If you have been grocery shopping lately, there is no question that prices and inflation are going higher. The same can be said for the price of a gallon of gas. But is it a transitory event, or are we at the beginning of an inflationary era not seen in decades?

 

Clearly, commodity prices, which are usually the harbinger of future inflation are soaring. Copper, oil, sugar, corn, steel, aluminum and lumber as well as many other food and material prices are hitting multi-year highs. But it is not just commodities that are seeing a price surge. Shipping costs are also skyrocketing. And there are parts shortages that are leading to higher prices, plus a global semiconductor shortage that is sending microchip prices climbing.

 

Against this backdrop, the U.S. economy is exploding higher with the growth rate. This quarter and next combined are expected to exceed 10 percent. The nation is reopening and with it the demand (and prices) for everything from airline tickets to rental vacation cottages. The back-to-the-office crowd, as an example, has retailers trying to keep up with the sudden heightened demand for everything from dress trousers to make-up.

 

And while all this activity is gathering momentum, the U.S. government is feeding more fuel to the fire. Both government spending and monetary stimulus are at historical levels. We would need to go back to the Roosevelt Era to find a similar period of spending in our history. But this governmental expansion has even dwarfed FDR's efforts.

 

Thanks to the pandemic, there have also been a growing number of supply shortages and logistical logjams worldwide. From diapers to toothpaste, consumer-related poduct scarcities are also contributing to rising prices. Time and again, during quarterly earnings calls over the last two weeks, corporate executives have complained about the mounting costs of almost every input to their businesses. Where they can, those costs will be passed on to the consumer through higher prices. The fear of inflation is no longer theoretical.

 

Up until now, if you listen to the Fed, the uptick in the rate of inflation is going according to plan. The need to expand GDP considerably will by necessity, mean that inflation will move higher. They expect inflation to run "hot," or at least hotter than would normally be the case.

 

Both the U.S. Treasury Secretary Janet Yellen, and Fed Chairman Jerome Powell, believe that a higher inflation rate will be necessary in order to get employment back to 2019 levels. Chairman Powell has said on many occasions that if inflation runs a little higher than their historical comfort level of around 2 percent that would be better than okay.

 

A higher rate of economic growth, they believe, will also address some of the potential scarring of the economy wrought by the pandemic. "Scarring" refers to the potential for permanent damage that may have occurred to the economy and the work force during the last year or so.

 

What has many investors concerned is that once the inflation genii is out of the bottle, it won't be that easy to put it back in again. Will a 2.5 percent inflation rate, for example, be a transitory event, or the harbinger of something more?  And if so, how much more?

 

Will the Fed be forced to hike interest rates, if inflation runs amuck? Will they take away the monetary punch bowel and with it the stock market and the economy?

 

One thing is clear. Until we know the truth, investors will be sleeping with one eye open. In recent days, several Fed members, in speeches around the country, have mentioned the "potential" for tapering in the near future — something opposite of the Fed's stated policy position. In addition, this week, Secretary Yellen also mentioned a possible need for higher rates ahead. That riled the markets, and she later walked back that statement. Investors dismissed it as a "slip." It is hard to believe that a veteran like Yellen would say anything in any circumstance.

 

 My own thinking is that what we are hearing are a series of trial balloons. It is usually the method by which the Fed and other official entities gauge and test the reaction to future policy changes. Could it be that, despite the central bank's belief that their lower-or-longer stance is the right approach, there may be the need to adjust if prices continue to ratchet too much higher? Afterall, when you allow things to heat up there is always the chance of being burned.     

 

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 bolstered by the Fed's message this week. Low interest rates and monetary stimulus will remain pillars of the nation's economic recovery for as long as it takes. Investors were comforted, but not enough to materially move stocks higher.

 

It was indicative that despite bullish news on a variety of fronts, investors ignored the good and focused on the negatives. First quarter earnings results, for example, have been better than good, but not enough to satisfy the bulls. Apple smashed earnings estimates, sending its stock price higher in after-hours trade, but the next day it finished down. It has been the same story for many of the market's winners. What this tells me is that a lot of the good news in the market and in individual stocks may already be priced in.

