer ounces of gold available to be mined, one way forward for producers of all sizes will be to ramp up mergers and acquisitions (M&A) activity.

You might have heard that Newmont Mining will be buying Goldcorp in a massive $10 billion deal. The resultant company, to be headquartered in Denver, will be the world’s largest gold producer by number of ounces mined—larger even than what’s being called “New Barrick,” after the $6.5 billion merger of industry giants Barrick Gold and Randgold Resources, announced back in September. Whereas Barrick-Randgold produced a combined 6.6 million ounces of gold in 2017, Newmont-Goldcorp was responsible for as much as nearly 8 million ounces.

The Newmont Gold Corp deal will create the worlds largest gold producer
click to enlarge

I see this news as positive overall for the metals and mining industry, which has long signaled the need for consolidation. As I explained in a Frank Talk Live segment back in October, it’s when an industry has found a bottom that you start to see big M&A deals. A couple of years ago, the very talented people at Visual Capitalist showed in an infographic that mining M&As peaked in the aftermath of the financial crisis.

A Positive Case Study in M&As: Domestic Airlines

This tacit rule applies not just to metals and mining but also to most other industries. Look at domestic airlines. It’s easy to forget now that between 2005 and 2008, more than two-thirds of U.S. airlines were operating under Chapter 11 bankruptcy protection. A huge wave of consolidation followed, giving us the “big four” carriers—Delta, American, United and Southwest. Profits surged to new highs. This year, according to the International Air Transport Association (IATA), global airlines should see their 10th straight year of profitability, and fifth straight year where “airlines deliver a return on capital that exceeds the industry’s cost of capital, creating value for its investors.”

Consolidation Could Speed Up the Closer We Get to “Peak Gold”

So will gold miners follow suit and consolidate (more so than they already are)? And will this lead to a similarly sustained period of outstanding profitability?

No one can say for sure, of course, but my guess is that we’ll continue to see more and more deals the closer we get to the idea of “peak gold.” As I’ve shared with you before, the yellow metal is getting exponentially more difficult and costly to mine. The “low-hanging fruit” has likely already been plucked, so to speak. Exploration budgets have been slashed, and the days of 20- and 30-million-ounce gold deposits could be behind us, to say nothing of 50-million-ounce discoveries.

The amount of gold in major discoveries has been trending down for years
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To replenish their own reserves, big-name miners such as New Barrick and Newmont might decide to absorb smaller-cap junior producers with provable mines instead of spend higher and higher costs to scour the world for progressively harder-to-find deposits.

Says Michael Siperco of Macquarie Research, the Barrick-Randgold and Newmont-Goldcorp deals could “spark a wider consolidation in the industry, where too many gold companies are chasing too few assets.”

Only time will tell if this happens. I’ll be curious to see what companies could be next to strike a deal!

Stay up-to-date on this potential trend by subscribing to our FREE, award-winning Investor Alert!

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 12/31/2018: Newmont Mining Corp., Barrick Gold Corp., Newcrest Mining Ltd., American Airlines Group Inc., Delta Air Lines Inc., United Continental Holdings Inc., Southwest Airlines Co.

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These Are the Five Wealthiest Self-Made Texans
January 9, 2019

Mark Cuban
Photo: JD Lasica / Social Media.biz | Creative Commons Attribution 2.0 Generic

A couple of months ago, Forbes updated its list of the wealthiest 400 Americans for 2018, with Jeff Bezos appearing at number one for the very first time. Worth some $160 billion, the Amazon founder and CEO finally dethroned Bill Gates, who had held the top spot for a remarkable 24 years straight.

I was particularly interested in learning about the Texans who made the list, including Mark Cuban, Ross Perot, Paul Mitchell-founder John Paul DeJoria, Lewis Energy CEO Rod Lewis and more. I’ve shared with you before my belief that, thanks largely to low taxes and reasonable regulations, there’s no better place in the U.S. to do business than Texas, the home state of U.S. Global Investors. Texas ended up with 38 billionaires on Forbes’ list in 2018, four more than it did the previous year. That’s also the third most of any state, following California (84 billionaires) and New York (73 billionaires). The wealthiest Texan on the list, and 12th richest American overall, was Walmart heiress Alice Walton, worth an estimated $44.9.

But I wanted to know which of those Texans were self-made, unlike Walton. To exclude those whose fortunes were mostly inherited, I cross referenced Forbes’ findings with the Bloomberg Billionaires Index, which measures people on how they make their money. This ruled out individuals like Walton and a few others.

So below is the countdown of the five wealthiest self-made Texans, beginning with number five.

