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America’s Infrastructure Needs Some Love, but Will Rising Rates Check Spending?

Summary:
Every four years, the American Society of Civil Engineers (ASCE) releases its report card on the condition of America’s infrastructure. In 2017, the group gave the U.S. a dismal D+, writing that crumbling infrastructure “is impeding our ability to compete in the thriving global economy.” The 2021 report demonstrates slight progress from four years ago. America’s infrastructure scored a C-, the first time in 20 years that our “GPA” is out of the D range. But as those of you with kids and grandkids know, a C- is nothing to celebrate. Much work still remains to bring our roads, bridges, sea ports, electric grids and more up to satisfactory standards. That means there may be some incredible opportunities for investors in companies that produce the metals, minerals and other raw materials

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America’s Infrastructure Needs Some Love, but Will Rising Rates Check Spending?

Every four years, the American Society of Civil Engineers (ASCE) releases its report card on the condition of America’s infrastructure. In 2017, the group gave the U.S. a dismal D+, writing that crumbling infrastructure “is impeding our ability to compete in the thriving global economy.”

The 2021 report demonstrates slight progress from four years ago. America’s infrastructure scored a C-, the first time in 20 years that our “GPA” is out of the D range.

But as those of you with kids and grandkids know, a C- is nothing to celebrate. Much work still remains to bring our roads, bridges, sea ports, electric grids and more up to satisfactory standards.

That means there may be some incredible opportunities for investors in companies that produce the metals, minerals and other raw materials that will be needed with an increase in spending.

According to the ASCE, the U.S. faces a $2.6 trillion investment gap over the next 10 years. Among the most critical is the nation’s 4 million miles of public roadways, 40% of which is now considered to be in “poor” or “mediocre” condition. Deteriorating, congested roads and highways cost U.S. motorists a combined $130 billion every year in wasted time and fuel, not to mention vehicle repair.

The U.S. has been underfunding its roadways for years, resulting in a $786 billion backlog of road and bridge capital needs, the ASCE says.

Not all roads are made equal, though. I’m pleased to report that our home state of Texas topped the list of best states to drive in, based on four factors including traffic and infrastructure, according to WalletHub. Indiana, North Carolina, Iowa and Tennessee rounded out the top five. Hawaii was found to be the state with the worst commuting conditions, followed by California, Washington, Maryland and Delaware.

Best and worst stated to drive in

Energy Experts to Texas: Winterize Your Power Plants or Connect with the Rest of the U.S.

The quality of Texas roads was one of the 11 reasons why I think people enjoy living in the Lone Star State.

The state’s power grid, on the other hand, needs some serious attention. As you know, an unusual winter storm last month caused days-long power outages throughout most of the state, leaving millions without electricity, water and heating.

This week, top energy “experts” recommended that Texas either winterize its electric generation plants—including not just wind turbines but also coal and natural gas plants—or consider connecting its grid with neighboring states, according to reporting by Reuters. Texas is the only U.S. state to operate its own power grid, which is managed by the dubiously named Electric Reliability Council of Texas (ERCOT).

ERCOT’s president and CEO, Bill Magness, was fired this week after as many as seven board members resigned in the wake of the power failures. Magness reportedly turned down an $800,000 severance package.

As I pointed out a couple of weeks ago, Texas is the ninth largest economy in the world. Winterizing its aging power grid will be a massive undertaking, requiring biblical amounts of raw materials. Investors take note.

…But Borrowing Costs Are Climbing

Like his last two predecessors, President Joe Biden has put infrastructure at the top of his list of priorities. Can he succeed where former presidents Barack Obama and Donald Trump failed?

Reuters reports that the White House has added transportation and manufacturing specialists to its ranks of advisors as the Biden administration prepares to lobby Congress for an infrastructure bill, possibly once the pandemic relief bill is signed. Also this week, the president and Transportation Secretary Pete Buttigieg met with House lawmakers to discuss such a plan.

The commitment is there, but rising borrowing costs could put a hamper on things.

The bond selloff continued this week after a mostly positive jobs report, sending the yield on the 10-year Treasury as high as 1.6% today. Bond yields rise when prices fall. To put this in perspective, the yield was trading below 1% in December.

This represents a significant 3 standard deviation (or sigma) move for the 60-day trading period, suggesting the selloff is overdone.

