Many on Wall Street are horrified that a presidential candidate might want to erode the independence of the Fed. Some have even called the idea the biggest threat to the U.S. economy. Any student of central bank history would beg to disagree.

 

We all would like to think that the Federal Reserve Bank's independence is sacrosanct. Once appointed by the president, the chairman of the Fed has the right and the duty to make decisions solely based on what is best for the economy and the labor force. The problem has been that many past presidents thought they knew best and sometimes they did.

 

A president can indeed both appoint and fire the Fed chair as well as most member officials, although he is not the sole judge of who takes those seats. Congress has a say in the matter. It is true that the president cannot bar the Fed from raising interest rates but can voice his concerns and participate in the conversation. A look back into history reveals presidential "conversations" have occurred often.

 

The first time a president attempted to push the Fed into taking a specific action was in the Roaring Twenties. President Herbert Hoover was concerned with the speculation he witnessed on Wall Street. He attempted to make the Fed raise interest rates before the economy overheated. Not only did the Fed refuse but it chose instead to cut interest rates.

 

By 1929, with the stock market crashing, Hoover pressured the Fed to slash rates, which he hoped would initiate a recovery and at the same time save his presidency. Instead, the Fed raised rates, froze borrowing, and tipped the country and the world into the Great Depression. One wonders what would have happened if Hoover had had more power to influence the Fed. Would the Depression of the 1930s and the succeeding World War in the 1940s turned out differently?

 

After World War II, President Harry Truman declared open warfare on the Fed Chairman Thomas B. McCabe. At the time, inflation was heading toward 20 percent while government bond yields were capped (a legacy of WWII). Fiscal spending, thanks to the Korean War, was going through the roof. McCabe was concerned that rock-bottom government-controlled interest rates, combined with huge government spending, were a recipe for inflationary disaster.

 

He warned Congress that Truman's policies made "the entire banking system nothing more than an engine of inflation." He was right. Fortunately, he had enough political backing to successfully negotiate the central bank's total control over monetary policy while ending its obligation to monetize the debt of the U.S. Treasury at a fixed rate.

 

This flew in the face of a president who stood on the verge of what could have been a nuclear war via the Korean conflict. Truman was infuriated with McCabe and accused him of doing "exactly what Mr. Stalin wants."

 

Truman failed in his fight with the Fed, but in the end, McCabe was forced to resign. Truman thought his replacement, William McChesney Martin, would be his yes-man at the head of the Fed, but in the words of Truman's chief economist, Martin "double-crossed" the president. Martin, who chaired the Fed from 1951-1970, continued to pursue the path of an independent central banker.

 

But presidents continued to try and get their way. John F. Kennedy had regular meetings with Martin telling him exactly what he wanted to do on rates. In 1965, Lyndon B. Johnson, after embarking on a powerful stimulus program, enjoined the Fed to keep interest rates as low as possible to help finance the Vietnam War.

 

Martin refused and instead raised rates by a half-point on inflation fears. Johnson was livid. He summoned Martin to his Texas ranch where he shoved him around his living room, yelling in his face "Boys are dying in Vietnam, and Bill Martin doesn't care."

 

Richard Nixon successfully used Arthur Burns' Republican party ties to pressure him frequently. He wanted to win re-election. To do so, he browbeat Burns to improve short-term employment by maintaining easy-money policies. He is caught on the White House tapes demanding that Burns do nothing to "hurt us" especially in the leadup to the 1972 elections.

 

Ronald Reagan and George H.W. Bush round out this list of presidents who have tried sometimes successfully, sometimes not, to influence the direction of the Fed and interest rates. 

 

The fact that there has been a decade or two of reprieve in which the Federal Reserve Bank has been left to its own devices does not mean that future presidents will refrain from having their say in managing the path of monetary policy. The Fed's top-down approach in managing monetary policy over the last 40 years, while enhancing economic growth, has also led to enormous income inequality in the United States.