5. Robert Rowling ($5.8 billion)

Robert Rowling is the chairman and owner of Dallas-based TRT Holdings, which holds recognizable brands such as Omni Hotels & Resorts and Gold’s Gym. It also holds the company founded by Rowling’s geologist father, Tana Exploration, which is where he initially made his extraordinary wealth. A Corpus Christi native, the media-shy 65-year-old now lives in Dallas. He and his wife have made significant donations to the University of Texas at Austin and support conservative political causes and candidates.

4. Richard Kinder ($6.6 billion)

Next on our list is Richard Kinder, who made his vast fortune in the oilfields. In 1997 he cofounded the company he’s best known for, Kinder Morgan, which owns and operates tens of thousands of miles of oil and gas pipelines throughout North America. Before that, Kinder served as president and chief operating officer of Enron, the ill-fated energy company that, in 2001, declared bankruptcy after being caught in perhaps the most notorious accounting fraud scheme in U.S. history. Kinder, 74, stepped down as CEO of Houston-based Kinder Morgan in 2015 but remains its executive chairman and largest shareholder.

3. Jerry Jones ($6.9 billion)

Jerry Jones
Photo: flickr/Keith Allison | Creative Commons Attribution-ShareAlike 2.0 Generic

Last year marked the 30th anniversary of Jerry Jones’ $140 million purchase of the Dallas Cowboys. Under his leadership, the Cowboys have been the most valuable team in the National Football League (NFL) for over a decade now, worth some $5 billion in 2018, according to Forbes. The 76-year-old Jones’ latest purchase? A “mega-yacht” measuring 360 feet long—about the same size as a football field—that features two helipads and a garage for water vehicles. The yacht’s reported price tag, $250 million, is over $100 million more than what Jones originally bought the Cowboys for. 

2. Andrew Beal ($9.9 billion)

Although not a household name, Andrew Beal is one of the more fascinating individuals on this list. A true self-made billionaire, Beal dropped out of Baylor University and even had a job for a time fixing broken TVs. At the age of 19 he began buying distressed properties, renovating them and selling them for a large profit. In 1988 he founded Beal Bank, headquartered in Plano, Texas, which specializes in purchasing undervalued real estate and savings and loan assets. The firm, of which the Dallas-based Beal owns 96 percent, held close to $8 billion in total assets as of September 2018. What sets the 65-year-old Beal apart from the others on this list is that he’s also an amateur mathematician and highly gifted poker player. The eponymous “Beal conjecture” math problem, formulated by the billionaire in 1993, is as-yet unsolved, and in 2004, he won one of the largest single hands of poker in Las Vegas history, totaling $11.7 million.

1. Michael Dell ($27.6 billion)

Michael Dell
Photo: Hartmann Studios | Creative Commons Attribution 2.0 Generic

And here we are at number one. The wealthiest self-made Texan, and the 39th richest person in the U.S., is Michael Dell, who, in 1984, founded his computer company in his University of Texas at Austin dorm room at the age of 19. According to an interview with NPR, Dell said that one of the things he noticed about the computer business at the time was that it was “very inefficient.” He added: “It took a really long time for the technology to get from the people that made it to the people that were buying it.” Interestingly, one of his earliest customers was fellow Texan and future self-made billionaire Mark Cuban, who bought some hard drives from Dell for his budding software company, MicroSolutions. Four years after the Round Rock, Texas-based Dell Computer went public in 1988, Dell became the youngest CEO of a Fortune 500 company. The company went private in 2013 but, a little more than five years later, is seeking to go public again. The move has set up a legal fight with activist investor Carl Icahn, who filed a lawsuit against the computer company late last year for allegedly withholding “material information.” It was revealed last year that Dell, 53, was the mystery buyer of a $100.47 million Manhattan penthouse in 2014, making it the highest price ever paid for a New York City residence.

Interested in reading more? Check out 10 Living, Self-Made American Billionaires.

Also, be sure to subscribe to the FREE, award-winning Investor Alert!

 

The Forbes 400 or 400 Richest Americans is a list published by Forbes magazine of the wealthiest 400 American residents, ranked by net worth. The 400 was started by Malcolm Forbes in 1982 and the list is published annually around September. The Bloomberg Billionaires Index is a daily ranking of the world's richest people. In calculating net worth, Bloomberg News strives to provide the most transparent calculations available, and each individual billionaire profile contains a detailed analysis of how that person's fortune is tallied.

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

Holdings may change daily. Holdings are reported as of the most recent quarter-end. None of the securities mentioned in the article were held by any accounts managed by U.S. Global Investors as of 9/30/2018.

