Transforming a government-heavy economy into one where the private sector leads not only takes time but also requires a period of detoxification, according to U.S. Treasury Secretary Scott Bessent. The idea that pain may need to come before any gains has caught the nation and the stock market by surprise. 

 

Last week, I explained that "the administration's first objective, is to slow demand in the real economy. Keynesian demand-side economics says the best way to do that is to reduce spending. Doing so, they believe, will also slow inflation. How do they do that? By distributing less money to the greatest number of people possible. That means slowing wage growth and providing fewer social services to Americans in the median income level and below."

 

This "pain trade," also includes the president's tariff agenda. The result will be slower growth, less inflation, and fewer jobs. As the demand side of the equation craters the economy, President Trump's strategy will be to increase stimulus into the private sector to expand the industry.

 

The game plan, according to their script, is to maintain massive corporate tax cuts while reducing taxes even further by gutting the Internal Revenue Service and corporate financial oversight. Tariffs will play their part by forcing foreign companies to invest in new plant and equipment in the U.S. Part and parcel of this will be deregulation wherever possible to allow corporations to increase profitability. The president's "Drill, Baby Drill" is an offshoot of this idea.

 

If this sounds familiar, it should, because this is classic supply-side economics. This well-worn supply-side theory is supposed to increase the economy's productive capacity by reducing taxes and deregulation, which should boost investment, job creation, overall economic growth, and more tax revenues.

 

If successful, once again (if history is any guide), money will flow to the top 0.1 percent of top wage earners, who don't need it. They won't spend it either. Instead, they will save or invest it. In this case, this kind of stimulus is not inflationary. These are policies that have been used by both Republicans and Democrats for decades.

 

In this equation, however, the demand-side policies in the works will take effect much faster than the supply-side stimulus. That should cause a deflationary environment six months out. This is why Wall Street economists are predicting either stagflation or even recession. At that point, the Federal Reserve Bank will be called on to loosen monetary policy by cutting interest rates and switching from quantitative tightening to quantitative easing.

 

One might ask what happens if the Fed does not cooperate? We could easily see the economy tip over into recession. However, there is a long history of Fed bullying by presidents, when they wanted lower interest rates. I would expect that tradition would come into play quickly.

 

And what if the Fed plays along? Then the same dynamics would reward some borrowers. Once again, who benefits? Ask yourself who can borrow the most from banks when interest rates fall. Why the top one percent, as well as large corporations, that's who. And what have they done in the past with those borrowings — invested overseas?

 

If on the other hand, they are forced by some mechanism to invest here at home, the most lucrative areas with the best returns are labor-saving areas like artificial intelligence and robotics. If you believe for one moment that corporations will hire unskilled and under-educated workers, train, and pay them a meaningful salary, plus benefits, when a robot or software program could easily do the same job, I have a bridge to sell you.

 

Next week, I will outline the risks and rewards of this economic plan not only for the stock market, but for the well-being of those who are worried about their own economic future.

 

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.

On April 2, Donald Trump has threatened to levy tariffs on several nations. This is in addition to the tariffs he has already imposed on China, Mexico, Canada, and now global auto producers. The question is whether the "if" in tariffs is still possible.

 

No, it isn't. The president is making good on his campaign promises to create an even playing field between the U.S. and our trading partners. Steel, aluminum, and the global auto tariffs he announced Wednesday evening are only the beginning.

 

Unlike his first term, this time around his tariff initiatives will be "extensive, explicit and enforced," as one hedge fund manager told me. That will be bad news for the financial markets but there may be a silver lining.

 

I have often said that markets can absorb and adjust to both good news and bad. If the trends are negative, investors and traders can hedge their portfolios, or move to the sidelines. Good news, as we all know, is much easier. Buy what you can and as much as you can. What the markets cannot deal with is uncertainty.

 

My readers are old enough to remember the presidential elections. The narrative among financial markets was that the country under Trump's presidency would mean four years of higher corporate profits, rising stock markets, the end of our debt crisis, and the Ukraine conflict.

 

Sadly, many investors, traders, and company managers focused on the positives but ignored the negatives. The financial markets and many voters bought into the campaign promises of the winning candidate lock, stock, and barrel. It is understandable. In populist times like this, hope springs eternal once every four years during presidential elections.

