The only thing that mattered to investors this week was the looming U.S. government debt default. Fortunately, the comments from major players in the debt talks have been largely encouraging. The devil, however, will be in the details.

 

The stated deadline for the passage of raising the debt ceiling is June 1, according to Janet Yellen of the U.S. Treasury Department. Some argue that it is a self-imposed deadline. Depending on several factors, including tax revenues, the U.S. might conceivably stretch its ability to pay its debt as far out as August, but that is no sure thing.

 

In any case, even if the two sides fail to agree on the details there is also the possibility of extending the debt ceiling limit a few weeks for the t's to be crossed and i's dotted. No one is talking about that yet, since Washington deadlines, artificial or otherwise, have the effect of galvanizing politicians to cross the finish line if at all possible.

 

House Speaker Kevin McCarthy said late last week that the House could vote on a debt ceiling deal as soon as this coming week. Both sides have gone out of their way to assure the public that a debt default is not on the table.

 

The discussions are continuing, and the negotiators are keeping the talking points close to the cuff and behind closed doors, which is another positive, in my opinion. The fact that McCarthy is talking directly to two of President Biden's most trusted negotiators is encouraging as well.

 

But every time one side or the other expresses something negative, markets react as they did on Friday when GOP Representative Garret Graves, who is leading negotiations for McCarthy, said "It’s time to press pause because it's just not productive." Market gains evaporated in seconds. Investors should expect more of this volatility next week.

 

Complicating the picture, however, is that both the House and Senate left town on Thursday and the Senate is not expected to be back in session until the last few days of May. There is also a danger that the hardline radical group of Republicans in the House could balk at any compromise hammered out by both sides.

 

In sum, while the markets are betting that a deal will be done on time, the danger is that it won't. If that were to occur, the downside in stocks could be considerable.  

 

The stock market, which has been stuck in a tight trading range for weeks (4,050-4,160), broke above that range and the S&P 500 Index vaulted above the 4,200 level this week. My upside target is still 4,325. Technology, semiconductors, and anything that remotely had something to do with artificial intelligence (AI) continued to lead the markets. 

 

Sectors that had been held back due to the risks associated with the debt ceiling found some strength while your typical safety trade areas such as precious metals, utilities, consumer staples, health care, etc. lost ground.

 

On the Fed front, there seems to be a crack in the monetary mantra that more interest rate hikes are on the way. Several Fed members seem to be advocating for a pause in the rate hikes, while others thought that we still needed at least one more hike. But none of them suggested that a rate cut was on the table any time soon.

 

In the coming week, all eyes will remain focused on Washington. President Biden plans to fly home early from the G7 meeting to shepherd the talks as the clock ticks closer to the deadline. If the politicians can keep control of the narrative and come to a deal, we could see my target met before the end of the month. If not, look out below.

 

 

For more than a year, consumers have been contending with higher food prices. The latest read of April's Consumer Price Index, however, gave some hope that relief may be around the corner.

 

Headline inflation rose 0.4 percent last month but a look under the hood revealed that the "food at home index" declined. This was the second month in a row that prices for fruit, vegetables, meat, and eggs among other items, fell.

 

That may be so, but I certainly am not seeing those price declines in my shopping bill. Let's take eggs for example. You may remember that in December 2022, we were paying as much as $5.46 on average for a dozen eggs. The culprit behind those soaring prices was a historic outbreak of avian influenza or bird flu that coincided with the winter holidays. The epidemic killed millions of egg-laying hens. Since then, influenza has subsided and there have been no new cases detected at commercial farms since December 2022.

 

The industry has bounced back since then and as it has the price of wholesale eggs has fallen. At the end of April, the benchmark Midwest Large White Egg price has fallen to $1.22 per dozen. That is a 78 percent decrease in five months. Some produce analysts expect we could soon see egg prices dip further to below $1 a dozen.

 

The average consumer paid $3.45 for a dozen large Grade A eggs last quarter, according to government data. That is down from January's $4.82, but still more than double the $2.05 the prior year.

 

While this may be good news for some consumers, a trip to my local supermarket tells me retailers have certainly not passed on those price savings to customers. Retailers can sell their eggs at whatever the market will bear. Here in the Berkshires, we are way above the so-called "average" egg prices. At Price Chopper, for example, a dozen cage-free Grade A large eggs are going for $5.39 a dozen, while organic eggs are $8.99. That is a markup of 441 percent and 736 percent.

