On Thursday of this week, almost 200 nations are meeting in Dubai at the COP28 Climate Summit to discuss global warming. The COP28 the participants will focus on how to keep temperatures from climbing any higher. Thus far, the track record is less than encouraging.

 

Over the last eight years, despite pledges from both political and business leaders worldwide to reduce industrial emissions, temperatures have continued to rise. This is in the face of massive efforts both here and abroad to develop and expand solar, wind, and nuclear power alternatives to fossil fuels.

 

Despite these efforts, carbon dioxide emissions and temperatures continue to rise. With that background, the climate summit will be focusing on how to keep their stated goal of keeping world temperature gains below their 1.5-degree Celsius (2.7 degrees Fahrenheit) target.

 

That number, established at the 2009 Copenhagen summit, was officially set as a temperature ceiling goal a year later by the United Nations.

 

In 2015, at the Paris Agreement, 195 countries agreed to hold temperatures below 2 degrees Centigrade, specifically to stay within that 1.5 centigrade level. The 1.5C level is akin to a speed limit for rising temperatures worldwide. Going above that level, scientists believe, would make some impacts of climate change irreversible.

 

It was not an arbitrary data point. Climate scientists arrived at the number by comparing the average global surface temperatures today with those that occurred in the late 1800s before industrialization. The difference between now and then is approximately 1.1 degrees Celsius (2 degrees Fahrenheit).

 

The bad news, according to Copernicus, a European climate service, is that we have already surpassed the 1.5-degree speed limit on at least 127 days this year. That may seem a tiny number to you and me, but when it is added to an overheated planet overall, the impact can be huge. As a result, it is almost a certainty that 2023 will be the hottest year on record.

 

Floods, heat waves, droughts, hurricanes, wildfires — take your pick — we all experienced the changes. Some more than others. 

 

More subtle changes are occurring as well like the change in farmers' growing seasons throughout the world. Fortunately, the ocean, which makes up 70 percent of the earth's surface, absorbed more than 90 percent of the excess heat (and 30 percent of excess carbon dioxide). However, even the oceans are succumbing to the extra heat. Coral reefs are bleaching and crumbling, the polar ice and snow caps are rapidly shrinking and so is marine life.

 

Here in the U.S., the heat is causing accelerated climate change. It is also creating more and more extreme weather events, according to the latest Federal National Climate Assessment. The cost of extreme weather events is at least $150 billion per year in direct damage alone. That total is projected to increase over the near term.  In addition, billion-dollar events are occurring at a far more rapid clip than they did in decades past, according to the report.

 

Today a billion-dollar disaster is occurring every three weeks, as compared to one every four months back in 1980.

 

Unless something changes, the 1.5C threshold will be broken permanently by the early 2030s, according to the Intergovernmental Panel on Climate Change. That would create much worse climate effects and make 2023's weather issues look like child's play in comparison.

 

Do I think something radical will change during the COP28 this week? No, I don't. Both President Biden and Vice President Harris are not even attending. That is not to say that America is doing nothing. The president has allocated $6 billion to strengthen the electric grid, help deploy carbon-free energy, protect communities from the impacts of climate change, and improve water reliability. But given the dangers, the U.S. and other industrialized countries need to do more, a lot more.

 

Work on reducing emissions is so slow that additional greenhouse warming is almost a guarantee. The world's efforts to roll back climate change have been incremental when was is needed is a transformative approach. Redesigning the way buildings are built, rather than installing air conditioning, halting, rather than slowing, new development in floodplains, the kind and number of cars we drive, how we cool and heat our homes, and how business conducts business from the ground up.

 

Am I preaching to the choir? I don't think so. We are all sitting on our hands, complaining about the weather, the tick seasons, and the ice storms and doing little to nothing about the cause. Well, unless you plan to vacate this planet in the next seven or so years, our time of reckoning fast approaches. By then it will be too late.

 

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.

This stock market rally lasted nine straight days. That was more than enough to trigger some profit-taking.

 

"Too far, too fast" is my interpretation of the nine-day continuous climb in the equity and bond markets. The rally that started early last week continued this week, although it was clear to me that it is showing some signs of faltering.

 

And as has happened throughout the year, the Magnificent Seven group of stocks was the focus of most of the buying but on less and less volume. Since they represent such a large part of the indexes, it was not hard to see that the indexes were supported by a handful of stocks. However, the remaining 493 stocks in the S&P 500 Index are rolling over, which they have done all year.