Bond selloff looks overdone

When we look at the 365-day trading period for the past 10 years, the move is even more dramatic. The probability for mean reversion is very high, but in the meantime, this vertical surge in yields will likely cause unexpected consequences in both equity and debt markets

americans saving their money at record rates

Watch my video on how to trade gold using standard deviation by clicking here.

The rise in borrowing costs could very well check some lawmakers’ appetite for a large infrastructure spending bill at a time when the deficit is already at or near record levels as a percent of GDP. In its just-released budget outlook, the Congressional Budget Office (CBO) expects the U.S. deficit to improve following the pandemic, but then sharply expand as interest payments eventually overtake all other forms of government spending, leaving less for investment in necessities like infrastructure.

Interest payments forecast to overtake government's primary deficit

Gold Under Pressure, Signaling an Attractive Buying Opportunity

An expected consequence of higher yields? Gold prices are under pressure, having recorded their fourth straight week of losses. Gold and bond yields share an inverse relationship, as you can see below, but again, it’s real yields you want to be paying attention to. When adjusted for inflation, yields remain below zero, making the yellow metal all the more attractive.

America’s Infrastructure Needs Some Love, but Will Rising Rates Check Spending?

Rising expectations for inflation are also strengthening gold’s investment case. This week, Federal Reserve Chair Jerome Powell rattled markets by saying inflation could pick up temporarily as the economy reopens from pandemic lockdowns.

Indeed, prices for industrial metals and materials have been climbing as manufacturers around the world expand operations and the number of new orders rises. Of the 29 nations IHS Markit monitors, 23 of them, or 80%, had manufacturing PMIs above the magic 50.0 mark in February, indicating a synchronized economic recovery. The country with the lowest PMI, at 27.7, was Myanmar (Burma), which is currently mired in a violent coup.

Manufacturing PMIs for select countries and regions

On the service industry side, the U.S. led the world with a blistering PMI of 59.8 in February, the highest reading since July 2014.

Mark your calendar for Wednesday of next week! I’ll be participating in our next webcast, on gold and cryptos. Joining me will be HIVE Blockchain’s CFO Darcy Daubaras and Bloomberg’s Mike McGlone. I hope you can join us! To register for free, click here.

America’s Infrastructure Needs Some Love, but Will Rising Rates Check Spending?

Gold Market

Date Event Survey Actual Prior
Feb-28 Caixin China PMI Mfg 51.4 50.9 51.5
Mar-1 Germany CPI YoY 1.2% 1.3% 1.0%
Mar-1 ISM Manufacturing 58.9 60.8 58.7
Mar-2 Eurozone CPI Core YoY 1.1% 1.1% 1.4%
Mar-3 ADP Employment Change 250k 117k 195k
Mar-4 Initial Jobless Claims 750k 745k 736k
Mar-4 Durable Goods Orders 3.4% 3.4% 3.4%
Mar-5 Change in Nonfarm Payrolls 200k 379k 166k
Mar-10 CPI YoY 1.7% 1.4%
Mar-11 ECB Main Refinancing Rate 0.000% 0.000%
Mar-11 Initial Jobless Claims 725k 745k
Mar-12 Germany CPI YoY 1.3% 1.3%
Mar-12 PPI Final Demand YoY 2.7% 1.7%

Strengths

America’s Infrastructure Needs Some Love, but Will Rising Rates Check Spending?

  • The best performing precious metal for the week was palladium, up 0.60% as auto sales are expected to rise with the vaccination rollout. Silver ETFs caught a bid this week despite massive gold outflows. ETFs added 1.02 million troy ounces of silver on Thursday, bringing total net purchases to 66.7 million ounces.
  • The Perth Mint reported gold coin and minted bar sales rose 441% year-over-year in February to 124,104 ounces as investors took advantage of lower gold prices. Spot gold fell 6.2% in February, and Perth Mint saw gold product sales 63% higher than in January. The U.S. Mint also reported strong sales in February. Sales of American Eagle silver coins totaled 3.19 million ounces last month and gold coin sales rose to 125,000 ounces.
  • The Perth Mint reported gold coin and minted bar sales rose 441% year-over-year in February to 124,104 ounces as investors took advantage of lower gold prices. Spot gold fell 6.2% in February, and Perth Mint saw gold product sales 63% higher than in January. The U.S. Mint also reported strong sales in February. Sales of American Eagle silver coins totaled 3.19 million ounces last month and gold coin sales rose to 125,000 ounces.

