The ongoing partisan battles in Congress over a government shutdown are making daily headlines. However, whether a shutdown ultimately occurs or not may not be the most important outcome of this squabble.

 

Over the weekend, at the 11th hour, Congress and the White House passed a continuing resolution to postpone a government shutdown until Nov. 14, 2023. Axing funding for Ukraine was the price Republicans demanded to kick this spending can down the road. This was somehow hailed as a bipartisan victory, one of the few in this deeply divided Congress. It seems to me that the only victor in this mess was Russia. 

 

Since then, a handful of radical right Republicans in the House, led by Matt Gaetz, a Republican congressman from Florida and the subject of an ethics probe, forced a vote to push House Speaker Kevin McCarthy out of his post. Combined with most Democrats, the House voted to oust McCarthy.

 

Gaetz and the radical right had accused McCarthy of breaking his word to conservatives on spending bills and how he would run his house. They pointed to McCarthy's behind-the-scenes, side deal with the Biden administration to restore funding for Ukraine as just another reason not to trust the speaker. The straw that broke the radical's back, however, was when McCarthy reached out across the aisle to come up with a compromise that would keep the government's lights on at least temporarily.

 

Democrats were divided on their response to the turmoil within the Republican Party. But few Democrats trusted the speaker, given his partisan track record. In the end, partisan politics dictated they voted to oust the speaker, even though it meant that no work could be done in Congress until a new speaker was elected.

 

If one steps back from the hour-by-hour circus in Washington and looks at this debacle from the perspective of others, the U.S. government appears to be in a precarious state. Many developed countries plan their budgets, their spending levels, the level of debt, etc. in five-to-10-year increments. Our government can't even agree on whether they will be able to pay its employees next month.

 

It is also becoming increasingly apparent that the U.S. government is unable to control spending on both the short-term and long-term levels. This failure to manage continues to happen under both parties. This is not just my opinion. Two of the three largest credit agencies, Fitch and Standard and Poor's, have come to the same conclusion.

 

Back in 2011 Standard and Poor's reduced our long-held triple-A credit rating to AA, citing a weakening in the effectiveness, stability, and predictability of American policymaking and political institutions. 

 

This year, thanks to the debt ceiling debacle spawned by this same group of dysfunctional politicians, Fitch, another big credit rating agency, downgraded our debt as well. Fitch cited a "steady deterioration in standards of governance over the last twenty years." They went on to explain that "repeated debt limit political stand-offs and last-minute resolutions have eroded confidence in fiscal management."

 

And here we are again — more than two months later — repeating the same suicidal behavior. The actions among U.S. legislators befit a banana republic economy, not the U.S. Only one credit agency is left, Moody's, that still maintains a AAA rating for our sovereign debt. How long that status remains is my concern.

 

Politicians of both parties fail to realize (or don't care) that these rating changes have a real cost to the nation and taxpayers for decades to come. The cost of issuing U.S. debt and paying bondholders interest is climbing year after year. As it stands today, interest payments alone are costing the country 8 percent of GDP. That percentage is expected to increase exponentially. We are talking billions of dollars, readers, if not trillions, when we consider the cost that we will have to bear (as will our children and their children).

 

Moody's has already commented that a shutdown would have credit implications. A downgrade in their rating based on "the weakness of U.S. institutional and governance strength," as well as "the fractious bipartisan politics around a relatively disjointed and disruptive budget process" indicates to me that unless things change dramatically next week, we could see yet another downgrade.  

 

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 Saturday, Sept. 30, 2023, $24 billion in emergency funding for the nation's child day-care industry expires. Estimates are that as many as 70,000 care centers or more will close over the next year, impacting as many as 3.2 million kids. The downside for working women with young children could be even more substantial.

 

In recent columns, I have written of the gains women have made in the post-pandemic labor force. Women's workforce participation, especially women with children under 5, is higher than it has ever been (at 70.4 percent, compared to a pre-pandemic high of 68.9 percent). That brings the employment gap between men and women to record lows.