 

Turning to the pandemic, the words we have all been waiting for "we have turned the corner," were spoken this week by President Biden in his first address to Congress. That should have sent markets shooting up, and it did for a moment or two. But investors choose instead to fret about the skyrocketing coronavirus cases in Brazil and India and what damage that might do to global trade.

 

On the economic front, this week's unemployment claims reached another pandemic-era low (553,000 claims), while first quarter GDP came in at a robust 6.4 percent. Many economists believe the numbers are going to get even better from here. The data was greeted with a mild yawn and little response other than to push the yield on the U.S. Ten-Year Treasury bond higher.

 

In the background, investors are keeping an eye on what most on Wall Street are calling President Biden's progressive agenda. The price tag on all this intended government spending (if passed) now totals in excess of $6 trillion. In order to pay for it, the president is seeking to raise the corporate tax rate, plus increase the income tax rate on the top 1 percent of taxpayers. In addition, the capital gains tax for millionaires would practically double in order to equalize the taxes on investment income and the tax rate for ordinary income.  In another blow to the wealthy, the president would get rid of the so-called step-up in basis at death for any gains of more than $1 million.

 

Higher taxes are almost never good news for financial markets and might provide some of the concern that seems to have soured investors' moods. The fact that most Americans would not be hurt by Biden's tax increases may be tempering the potential damage of these tax initiatives as there is the plan itself.

 

If passed, investors know there could be an awful lot of fiscal stimulus on the way.  Some economists are now comparing President Biden's plan to FDR's social programs during the Depression. If that were the case, a look at history would indicate a great leap forward in economic growth.

 

The three major indexes responded to all this good news, making new highs as the week progressed, but the bulls just couldn't keep up the pace. There was an increasing churn to the markets with individual stocks getting clobbered, despite favorable news across the board.

 

This is usually a precursor to some further consolidation that may be in store for us. An increasing number of Wall Street strategists have been sounding the alarm, predicting a 5-10 percent pullback at any time.  Of course, several of them have been saying that for weeks or months and it has not occurred.

 

My own guess is that we spend the next few days digesting more earnings results, and then take a run at 4,240-4,280 level on the S&P 500 Index. At that point, let's see where we are. If there isn't still enough steam to move higher, than the ‘sell in May and go away' advice we hear every year might be in the cards.  And May is only a day away.

 

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.

Oceans cover more than two-thirds of the earth's surface. For centuries, these bodies of water have supplied us with a bountiful harvest of ocean wildlife and millions of well-paying jobs. Unless something changes, however, the future of fisheries is in serious jeopardy.

 

The demand for fish is growing with aquaculture trends reaching a growth rate of 527 percent from 1990 to today. At the same time, fish consumption has doubled as well.

 

Declining fisheries, the destruction of the marine habitat, and the near-depression-like economic conditions of more and more coastal fishing communities, is no surprise to most of us. It has been going on for decades. And yet, the appetite for fish, especially among developing nations, keeps growing by more than 3 percent a year. Fish consumption accounts for one-sixth of the global population's intake of animal protein, and more than half in many emerging markets has doubled as well.

 

Since the 1980s, the global seafood catch has been falling. This is despite better fishing boats and improved underwater technology, such as GPS, fish finders, echo-sounders, and acoustic cameras. This has led to an annual 2 percent-per-year increase in a boat's capacity to capture fish. Thanks to this "technological creep," the 10-boat fishing fleet of a generation ago has the power of 20 vessels today.

 

At least a billion people, if not more, rely on fish as their primary protein source and tens of millions of people around the world depend on the sea for their livelihood. As such, several foreign governments have traditionally provided massive subsidies ($35-40 billion a year) to their fishing fleets in order to increase their ability to compete and catch more of the world's fish. The top five nations include China, the European Union, the U.S., Korea and Japan.

 

Global fishing fleets are taking too much wildlife from the sea and the laws and regulations that are meant to manage and conserve fisheries are either ignored or only selectively enforced. The fact that wild-capture fish prices continue to increase and are projected to rise by 23 percent over this decade makes flouting the law an easy excuse. There is not a day that goes by without some new violation of existing fishing regulations somewhere, and those illegal activities are increasing.