Weaknesses

  • The worst performing precious metal for the week was silver, down 5.33% which followed gold lower this week. Gold fell to a nine-month low below $1,700 an ounce as rising U.S. Treasury yields remain a headwind, along with optimism of an economic recovery. Bullion is now down 11% so far in 2021.
  • According to Bloomberg data, holdings in gold-backed ETFs fell more than 14 metric tons on Monday, the most in three months. Thursday was the 14th straight session of outflows – the longest streak since December 2016. “Gold’s reputation appears to have been tarnished considerably by the heavy losses of recent weeks, as evidenced by the ongoing outflows from gold ETFs,” said Commerzbank AG analyst Carsten Fritsche in a note.
  • Rhodium’s surge to 27,000 an ounce is driving a surge in thefts of catalytic converters, reports Bloomberg. The byproduct of platinum and palladium production, rhodium is known for its ability to remove the most toxic pollutants from vehicle exhaust. Lara Smith, founder of mining market research group Core Consultant, says “there are certain metals that don’t follow fundamental supply and demand dynamics because nobody is going to set up a mine just for the rhodium. Rhodium will always be mined or not mined because of the platinum.”

Opportunities

  • One opportunity thanks to lower bullion prices: stronger retail purchases. Benchmark gold futures in India are down 20% from a record in August last year, and imports rose 412% in February from a year earlier to the highest since November 2019. “The festival and wedding season looks good,” said Ashish Pethe, chairman of the All India Gem & Jewellery Domestic
    Council. India is the world’s second largest consumer of the precious metal and demand historically picks up ahead of holidays and celebrations.
  • Analysts at Goldman Sachs led by Jeffrey Currie said now is the beginning of a structural bull market in commodities driven by demand. “Lockdowns have driven a wedge between the consumption of services and goods, generating additional demand from both households and governments looking to stimulate activity while minimizing the virus spread.” The report continued to say “commodities are the crucial link between growing demand, a weaker
    dollar and inflation, which is why they have been statistically the best hedge
    against inflation.” This boost the case for investing in physical precious metals.
  • Citigroup head of commodities research Ed Morse said in a Bloomberg TV interview that gold could get a boost from emerging market central bank purchases. “We expect Emerging Markets central banks will buy more gold in part because of increasing concerns about where the dollar
    goes.” Citigroup expects gold to hit a bottom and be supported by traditional buyers due to the change in the macro environment.

Threats

  • The VanEck Vectors Junior Gold Miners (GDXJ) exchange-traded fund relative to the SPDR S&P
    500 ETF Trust has broken below four Fibonacci support levels, write Bloomberg Intelligence’s Anthony Feld and Mike McGlone. This is a bearish signal and shows gold stocks aren’t acting like the inflation hedge that they’ve historically served. Like the rapid sell off with the nationwide lockdowns back in March of 2020, risk parity trades had to be unwound.  Gold is often held alongside these trading strategies but when markets are stressed, gold positions also get liquidated as the risk parity trade is taken off. Gold rallied very strongly out of the market bottom, finishing the year strongly.
  • Gold’s biggest threat remains rising bond yields. The 10-year Treasury yield continues to surge, hitting 1.6% Friday morning after a stronger-than-expected jobs report. Gold and bond yields historically share a strong inverse relationship.
  • U.S. oil futures rose above $65 a barrel on Friday and Brent rose toward $70. Higher oil prices are a headwind for precious metal miners who use the fuel at operations. Oil has recovered globally as producer work to keep supply limited while demand increases post-lockdown.

America’s Infrastructure Needs Some Love, but Will Rising Rates Check Spending?

Index Summary

  • The major market indices finished mixed this week. The Dow Jones Industrial Average gained 1.82%. The S&P 500 Stock Index rose 0.80%, while the Nasdaq Composite fell 2.06%. The Russell 2000 small capitalization index lost 0.40% this week.
  • The Hang Seng Composite lost 0.66% this week; while Taiwan was down 0.62% and the KOSPI rose 0.44%.
  • The 10-year Treasury bond yield rose 16 basis points to 1.567%.