 

In 2008, the Fed made a historic policy change with the introduction of qualitative easing. Since then, the Fed's balance sheet has skyrocketed. It has more power than it ever has over the economy and the allocation of credit through bond buying of agency securities. In addition, many Americans are demanding a more bottom-up approach in monetary and fiscal policy. In this budding era of populism, it does not surprise me that a potential president might want more control of the Fed for better or worse.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

It was a week of massive moves, both up and down. A host of unanswered questions made pricing stocks at the right level almost impossible. Are we on the brink of recession? How low will the unwinding of the Japanese yen carry trade take the U.S. equity markets? Will conflict in the Middle East spill over into something even more serious?

 

There are no quick or easy answers to these questions. Last week's down draft in the US nonfarm payrolls numbers triggered an 8 percent decline in the S&P 500 index and more than double that for the tech-heavy NASDAQ. Was that even justified?

 

If the labor market is truly rolling over, say the bears, then a recession cannot be far off. The bulls disagree, pointing to an economy still growing, even if it is not at the same pace as last year.  At most, they say, we may be experiencing a growth recession. What is that, you might ask?

 

It is a period of slower economic growth that is not low enough to be considered a technical recession. The economy may still be growing, but at a rate that is too slow to keep up with demand for new jobs. Growth recessions are uncommon and usually don't last more than a few quarters. It is unlike a traditional recession where the economy experiences a significant decline in economic activity over multiple quarters. 

 

My take is that we are putting the cart before the horse in either case. A one-month jobs report does not mean much. It could have been a reporting error or faulty data. Some economists blame the weather (Hurricane Beryl)  for most of the shortfall in employment data.

 

This week's jobless claims did not indicate a rapidly deteriorating job market. The number of claims dropped to 233,000 from last week's 250,000, which was much fewer than economists were forecasting. Whatever the case, we will have to wait almost a month for the next nonfarm payroll report to show more deterioration or improvement.

 

The other issue that could be as contentious, if not more so, may be the unwinding of the yen-carry trade. Let me explain how that works. For decades, American financial institutions and others have been borrowing the Japanese yen, at super-low interest rates. They then turn around and use those borrowed funds to buy the U.S. dollar. From there, they can either invest that money in 'safe' U.S. Treasury bills and bonds with higher yields than the yen or, if they want to speculate (which many do), they can buy stocks (think FANG and AI favorites) or any number of high-flying assets.

 

Now, no one knows how much money is involved in these yen-carry trades, but it is a lot ( trillions of dollars). And because of the leverage and money involved, carry trades are far more sensitive to currency moves and interest rate expectations. For years, as long as the Bank of Japan(BOJ) kept interest rates at a negative to zero return, the carry trade was extremely profitable, so more and more of the world's financial institutions participated.

 

However, that began to change a few weeks ago. Over the last few months, inflation began to rise in Japan, and as a result, the BOJ began to change course. They announced a small rise in their overnight lending rate to just 0.25 percent with more to come. That is tiny, right (especially when you compare that to the U.S. dollar lending rate of roughly 5.5 percent), but not so in the carry trade leverage business.

 

The mere talk of future rate rises in Japan, plus the almost certainty of Federal Reserve interest rate cuts beginning in September drove the yen up 13 percent in a few weeks and the dollar down. The combination of the two events has narrowed the yield gap between the yen and the dollar almost overnight.

 

 Suddenly, the profitable yen-carry trades have turned into multi-billion-dollar losses. It forced big, leveraged investors to unwind not only the carry trade but also forced them to de-leverage overall by shedding other stock and bond holdings.

 

The fact that no one knows how or when more trades will be unwound has traders glued to the yen/Dollar index night and day. The instability this week in global markets spooked the BOJ. On Wednesday, Shinichi Uchida, a deputy governor at the BOJ said the bank would not hike interest rates further while the financial and capital markets remain unstable.

