This week, bond yields across the board rose on the back of several disappointing U.S. Treasury bond auctions. However, the Fed's key inflation index, the PCE, for last month came in a touch cooler. It helped, but not enough to keep stocks in the green for the week.

 

Three bond auctions this week met with tepid interest from buyers sending bond yields to their highest levels in over a month. The scorecard on government debt sales was 0 for three as two-, five-, and seven-year notes worth a total of $183 billion faced a chilly reception from bond investors worldwide. Who can blame them?

 

As the months pass, the U.S. debt level continues to rise. All most investors can see is a long road ahead of billions of dollars in Treasury bond auctions. The fundraising is necessary to fund the government's multi-trillion dollar spending programs.

 

 U.S. Treasury Secretary Janet Yellen has purposely confined most of the country's need for financing to shorter maturities, rather than auctioning 10- and 20-year bonds.

 

There is a method to that madness since selling billions of dollars in longer-duration bonds would jack up yields and might send the benchmark, U.S. Ten-Year bond above 5 percent from its current yield of 4.50 percent. She knows that would surely pressure equities lower. In an election year, a sitting president would not be happy to see a sinking stock market when he is already in a tight race to regain the White House.

 

And while yields climb, the Fed's policymakers continue to warn the markets that there is not enough inflation progress to warrant a cut in interest rates just yet. However, they continue to assure us that sometime down the road a cut is possible. Some members, like Minneapolis Fed President Neil Kashkari, have gone the other way and suggest that a rate hike is still entirely possible. That leaves investors in limbo.

 

The economic data is not helping either. First quarter of 2024 Gross Domestic Product was revised downward from the already weak growth rate of 1.6 percent to 1.3 percent. Over in the housing market, pending U. S home sales fell much more than expected. Month-over-month decline was minus-7.7 percent versus minus-3.6 percent expected. The shortfall in sales was blamed on the escalating rise in mortgage interest rate loans in April.

 

That data was bound to set tongues wagging as more traders worry about a possible stagflation scenario. They argue that rather than revisiting the 1970s era of full-blown stagflation, a milder version of the same may be in the offing.

 

Readers may recall that the 1970s was a period with both high inflation and uneven economic growth. High budget deficits, lower interest rates, the OPEC oil embargo, and the collapse of managed currency rates were the hallmarks of that period. Not all those conditions are present today. However, some argue that history does not need to repeat itself, but only to rhyme.

 

The Personal Consumer Expenditure Index (PCE) did come in a touch lower than expected. The core PCE, which strips out the cost of food and energy, rose 0.2 percent in April, which was in line with Wall Street's expectations but lower than the 0.3 percent increase seen in March. 

 

Last week, I warned readers that we would see some profit-taking. The S&P 500 Index fell almost 100 points from 5,304 to 5,214 as of Friday morning. This summer, I expect that we will be entering a period of consolidation. I don't see the averages making much headway until the end of August. It won't be all downhill. We could see bounces as markets get oversold, but it will be difficult to achieve new highs.

 

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 Federal Reserve Bank is the most powerful central bank in the world. It has a long history of successes and at times, failures in steering the U.S. economy through ups and downs. This is a story of how a well-intentioned policy has resulted in one of the worst disasters in American history.

 

After the stock market crash on Oct. 19, 1987, just two months after Alan Greenspan assumed the chairmanship of the Federal Reserve bank, he fired off a one-sentence statement before the start of trading on Oct. 20, "The Federal Reserve, consistent with its responsibilities as the nation's central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system." It was enough to turn markets around and kick off an economic expansion that lasted for 10 years.

 

The Fed soon realized that it might be able to smooth out the bumps in the business cycle and the economy by using monetary policy. They tried and succeeded in doing so in the early 1990s to combat a credit crunch, a Russian default on government securities, and the overheating of the U.S. labor market in 1994. As a result, the decade was marked by generally declining inflation and the longest peacetime economic expansion in our nation's history.