 

This progress was made possible in part by the $1.9 trillion American Rescue Plan of 2021. During the pandemic and its aftermath, the federal government, under the Biden administration, a congressional bipartisan bill passed one of the largest economic rescue plans in U.S. history. The legislation earmarked $24 billion in spending to bail out the faltering day-care industry. It gave wage increases to woo workers back into the sector, helped to offset rising costs, and made several more improvements to help an area reeling from the impact of COVID-19. The result was to give mothers the ability and freedom to rejoin the workforce. They did so in droves.

 

Those gains will now be threatened. The care centers that remain open will need to reduce staffing and operating hours, while raising tuition and fees. This will take time to unfold, but probably over the next six to 12 months the results of this change will be in full force.

 

A Hail Mary hope within the day-care industry is that the states might come to their rescue. The disruption could cost states $10.6 billion in tax and business revenue annually and reduce family earnings by as much as $9 billion, according to the Century Foundation.

 

This crisis is going to force parents (especially women) into working fewer hours or leaving the workforce altogether. For many others, it may mean switching to less demanding roles with obvious consequences for career advancement.

 

It will also resurrect a litany of economic inequalities that have plagued American women for decades. If they become part-time workers, they will lose employer medical benefits. And if they must once again leave the workforce it will reduce their Social Security benefits at retirement.

 

A viable child-care system is considered a public good by most Americans. Studies indicate that children who receive high-quality care become better educated and ultimately receive better-paying jobs. Unfortunately, in this country, the myth that the private sector can do a better job at this than the government has proven not to be the case.

 

Providers operate on slim margins, pay workers a lot less than most fast-food chains, and experience high turnover. Low-wage workers have plenty of other choices in this tight labor economy, which leaves care centers in many areas of the country unable to provide the services needed. 

 

Today the industry is short 40,000 positions from early 2020 levels. The end of government funding could mean as many as an additional 232,000 jobs could be lost. Day-care waiting lists are years long. And that is if you are lucky enough to live in an area that still provides child care. Even with the government funding, child-care costs have skyrocketed in this inflationary environment. Families, especially in lower-income jobs, can't pay the freight any longer. 

 

It all creates a combination that turns out to be a disaster when it comes to child development. "Child care is a textbook example of a broken market," said Janet Yellen, the U.S. Treasury secretary, back in 2021.

 

As I write this, the new battle cry of partisan politics in Washington revolves around cutting government spending. We suffered through the debt ceiling debacle because of it and now a potential government shutdown is in the making. The government appears ready to abdicate its responsibility to ensure the continued existence of child care. We will all suffer, but women most of all.

 

As the Sept. 30 expiration approaches, couples and single parents will be faced with some hard choices. Pay for the coming higher costs and reduced services of a dwindling number of child-care providers or figure another way to keep working and take care of the kids at the same time. Let's hope there are still a lot of grandparents available to fill the child-care gap.

 

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 financial markets were expecting a lot of good news out of the Federal Open Market Committee meeting this week. Investors were betting that not only would the Fed pause, but possibly announce an end of interest rate hikes altogether. Some even expected a timetable for future rate cuts that would be sooner than later.

 

The market was right on the pause in interest rate hikes. The U.S. central bank decided not to hike the Fed funds rate but that was about the extent of the good news. In his Q&A session after the meeting, Chair Jerome Powell reiterated his message that further rate hikes were still on the table, but they would proceed "carefully." They have already raised rates 12 times over 17 months. He also left the audience with an expectation that there would be at least one more interest rate hike, if not two, this year.

 

In addition, the dot plot chart, which represents Fed members' expectations for future changes in interest rates indicated that most members had backed off from a prospective four cuts next year to only two, maybe. Most thought an interest cut would not occur until sometime in the latter part of 2024 — if then. Part of the problem, Powell said, was the continuing strength in the U.S. economy, which is performing far better than fed officials expected.

 

When everyone is on one side of the boat (as they were before the meeting), the risk is that a disappointment could capsize the boat. That was what exactly happened as Powell came out much more hawkish than anyone expected. Traders pulled the plug on bullish trades driving the main averages down by more than 1 percent and followed through on Thursday with similar losses.