 

That reassured investors and lifted stocks. I think the carry trade debate might continue, but most of the damage has been done, in my opinion. In that sense, the carry trade is yesterday's worry.

 

I estimate that there is about $100 trillion in equities and about the same amount in bonds worldwide. If we declined 10 percent, as we have in just a few weeks, that is equivalent to a drop of $20 trillion in global money flows all-in. Of course, lobbing off that much wealth in a short period should cause some dislocations and require some backing and filling over the next few weeks in the equity markets.

 

Last week, I warned readers that "a full 10 percent correction would not surprise me" on the S&P 500 Index by early this week. Most of that decline occurred by Monday mid-day. Since then, we have seen 1-2 percentage point moves daily. The good jobless claims numbers on Thursday saw all three indexes climb by between 1.6 percent to 2.75 percent. By Friday, most of the losses for the week have been recouped. That left many investors to ask if this correction is over or do we have more to go.

 

Finding a bottom is usually a process. Normally, when markets fall like they have in such a short time frame, there is a dead count bounce. We are in one as I write this. But then the markets fall, re-testing, or breaking the recent lows. Over time, the markets then normalize before moving higher. However sometimes (although not often), we have a "V" shaped recovery, in which case, the rest of August may be much calmer. In any case, after this week, most of the downside has already happened in my opinion. Let's see what happens.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

Over the past few years, labor unions have experienced a renaissance in interest and activity. As a result, unions have begun to flex their muscles, and their influence may extend beyond economics into this year's turbulent election politics.

 

In several columns over the past two years, I have explained how unions have made headway in various U.S. economic sectors from autos to Amazon. The UAW's strikes against the Big Three auto companies are what most readers may remember. It ended in victory for the workers and sparked further union outreach to manufacturers in the notoriously anti-union South.

 

In addition, unions in other areas have begun to organize at Amazon Starbucks, and a host of different companies with some success. And yet, all union membership in the United States is still just about 10 percent, which is half the rate in 1983. If you add in workers who have no union affiliation, but whose jobs are covered by a union contract, that percentage jumps to 11.2 percent.

 

In total, we are talking about no more than 16.2 million workers in a total American labor force of 167.58 million people. How could such a paltry number of voters impact who wins the presidency?

 

My father was a machinist, working two jobs in Philadelphia when I grew up. His union job was with SKF, a Swedish ball-bearing company, while his side job was at a non-union shop with higher pay but no benefits. He voted in every election his union bosses dictated and he also worked in his spare time to get out the vote.

 

Back in the day, Democrats took his participation, and the union vote for granted. This Democrat voting bloc carried on through the decades until at least  2012.  During the Barack Obama election, 66 percent of union voters backed him, while only 53 percent of nonunion workers voted Democratic. And then came Donald Trump four years later.

 

In 2016, only 53 percent of union members voted for Hilary Clinton, as an increasing number of working-class Americans, dissatisfied with both their political and economic share of the American pie voted for Trump and populism. That precipitated a great deal of soul-searching among the Democrats. As a result, Democrats over the last two national election cycles are no longer taking the union vote for granted.

 

They have made some headway in regaining their marginal edge with union voters. Joe Biden captured 60 percent of union votes in 2020, which was an improvement over the Clinton numbers, but still below Obama's turnout by 6 points. In the 2022 midterm elections, 63 percent of union members voted for Democrat members of Congress.

 

However, in this age of gathering populism, the union vote can go either way this time around. In the past, union members are more likely to vote than nonunion workers. And while they are only 10 percent of the workforce, in three swing states — Michigan, Nevada, and Pennsylvania — union membership is much higher than the country overall. More than 12 percent of workers in each state belong to a union.

 

Given this backdrop, it is not surprising that for the first time in history, an American president walked the UAW picket line, while Donald Trump countered that move by addressing striking workers as well. It was also no accident that the Teamsters President Sean O'Brien addressed the Republican National Convention, which was an unprecedented action by a union representative.