 

How exactly does the Fed work its magic? Think of monetary policy as a money spigot. When the Fed believes the economy is going to enter a slow patch, it turns on the money spigot. It turns the spigot off when it fears the economy is overheating, which could cause inflation. Simple, right?

 

It was a wonderful discovery. The government, through the Fed's actions and its fiscal spending, could minimize unemployment and ensure price stability by controlling the money supply if the dollar maintained its status as the world's preeminent currency.

 

However, money is distributed into the economy in a certain way — through the banking system in the form of lower interest rates. Interest rates are the cost of money when borrowed. The lower the rate, the cheaper the money. Banks offer loans to borrowers and these loans flow from the top down. Therein lies the problem.

 

Take a guess who gets to borrow the lion's share of this easy money?

 

Corporations, of course, are followed by the wealthy who own them. Corporations are profit-seeking entities that use capital most efficiently. The biggest, most profitable companies get to borrow the most at the lowest rates. The same top-down mentality pervades our fiscal policy efforts. Who, for example, will receive the $90 billion in new spending for Ukraine? It will not be soldiers on the front line. It will be defense companies, arms suppliers, munition distributors, etc.

 

From the government's and the Fed's point of view, this is the most efficient means available to inject monetary stimulus into the economy. The Fed also realized that with their top-down efficient capital approach, monetary loosening was not by itself inflationary. 

 

Remember last week's column concerning a swinging pendulum where on one side sits winner-takes-all capitalism versus fairness, equality, justice, and equity on the other. In this top-down situation, what happens to those who are at the bottom of the borrowing chain? Is this fair, and if so, how do they benefit?

 

Well, that is where trickle-down Reaganomics is supposed to come in. Corporations and other wealthy borrowers, according to supply-side economists, would invest in new plants and equipment, which would bring new jobs and higher pay to the masses. Economists used the same arguments for tax cuts as well. It may have worked in the 1980s, although many have their doubts, but it didn't work in the 1990s, or any time since then. Why?

 

Next week, I answer that question and give readers an understanding of how a swing in the country's economic pendulum isolated and decimated the lower and middle classes of this country.

 

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 had to happen at some point. Gold, silver, and copper prices experienced a steep downturn this week. Profit-taking set in as traders rung the cash register after weeks of gains. However, tech got a boost from Nvidia's earnings.

 

And while tech took the lead, keeping the S&P 500 and NASDAQ up, the rest of the market did not fare as well. The strength in the economy and the early estimates of the Purchasing Managers Index called the flash PMI, indicated that prices were still increasing. The publication of the Federal Open Market Committee notes from the last Fed meeting on Wednesday didn't help.

 

Here's what the Fed members wrote: "Participants observed that while inflation had eased over the past year, in recent months there had been a lack of further progress toward the Committee's 2 percent objective."

 

That was no surprise to the markets given that all week the members of that committee were giving interviews and making speeches arguing the same "higher for the longer" theme. What was new and concerned investors was this: "Various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such action became appropriate."

 

It was the first mention this year by the Fed that an interest rate hike might be on the table. That set investors back on their heels. Higher interest rates are like kryptonite to the markets and especially to commodities such as gold, silver, and copper. It would call into question the gold bull's narrative that we have entered a super cycle for commodities

 

But commodities weren't the only area of the markets that saw declines. China stocks, which have had a similar period of outperformance, succumbed to the same kind of selling. Overbought conditions gave traders here and in mainland China the excuse to take profits.

 

What I found interesting is that several large-cap Chinese companies that are also traded in the U.S., reported amazing earnings and sales. PDD, the parent company of Tumu (a Chinese rival of Amazon here and abroad), for example, announced revenues and earnings that were double the estimates of analysts. Trip.com. Group (travel), Bilibili, (social media), and NetEase (online gaming) are some other companies that had great earnings as well. Yet, their stock prices fell in this downturn.

 

As for the U.S. equity and bond markets, investors had pinned their hopes on the earnings announcement of Nvidia, the number one player in the artificial intelligence space. AI has supported stock prices all year and AI plays have expanded to many areas of the market from utilities to grocery stores.

