Last weekend, I had the chance to experience the thrill of Formula 1 Grand Prix du Canada in Montreal. Seeing the incredible fluidity and flexibility of every race car, it got me thinking about how F1 has evolved over the past 60 years. Cars are now aerodynamic like a jet fighter, designed with wings that use the same principle as an aircraft and tires that withstand tremendous forces. Even with all these incredible advancements in technology, rules and regulations have been streamlined to reduce costs and improve safety. Since 1994, there hasn’t been a fatal accident in the motorsport.

The ever-evolving rules seem to have improved competition as well. This year, the first seven races have resulted in a different winner each time, breaking a historical trend of only a few drivers dominating the track. When asked about this phenomenon, Peter Sauber, the team boss of Sauber-Ferrari, says he thinks fans are “delighted with the unpredictability, the sheer variety and the unbelievably close competition.”

F1’s fine-tuning of regulations to respect the risks and rewards of racing is the formula government policies should strive for when regulating businesses. Instead, as The Economist pointed out a few months ago, excessive regulations are acting as speed bumps today. Not only is the financial industry burdened with Sarbanes-Oxley and Dodd-Frank, companies in the telecommunications, materials and utilities are also highly regulated.

Thoughtful regulation in moderation is needed to maintain healthy competition. Sporting events need referees and officials to keep the game fair and exciting—no spectator wants them to control the outcome.

Excess regulation, on the other hand, can dilute the efforts of entrepreneurs and result in fewer innovations, lower profitability and less job creation. Compare, for example, the performance of the telecom, materials and utilities sectors to Apple. The company has been the “winning driver” of the market over the past decade and its business operates in a less regulated environment. 

Shortly after his death, Bloomberg wrote that Steve Jobs was “not just a techie visionary, but the virtuoso executive who built the world’s second-most valuable company after Exxon Mobil.” As you can see below, Apple’s market capitalization has grown so significantly that J.P. Morgan declared the company a “sector unto itself.” AAPL is now bigger than all of the companies in the telecom sector, all of the materials stocks, and all of the utilities companies combined, generating more profit on an earnings before interest, taxes, depreciation and amortization (EBITDA) basis than any of those sectors.

Bloomberg says Jobs “embodied the Silicon Valley entrepreneur,” with an intensity and ingenuity that changed how people interacted with technology. How innovative could Steve Jobs be if Apple operated under an excessive regulatory environment?

Apple’s success is a great example of what can be accomplished in a free market with sufficient regulation. Rules and regulations are unquestionably needed, yet there shouldn’t be more officials than players, or more rules than plays. Sporting—and business—is at its best when there’s fluidity and flexibility.

I believe with policies that pursue a balance between prudent regulation and capitalistic risk-taking, America can maintain its competitive edge and create jobs for more Americans even in a challenging global economy like we have today.

This week I appeared on Bloomberg and CNBC to discuss oil, gold and precious metals. Head to bloomberg.com and cnbc.com to see the interviews.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The following security mentioned was held by one or more of U.S. Global Investors Funds as of 3/31/12: Exxon Mobil.

For the eighth consecutive year, CEOs named Texas the best place to do business, according to the latest Chief Executive magazine. Its annual survey received feedback from 650 business leaders from all over the country on topics relating to tax and regulation, quality of workforce and living environment.

The state has been home to the U.S. Global Investors headquarters for more than 40 years and it’s been my home for over two decades. I recently talked about the Lone Star State’s pocket of strength, as nine Texas cities made Milken Institute’s 2011 Top 25 Best-Performing Cities list. San Antonio was the top best-performing city, along with El Paso, Austin area, Killeen-Temple-Fort Hood, Houston area, McAllen-Edinburg-Mission, Dallas area, Fort Worth-Arlington and Lubbock.

During the time I’ve been a business leader in the state, I’ve been amazed at the incredible growth across multiple industries—not only the petroleum sector, but also manufacturing, technology and alternative energy. In fact, Texas is now the leading state in wind energy production, according to the Energy Information Administration.

Texas is a right-to-work state, as are many of the top 20 in the Chief Executive survey. This doesn’t surprise the magazine, which says that “labor force flexibility is highly sought after when a business seeks a location.” Economists have found that right-to-work areas “grow faster than other states, have higher employment and attract more inward migration,” says Chief Executive.

There’s been quite a boom in job creation in Texas: From June 2009 through July 2011, the number of jobs in Texas grew by 328,000—this is nearly half of all the jobs added in the entire U.S.

And jobs attract people outside of Texas who have migrated from all over, moving approximately $17.5 billion net adjusted gross income into the state. Of the 808,000 people who have moved here from 2000 to 2010, about 225,000 came from California, bringing with them a net adjusted gross income of about $4.5 billion, according to the Tax Foundation’s new State to State Migration Data Tool. More than 100,000 people from Louisiana have moved to their neighboring state, followed by residents from Illinois, New York and Michigan.

Most People Leaving California for Texas
Migration To Texas From 2000 to 2010

		Net Taxpayers Gained	Net AGI Into Texas (in thousands)
	California	225,111	$4.5 billion
	Louisiana	107,360	$2.6 billion
	Illinois	56,822	$1.5 billion
	New York	40,663	$1.1 billion
	Michigan	39,167	$1.0 billion
Source: Tax Foundation

It’s not surprising that Californians are moving east, as CEOs rank the state as the worst in which to do business. The Golden State is not so golden these days, as it has nearly the highest unemployment and, in 2011 alone, about 250 companies have moved some or all of their work out of California, says Chief Executive. The state is losing companies due to “the high cost of doing business due to excessive state taxes and stringent regulations,” says Chief Executive.