 

However, since the inauguration, investors as well as corporations and small businesses have been dealing with a mountain of uncertainty. Radical and sudden change will do that to you. Few had done the math on what tariffs or downsizing the government would do to the economy and inflation. How exactly would the president reduce the nation's debt or end the Ukraine/Russian war, and what would the downside be?

 

Those issues were dismissed as negotiating tactics or, as part of America's long tradition of campaign promises, were never meant to be kept. Instead, we discovered that Donald Trump was deadly serious in his intentions to radically transform the nation and its political and economic system quickly. "Burn it all down," was not just a stump speech.

 

The changes taking place in downsizing government and reducing the workforce are ongoing. No one, not even the Fed, knows how this will turn out. Uncertainty has become a popular word. Fed Chair Jerome Powell used the word "uncertain" 22 times during his March 19 FOMC meeting remarks.

 

If you throw in the daily threat of tariffs, you have a perfect storm of uncertainty. Donald Trump's on-again, off-again, tariffs have left investors uncertain and stressed out with their finger on the buy or sell trigger hourly. That is why the S&P 500 Index is off by more than 10 percent while markets overall are experiencing 1-2 percent swings in the averages almost every day.

 

The announcement of tariffs will remove at least one level of uncertainty from the markets. Of course, that won't resolve the issue in its entirety, but it might help to calm the markets for a little while — until the next shoe falls.

 

We do not know what our trading partners will do, or what the U.S. response will be to their reactions. They may retaliate or they may negotiate. In addition, we still need to grapple with the rest of Trump's initiatives and their impact on the economy, inflation, and employment. That can take another 3-6 months. You can read my thoughts on the subject in this week's column, "The Trump Economy 101."

 

Unfortunately, after two-plus years of great returns, investors are paying for those gains this year. On June 27, 2024, in my column,  "What can investors expect from the coming era of populism" I warned readers that in the last populist era between 1964 and 1982, stocks went nowhere — except in election years.

 

As for the short-term, I expect more of the same in markets. I predicted a dead cat bounce last week and we got that for two days. However, the auto tariff announcement ended those gains. We could see the market test the March lows before another move-up sometime in April, although once again it would be temporary. Alas, we are Trump-dependent, and he is no friend of the stock market nor are many of his voters. Why would that be the case?

 

Many of his following have little if any savings and none in the stock market. In the last election, Trump captured the vote of lower-income household voters who earned $50,000 or less, while those making $100,000 or more voted for Harris. It seems a safe bet that the stock market is meaningless to many of his supporters, although not all. I would hazard a guess that the stock market rout to them is simply another example of how the deep state works to undermine the president's initiatives, at least according to the comments I have read from far-right media figures.

 

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.

For those of us in the business world, the myriad economic policy initiatives spewing from the White House are both confusing and at times difficult to understand. 

 

Certain policies seem to cancel each other out. Full employment while reducing immigration, drill-baby-drill to force oil prices lower while raising tariffs to increase prices? 

 

The point is that if even the professionals are having difficulty, how can those with little financial background hope to understand where the economy is going and why?

 

It appears, for example, that economic growth may be moderating as consumer spending weakens, while inflation remains stubborn. Some are calling for a recession. Others stagflation, while the president sees a golden age ahead of us.

 

After sorting through all the above and reading the statements of the president and his cabinet while ignoring the partisan rhetoric, some objectives of the Trump approach to economics have become clear to me.

 

Few would argue that over the last eight years, fiscal spending, deficit, inflation, and the size of government have exploded. As a result, the share of the economy represented by the government versus the private sector has grown lopsided. From an economic viewpoint, the present situation is unsustainable.

 

The Trump administration wants a larger private sector and a smaller share of the economy by the public sector. However, all that government spending did have some beneficial consequences. The growing gap in income and wealth between the haves and have-nots, which we call income inequality, slowed somewhat from historical levels. But it also increased inflation. Over those years, most consumers neither invested nor saved their government-fueled additional income. Instead, they spent their enlarged paychecks on another TV, a bigger car, a family excursion to Disney World, or a front-row seat to the latest rock concert.

 

Turning the direction of the world's largest economy, however, is no easy feat. It will take time and, according to the president and Scot Bessent, his Treasury secretary, will involve a period of pain and discomfort for most Americans.