 

I know there are other costs that retailers need to cover — transportation, labor, etc. — and there is always a lag effect between a decline in wholesale prices and the price we pay at the check-out counter. We could see price cuts in the months ahead for eggs and other products but the jury is still out when it comes to beef.

 

 Beef prices remain in the stratosphere. There are reasons for this situation. A continuous and extreme series of droughts in the U.S. in recent years has made maintaining cattle herds expensive or, in many cases, impossible to maintain. Herds (including breeding cows) were slaughtered, which has resulted in a growing scarcity of beef products. This year will be the first significant drop in beef production since 2015. Less beef supply usually means higher prices if demand remains the same.

 

There is some evidence, however, that beef prices may have reached a level where consumers are beginning to cut back on their beef purchases. Tyson Foods, which processes 20 percent of the nation's beef, poultry, and pork, saw its first fiscal quarter net income drop more than 70 percent based on weaker results in all three of those product areas. Analysts believe some consumers are substituting more chicken and pork for beef in their diets. Tyson was caught between higher live cattle prices and less consumer demand and was forced to reduce prices somewhat. Will this trend continue?

 

That remains to be seen. Demand for beef usually picks up about now (during the grilling season), so this summer will be key to determining the consumers' appetite for continued purchases of high-priced hamburgers and steak. If so, we can expect meat processors and retailers to charge even higher prices in the fall and winter for meat. However, if the economy begins to slow, consumers might cut back even more on their spending across the board and that could keep beef prices flat or even slightly lower.

 

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. Federal Reserve Bank has been battling inflation for well over a year. A key variable in their efforts has been to slow the economy enough to reduce employment. The opposite is happening, thanks to the Baby Boomers.

 

Historically, the Fed has used interest rates successfully to manipulate employment. Their use harkens back to a theory John Maynard Keynes espoused in his 1936 treatise, "The General Theory of Employment, Interest, and Money." Keynes argued that there exists an inverse relationship between unemployment and inflation and that governments should manipulate fiscal and economic policy to ensure a balance between the two. So far, it is not working too well in 2023.

 

The April 2023 payroll report was only the latest in a series of strong employment gains that flies in the face of the Fed's efforts. The U.S. is experiencing one of the strongest labor markets in decades, if not ever. The economy has added 666,000 jobs over the last three months, while the Fed continues to raise interest rates. The headline unemployment rate fell to 3.4 percent, its lowest level in 50 years. Wages are also growing again, up 0.5 percent, after declining steadily since November 2022. What is going on?

 

The short answer is that there are simply not enough workers to go around. The labor force participation rate among prime-age workers, those aged 25-53, is at 83.3 percent. That is higher than it was pre-COVID. The prime-age women's labor force participation rate hit 77 percent as well. I believe that demographics has thrown a monkey wrench into Keynes' theory.

 

Baby Boomers have always been a force to reckon with for both good and bad. The percentage of Americans aged 55 and over has doubled over the last twenty years and continues to grow. The fact is that more and more Americans are getting too old to work.

 

This trend is nothing new and has been in place for several years. COVID-19 and the subsequent Pandemic simply accelerated the pace of retirements. Moody's Investment Services estimates that 70 percent of the decline in the labor force since the end of 2019 was due to aging workers, like me. That comes to about 1.4 million Americans who have retired. In addition, declining fertility rates and increasing life expectancy are also contributing to this labor shortfall and we are not alone. G20 countries are all experiencing a decline in working-age populations. Korea, Germany, and the U.S. are expected to see the sharpest declines over the next 10 years.

 

How this will impact individual sectors of the economy varies. Industries that depend on knowledge and experience (human capital) will be hit hard. This brain drain will impact productivity for years as it did when boomers first entered the workforce in the 1970s and 1980s.

 

In industries where demographics create demand, such as an aging population for health care services, labor shortages could continue for many years. On the lower end of the pay scale, the scarcity of workers should accelerate the adoption of automation. That is already beginning to occur in the fast food and banking services areas. Finally, Artificial Intelligence (AI) over the next five years, is predicted to reduce the need for labor in some job areas.

 

However, not all is gloom and doom. Black Americans are benefiting from the imbalance in labor as their unemployment rate has fallen below 5 percent for the first time in history. The pre-pandemic all-time low was 5.3 percent in August 2019. Women have also benefited, although long-standing pay gaps and occupational segregation remain.

 

All-in-all, we Baby Boomers are still causing havoc--even in retirement. However, a simple solution to this labor shortage (and inflation) can be solved with a stroke of the pen. If we need more field workers, waiters, waitresses, babysitters, nurses, doctors, internet technicians, plumbers, electricians, technicians, bricklayers, etc., they are available and dying to enter this country. All Washington needs to do is jettison their immigration policies, but I wouldn't hold my breath. 

