Decentralization Is Winning the War Against Centralization

Think back to your American history class, and you might remember being taught the differences between federalism and anti-federalism.

On one side were the Federalist Founding Fathers, led by statesmen such as Alexander Hamilton and John Adams, who believed in a strong central government. On the other side were the anti-Federalists, led by Patrick Henry of “Give me liberty or give me death” fame, who believed in a weak central government.

Today, nearly 250 years later, we might think of this ideological rift in terms of centralization (a strong central authority) versus decentralization (a more distributed system). In fact, I would go as far as to say that the push-and-pull of these two forces is the great contest of our times. And I believe decentralization is winning out.

The global trend toward decentralization really got a boost six years ago when the United Kingdom voted to leave the European Union. Brexit was about redistributing power from a bloated centralized authority, Brussels, and returning it to London. Admittedly, the U.K. has faced a number of expected challenges since it officially departed the EU in January 2020, including a slump in trade and foreign direct investment (FDI), but I believe these issues will be ironed out over time and the country will be stronger for it.

Two Case Studies in Centralization: Russia and China

The truth is that the world is a safer, richer, more transparent place when power is distributed across a greater number of actors, not fewer.

Consider what’s happening in Eastern Europe. Russia’s efforts to take over Ukraine are a highly centralized move, one that will ultimately fail. In the meantime, Moscow is paying the price because of stiff international sanctions.

And then there’s China. Tens of millions of people in Shanghai, Beijing and other cities have become prisoners in their own homes due to the country’s sweeping zero-Covid policy. As of this week, one out of every five container ships across the world is waiting to dock at a Chinese port, with the worst yet to come in terms of global supply chain disruptions, all because of the centralized Chinese Communist Party’s hardline approach to containing the virus.

The economic and financial impact has been significant. Shanghai-listed stocks have sold off to two-year lows, and the country’s manufacturing industry, as measured by the purchasing manager’s index (PMI), contracted in March.

What’s more, the Chinese yuan just had one of its worst months on record against the U.S. dollar, plunging as much as 4.5% at its low.

It’s largely due to the actions of these two highly centralized countries that the world is experiencing the highest rates of inflation in decades. In March, global food prices hit a new all-time high going back to 1961, which I’m sure everyone reading this is feeling.

Progress Is Made Possible Through Decentralization

Meanwhile, here in the U.S., decentralization still holds, even if it doesn’t feel like it sometimes. That’s thanks to Founders like Patrick Henry, who fought to include a Bill of Rights that, as the name implies, conferred certain liberties to individuals and states that the federal government could not take away.

Americans also enjoy separation of powers, as well as checks and balances, so that no single government branch can make all the decisions. A good example of this type of decentralization in action is when a federal district court judge recently struck down the White House’s mask mandate on mass transit, including commercial flights.

I was in sunny yet cool San Diego this week attending and speaking at the 24th annual Investment U Conference, sponsored by the Oxford Club, and the flight here was the first I took during the pandemic that did not require passengers to wear a mask. As someone who had to wear a mask during the entire 14-hour flight to Dubai last October, I’m relieved the U.S. is finally putting the worst days of Covid behind it.

But I’m not just speaking for myself. While Chinese families aren’t permitted to step out and grab food for the week, Americans are free to travel and congregate and conduct business in person. In addition, I believe that not having to wear a face covering will encourage more people to take longer-distance flights, and that’s made possible through decentralization.

Bitcoin, the Most American of All Assets

Some of you may have already guessed where I’m going with this. At Investment U, I spoke at length on Bitcoin, which I believe to be a fiercely American asset that’s imbued with all that Patrick Henry stood for and more.

If he were alive today, Henry would be appalled at the idea that the Federal Reserve, the nation’s central bank, has complete authority over monetary policymaking. Since 1913, when the Fed was created, the greenback has only lost value, and the downslide has accelerated even further in the years following the end of the gold standard.

Bitcoin, as they say, fixes this. As a completely decentralized asset, it has no president, no CEO, no governor or central bank or board of directors. Like gold, Bitcoin is the chosen currency of those who love liberty and private property, which I believe would describe not just every American but every person, no matter where they live. That includes even people in Russia and China.

Enjoy your liberties this weekend!

Index Summary

• The major market indices finished down this week. The Dow Jones Industrial Average lost 2.47%. The S&P 500 Stock Index fell 3.22%, while the Nasdaq Composite fell 3.93%. The Russell 2000 small capitalization index lost 4.00% this week.
• The Hang Seng Composite gained 2.31% this week; while Taiwan was down 8.93% and the KOSPI fell 9.49%.
• The 10-year Treasury bond yield rose 1 basis point to 2.913%.