 

We all know this, but few realize how bad the problem has become. Most scientists expect that if the present situation continues, by 2050 there will be a complete collapse of all wild seafood that is fished today. Ninety percent of all tuna, marlin and sharks will be gone. Of the top 10 species that account for 30 percent of all fisheries production, six of them (anchoveta, mackerel, pollock, Japanese anchovy, blue whiting and Atlantic herring) are fully exploited or overexploited today.

 

The World Trade Organization (WTO) is where government leaders meet to negotiate the dos and don'ts of commercial fishing. Six years ago, negotiations began on eliminating government subsidies that are behind the excessive and illegal depletion of the world's fisheries. It has been a game of good intentions, but broken promises. Deadlines come and go, but like so many things at the WTO, nothing has changed.

 

China, India, and other Asian nations account for 85 percent of the world's commercial fishing employment. Those governments have only been interested in gaining exemptions, rather than enforcing more discipline among their fishing fleets. But there may be hope yet.

 

For one thing, there is a new director-general at the WTO, Ngozi Okonjo-Iweala. She has moved a successful fishery deal to the top of her agenda for 2021. She is pushing member trade minsters to agree and sign a deal by July.

 

At the same time, President Biden has placed environmental concerns at the top of his agenda. His U.S. Trade Representative Katherine Tai seems focused on the problem of overfishing and is backing the WTO's efforts to finally get members to take some actions. Let's hope, for all our sakes, that the world can finally come to its senses before our oceans end up depleted.

 

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 losing week for stocks. Most of the blame can be pinned on a proposal by the Biden administration to double the capital gains tax on investments. It is not official yet, but investors are counting on an announcement next week.

 

Before you hit the sell button on all those huge capital gains you have accumulated over the last few years, know the facts. Right now there aren't any. What we do know is that Joe Biden ran his winning presidential campaign on increasing taxes on the rich and on corporations. He plans to do just that, so it should not be a surprise to investors.

 

This proposal, if true, would impact the top 0.3 percent of Americans. For those earning $1 million a year or more, he wants to increase the capital gains tax rate from 20 percent to 39.6 percent. That is on top of the 3.8 percent tax on investment income that presently funds Obamacare. If you add in state taxes, the overall capital gains tax would be as high as 52.22 percent for New Yorkers and even higher for California residents (56.7 percent).

 

That would clearly be a steep increase and one that would impact all the stock market, at least temporarily. Just think of the gains some have accrued in the FANG stocks over the past few years. Many high-growth stocks are in the technology space and wealthy investors may want to cash in some of their chips if they truly believe the capital gains proposal would soon be the law of the land.

 

Wall Street pundits, while concerned, are attempting to downplay the suggested tax risk to investors. The level of increase, they say, is simply an opening gambit, a trial balloon, meant to be negotiated downward, if it were to pass at all. The slim majority of Democrats in Congress might make it impossible to get any capital gains tax change to get through.  And, even so, the timing of any tax hike is also in question. Would it be effective this year or next?

 

Market participants are also anxiously watching the global COVID-19 case levels. Countries such as India and Japan are seeing coronavirus cases skyrocket. Here in the U.S., spring coronavirus cases are surging. Back in February, during the last surge, the U.S. was averaging 65,686 new COVID-19 cases a day. Fast forward to today, and we are averaging 64,814 new cases daily. Some states, like Michigan, are breaking all-time records in new cases.

 

You would think that doubling the number of vaccinated Americans would have at least made a dent in the rate of new cases, but at best, all it has done is kept the level of new cases around 65,000 a day. What may be even more concerning is that a new COVID variant has been detected by scientists at the Texas A&M lab that show signs of antibody resistance and more severe illness among young people.

 

The more contagious variants of COVID-19, which have become the dominant strains within the U.S., seem to be the culprit in this case and in the high level of new cases, according to medical experts. However, the good news is that the present administration seems to be doing all it can to get more people vaccinated, provide additional stimulus to the economy, and expand global trade and relations.