 

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.

American capitalism has long applauded and rewarded economic efficiency. Faster turnaround times, producing the same results with fewer workers, and doing more with less are the name of the game. Most times it works but sometimes it doesn't.

 

Over the past few years, that mantra of efficiency and profit growth has worked well for big freight operators in the railroad business. Wall Street has rewarded their efforts with higher stock prices and rail companies have returned the favor with generous dividends and stock buybacks.

 

Truth be told, America has had a long-lasting love affair with railroads that dates back almost 200 years. For most of that time, railroads and those that owned them were a symbol of the "can do" spirit of the nation. For decades, railroads flourished as their steel highways penetrated more and more of the nation carrying passengers and freight throughout the land.

 

In the 1950s, that began to change. The expansion of the U.S. highway system triggered a resurgence in the trucking industry. Inroads by long-haul truckers posed a threat to an industry that had grown fat and happy for way too long. That ushered in a long period of consolidation with fewer and fewer competitors.

 

As rail operators entered the 21st century, company management began to pay much more attention to productivity and efficiency. The number of employees was reduced, costs came down and profits began to rise and so did their stock prices. Over the last six years, railroads outdid themselves vying to become the most efficient, lowest-cost operator in the business. Today, only a handful of major companies remain and most of them are publicly traded companies in North America. They remain darlings of Wall Street for the most part and have spent as much in stock buybacks and dividends as they have invested in their businesses.

 

One obvious way to improve efficiency was simply to make freight trains longer since the railroad industry makes its money by the weight and distance of the cargo it hauls. You would think that workers could just string together a couple miles of cars together and off we go from point A to point B. After all, a long train makes in one trip what a short train would make in several, but it is not as easy as that. Trains must be assembled to distribute weight and cargo risk. Another issue is the length of railroad sidings. Many were never built to accommodate longer trains.

 

In any case, none of this was an issue for me until Feb. 3. It was on that date that 38 cars of a Norfolk Southern freight train carrying hazardous materials derailed in East Palestine, Ohio. It is now three months later, since the fiery derailment, which caused about half the 5,000 residents of the town to be evacuated. At the time, officials decided to burn vinyl chloride from five tanker cars in the accident to prevent a catastrophic explosion.

 

Tens of thousands of tons of contaminated soil must now be excavated as well as the removal of toxic chemicals from two creeks. This will take months, leaving the inhabitants in limbo. The only thing positive that can be said about the disaster is that it has kicked off a national debate on rail safety.

 

In 2022, there were more than 1,164 train derailments in the U.S., according to the Federal Railroad Administration. That equates to roughly three derailments per day. That may sound like a lot, but most of these derailments occur within the confines of rail yards.

 

 If you listen to the railroad industry, it is the safest period in the history of train transportation. The numbers appear to be on their side. Only 16 people, for example, were injured by derailments last year. Compare that to how many people are injured in car accidents each year. Since the late 1970s, derailments have dropped by 75 percent. Consider that in 1978 alone, there were 8,763 derailments, which killed 41 people.

 

Where do long trains fit into this equation? To be sure, there have been plenty of long train derailments, some serious. Are long trains riskier than short ones? The industry claims that long trains have improved rail safety. The Association of American Railroads, the industry lobby, also notes that regulators have never cited length as the direct cause of an accident.

 

The Federal Railroad Administration (FRA) does say it lacks evidence that long trains pose a particular risk. They do fail to mention that the FRA does not require companies to provide certain information after accidents and derailments such as the length of the train. I would guess that does make it difficult to assess the extent of the danger.

 

As for me, I walk our dog every night along a major railroad track. It is close enough to our condo that the trials and tribulations of the people of East Palestine are with me every night. It devils my footsteps as I witness the long procession of car after car groaning and squealing its way into the city. The line of faint lights floating by sometimes requires half an hour or more to pass by in the night.

 

I confess that I worry that a derailment could spew toxic gas or chemicals throughout my neighborhood with no warning. I am sure I am not alone. Long freight trains traverse the nation. They are bearing God knows what through our communities. Long trains block traffic crossings for long periods. They are delaying everything from fire trucks to first responders, school buses, foot traffic, and daily commutes.

 

It is bad enough when the train is moving, but a resting line of cars can be an enormous temptation. In this country where "do not cross" does not apply to one too busy or important, the risk of sneaking under or between cars is an accident waiting to happen.  