 

Fortunately, the company delivered better-than-expected earnings, sales, and guidance for the third time in a row. It also announced a 10-to-1 stock split in which shareholders will receive 10 shares for every share of the company they own as of June 7.

 

The good news sent the price of Nvidia up more than 11 percent on Thursday and took the stock market up with it at first, but while Nvidia stayed strong, the averages gave back most of those gains by Thursday's close.

 

Last week, I wrote "I could see 5,340 on the S&P 500 Index," we did reach a new intraday high, of 5,341 on the S&P 500 Index and 16,996.39 on the NASDAQ. However, I also warned that "I expect to see a couple of days of profit-taking, especially in those areas that have seen outsized gains. That would be ideal, reduce overbought conditions and set up for another ramp higher in June."

 

The pullback in commodities and China stocks this week certainly qualifies as a pullback but one that I would buy. As for U.S. markets, I suspect next week we might see some minor profit-taking earlier in the week as traders eye next Friday's Personal Consumption Expenditures Index. The PCE is the Fed's No. 1 inflation indicator. If you are bullish on the stock market, you don't want to see an increase in that data point.

 

I wish all my readers a long weekend but do take the time to remember what the Memorial Day holiday is about. I know I will be remembering my fellow Marines who were left behind in the jungles of Vietnam. Semper Fi! 

 

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.

"If left unchecked, the trend in income inequality in this country will continue to widen.
It will lead to an increasingly dysfunctional economy, heightened political polarization,
paralyses and a level of anger andmistrust that this nation has not seen since the Great Depression"

 

"Income Inequality: The Trend is Not Your Friend," Bill Schmick, Oct. 26, 2012

 

The country is divided. Immigration and the economy are leading election issues. Inflation has soured attitudes. Labor unions are on the rise. Students are demonstrating and demanding we divest U.S. holdings in Israel. If I said that all the above issues are related and have a common economic cause, would you believe me?

 

We have seen all of this before. Maybe not in the exact same way but in the 1930s and 1960s dissatisfaction, unrest, what's fair and what's not led to conflict, assassinations, changes in economic and social policies and ultimately to regime change. Political analysts call it populism "a political approach that strives to appeal to ordinary people who feel that their concerns are disregarded by established elite groups."

 

Gathering populism around the world indicates to me that regime changes are coming. In the latest New York Times/Siena polls of swing states, 69 percent of respondents said that both the economic and political systems in this country need major changes or should be entirely torn down. You might ask how did we get to this place and, more importantly, where are we going?

 

While history does not repeat itself, it can generally rhyme, and a look back to our founding fathers might help us gain perspective. The philosophies of Thomas Hobbes and John Locke were popular back then and gained influence with those who drafted our constitution and form of government.

 

The natural state of mankind in short was a state of war of one man against another. Call it survival of the fittest, dog eat dog, or free market capitalism, the concept is the same. The way to escape this natural chaos is through a social contract to be agreed upon by the people to be governed and the government. It is where concepts such as fairness, equity, equality and community come together.  

 

Our political and economic system developed and succeeded because we melded the two ideas together in a system of checks and balance where free markets existed and flourished.

 

While not perfect, democracy thrived and functioned somewhat like a pendulum. When one or the other idea gained too much sway in the country, conflict arose. These crises triggered changes in laws, regulations and existing practices correcting abuses and extremes until the system gradually righted itself and swung back the other way.

 

These cycles are multi-year occurrences, and we have many of them in our history. At times, the pendulum bordered on the extreme, but thanks to our system of government these so-called regime changes have kept us in business. Some of our greatest breakthroughs as a country have come from these changes. The Civil War was one exception. We managed to survive even that bloody event, but it took several generations before that regime change was reconciled and repaired.

 

Our present problems are the result of a swing in the pendulum that has us so far in one direction that the nation is truly unbalanced. The "winner takes all" atmosphere of free markets and capitalism has over the past forty years reached an extreme. Income inequality among Americans has reached a point where even the Roman Empire had a lesser degree of income inequality.