Blockchain and Digital Currencies

Strengths

  • Of the cryptocurrencies tracked by CoinMarketCap, the best performer for the week was Chiliz, rising 109.89%.
  • Good Works Acquisition, a special purpose acquisition company (SPAC), is merging with Cipher Mining Technologies, a unit of the BitFury Group. The combined company’s enterprise value is said to be $2 billion and Cipher expects to reach mining capacity of 745 megawatts by the end of 2025 and industry leading cost of energy of approximately 2.7c/kWh. BitFury, which makes hardware for Bitcoin mining and provides blockchain software and services, is positioned to improve Cipher’s access to relevant hardware, maintenance, and management. The combined company is set to receive proceeds of $595 million when the deal closes in the second quarter of 2021.
  • As Bitcoin is finding a new base, bulls believe that Grayscale Bitcoin Trust’s (GBTC) premium flipping negative is a signal of continuation of the bull cycle. GBTC shares are trading at a discount to their net asset value and this “negative premium” was also observed in March 2020, the start of the bull cycle that has brought BTC/USD from $3,600 to $58,300. With an increase in investment products designed to provide exposure to the cryptocurrency, market sentiment seems set to drive Bitcoin higher.

America’s Infrastructure Needs Some Love, but Will Rising Rates Check Spending?

Weaknesses

  • Of the cryptocurrencies tracked by CoinMarketCap, the worst performing for the week was 1inch, down 25.45%.
  • According to a recent survey done by JPMorgan, a large majority of institutional investors do not plan on investing in or trading cryptocurrencies. 78% of the survey respondents said that it was unlikely that their firm will invest in or offer trading services for digital assets. Around 58% of the respondents do believe that cryptocurrencies are here to stay while 21% believe that they are a “temporary fad.” The survey included 3,400 investors representing 1,500 different institutions.
  • Binance is mulling new marketplace controls after a single large order triggered a flash crash in Polkadot trading contracts. The world’s biggest cryptocurrency exchange reported that prices of the quarterly perpetual-futures contracts on Polkadot tumbled 99.2% in less than a minute. Within that time, around $18 million contracts were traded on the exchange. According to Binance, this flash crash was caused by an individual who had put a stop market order on their large position that exceeded the total available bids in the market.

Opportunities

  • Crypto.com, the Hong Kong based cryptocurrency exchange, announced that it is launching a $200 million venture arm dedicated to investing in crypto startups. Crypto.com Capital, the venture arm, will invest in startups and projects at seed and Series A stages. They are planning on leading funding rounds with investments of between $100,000 and $3 million at seed stage and between $3 million and $10 million at Series A. The firm believes that crypto startups will rely on Crypto.com Capital to move fast and provide both capital and access to a global user base.
  • Mark Cuban announced that his NBA team, the Dallas Mavericks, will be accepting Dogecoin as payment for tickets and merchandise as part of an agreement with crypto payment services provider BitPay, as the provider begins to offer the cryptocurrency as a form of payment to its customers.
  • BitMEX, the cryptocurrency exchange, is planning on adding spot trading, brokerage, and custody services to its offerings. The company’s new CEO, Alexander Höptner, joined in December and he is working to transform BitMEX by amending relationships with regulators and expanding business operations. As the company battles charges regarding unregistered trading, Höptner’s experience working for a German exchange will be crucial to amend the wrongdoings of BitMEX’s former CEO.

Threats

  • The Ministry of Finance of Vietnam has warned the public about the risks of cryptocurrency investments and stated that the country has not adopted any legislation related to the issuance, trading, and exchange of digital currencies and assets. These warnings come amidst reports of growing skepticism regarding Pi Network, a new cryptocurrency platform that is becoming increasingly popular in the region, which has some worried that it could be a pyramid scheme.
  • The Biden administration will have to decide the fate of last-minute rules proposed by the former Trump administration that would require financial services firms to record the identities of cryptocurrency holders. If adopted, these measures could lead to a plummet in cryptocurrency prices. The rules were proposed to suppress attempts of using the digital assets for money laundering and illegal activities.
  • Ethereum’s network is scheduled to have an upgrade in July 2021, which may result in the cryptocurrency becoming a deflationary asset. The EIP-1559 fee market overhaul will transition Ethereum’s fee structure away from a bidding system that allows miners to prioritize the highest bids. After the implementation of EIP-1559, the network will dynamically adjust fees so users only pay the lowest bid for each block. This might reduce the revenue and margins earned by Ethereum miners and will certainly have an impact on share prices of publicly traded cryptocurrency mining companies.

Read the remainder of the article at https://www.usfunds.com/investor-library/investor-alert/americas-infrastructure-needs-some-love-but-will-rising-rates-check-spending/

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

 

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