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Gold Miners Are Crushing the Market in the Face of Higher Rates
December 24, 2018

Summary:

  • Anticipating trouble ahead, fund managers make a historic rotation out of equities into bonds.
  • Gold and gold mining stocks have been the one bright spot this quarter.
  • Tax reform turns one year old. Has it achieved what was expected?

Gold Miners Are Crushing the Market in the Face of Higher Rates

Disregarding strong opposition from the likes of DoubleLine Capital founder Jeffrey Gundlach, legendary hedge fund manager Stanley Druckenmiller, “Mad Money” host Jim Cramer, President Donald Trump and others, Federal Reserve Chairman Jerome Powell hiked rates last Wednesday for the fourth time in 2018.

Markets responded negatively, with the Dow Jones Industrial Average jumping around in a nearly 890-point range before closing at its lowest level in more than a year. By the end of the week, both the small-cap Russell 2000 Index and tech-heavy Nasdaq Composite Index had entered a bear market, while the S&P 500 Index was on track for not only its worst year since 2008, but also its worst month since 1931.

Among the sectors now in a bear market is financials, down around 20 percent since its peak in January. Regional banks, as measured by the KBW Regional Bank Index, have been banged up even worse, having fallen close to 30 percent since their all-time high in early June.

Canary in the Coal Mine? U.S. Financials Are Now in a Bear Market
click to enlarge

I bring up financials here because the sector is sometimes considered to be the “canary in the coal mine,” for the very good reason that financial institutions are highly exposed to the performance of the broader market.

What’s more, we learned last week that lenders are starting to pull back from riskier loans, a sign that they’re getting more cautious as recession fears loom. According to the New York Fed, the credit card rejection rate in October climbed to 21.2 percent, well above the year-ago rate of 15.7 percent. Banks also cut off credit from 7 percent of customers, the highest rate since 2013.

Fund Managers De-Risk in Favor of Bonds and Cash

Against this backdrop, fund managers have turned incredibly bearish on risk assets and bullish on defensive positions such as bonds, staples and cash. According to Zero Hedge’s analysis of a Bank of America Merrill Lynch report, this December represents “the biggest ever one-month rotation into bonds class as investors dumped equities around the globe while bond allocations rose 23 percentage points to net 35 percent underweight.” Fund managers’ average cash levels stood at 4.7 percent in November, above the 10-year average, according to Morningstar data.

Investors Just Poured a Record Amount of Money Into Bonds
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Equity outflows have been particularly pronounced. Lipper data shows that, in the week ended December 13, as much as $46 billion fled U.S. stock mutual funds and ETFs. That’s the most ever for a one-week period. It’s very possible that the selling is related to end-of-year tax-loss harvesting, but again, we’ve never seen outflows of this magnitude.

As such, I highly encourage investors to heed the recent advice from Goldman Sachs: Get defensive by positioning yourself in “high-quality” stocks. This probably isn’t the time to speculate.

Gold Has Been the One Bright Spot

I would also recommend gold and gold stocks. The yellow metal, as expected, is performing well at the moment, and commodity traders have taken a net bullish position for the first time since July. So far this quarter, gold has crushed the market, returning around 6 percent as of December 21, compared to negative 15 percent for the S&P 500 Index. Gold miners, though, as measured by the NYSE Arca Gold Miners Index, have been the top performer, climbing a phenomenal 12.3 percent.

Gold Miners Have Been the Standout Performer This Quarter
click to enlarge

On a recent episode of “Mad Money,” Jim Cramer aired his frustration with the Fed’s decision to move ahead with another rate hike, predicting that the central bank will “have to reverse course, maybe in the next four months.” When and if that happens, “you’ll regret selling because the market will rebound so fast.”

But in the meantime, Cramer says, investors should consider buying into the “bull market” in gold. He added that he likes Randgold Resources.

You can read more of my thoughts on gold and gold mining stocks by clicking here.

Is It Time for the Fed to Take a Breather?

Although there’s more to the selloff than higher interest rates, industry leaders have been quick to point fingers at the Fed’s long-term accommodative policy. Speaking to CNBC last week, Jeffrey Gundlach commented that the problem isn’t so much that the Fed is currently hiking rates. The problem, he says, “is that the Fed shouldn’t have kept them so low for so long.”

Stanley Druckenmiller made a similar argument, writing in a Wall Street Journal op-ed that, in a best-case scenario, “the Fed would have stopped [quantitative easing] in 2010” when the recession ended. Doing so, he says, would have helped mitigate a number of problems, including “asset-price inflation, a government-debt explosion, a boom in covenant-free corporate debt and unearned-wealth inequality.” Too late now.