 

Bond yields, on the other hand, have stopped going down. Instead, the U.S. 10-year Treasury bond had been consolidating. That is until the bond auctions on Wednesday and Thursday. The 10-year bond auction was fair, but the 30-year sale on Thursday did not go well at all. It was the weakest auction in almost two years. There was little to no appetite for long-dated bonds after the large decline in yields last week. On Friday, yields, and with them the stock market, recovered a bit.

 

To be clear, I am not convinced that we have seen the peak in long-term interest rates. If I look out further than January, I know that next year the U.S. Treasury will need to auction even more bonds simply to finance the government's existing spending plans. Some bond analysts expect more than $2 trillion in fundraising will be on the docket. If so, that should push interest rates back up and yields higher than where they are now.

 

As for the Fed, right now the betting is that there will be no rate hike at the December FOMC meeting. Some now predicting a rate cut as early as June 2024. Those kinds of predictions usually crop up to justify why stocks can continue to climb higher. I don't put much faith in that, especially when not one Fed member has even discussed rate cuts in the coming year.

 

In a speech before members of the International Monetary Fund on Thursday, Federal Reserve Bank Chairman Jerome Powell said the Fed is 'not confident' it has done enough to bring inflation down. He warned that more work could be ahead in the battle against higher prices.

 

 This statement was only a week after the FOMC meeting in which Powell's words were interpreted by the market as indicating the Fed was through raising rates. The moral of that tale is one usually hears what one wants to hear.

 

We are once again getting close to the deadline for a government shutdown. The Nov. 17 deadline is fast approaching and there is still no plan to keep the lights on in Washington. House Republicans are all over the map in what they want. Unfortunately, the new Speaker has yet to table any plan that would satisfy all his members. 

 

What is worse, Senate Republicans are now also demanding stricter border policies as a condition for Ukraine aid. At this point, the best that can be hoped for is yet another continuing resolution that would stretch funding out for another month or two. If not, I would expect the financial markets to hit some turbulence.

 

Chair Powell's words, combined with the poor bond auction, all on the same day (Thursday, Nov. 9), had bulls rethinking the market direction in the days ahead. I am looking for a minor pullback in the averages here short-term. A decline of 30-50 points on the S&P 500 Index should about do it from here. Anything lower than say 4,300 would tell me that there is more trouble in paradise than I am expecting.   

 

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.

Baby Boomers are aging. As their health fails, an increasing number of the elderly are turning away from nursing homes and opting for home health care instead. The problem is finding enough trained caregivers to handle demand.

 

The demographics in the U.S. indicate two trends — an aging population as well as a declining birth rate. By 2034, there will be more adults over the age of 65 than children under the age of 18. Between 2018 and 2060, the population of seniors will double.

 

An overwhelming majority of Americans (88 percent) would rather receive long-term care services in their homes as they age, according to a recent study by the Associated Press and NORC Center for Public Affairs. Being cared for at home instead of in a clinical setting has many benefits according to studies. Daily routines in housekeeping, mealtimes, and things like prescription reminders seem to alleviate feelings of isolation and alleviate stress and depression while helping to improve memory and physical stability and fostering a sense of independence. And it is not just the elderly, individuals recovering from short-term surgery, rehab, or chronic illnesses prefer to recover at home as well.

 

About 12 million Americans are receiving some kind of home-care services at any given time and that number is increasing. There are 45 million seniors, based on Medicare statistics, of which 15 million will end up in the hospital every year. Of those, more than 3 million suffer from five or more chronic conditions and will be hospitalized several times a year. That is why home care is one of the fastest-growing segments of the health-care sector. 

 

The median costs of in-home care are different depending upon the state, but a survey by Genworth Financial believes the national average is approximately $4,000 per month. Private insurance companies, Medicare, and Medicaid foot some or most of that bill depending on the individual's circumstances.

 

The total home-care market was valued at $301.09 billion in 2021. It is expected to top $813.17 billion in the next five years. That is a compound annual growth rate of 15.25 percent. The U.S. Bureau of Labor Statistics indicates that the demand for home health care and personal care aides is expected to rise by 34 percent from 2019 to 2029, which would surpass the average growth rate of all other occupations. Last year, home care spending hit a historical high of $113.5 billion.

 

Unlike trends in other segments of health care that have seen high levels of corporate concentration, the home care industry is made up of more than 33,200 small businesses as of 2022. In total, there are an estimated 3.4 million home care workers providing health care support to older adults with disabilities in the U.S. Overall, roughly 78 percent of providers employ fewer than 50 workers. The facts are that there is a growing gap between the number of home care workers and patients. This is nothing new. Between 2013 and 2019, the number of available home care workers for every 100 patients has fallen by nearly 12 percent. The gap has widened since then. Some recent studies indicate that as many as 25 percent of referred patients have been turned away from home healthcare providers due to a lack of workers.