Strengths

• The best performing airline stock for the week was Cathay Pacific, up 6.6%. System net sales improved to -10.5% versus 2019 levels for the week compared to -12.3% the previous week. The improvement was driven by the domestic channel, although there was a pickup in the international trend as well. System pricing remains strong and is now 1.7% higher versus 2019 as the international channel pricing improved to only -1.2% versus 2019.

• Domestic large corporate volumes are now at -27.8% versus 2019 are well ahead of the 2021 data at this point, which was approximately -76% versus 2019. Another key difference outside of volumes is the strong pricing environment, as both domestic leisure and large corporate travel have improved dramatically and are now 11.5% higher versus 2019 levels and 6.4% higher versus 2019 levels, respectively, compared to negative levels last year.
• Latest data shows that international volumes and pricing improved to 15.8% versus 2019 and -1.2% versus 2019, respectively. International bookings have steadily improved this year and are 40 points better than the start of 2022.

Weaknesses

• The worst performing airline stock for the week was JetBlue, down -14.3%. Dozens of flights were canceled or delayed over the weekend at Amsterdam’s Schiphol Airport as a group of KLM baggage handlers went on strike for several hours on one of the busiest days of the year. The protest was surrounding working conditions and staff shortages.
• Second quarter 2022 planned growth for U.S. carriers is 60 basis points lower to -9% versus 2019 levels (-5% domestic, -16% international) versus -10% versus 2019 in the first quarter of the year. Preliminary third quarter data indicates a decline of 2% versus 2019, 140 basis points lower. Multiple U.S. carriers are cutting capacity in the June to August timeframe.
• Air Canada’s first quarter 2022 came in below expectations. EBITDA of -$143 million was below consensus of -$71 million. With revenue in line, the variance was mainly on margins as higher fuel prices ate into profitability, even with higher ticket fares. Capacity was in line with prior guidance, though load factors at 66% were a bit below the 70% consensus.

Opportunities

• Intra-Europe net sales were up by three points to -23% versus 2019 and increased by 14% this week. International net sales grew by two points to -27% versus 2019 and were up 11% this week. This led to a two-point increase in system-wide net sales to -26% versus 2019 and up 11% this week. The improvement was driven by a seven-point improvement in volumes while average pricing was softer at -6% for intra-Europe and up 1% for international versus 2019.
• U.S. airlines’ earnings releases last week provided a positive pricing outlook for the second quarter of 2022 and were supportive of European airline shares. United Airlines guided for second quarter TRASM (total operating revenue per available seat mile) of up 17% versus 2019 and noted that limited near-term supply is positive for pricing power. Similarly, American Airlines guided for second quarter TRASM of up 14-16% versus 2019, driven by strong demand and capacity constraints due to operational issues.
• According to Seaport Global, chaos in the energy markets led them to step to the sidelines on weaker balance sheet stories in early March, including Azul SA and Gol Linhas Aereas (GOL). Following a return to office in early March by large corporations, there are signs that pricing is accelerating which finally points to a durable revenue recovery. Underlying fundamentals are aided in part by an 85% COVID vaccination rate in Brazil that is quickening the return to normal.

Threats

• United Airlines CEO Scott Kirby has turned bullish on the domestic market due to a view that pilot supply is likely to constrain ASMs over the next few years with legacy airlines advantaged. Against the backdrop of an industry that creates 5-7,000 pilots per year, Kirby noted that airlines were set to hire 13,000 in 2022 with a similar/higher number in 2023. Importantly, the industry is dealing with two issues, pilot supply (felt acutely by regionals) and training bottlenecks (addressed by increasing simulators and wage increases to entice pilots into training roles and away from line flying).
• In response to operational issues noted two weeks ago, mostly stemming from pilot training constraints, Alaska Air trimmed second quarter 2022 capacity guides by 7.5 points below consensus. Last weekend, JetBlue noted it had reduced capacity by 8-10% in May and expects similar reductions through the summer.  Spirit Airlines announced this week it would cut 5-6% of its planned flying from June through August 9 and Hawaiian cancelled 20% of its interisland flights last weekend.
• The second quarter 2022 guide and 2022 outlook for JetBlue looks disappointing. While U.S. airlines have broadly reduced 2022 capacity outlooks since initial expectations in late January, JetBlue’s cuts appear deepest to date, cutting 10.5 points since the late-January outlook, which is significantly higher than Alaska’s 5.5-point cut. JetBlue’s heightened growth in the capacity-constrained New York area is partially leading to its poor operations and capacity cuts, which is in addition to industry-wide impacts of pilot training bottlenecks, air traffic control staff shortages, and higher fuel.