Other analysts have highlighted the untimeliness of this month’s rate hike. According to Bloomberg’s Lu Wang, rate hikes are “exceedingly rare” when “stocks are behaving this badly.” Not since 1994, Lu says, has the Fed decided to tighten in such a volatile market. Nor has it ever tightened like this when the budget deficit was expanding, as it is right now. (I’ll have more to say on the deficit later.)

Then again, there’s a case to be made that, should another recession strike, the Fed needs the ammunition to stanch further losses. If it doesn’t hike now, it won’t have the option to lower rates later. That’s the argument made by Axios’ Felix Salmon, who believes “the only way to prevent another catastrophic asset bubble is to allow interest rates to revert to something much more normal.”

Federal Funds Rate Turns Positive for the First Time in 10 Years
click to enlarge

Salmon points out that, when adjusted for personal consumption expenditures (PCE)—the Fed’s preferred measure of inflation—the federal funds rate is now positive for the first time in over a decade. That’s “something to be welcomed,” he says.

Deficit Is “Unprecedented” in Such a Strong Economy

There are other worrisome economic signs, including the ballooning deficit. I was surprised to learn last week that, outside of a war or recession, the U.S. deficit has never been as high as it is now. That’s according to the Committee for a Responsible Federal Budget (CRFB), which reports that the budget deficit in 2018 is projected to total around $970 billion, up more than 45 percent from $666 billion last year.

“This borrowing,” says the CRFB, “is virtually unprecedented in current economic conditions.”

Normally, deficits expand during recessions and shrink during times of economic growth. But because of increased entitlement spending and other obligations, not to mention higher debt service on interest payments, the government’s outlays are far outpacing revenues.

The Tax Cuts and Jobs Act Turns One Year Old

That brings me to the issue of corporate taxes. One year ago past weekend, President Trump signed into law the Tax Cuts and Jobs Act (TCJA), which, among other things, cut the corporate income tax rate from 35 percent to 21 percent. It was initially estimated that as much as $4 trillion would be repatriated back to the U.S. by multinational corporations that have long held hordes of cash overseas in more tax-friendly jurisdictions. So, has this happened?

December 21, 2017 Signing of the Tax Cuts and Jobs Act (TCJA)

I’m pleased to see the tax law working. Companies are indeed bringing funds back, though admittedly at much lower rates than was anticipated. According to data released last week by the Commerce Department, only $92.7 billion in offshore cash was repatriated during the September quarter. That’s the lowest quarterly amount this year and 50 percent down from the second quarter. All combined, a little more than half a trillion dollars have returned to the U.S. It’s a good start, even if it falls short of expectations.

Another projection was that companies would plow their tax savings back into employees, new equipment and overall expansion. Here the outcome is more mixed. Wages jumped 3.1 percent in the third quarter, the fastest rate in over a decade, which I believe can be directly attributed to the tax law.

But the biggest consequence of the tax law by far has been corporations’ historic buybacks of their own stock. For the first time ever, $1 trillion was spent this year on stock repurchases. That beats the prior record of $781 billion set in 2015.

Stock Buybacks Hit a Record $1 Trillion in 2018 After Tax Reform
click to enlarge

These buybacks helped stocks head higher this year—until they didn’t—but they’ve been strongly criticized for a number of reasons. One criticism is that aggressive buyback programs are often launched when stock prices are elevated, rather than when they’re on sale.

With most of the S&P 500 now in a bear market, many stocks certainly look like a bargain. I would proceed with caution, however, and make sure that I’m following the 10 percent Golden Rule: 5 percent in physical gold and the other 5 percent in well-managed gold mutual fund and ETFs. Now would be a great time to rebalance.

On a final note, I want to wish all readers and shareholders a very Merry Christmas! May this time bring you comfort and happiness as we head into a new year.

The Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. The Russell 2000 index is an index measuring the performance of approximately 2,000small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States. The KBW Regional Banking index is a modified-capitalization-weighted index, created by Keefe, Bruyette & Woods, designed to effectively represent the performance of the broad and diverse U.S. regional banking industry. The S&P 500 Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The S&P 500 Financials Index comprises those companies included in the S&P 500 that are classified as members of the GICS financials sector. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The NYSE Arca Gold Miners Index is a modified market capitalization weighted index comprised of publicly traded companies involved primarily in the mining for gold and silver. The index benchmark value was 500.0 at the close of trading on December 20, 2002.

Personal consumption expenditures (PCE), or the PCE Index, measures price changes in consumer goods and services. Expenditures included in the index are actual U.S. household expenditures. Data that pertains to services, durables and non-durables are measured by the index.

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 09/30/2018.