 

On the other hand, moving goods by rail is probably the safest way of moving cargo and people across the country. A single train with 100 cars of coal or grain would require hundreds of trucks to do the same job. It is much more fuel efficient and is therefore reducing our country's carbon emissions as more freight shifts from the trucking industry to rail.

 

I believe that somewhere there should be a balanced solution between the industry's need for 2-3-mile-long trains and the need for life-saving solutions for our communities. All we must do is find them.

 

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 bankruptcies and financial contagion among regional banks have spotlighted a question point among many consumers. Why is it that banks are getting away with paying zero interest on billions of dollars in checking accounts?

 

The interest on savings accounts isn't much better. In a recent survey by Bankrate, a consumer financial services company, nearly 80 percent of U. S. savers say they earn less than 3 percent in their savings accounts. Today, with interest rates yielding between 4-5 percent (and inflation topping 7 percent), a mere 7 percent of Americans are getting the prevailing rates. What is worse, only a relative few are taking advantage of the opportunity to earn money on their money.  

 

The origin of this financial disconnect hearkens back to 1980. Before that date, banks were not allowed to pay interest on checking accounts. Non-bank institutions, such as thrifts and savings and loans, could not even offer checking accounts. The amount of interest banks were allowed to pay on deposits was limited by laws that were in effect since the Great Depression. These regulations were thought to preserve the health of the banking system at a time when interest rates were set by the Federal Reserve Bank.

 

The late 1970s revealed how detrimental this arrangement was for the consumer. It was a period of both double-digit inflation and double-digit interest rates. Savers were getting zero on their checking accounts, and only a regulated 5.25 percent on savings accounts. To lock in higher interest, beleaguered consumers bailed out of banks and moved their savings into unregulated entities such as mutual funds that were offering twice the rate of interest.

 

This all changed when Congress, during the Carter administration, passed the Depository Institutions Deregulation and Monetary Control Act in 1980. The legislation deregulated institutions that accepted deposits and phased out restrictions (over six years) on how much interest they could offer on deposits.

 

This kicked off a period where banks competed aggressively to increase customer deposits by paying interest on checking accounts. The overall result was disastrous for banking's bottom line. Net interest margins (NET) are a major indicator of a bank's profitability and growth. NET is the amount of money that a bank is earning in interest loans, compared to the amount it is paying in interest on deposits. That margin shrank year after year, but banks continued to offer high-interest checking accounts to attract new customers.

 

The Financial Crisis of 2009 put an end to most interest-bearing checking in the U.S. In an atmosphere of the "too big to fail" banking bailouts, paying interest on checking accounts seemed almost irresponsible. In addition, to support the economy, the Federal Reserve Bank pushed interest rates to historic lows where they remained for years.

 

It wasn't until the pandemic that the financial landscape began to change. Inflation, higher interest rates, and ultimately the Silicon Valley Bank (SVB) blowup, have conspired to refocus people’s attitudes toward money.

 

Why, therefore, haven't savers at least kept their cash in interest-bearing savings accounts? Theoretically, in a digital world, it is not difficult to move funds back and forth between savings and checking when needed. The simple answer is that up until a year ago interest rates were still too low to make much of a difference. In addition, few of us have been willing to take the time and effort to continually transfer funds, even if we are computer savvy. The banking sector has been counting on that.

 

The news that depositors of SVB were able to move funds electronically with a press of a button has encouraged commercial enterprises and institutions to do the same. In an economy where interest rates are climbing higher, moving cash deposits is now a priority among many corporate financial departments. As they do that, the retail public may start to realize that banks should be paying them interest on their money as well. It has already touched off a larger movement of deposits within the banking system than we have not seen in years.

 

Given the drain on deposits from less capitalized banks to larger banks, especially money center banks, the battle for retail customers has once again come to the forefront. You may have noticed a proliferation of checking account ads in the media lately. Banks are competing to pay you more for your deposits, but buyers should be aware of bait-and-switch tactics.

 

For decades, banks have used eye-popping interest rate offers to suck in new customers.  Shoppers should be attentive to just how long these great rates are in effect. Six months from now, you don't want to be told those deals no longer apply. Remember too that most banks try and avoid paying these same higher rates to existing customers.

 

In many cases, deals on interest rates by banks are marketed in areas where they have few customers but are not available to those in areas where they have a loyal customer base. What to do? A call to your bank might convince them to give you the advertised higher rate but don't count on it. Bottom line: to earn more on your money, you may need to open a new account and transfer money into it. That takes time and effort, but when interest rates are between 4-5 percent, it may be worth it.

 

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.