I believe this pocket of strength in Texas can be replicated across any of the 50 states. While regulatory policies are important and workforce and living environment differ, the magazine says states also need to have a “cooperative attitude and a willingness to work with the private sector.”

See how many people are coming into or leaving your state at Tax Foundation’s Migration Tool.

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

Every month, policymakers track purchasing managers’ indices (PMI) around the world as they consider fiscal and monetary actions. To us, a PMI is a measure of health of companies around the world, because it includes output, new orders, employment and prices across manufacturing, construction, retail and service sectors.

Today, the J.P. Morgan Global PMI for May came in lower at 50.6—just above the level indicating expansion—and China’s HSBC Manufacturing PMI fell to 48.4. Both numbers were below their respective three-month moving averages. Historically, we’ve seen China’s PMI number leading the year-over-year change in exports by three to four months, so when the PMI has increased, a few months later, Chinese exports have historically risen, and vice versa.

China’s HSBC PMI tends to be more reflective of export demand, as it is compiled by private parties, covers a smaller survey sample and is weighted toward smaller businesses. Therefore, a lower PMI number indicates lower export demand.

With Europe’s growth in a deep freeze, China is feeling the pain. While many think the U.S. is receiving most of the Chinese-made goods, Europe is actually China’s largest export partner. Nearly 22 percent of China’s exports head to Europe, contributing nearly 6 percent to China’s GDP; only 17 percent of exports from China are shipped to the U.S.

With fewer exports to Europe, China’s GDP growth could be affected, but probably much less than one might think. Listeners of our webcast a few months ago heard Andy Rothman from CLSA explain how China has become less dependent on the world for its growth. As you can see from the chart below, CLSA had already assumed net exports of goods and services out of China to be negative this year because of slower growth from Europe and the U.S.

Yet, China clearly has the upper hand in controlling growth. Take a look at what happened in 2009 when exports declined dramatically: The government stepped in with a massive stimulus package devoted to bank lending and infrastructure construction. This effort significantly boosted overall GDP growth and “pushed the Chinese economy out of a deep slump,” says research firm BCA Research.

Despite net exports falling about 4 percent in 2009, GDP actually grew more than 12 percent.

China won’t put the pedal to the metal like it did in 2009, though. Premier Wen Jiabao recently said that the government “should continue to implement a proactive fiscal policy and a prudent monetary policy, while giving more priority to maintaining growth,” according to Bloomberg News. China is more like Goldilocks: The government wants the economy to be not-too-hot or not-too-cold.

The important thing to remember is that the government will want to avoid the expansion that was “associated with the earlier plan that led to higher CPI, asset price inflation and a surge in lending to non-priority projects,” says J.P. Morgan. Rather, the focus is on making sure the country shifts to a “more sustainable trajectory of growth,” says the research firm.

With the renewed eurocrisis, “Chinese authorities are currently facing an extremely complex and unpredictable situation,” says BCA. They’ll continue to monitor the situation and not make any drastic moves; rather, “Chinese authorities will stay on high alert and act promptly to rescue growth in case of external shocks,” says BCA.

So what will they be tracking as they monitor the situation? We’ve heard the new Chinese Premier-to-be Li Keqiang is paying attention to three factors: power production, railroad freight volume and new bank loans.

Power production in April was slightly positive on a year-over-year basis, but still remained weak.

On May 31, railroad freight volume was released for April, and showed an increase of 3.3 percent over last year, the same reading as March.

New bank loans are down 7.8 percent year-over-year as of May 11, which we believe was the primary reason that China cut the required reserve ratio (RRR) on May 12. J.P. Morgan agrees, saying that together with the RRR cuts, “the seeming start of a new cycle of public spending and consumer stimulus should help to boost loan demand in the economy.”

Looking at the five year data above, all factors are near their lows and below their 3-month moving averages. In whatever shape or form, we expect policy easing to continue.

What appears to be overlooked by the mountain of negative economic news is the fact that China’s stock market is outperforming. In May, the A shares were the best-performing equities among all the developed and emerging stock markets we track. For the year, China’s investors still hold onto a gain of 7 percent, putting the country among the top half of the emerging markets and above all developed markets. This bifurcation may be signaling that the worst is behind us.

Keep in mind that negative news in the media may be a danger sign to some people; to Chinese policymakers, it’s a signal to act.

We believe the next government policy cycle might be just around the corner. In fact, we’ve already seen indications of stimulus from China, such as giving the “green” light to car buyers. Perhaps the European Central Bank and the Federal Reserve will follow suit to avoid a repeat of the last few summers.

This is only a few of the points I discussed at the Cambridge House’s World Resource Investment Conference in Vancouver. I hope to post my presentation on www.usfunds.com in a few days.

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

The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals. The weights of components are based on consumer spending patterns. 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. The Shanghai A-Share Stock Price Index is a capitalization-weighted index.  The index tracks the daily price performance of all A-shares listed on the Shanghai Stock Exchange that are restricted to local investors and qualified institutional foreign investors.