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No One Ever Said Brexit Was Going to Be Easy
December 11, 2018

The Yield Curve Just Inverted for the First Time in Years. Time to Reconsider Risk?

If you followed some of my posts from two years ago, you might recall that I was in favor of Brexit. I still am. One of British voters’ main grievances was the heavy burden of European Union (EU) regulations, many of which are decided by unelected bureaucrats in Brussels. Altogether, these regulations cost U.K. businesses an estimated 33.3 billion pounds every year. Voters should have the right to decide whether to abide by these rules, which hamper business, or choose a different path.

At the same time, I was realistic about the huge, unprecedented challenges this divorce presented—to the United Kingdom, but also to the EU and its main trading partners. “Global growth is unstable, especially in the EU, and Brexit will only add to the instability,” I wrote. “This will likely continue to be the case in the short and intermediate terms as markets digest the implications of the U.K.’s historic exit.”

No one said it was going to be easy.

Today was supposed to be the day when U.K. Members of Parliament (MPs) voted on Prime Minister Theresa May’s Brexit deal with the EU, capping off two and a half years since Britons elected to leave the 28-member bloc.

Yesterday, however, May postponed the vote in the face of certain defeat, thanks largely to disagreement over how best to deal with the border between Northern Ireland (part of the U.K.) and the Republic of Ireland (part of the EU).

The British pound sterling promptly lost as much as 1.25 percent against the U.S. dollar, falling to its lowest level in more than a year and a half as foreign investors halted nearly all trading of the currency, according to the Financial Times.

British stocks, as measured by the FTSE 100 Index, extended losses for the fourth time out of the past five trading days. Telescoping their uncertainty of May’s deal, investors sent London-listed stocks plummeting 3.15 percent last Thursday in the worst session since the day after the Brexit referendum in June 2016.

British pound and stocks slipped after delay of Brexit vote
click to enlarge

The question on everyone’s mind is: What happens now? 

Between a Rock and a Hard Place

As I see it, there are three main options: 1) leave the EU without a deal (the “hard” Brexit); 2) halt the entire Brexit process, leaving open the possibility of another referendum; and 3) go back to the drawing board and renegotiate.

By any measure, a hard Brexit would be disastrous. Thomas Verbraken, executive director of risk management research at MSCI, estimates that U.K. stocks could fall as much as 25 percent, European stocks at least 10 percent, if either Parliament rejects the deal or a “disorderly Brexit” is triggered. In such a scenario, according to Morningstar’s Alex Morozov, the British auto industry would fare the worst since its entire supply chain is highly integrated with the EU, including parts manufacturing and vehicle production. U.K. and EU aerospace and defense companies such as Airbus, Rolls-Royce and Meggitt are also highly exposed to Brexit risks.

As for the second option, May has already nixed the idea of bringing a halt to Brexit, even though the European Court of Justice (ECJ) just ruled that the U.K. can “unilaterally withdraw its notification to leave the European Union without the permission of other EU countries,” according to Politico.

May’s job may be in peril because of her handling of Brexit—Jeremy Corbyn, leader of U.K.’s Labour Party, could push for a vote of no confidence at some point—but here I think she made the right decision. The people of the United Kingdom spoke. Even though Britons’ approval of EU leadership has improved since the 2016 referendum, disapproval is still above 50 percent.  

More than half of britons still disapprove of european union leadership
click to enlarge

That brings us to option number three. The problem here is that the nearly-600-page agreement already required a year’s worth of back-and-forth. European Commission President Jean-Claude Juncker made clear today that Brussels will not reopen negotiations. “The deal we have achieved is the best deal possible—it’s the only deal possible,” Juncker said. “So there is no room whatsoever for renegotiation.”

What there is room for, according to Juncker, is clarification and reinterpretation of the deal.

So Where Does This Leave Things?

I don’t believe anyone knows the answer to this question. As of now, the U.K. is scheduled to leave the 28-member bloc on March 29 of next year. I hope that before that time, MPs can be convinced that the package May has delivered is the best possible solution to an impossible situation.

I urge investors to be cautious. Brexit isn’t the only geopolitical risk to stocks right now. Here in the U.S., Democrats will take control of the House in about a month, and although talk of impeaching President Donald Trump is premature, it’s certain we’ll see innumerable new investigations into this administration.

With a new year about to begin, it might be a good time to rebalance your portfolio and make sure you have a 10 percent weighting in gold, with 5 percent in bullion and jewelry, the other 5 percent in high-quality gold mining stocks, mutual funds and ETFs. I also recommend short-term, tax-free municipal bonds, as they’ve performed well even in times of economic pullbacks and bear markets.

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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Net Asset Value
as of 05/24/2019

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