 

It is no accident that Vice President Kamala Harris and her pick for vice president, Tim Walz, governor of Minnesota,  as well as Donald Trump's running mate, J.D. Vance, made sure to visit Michigan (both a swing as well as a labor state) on Wednesday. Against heavy odds, Vice President Harris selected Governor Walz over Pennsylvania's Gov. Josh Shapiro. Pundits believe that one reason Shapiro did not make the grade was his support for private-school vouchers, which put him at odds with teachers' unions.

 

Both the Democrat and the Republican teams have floated several pro-unions, pro-worker, policy initiatives. Workers have been receptive to this kind of populist rhetoric but countering that has been the nation's weak labor laws.

 

In addition, several red states' recent legislative attempts to stop further union organizing in the southern part of the country are not playing well among the membership. The conservative Supreme Court rulings in favor of business over unions are another stumbling block for many workers as well.

 

All indications are that if the election is as tight as the polls indicate, a handful of swing states could make a big difference in who wins. In three of those five states, unions may end up holding the key to who wins. Both sides know this, so expect a lot more attention to be paid to this crucial voting bloc. 

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

Most people think of stocks when financial markets are mentioned. That is where the action is and where the big money is made. That may be so, but investors should not ignore the promise of the bond market.

 

In my graduate school days, a required subject was Modern Portfolio Theory. Its author, Harry Markowitz, who, back in the '50s, proposed that the optimal portfolio for most risk-adjusted investors was 60 percent U.S. stocks and 40 percent U.S. Treasury bonds. The idea was that these two asset classes were negatively correlated, meaning that if stocks went down, bond prices would increase and vice versa. Over time, this diversification would produce better returns than putting all your eggs in one basket.

 

For most of my career, this investment theory worked well. However, over the past decade, interest rates were at or near zero. This made the bonds side of this equation a drag on overall performance. As a result, more and more fund managers reduced their bond weighting as stocks continued to rise. And then came COVID.

 

During the initial COVID market crash, both bonds and stocks fell together. In the subsequent market rally, both asset classes went up simultaneously. They lost again when the Federal Reserve Bank started hiking interest rates. In 2022, the 60/40 portfolio suffered a 17.5 percent decline. That was its worst performance since 1937 and its fourth worst in 200 years.

 

Both prices of bonds and stocks rose together once again as inflation peaked.  Investors started positioning for a time when interest rates would come down. In this period the Fed stopped tightening and inflation was beginning to weaken. In the meantime, stocks were increasingly being priced as if they were bonds.

 

The formula was the same for both asset classes. The present value of a stock (or a bond) was calculated as the worth of its future cash flows (earnings and dividends, or in the case of bonds, interest payments), discounted at prevailing interest rates. Therefore, when those interest rates go down, the value of the stock rises just like a bond. The reverse happens when rates rise.

 

It appears that inflation and the global central bank response to combat it (coordinated interest rate hikes) had forced the correlation between stocks and bonds to become much closer. This we know to be true. In a study they completed this year, Morgan Stanley, the brokerage firm, found that whenever U.S. inflation exceeded 2.4 percent over the last 150 years, there was an increase in the correlation between stocks and bonds. It also led to heightened volatility in both asset classes. 

 

Morgan Stanley (and others) believe the past few years were an anomaly. It was a period where inflation spiked, driving the correlation between bonds and stocks together. If we fast forward to today, the picture has changed. Thanks to the Fed's tightening program over the past two years, interest rates are now high enough to provide a healthy return to a bondholder. In addition, the market expects the Fed to begin cutting interest rates as early as September. If and when they do, and rates start to fall, bonds will rise in price giving holders significant capital gains in addition to interest payments.

 

Stocks, on the other hand, are already close to record highs and extended. In the best of all worlds, If the Fed cuts rates, equities should continue to gain, but likely at a slower rate than the price appreciation of bonds.