 

The physical, mental, and emotional stress required to care for these individuals is often overwhelming. It is not an easy job. More than half of these current home care workers have no formal education beyond a high school degree. Many are immigrants from various ethnic, economic, and cultural backgrounds.

 

Nationally, home health-care workers are paid an average of about $13.50 per hour. In some states such as Louisiana, West Virginia, Texas, Mississippi and Oklahoma, workers make less than $12 an hour. Almost 43 percent of workers' income is below the poverty level. In addition to the low pay, poor communication, lack of recognition and challenging work hours conspire to discourage workers from continuing in this field. In 2022, the professional caregiver turnover rate was more than 77 percent.

 

But before we pin the blame on unscrupulous home care agencies, recognize that these companies face enormous challenges in financial, operational, and clinical areas. Providing health-care services is extremely complicated, beset by logistical challenges, system inefficiencies, complex payment systems, and lack of care coordination. Private insurance companies, Medicare, Medicaid, differing reimbursement policies, eligibility, and all sorts of differing care requirements must be included in the mix.

 

It is an industry that is difficult to apply economies of scale because no two agencies address these problems in the same way. Usually, the owners as well as their employees, are overrun with existing duties, and as such expanding is just not worth considering. Paying higher wages might increase the supply of workers, but training them to understand, communicate, and deliver quality services to an expanding patient base is just as important.

 

If ever there was an industry in need of data-driven technology, it is this one. The industry could benefit greatly from communication tools, such as data access and secure data information exchange. If workers were able to access easy-to-use technology that could connect them to experts while on the job, both the stress levels and the probability of making medical mistakes would be lessened considerably. Software that could improve care delivery, while reducing paperwork, as technology has done in countless other areas, is just begging to be developed and introduced to an important area looking for solutions. 

 

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.

Investors were treated with good news on a variety of fronts as October closed and we enter the November-December seasonal period. Both the U.S. Treasury and the Federal Reserve Bank should be credited with most of the positive developments that sent bond prices higher and yields lower.

 

Since September, I was convinced that if bond yields continued to rise, stocks would fall. Last week, however, I advised investors that we were nearing the end of this trend, and "I expect a rebound to begin in November if not sooner."

 

To me, the most important development was the decision by the U.S. Treasury to slow the pace of increases in longer-dated debt auctions in the November 2023 to January 2024 period. The Treasury also expects it will need only one more additional quarter of increases after this to attain its financing needs. They also cut their borrowing estimate for the fourth quarter by $76 billion to $776 billion.

 

Now, while this is still a lot of money it is less than bond investors and the markets overall expected. It also means that by auctioning more shorter-term bills, liquidity in the financial markets increases and that is good for financial assets like stocks and long-term bonds. The result was a drop in long-term yields and a rally in the U.S. 10-year and 30-year bonds. And as I have said, lower yields on the long end immediately trigger a run-up in equities. That was on Nov. 1.

 

The next day, on Wednesday, Nov. 2, the Federal Open Market Committee decided to hold interest rates where they are. That was the second month in a row that the Fed has kept its monetary policy of further tightening on hold. That was no surprise to the markets since the inflation data seems to be under control at least for now.

 

However, the Fed was still holding out the possibility that they could raise again in December if the data warranted it. Chairman Jerome Powell, in his Q&A session after the announcement, maintained the line that they would remain data dependent, but to most observers he appeared less hawkish, if not downright "dovish" in his answers.

 

Traders took this to mean that the raising of interest rates that has been a daily diet for the markets over the last 18 months may be over. That still leaves the Fed's quantitative tightening program (QT) in place. Between the rise in long-term yields over the last few months and QT, it could be that the Fed feels they no longer need further hikes in the Fed funds rate to achieve their inflation objectives. In any case, both bonds and stocks spiked higher since Wednesday.

 

The October U.S. non-farm payroll data also cheered investors. The economy only added 150,000 jobs, as unemployment ticked up to 3.9 percent from 3.8 percent. The unemployment rate now stands at its highest level since January 2022. Remember that negative news on the economy means good news for investors, since the Fed will likely hold off on tightening as the economy slows. Bond yields dropped further as bonds on the long end soared as traders were forced to cover their shorts by buying back U.S. Treasuries.

 

 Many Fed watchers now believe that the U.S. Treasury and its secretary, Janet Yellen, maybe replacing the Fed as the markets' focal point for determining the future path of interest rates. Instead of parsing every word of FOMC members for clues on the Fed's next move in taming inflation, the Treasury's auction plans have taken center stage. That could have some interesting implications for the future of the stock market.