 

Their first objective, in my opinion, is to slow demand in the real economy. Keynesian demand-side economics says the best way to do that is to reduce spending. Doing so, they believe, will also slow inflation. How do they do that? By distributing less money to the greatest number of people possible. That means slowing wage growth and providing fewer social services to Americans in the median income level and below.

 

Here is where Elon Musk and his DOGE efforts come in. His job, while ostensibly to reduce waste in the government, is also about cutting government employment. All department heads now have that as their No. 1 priority. That is how you generate real cost savings.

 

In addition, Congress has its marching orders. Given the ongoing budget discussions, it is certain that the Republican majorities in both houses intend to cut social services drastically. Medicaid, SNAP food assistance, school lunches, low-income housing assistance, and dozens of other programs are on the chopping block. Those cuts will impact those who are making $80,000 a year or less, which is roughly 81 percent of the population.

 

That will mean no more rock concerts, and in many cases no more jobs unless you want to replace immigrants picking tomatoes or peanuts. Once these bills are passed, it will likely take three to six months for all these spending cuts and lost jobs to work through the economy. 

 

Our income inequality problem will reverse. How will that impact a generation of populists counting on a better life in the months and years ahead? Next week, we will examine the next step in Trump's economic plan, which will center on his program to jump-start a faltering economy through a return to supply-side economics.

 

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, the Federal Reserve Bank hiked its inflation forecast and reduced the growth target for the economy this year. Despite this news, traders termed the March FOMC meeting a "dovish pause," although it did not help the stock market.

 

The upshot of Chairman Jerome Powell's Q&A session on Wednesday afternoon after the FOMC meeting was that as far as the future is concerned, the Fed would need to wait and see just like the rest of us. In the meantime, the bank decided to slow its quantitative tightening program. That was interpreted as dovish by most Fed watchers since it does add liquidity to the credit markets.

 

Powell did say tariffs would probably add to the inflation rate (from 2.5 percent now to 2.8 percent). Although for the most part, he believed these measures would be "transitory." The rate of economic growth would also fall from 2.8 percent in 2024 to 1.7 percent this year.

 

Those forecasts, while not what I would call a full-fledged period of stagflation like we experienced in the 1970s, are akin to my own expectations. I would call it a brief bout of stagflation but with a small "s." I see a quarter or two of slower growth and a smidge higher inflation rate, but I do not see these trends remaining in place for the full year.

 

"I don't know anyone who has a lot of confidence in their forecast," admitted Powell, but the median of Fed officials still expect two rate cuts this year. However, their conviction on where things are heading is weak, and understandably so. After many years in the driver's seat, the Fed is now in the back seat as far as the economy is concerned.

 

Fiscal policy as interpreted by Donald Trump is now calling the shots. Depending on how badly the coming tariff war develops, the administration's overall trade policy, spending cutbacks, immigration restrictions, and deregulation, we could see a recession.

 

However, if tariffs turn out to be simply a negotiating tactic, as many expect, tax cuts do get passed, and somehow the deficit falls then growth could resume, inflation remains in check, and the markets could live happily ever after. I give 50/50 odds on these economic outcomes.

 

I hate "on the other hand" statements, but sometimes, they are what they are. Whether your cup is half full or half empty, I suspect, depends on your political persuasion. As Powell said, "I mean, it's really hard to know how this is going to work out." My sentiments exactly.

 

Unfortunately, the financial markets do not do well when faced with the unknown. As such, the present turmoil in the markets should continue. About the best I can say is that we should expect the daily 1-2 percent swings in the equity market to slow down a bit after this week after Friday's multitrillion-dollar options expirations. That does not mean the downside is over. The fate of the markets remains dependent on the news coming out of the White House.

 

Behind the scenes, the top men at Treasury and  Commerce and Trump's economic adviser, Kevin Hassett, are working hard to reduce the impact of the coming tariffs before the deadline. Scott Bessent, the U.S. Treasury secretary, appears optimistic they can work a deal between the U.S. and our largest trading partners to roll back tariffs before the April 2 deadline. If so, that would go a long way to alleviate the downside pressure on the markets.