 

All this news, as you can imagine, is having an impact on the financial markets. The three averages have pulled back a little this week, but the real story is in the Bitcoin trade. I warned readers last Friday, cryptocurrencies (Bitcoin specifically), were ripe for a correction. Saturday, Bitcoin dropped 15 percent and by the end of this week the price of Bitcoin was below $50,000. Other popular coins such as Ethereum and Litecoin have also declined. Some analysts are expecting as much as a 50 percent pullback in Bitcoin (to $30,000) before the correction is over. 

 

It does appear that momentum is stalling in this space. As I have written in the past, cryptocurrencies are considered speculative assets and not currencies, according to The U.S. Federal Reserve Bank, and other central banks. As such, investing in this area is fraught with risk, no matter how convinced you are in its viability in the long-term. Only those with a strong stomach and staying power should be involved in this space.

 

As for the equity markets, despite a 1-2 percent decline, stocks are in a trading range. As we consolidate recent gains, I expect continued daily rotations between sectors and asset classes. I still think stocks will continue higher in the weeks ahead, but so will volatility.

 

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.

COVID-19 effectively put a halt to most elective surgeries. As the nation gets vaccinated, however, medical authorities have given the all-clear to resume those surgeries. But will patients come back?

 

The answer to that question is important to the nation's hospitals, whose bottom line has suffered as much as, or even more than, most of their patients. Last year, hospitals were forced to shut down surgery in order to create capacity for skyrocketing cases of the coronavirus. But even after beds opened up again (as a result of the reduction in new, serious Covid-19 cases), most patients are still putting off surgery, concerned that they might catch the coronavirus during a hospital stay.

 

In 2020, the nation's hospitals' revenues declined by $320 billion. At the same time, drug expenses increased by 17 percent, labor by 14percent and hospital supplies by 13 percent. This year, hospitals are expected to lose another $53 billion to $122 billion, which amounts to 4 to 10 percent of their total sales. In the meantime, costs continue to rise.

 

A recent health-care market research survey by Becker's Hospital Review, found that fully 68 percent of respondents, who are considered health-care leaders, believed patient fear will delay or limit demand for surgery for at least the next six months. In response, hospitals are working overtime to turn the way they do business on its head.

 

Since making patients feel safe must be their top concern, hospitals have implemented a number of changes in the way in which they operate. For instance, 68 percent of hospitals surveyed have reserved operating rooms and/or intensive care units just for Covid-19 patients. About 23 percent of these organizations have allotted an entire building, including parking lots, to ensure coronavirus patients are isolated from other patients. That increases the feeling of safety but cuts down on the number of non-COVID patients that can be served at any one time. As a result, more than 70 percent of hospitals are running at less than 75 percent capacity.

 

That level of separation also incurs costs that would otherwise be saved. Additional cleaning, maintaining PPE, and conducting testing, as well as the need for higher numbers of employees to accomplish all of the above, hurt the bottom line. As readers might imagine, the demand for additional cost savings is of paramount importance. That is where virtual care solutions come in.

 

Virtual health care reduces cancellations, streamlines surgical operations, provides less time in the physical hospital setting, and reduces costs dramatically. Many hospitals had already been employing some level of virtual care, but it was mostly confined to information gathering and storage. The bad news is that few hospitals have the appropriate tools necessary to effectively deliver virtual care at the scale required.

 

There are no easy answers to the dilemma hospitals face, outside of more aid from the federal government. The Provider Relief Fund, which was included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act is currently helping hospitals to stay afloat. But the $100 billion fund is not nearly enough, according to the American Hospital Association. Given the present trend, I have to agree that it won' t be enough to keep the doors open in many emergency rooms, let alone surgical centers.

 

What's worse, most medical experts believe that we should expect additional coronavirus-type threats in our future. Prior to the pandemic, we already knew that our healthcare system was broken. It is clear to me that we can no longer deny the obvious. The hospital system may be the wakeup call that we all needed to finally overhaul the healthcare system in the U.S.; at least I hope so.

 

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.