 

Unlike the Fed, Yellen is a politician as a member of the Biden administration's cabinet, which is entering a presidential election in 2024. The stock and bond markets are an integral part of any candidate's election prospects. Putting the two together, we may see the U.S. Treasury pull some rabbits out of the hat that could stack the economic odds for a favorable outcome.

 

Marketwise, we got down to 4,103 last Friday, three points from my target, and have been climbing ever since. The S&P 500 Index has retraced almost 50 percent of the entire three-month decline in six days! 

 

It was a testament to the bullish sentiment that Apple's disappointing earnings, which would have decimated the stock price and pulled the stock market down with it a week ago, has had little impact. A pullback and consolidation would make sense to me after this run and then up again. 

 

We are in a seasonably strong period in the markets (November-December) with bond yields dropping and equities hopping. What could be better than that?

 

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.

The U.S. government has been borrowing from Peter to pay Paul for decades. That should come as no surprise to most, but the speed by which we are piling up debt to support our spending has become alarming.

 

The federal budget deficit is the difference between how much Washington spends and how much it receives in taxes. That concept should be familiar to all of us who count on our income to support our family's spending. Imagine if the amount you owed (your deficit) doubled from last year.

 

That is what happened to the nation's budget deficit over the last year, to the tune of $1.7 trillion.

 

If you look at the big picture, the U.S. total federal debt topped $33 trillion this year. That amounts to 121 percent of 2022's GDP. Usually, the U.S. deficit expands during hard times for the economy since tax receipts fall. The opposite occurs when the economy grows. However, that relationship has come apart.

 

The U.S. economy has been growing since the pandemic and yet tax receipts continue to fall. Much of the blame for this situation can be laid at the doorstep of various administrations and Congress. Tax cuts by George W. Bush, Barack Obama, and more recently Donald Trump have reduced the amount of taxes coming into the government's coffers.

 

In typical political fashion, the present White House under President Biden has pinned the blame for lower tax revenues on the former president. Trump indeed left the country in far worse shape than his predecessors. His more than generous corporate tax cuts failed to jump-start the economy. Instead of investing in capital formation, corporations used those savings to increase dividends and stock buybacks.

 

Federal spending now accounts for 25 percent of GDP. In defense of government spending, you might say the last few years have been unusual and you would be right. The COVID-19 pandemic triggered a huge spending program to save the economy and voters. In addition, the need to do something about the country's deteriorating infrastructure was finally addressed after years of inaction. Since then, Russia's invasion of Ukraine and the terrorist attack in Israel have added even more pressure to increase spending.

 

But the really big programs that have consumed so much of the government's spending commitments are Social Security and Medicare, which account for almost half of U.S. spending. As more Americans retire, the costs of these programs will continue to escalate. As such, deficits without tax increases are expected to climb.

 

Back in 2011, the Congressional Budget Office (CBO) predicted the fiscal deficit would average 1.8 percent of the economy in the ensuing decade. This past May, in the CBO's latest projections, that number has increased to 6.1 percent of Gross Domestic Product. Altogether, federal spending will account for almost 25 percent of the U.S. GDP over the next decade while tax receipts will account for 18 percent of GDP. If we continue this trend, Penn Wharton School researchers predict that the U.S. could default on its debt as soon as 20 years.

 

Up until now, the financial markets have largely ignored the deficit, and the endless debates and false promises by legislatures who talk a good game but simply move the deck chairs around on a sinking ship once they are in power. The bond market, however, is beginning to take notice.

 

As the nation's borrowing grows larger to finance a growing deficit, bond vigilantes are taking matters into their own hands. They are selling U.S. government bonds, which is pushing yields higher and higher on government debt. It is the private sector's response to Washington's profligate spending and irresponsible deficits. The result is that the credit markets are shifting long-term interest rates higher making it more and more expensive for Washington to continue spending and borrowing.

 

The government is now facing the reality of spending much more in interest payments on our ballooning debt than ever before. In the current fiscal year interest spending should surpass $800 billion, which is more than double 2021's $325 billion number.

 

By 2026 net interest expense should reach 3.3 percent of GDP. That would be the highest on record. If interest rates remain where they are, and fiscal policy continues its spending path. If unchecked, the cost of servicing this debt could be larger than defense spending by 2025, and top Medicare spending by 2026. 

 

I believe the present push by Republicans in Congress to cut spending is both necessary and urgent. It will be painful. It should also be accompanied by tax increases across the board, but that may be too much to ask for given elections next year, but one can always hope.

 

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.