 

At its low, the S&P 500 Index has been off by a little more than 10 percent. Since then, we have bounced, as I expected, but we could still retest those lows or even break them. Sentiment among market participants couldn't be worse. That makes me suspect there might be some light at the end of the tunnel. Of course, I could be wrong and that light at the end of the tunnel could be a freight train. Let's see what happens.

 

The Trump administration's economic policies have placed a target on the back of most foreign nations. As for the economy, a slowdown, if not a recession, seems to be around the corner. As such, overseas investors have little reason to remain in America's financial markets.

 

Foreign investors represent about 17 percent of the overall holdings in the U.S. equity market and about the same in the bond market. Over the last 15 years, as I wrote in my previous column, American markets were the only game in town. While our share of the world's economy was only 27 percent, our share of the world's total investments was 70 percent.

 

America was perceived as being the safest place on Earth to put your money. Our currency, Treasury bonds, and stock markets are the strongest and most lucrative around the globe. In the last 80 days, however, thanks to American policy shifts and a growing realization that our debt and deficit are coming unstrung, foreign investors have been having second thoughts. 

 

At the same time, the administration's about-face in geopolitical terms has not only caught the rest of the world by surprise but has also called into question the future security of many of our allies including Mexico, Canada, Japan, Korea, and the European Community.

 

For the first time in years, there have been compelling arguments for shifting focus from the American financial markets to elsewhere. Is that a good or bad thing? It is always nice to be number one but too much of a good thing can be a negative. One must credit the president for this global shift in thinking.

 

As Scott Bessent, the U.S. Treasury secretary said last weekend about U.S. markets in an NBC interview, "I can tell you that corrections are healthy. They're normal. What's not healthy is straight up." Neither he nor the president has ruled out a recession this year.

 

Trump's tariff plans have caused a wave of self-examination. He has forced countries to re-think who besides the U.S. could offer better and more stable terms of trade in the future. His reciprocal tariffs that are going into effect in April have spurred other countries to stop talking and start planning a defense. Without his sudden about-face in U.S. support for Ukraine and rapprochement with Russia, I suspect Europe would have carried on taking our support for their economies and security for granted for another 50 years.

 

These nations now realize that there has been a generational change sweeping America. It is not only Donald Trump who demands a different approach to trade, politics, and security. In this new era of populism, more than half of all U.S. voters not only applaud his policies but want even more change. It has finally hit home to the rest of the world that MAGA was always about "Making America First" by beggaring everyone else.

 

Trump has provided a wake-up call for the EU and others. Last week, Germany's plan to massively increase spending, just announce has triggered a sea change in European policy making. Canada, who in some respects has acted like a back-water subsidiary of the U.S. for decades, has suddenly found its voice, as has Mexico.

 

China, after several years of declining growth, has used the U.S. trade and security initiatives as a reason to not only stimulate their economy and reach out to other countries to form trade and military alliances but also galvanize the government and private sector. Many in China believe Donald Trump's governance style has much in common with their leader, Xi Jinping. They applaud his efforts to steer the American government closer to their own authoritarian central model.

 

In the last month, money is fleeing U.S. markets and going home. Trump's policies have increased the total value of all businesses in China and Hong Kong by 20 percent and decreased business values in the U.S. by 10 percent. Money is fleeing US markets and going home. Chinese equities are up double digits this year, while the German stock market gained 17 percent, Italy up 15 percent, Spain 14 percent, and emerging markets are up 8 percent.

 

Extreme valuations may also be a factor in the recent move by foreigners to "take their money home." Based on price-to-book value and enterprise value, the U.S. premium to non-U.S. markets is above the 95th percentile and has continued to climb until now. The growth premium for U.S. stocks is what helped to justify those valuations.

 

If growth were to slow, as both the government and investors believe is happening now, U.S. valuations become a headwind. Investors everywhere may no longer be willing to pay lofty prices for less growth.

 

In addition, for America to maintain or increase its share of the world's private-equity market capitalization, which is growing every year, more and more of the world's capital would need to be allocated to the U.S. Given the policies of deliberately slowing economic growth, increasing unemployment, a falling dollar, and an expanding debt problem, why would any foreign investor want to increase their capital allocation to the U.S.? This point was driven home by this month's Bank of America Global Fund Manager Survey. It revealed the second-largest decline in U.S. growth expectations by professional investors ever as well as the largest drop in U.S. equity allocation in the history of the survey.

 

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.