 

I have been warning readers of the consequences of this condition as far back as 2010.   In a column entitled "Income Inequality: The Trend is Not Your Friend," I wrote "If left unchecked, the trend in income inequality in this country will continue to widen. It will lead to an increasingly dysfunctional economy, heightened political polarization, paralysis, and a level of anger and mistrust that this nation has not seen since the Great Depression."

 

That time has come to pass. Next week, I will explain how and why that inequality occurred with the full cooperation and urging of corporations and both political parties. We will also examine the role the Federal Reserve Bank played in this disaster and how we are still applying outdated 40-year-old policies to fix something that requires radical new approaches.

 

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 week's inflation data heartened investors. Equities and commodities rose while bond yields and the dollar fell. The question is whether the data will convince the Fed to relent on keeping interest rates higher for longer.

 

If we take a long-term view, the Consumer Price Index (CPI) change was minuscule. For April, inflation gains slowed from 3.5 percent to 3.4 percent, while core inflation increased over the last 12 months by 3.4 percent compared to 3.5 percent in March. That's no big deal, and yet, the numbers did break the trend of warmer CPIs over the last three months.

 

The cooler inflation announcement caught investors by surprise since most observers were convinced that inflation would continue the trend of hotter numbers. Readers may recall what I wrote in last week's column:

 

"The ramifications for the equity and bond markets could be serious. A weak inflation number in one or both indexes would be taken positively, I imagine with stocks climbing, possibly to new highs, and bond yields falling. It would also be beneficial for the commodity space and could push precious metals and copper higher. On the other hand, hotter numbers would have the opposite effect.

 

No one knows for sure, but readers aren't paying me for "on the other hand" opinions. So, I will come down on the side of cooler numbers next week. I base my guess on things like used car prices that have come down by about 30 percent thus far in 2024 and are accelerating to the downside. Insurance premium increases have been the major culprit in the hotter CPI data thus far and I am expecting at least a leveling out of price increases in car insurance this month.

 

That was exactly what happened. Stock indexes made record highs, yields fell, and commodities, especially gold, silver, and copper, soared. The question I am asking myself is now that we are above yearly highs on several indexes, are we jumping the gun here? Do you think the Fed is going to abruptly change its stance on one cooler inflation number?

 

I still don't think the data supports a change in Fed policy. The bond market disagrees. Traders are certainly upping their odds (again) for a cut in June, with more to follow. Sure, it could happen, but I won't hold my breath. Frankly, the Fed has already begun the easing process by reducing its Quantitative Tightening (QT). QT occurs when the Fed ups the amount of bonds they sell into financial markets from their balance sheet. That reduces the cash (liquidity) in the system.

 

At the beginning of May, the Fed announced it would slow down bond selling by over half from $60 billion per month to $25 billion. That is roughly equivalent to a 25-50 basis point cut in interest rates. At this point, I suspect the health of the labor market would influence the Fed more than one inflation reading. If unemployment increased suddenly (especially in an election year), the Fed might change its mind. Presently, while job gains have slowed, employment is still at almost historical lows.

 

As far as the markets are concerned, if markets continue to believe that the next move from the Fed will be an interest rate cut, risk assets will continue to gain, while the dollar and yields will decline further. I could see 5,340 on the S&P 500 Index, but I think Nvidia's earnings on May 22 will be crucial to where the market goes next. The entire AI rally and the gains in the technology sector for the year hinge on this AI chip producer. I believe it will set the stage for sentiment and earnings for the remainder of the month.

 

The markets have had a good run over the last two weeks. Is it time for a break? If so, I would call it a pause, where traders consolidate gains, catch their breath, and prepare for the summer. I expect to see a couple of days of profit-taking, especially in those areas that have seen outsized gains. That would be ideal, reduce overbought conditions and set up for another ramp higher in June.

 

June should be a period where markets grind higher. I am expecting a lot of rotation as well. Underperforming sectors will be squeezed higher, and favored areas will see bouts of profit-taking. By the end of August, we could see as high as 5,600 on the S&P 500 Index.

 

By the way, have you checked out the Chinese stock market since my column "China is on a tear?"

 

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.