 

If this were to happen, one would expect the 60/40 portfolio should come back into vogue. Vanguard, one of the world's leading fund managers, expects U.S. bonds to yield between 4.8-5.8 percent over the next ten years, compared to 4.2-6.2 percent for stocks. If they are right, taken together, a 60/40 portfolio may just be the optimal approach for a moderate-risk investor.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

Have you ever wondered how much your time and effort were worth as a stay-at-home spouse? Chores like child care, laundry, home repairs, and meal preparations rarely come with a bill attached, but what if they did? You may be about to find out.

 

All the above chores plus many more, from driving the kids to school or soccer practice to treating illnesses among family members are critical to the functioning of the U.S. economy. However, none of that essential work is measured.

 

ScienceDirect defines household production as "the production of goods and services by the members of a household, for their consumption, using their capital and their unpaid labor."

 

The concept is recognized worldwide (including the U.S.), as an alternative economy to the labor market. In many nations, the household economy absorbs more labor and at least one-third of the physical capital used in the market economy. Because this work isn't tracked through marketplace transactions, it is excluded from U.S. Gross Domestic Product (GDP). Three years ago, thanks to the labor dislocations spawned by COVID-19, the Department of Labor decided to change that. 

 

As part of an initiative to come up with a major new input to their understanding of consumer expenditures, the DOL commissioned a group of economists at Bard College to figure out how the government could put a dollar and cents value on household activity. Overall, the survey examined how much Americans spend on everything that costs money. It excludes activities that don't cost money but do cost time.

 

Last month, the resulting Integrating Nonmarket Consumption into the Bureau of Labor Statistics Consumer Expenditure Survey was published by four researchers, Ajit Zacharias, Fernando Rios-Avila, Nancy Folbre, and Thomas Masterson. Chief among their findings was that women performed 78 percent of the total value of unpaid production in 2019.

 

I'm betting that most readers are not surprised that women are responsible for the lion's share of household production. What is as important is that the study promises to give the country insight into how worthwhile this unpaid labor is but is also critical to the continuing functioning of the economy.

 

For years, mainstream America argued unpaid work was not an economic issue. Sadly, I still hear it all the time (mostly by men) that it is a woman's moral duty, borne out of love, to take care of the household. During the pandemic, I wrote several columns on women as the unsung heroes throughout the lockdown. To me, they were the engine that kept the economy running.

 

So many of them were expected to not only continue to work at home, or even in the office while assuming the additional burdens of at-home education, child care, homemaking, etc. But it goes beyond that effort.

 

There is a thing called cognitive labor as well. It is invisible but requires an enormous amount of effort, especially in periods of societal crisis like in the pandemic. A Harvard sociologist, Allison Daminger, breaks it down into four parts: Anticipating needs, identifying options for meeting those needs, deciding among the options, and monitoring the results. It is how shit gets done in most households and I believe women do most of it.

 

The Bard economists looked at realms of data from the Census as well as other sources to determine how Americans spend their time. They then paired this data with DOL numbers on how much each work category costs. How much, for example, is the going rate for six hours of child care? What are the wages for the typical caregiver? Was the rate higher for simply reading to a child versus supervisory work?

 

Other areas from laundry to cooking and everything in between were studied and included in the research. The object was to convert the hours spent on tasks into a measurable value. They also looked at the unpaid contribution of members outside the household like grandparents, sisters, or aunts.

 

The DOL is hoping that this additional data will bring all of us closer to determining the true cost of living for Americans. It could also explain and give further insight into the pay gap between genders and the lower labor participation rates between men and women. For example, people tasked with household production have fewer hours for paid work, on average, and can be expected to earn lower incomes as a result.

 

The next step will be for the DOL to evaluate the methodology of the report, and if that passes its' economic litmus tests, they intend to add a household production measurement to its consumer expenditures data by next year.  In America, it is all about the buck. Unfortunately, most of us measure one's worth by this dollar and cents metric. Putting a price tag on household production would provide a great leap forward to appreciating those of us who toil without pay in the interests of the family.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.