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Traffic Jam on the Superhighway
August 20, 2010
There’s growing congestion on one of America’s highways and reports say the problem will only get worse. In just the past few years, America’s technological network—our information superhighway—has gone from hare to tortoise. Dropped calls, Internet outages and surfing at a snail’s pace now seem to be commonplace.
One of the main causes of the congestion is the exponential growth of smartphones. Did you know that the new 4G iPhone uses the equivalent network capacity of 200 older generation cell phones?
Earlier this year when Apple sold 1.7 million of them in just three days, it was the data equivalent of dumping 340 million new cell phones into the system at once—no wonder there were problems. It isn’t Apple’s (or AT&T’s) fault so many people wanted their product, but it does highlight the investment opportunity.
According to tech research firm PacificCrest, the global technology buildout is a $200+ billion opportunity over the next five years. The infrastructure needs include $100 billion to relieve congestion and $50 billion for boosting networks by upgrading Internet protocols. PacificCrest also estimates $54 billion is needed for new routing systems to improve data flow.
PacificCrest says we’re entering the next phase of the Internet infrastructure build cycle as big firms boost their capital spending to alleviate bottlenecks and accommodate technological improvements.
During the last cycle (2004-2008) the top five Internet firms spent roughly $15 billion on infrastructure, but that figure is expected to jump to $28 billion over the next four years.
The infrastructure upgrades and additional networks are important because much of the world still isn’t connected. There are 183 billion emails sent each day, but 78 percent of the world’s population still doesn’t have email. There are roughly 6 billion devices (4.6 billion mobile phones, 1.2 billion computers) hooked up to the Internet today, but less than 10 percent of those have high-speed access.
As more people—especially in the developing world—join the broadband and mobile communities, immense strains will be placed on the global network over the next few years. There should be substantial opportunities to participate in this buildout along the way.
The following securities mentioned in the article were held by one or more of U.S. Global Investors family of funds as of 6/30/10: Apple, AT&T
The Biggest (And Getting Bigger) City You’ve Never Heard Of
August 19, 2010
Deep inside China, the city of Chongqing is growing so fast that maps are out of date the moment they’re printed. Even for a country busting at the seams with development, Chongqing is exceptional—it’s the world’s fastest growing city.
From just 200,000 people in the 1930s, the city’s population has ballooned to 32 million and there are no signs of slowing – the metropolitan area absorbs an additional 1 million people every year.
Like many other places in China, this high-speed transition has overwhelmed infrastructure and the very idea of “city planning.” An article about Chongqing in the latest issue of Foreign Policy magazine likens the city’s growth to “a railroad car hurtling down the line at the same time that attendants scramble to hitch on the wheels and lay the track.”
Speaking of laying track, $1.5 billion is to be spent on the city’s light-rail system and $1.2 billion on other rail lines this year, Foreign Policy writes. On top of that key infrastructure outlay, $2.3 billion is going to highways and a massive project is under way to double Chongqing’s airport capacity to 30 million passengers by 2011 and 70 million by 2020. Financing for these and other projects is a mix of government and foreign investment.
On the jobs front, the local government slashed corporate tax rates to 15 percent (the national rate is 25 percent) to woo foreign corporations. That appealed to Hewlett-Packard, which is setting up shop in the area.
The “Chongqing model,” as it is called, has quadrupled the city’s GDP since 1998 to $86 billion. Currently, the city’s per capita income is only $3,300 a year, well below Beijing’s $10,000 level.
Chongqing’s robust weapons, motorcycle manufacturing and chemicals factories aren’t cheap-labor exporters to the developed world. Nearly 90 percent of the industrial goods produced in Chongqing are kept in the country.
This is a good example for the Beijing government to point at as it works to transition China from an export-led economy to one built on domestic consumption.
Read more about investing in the China Region.
Read “Chicago on the Yangtze” from Foreign Policy Magazine
By clicking the links above, you will be directed to the Foreign Policy website. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content. None of U.S. Global Investors family of funds held any of the securities mentioned in this article as of 6/30/10.
Chart of the Week: China’s Energy Needs
August 18, 2010
All indications are that China will see a GDP growth slowdown through the end of 2010 as the Beijing government works to take some of the heat out of property prices in the country’s key cities.
We see this short-term slowdown as a good thing in the longer term because, by acting before there’s an economy-wrecking crisis, China can position itself for a more sustainable growth pace going forward. This means a lesser reliance on exports and fixed-asset investment, and more emphasis on the domestic sector.
This chart from Deutsche Bank, which appeared in U.S. Global’s weekly Investor Alert, shows the progression of China’s crude oil imports going back to 2002.
As you can see, the trend—represented by the red annual average lines—shows that China is importing three times more crude than eight years ago to support its economic growth.
Last month’s imports (the farthest right vertical blue line) show a steep fall off from June’s levels, and PetroChina forecasts slow growth through year-end as industrial production and GDP growth fall off.
But in 2011, Deutsche Bank’s analysts say, the story gets better. Refining capacity is scheduled to expand beginning in September, and these refineries will need more imported crude to operate.