Strengths

• The best performing country in emerging Europe for the week was Russia, gaining 9.54%. The Moscow Stock Exchange remains closed to foreign investors and the central bank of Russia limited the number of shares that can be sold on the exchange. The best performing country in Asia this week was Hong Kong, gaining 2.33%.
• The Russian ruble was the best performing currency in emerging Europe this week, gaining 8.21%. The Pakistani rupee was the best performing currency in Asia this week, gaining 0.91%.
• The Eurozone reported stronger construction output data. In February, construction output increased 1.9% month-over-month, and on a year-over-year basis construction output increased by 9.4%. This was the strongest pace of growth in construction activity since May 2021.

Weaknesses

• The worst performing country in emerging Europe for the week was Poland, losing 5.2%. The worst performing country in Asia this week was the Philippines, losing 3.73%.
• The Hungarian forint was the worst performing currency in emerging Europe this week, losing 4.05%. The Chinese yuan was the worst performing currency in Asia this week, losing 1.62%.
• Asian currencies, China’s yuan, and Japan’s yen took their sharpest dives in years. In Europe, the euro slipped to a five-year low as well. A stronger U.S. dollar is pushing emerging market currencies lower. The U.S. Dollar Index gained 1.6%, reaching an elevated level last seen at the beginning of 2017.

Opportunities

• Emerging markets saw robust growth (62% year-over-yar) in buyback activities in 2021, according to JPMorgan. The total value of emerging market (EM) shares repurchased has grown from $8.8 billion in 2002 to $44 billion in 2021, and the quantity of buybacks moved from 93 to 210. Buyback activity in EMs compared to the U.S. has been relatively small, where value has grown from $166 billion in 2020 to around $760 billion in 2021.Within emerging markets, JPMorgan recommends focusing on stocks with high buyback yields.
• China has indicated its readiness to provide more support for the economy. All-out efforts must be made to spur infrastructure spending, Xi said Tuesday at a meeting of the Central Committee for Financial and Economic Affairs. That includes airports and other transportation hubs as well as energy and water conservancy projects. The committee also urged more fiscal spending and a broadening of long-term financing channels for construction.
• Final Manufacturing PMI for the Eurozone should remain well above the 50 level, which separates contraction from expansion. Bloomberg economists expect the S&P Global Eurozone Manufacturing PMI to be reported at 55.3, unchanged from the preliminary reading. Data will be released on May 2.

Threats

• Negotiations between Russia and Ukraine continue, but the talks are not going anywhere. Russia tried to expand its control over the East and South of Ukraine while Ukraine it trying to push the aggressor back. While Russia is talking about taking control of the Donbass area and south of Ukraine, blocking Ukraine’s access to the Black Sea, the president of Ukraine, Zelensky, said that he will not give an inch of land to Vladimir Putin. This week, Russian Foreign Minister Sergei Lavrov warned that there is a serious danger of nuclear conflict.

• Russia stopped the flow of gas to Poland, Bulgaria, and Lithuania. Gas prices in Europe spiked on expectations that more countries will be cut from gas deliveries from Russia. Bulgaria and Lithuania will easily replace Russian gas. Poland, in five months, will be able to import gas from Norway once the Baltic pipeline connecting Norway to Poland is opened. Poland also has an LNG port on the Baltic Sea and gas storages are at 76% capacity. Warm summer months do not require significant gas consumption, but if other countries are blocked from Gazprom’s gas deliveries, prices will spike, and Europe may experience gas shortages in the winter.
• Poland’s preliminary inflation in April spiked to 12.3% from an already elevated reading of 11% in March. The central bank’s survey among 2,611 domestic businesses revealed that the outlook of Polish companies for this quarter and over the next 12 months is noticeably pessimistic and one of the worst in the history. Companies expect further producer price increases and weaker demand.

Strengths

• The best performing precious metal for the week was platinum, though still off 1.76%, as speculators flip back to net short this week. Shipments of gold from Europe’s key refining hub rose to 127.0 tons last month with U.S. shipments jumping by 2,303% to 81.5 tons. Russian gold imports into Switzerland fell to zero for the first time in a decade with sanctions choking their access.
• Exchange-traded funds (ETFs) added 37,967 troy ounces of gold to their holdings in the last trading session, bringing this year’s net purchases to 9.19 million ounces, according to data compiled by Bloomberg. This was the sixth straight day of growth. The purchases were equivalent to $73.3 million at the previous spot price. Total gold held by ETFs rose 9.4% this year to 107 million ounces, the highest level since February 5, 2021.
• Although gold dropped to its lowest level since February as the dollar’s rally continues, the yellow metal managed to remain little changed as we close out the week, reports Bloomberg. Following the U.S. economy contracting in the first quarter of 2022, gold pushed back into positive territory, attracting some new bullish momentum, writes Kitco News.