The International Energy Agency (IEA) predicted last week that China will use more than 9.3 million barrels per day in 2011, up 4.5 percent from this year. The IEA says China will account for one-third of new crude oil demand next year.
Another driver for imports: China is building its strategic petroleum reserve and will add 40 million barrels worth of storage capacity in the first half of 2011.
Read how China factors into our Case for Natural Resources.
The following securities mentioned in the article were held by one or more of U.S. Global Investors family of funds as of 6/30/10: PetroChina
Gold and Deflation
August 16, 2010
I have been speaking and writing about gold’s appeal in a deflationary environment – this is a concept that opposes the conventional opinion that the gold price will not rise without inflation.
Those who cling to that singular gold-inflation relationship have not examined the history of gold as money. Whenever there is substantial inflation or deflation, governments tend to either be too slow to react or they overreact with policies, and this is typically good for gold.
Interest earned on 90-day Treasury bills below the inflation rate is a signal for governments to try to stop deflation and reflate the economy. When this happens, gold becomes attractive. We are in such an environment now.
During these periods, governments usually need to increase their deficits by escalating their borrowings to support the economy. This also supports gold as safe money in addition to its beauty as jewelry.
The twin engines of negative real interest rates and government deficits tend to make gold a very attractive investment. Recent research supports our historical findings on what drives gold.
This chart from Deutsche Bank shows that for the past four decades gold (and silver) have performed well in a country’s currency when that country has low or negative real interest rates.
The Federal Reserve’s main interest rate is near zero and inflation is a little over 1 percent, so we now find ourselves in a negative real interest rate situation. The Fed has made it clear that it has no plans to tighten money by raising that key rate any time soon because of the sluggish economy and soft housing market (mortgages are now at a 21-year low), so this condition is likely to endure.
“The decline in core inflation from 2.5 percent two years ago to under 1 percent today will sustain market fears of deflation and hence a more rapid depreciation of the U.S. dollar to arrest any deflationary pressures,” Deutsche Bank’s analysts wrote. “We believe that the road map to resolve deflation is therefore bearish for the U.S. dollar and another factor which will propel gold prices to new highs.”
The Fed this week plotted part of that road map – it said it will pump more money into the system to try to kick up economic activity. As the 2010 midterm election draws closer, there is also a growing call for another round of stimulus spending to try to pull down the 9.5 percent unemployment rate.
Such a move would widen the federal budget deficit, which is already estimated at nearly $1.5 trillion for this year and will roughly be the same in 2011. The U.S. dollar is not only our currency, it is also the world’s reserve currency. Deficit spending puts downward pressure on the dollar, and when the dollar falls, investors tend to turn to gold.
When you add the interest rate and deficit scenarios to the gold seasonality trend – September is historically the best month of the year for both bullion and gold equities – the conditions now appear promising for gold.
We discuss What’s Driving Gold in an interactive presentation – click on the chart to learn more about these critical drivers.
Browse Our What’s Driving Gold Matrix
Being Contrarian on China
August 13, 2010
The news and analysis about economic conditions in China has turned decidedly negative of late after the latest round of key indicators – GDP growth, imports, fixed asset investment and industrial output – showed signs that a broader slowdown could be coming.
The discussion has had a very short-term focus, while the Beijing government has taken a longer view by taking some of the hot air out of the property sector to head off the kind of 2008-09 bust that dragged down the U.S. and Western European financial sectors and eventually their economies.
Others (including us) also take a longer view – here’s a sampling of analysis that doesn’t share the same dire outlook as is dominating the mainstream.
BCA Research: “Chinese banks’ total lending to the property sector has been increasing in recent years, but banks’ credit exposure to the property market is very low compared to other major economies. The large down payments of mortgage borrowers provides a significant buffer between banking sector assets and property prices.”
ISI China Research: “China’s fiscal revenue in the first seven months of this year was 26 percent more than those in 2009 or 2008… yet spending only increased 17 percent … the fiscal strength is impressive. Beijing will have a lot of fiscal ammo in (the second half of 2010).”
CLSA Asia Pacific Markets: “The upside of slowing data is that the potential for further tightening measures recedes even if Beijing is not yet ready for outright easing.”
Net Asset Value
as of 09/08/2010
- Global Resources Fund
PSPFX $8.78 +0.05 - Gold and Precious Metals Fund
USERX $17.44 +0.03 - World Precious Minerals Fund
UNWPX $20.18 -0.01 - China Region Fund
USCOX $8.61 -0.02 - Eastern European Fund
EUROX $9.11 +0.13 - Global Emerging Markets Fund
GEMFX $8.17 +0.08 - Global MegaTrends Fund
MEGAX $7.71 +0.04 - All American Equity Fund
GBTFX $20.02 +0.09 - Holmes Growth Fund
ACBGX $16.04 +0.15 - Tax Free Fund
USUTX $12.58 -0.01 - Near-Term Tax Free Fund
NEARX $2.26 -0.01 - U.S. Government Securities Savings Fund
UGSXX $1.00 No Change - U.S. Treasury Securities Cash Fund
USTXX $1.00 No Change