Weaknesses

• The worst performing precious metal for the week was palladium, off 6.99% as speculators push their net short position to a three-month high. Raymond James slightly reduced its earnings per share (EPS) for Newmont for 2022, from $3.41 to $3.33. Newmont’s 2022 attributable gold production forecast is still 6.2 million ounces at cash costs of $1,050 per ounce. However, given first quarter operating challenges, the mining company did indicate it could lose as much as 100,000 ounces (mostly Ahafo) of production. In addition, the company continues to experience inflationary pressures, so costs could be higher than forecast.
• Trevali Mining Corporation provided an update on search and rescue efforts for eight missing workers, as well as progress made on mine rehabilitation and dewatering at the Perkoa Mine in Burkina Faso (following intense rainfall that occurred in the early morning of April 16, resulting in flooding of the mine). The eight workers remain unaccounted for following the evacuation of the underground area of the mine and the Company is collaborating closely with Burkinabe authorities as search and rescue efforts continue. Mining and milling operations at Perkoa will remain suspended for the near future as the Company investigates the cause of the flood event.
• Gold’s slide amid China’s worsening COVID outbreak indicates that energy matters more than yields right now. The yellow metal is down, even though real yields are lower again, after briefly turning positive last week. Lower real yields historically lead to higher gold prices, as they represent the opportunity cost of holding a non-interest-bearing asset like bullion. Though the dollar’s rally on risk-off sentiment partly explains why gold is lower, one should not discount the effect of the slump in other commodities like oil.

Opportunities

• On April 25, Kinross Gold announced it sold its 90% stake in the Chirano mine for $225 million to Asante Gold. The $225 million total consideration consists of $115 million cash and $50 million Asante shares upfront, and $60 million in deferred cash over two years. Kevin MacKenzie of Canaccord Genuity initiated coverage of Asante on April 14 and summaries the pending transaction as well as the positive outlook he sees for a new producer in West Africa with a proven management team.
• The yen’s swift collapse to a two-decade low, plus a resilient showing from gold, have combined to lift bullion prices in the Japanese currency to an all-time high. The traditional haven now costs almost a quarter-of-a-million yen per ounce, up 18% this year. “In the past, Japanese investors have taken advantage of higher gold prices, selling to lock in profits,” said Andrew Naylor, regional chief executive officer for APAC, ex-China, and Public Policy at the World Gold Council. “This is especially the case for older investors.”
• The first ever exchange-traded product combining Bitcoin and gold has launched in Europe, writes Mining.com, offering the twin prospect of long-term returns and inflation protection, at least in theory. The novel fund aims to bring together “the best of the old and new worlds of finance” by betting on the portfolio hedging power of gold along with the “strong” returns of the most well- known crypto token, the issuing parties said in a statement. The physically backed index product is known as 21Shares ByteTree BOLD ETP (ticker: BOLD).

Threats

• Polymetal International Plc, a London-listed gold miner operating in Russia, said it is avoiding selling to the country’s banks as they will only buy at a discount. While sanctions on state-run lenders have already choked off Polymetal’s traditional sales routes, the company is able to sell to non-sanctioned banks. Yet those institutions are now only purchasing gold at a discount to international prices, pushing the miner toward shipments abroad.
• Palladium traded lower at $2,101.24 an ounce toward the end of the week, after earlier dropping to the lowest level since March 29. “It’s not a palladium-specific move,” said Nicky Shiels, head of metals strategy at MKS PAMP. “It’s just playing catchup to the broader commodities selloff as demand fears ramp up.”
• MAG Silver continues to wait on approval for the final grid power tie-in from the Mexican energy regulator, which could be delayed. Production is still expected to be at 85-90% capacity at the Juanicipio JV by the end of the year. However, one must be cautious about this timeline given that Fresnillo’s Saucito operation is experiencing similar delays which have persisted for more than a year.

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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 (03/31/2022):

Air Canada
Air France- KLM
United Airlines
American Airlines
Gol Linhas Aéreas Inteligentes
Azul
Hawaiian Holdings
Spirit Airlines
Alaska Air
JetBlue Airways Corp.
Newmont Corp
Asante Gold Corp.
Highland Gold
Polymetal International Plc
Tesla Inc.
Bayerische Motoren Werke
Gazprom Neft

*The above-mentioned indices are not total returns. These returns reflect simple appreciation only and do not reflect dividend reinvestment.

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The Philadelphia Stock Exchange Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leading companies involved in the mining of gold and silver. The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar. The S&P/TSX Canadian Gold Capped Sector Index is a modified capitalization-weighted index, whose equity weights are capped 25 percent and index constituents are derived from a subset stock pool of S&P/TSX Composite Index stocks. 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 S&P/TSX Venture Composite Index is a broad market indicator for the Canadian venture capital market. The index is market capitalization weighted and, at its inception, included 531 companies. A quarterly revision process is used to remove companies that comprise less than 0.05% of the weight of the index, and add companies whose weight, when included, will be greater than 0.05% of the index.

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