 

In the bond market, the thinking was just as dire. If interest rates were going to stay higher for longer than yields needed to adjust to reflect that new reality. 

 

Traders sold bonds across the board sending yields to 15-year highs. The yield on the 10-year, U.S. Treasury bond spiked to 4.6 percent, which sent the dollar higher and equities lower.

 

Technology was the hardest hit, but few sectors escaped the selling. Sectors that have an inverse correlation with the dollar, such as precious metals, and materials. etc., were dumped and speculative stocks took it on the chin.  Energy was one of the few bright spots with oil prices holding up in the $90/bb. range. However, higher oil prices only complicate the Fed's work. As I wrote last week, higher energy prices fuel higher inflation and the longer it stays at this level, the harder the Fed's job becomes in reducing inflation.

 

Several negative short-term events are adding to the pessimistic attitude of investors. The UAW strike, which threatens to expand, could dent economic growth. The looming government shutdown, caused by the chaotic atmosphere within the Republican party, does not inspire buyers either. The sharp climb in bond yields has also tempted more investors to seek safety.

 

The Fed's hawkish stance ruined my hopes for a bounce this week, and we are still in a weak seasonal period. I warned readers this is historically a negative time for the markets. I had expected that the SP 500 Index would at least re-test the August lows and that did occur this week (the intra-day low for that index was 4,335). Right now, the S&P 500 Index is oversold, more so than at any other time this year.

 

A relief rally on Friday was to be expected. It seemed anemic to me but could continue into next week. I advise readers to remain cautious for now and most likely into mid-October. There could be further downside, especially if we see yields and the dollar move higher.

 

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.

Over the last month, pot stocks have spiked higher. Some have doubled in price. The news that the U.S. Drug Enforcement Agency may reclassify marijuana from Schedule I of the Controlled Substances Act to Schedule III has given new hope to this beleaguered industry and investors.

 

The effort to reclassify started 10 months ago when the Biden administration directed the Department of Health and Human Services to review the scheduling of cannabis under federal law. As a result of that review, HHS sent a letter to the DEA recommending a proposed schedule change.

 

Currently, marijuana is listed as a Schedule I drug with no accepted medical use and a high potential for abuse similar to heroin or LSD. If the DEA were to reduce cannabis to a Schedule III drug, it would have the same profile as drugs such as Tylenol with codeine, anabolic steroids, or ketamine. That could be good news for pot companies selling medical marijuana. However, the new classification would only be available by prescription, and still be regulated by the federal government including possibly the FDA. And while medical marijuana might become broadly legal, most states would need to overhaul their legal and tax systems to align with the federal Schedule III restrictions.

 

It would not make marijuana legal. In addition, rescheduling the drug would do nothing to close the policy gap between state and federal cannabis laws. The reclassification is also completely different from the SAFE Banking Act, which would allow banks to provide financial services to the industry. That is still held up in Congress. Given the facts, why therefore would the stocks of some marijuana companies double in price in less than a month? The simple answer is taxes.

 

As a Schedule I substance, marijuana and the companies that produce and sell it are prohibited (by IRC Section 280E) from claiming deductions and credits for trade or business expenses that other legal businesses can claim. A rescheduling to Schedule III would be a large, and for some companies, a huge boost to their bottom lines. Expenses like rent, payroll, interest, depreciation, advertising, and so much more would be allowed to be deducted from taxes. For normal companies, these are all standard tax deductions.

 

Depending on the company, some players in the industry could see a 20-30 percent boost in their bottom-line after-tax profits, which explains why so many pot stocks have moved up in price. However, Canadian companies are not affected by these U.S. tax benefits. A potential buyer should understand that if interested in this sector.

 

Rescheduling would also allow cannabis companies to advertise in newspapers, magazines, and other media without worrying about crossing state lines. It would allow mailing advertisements as well. Research on the impact of marijuana and its many forms becomes easier and more widespread as well without the restrictions associated with a Schedule I drug.

 

On the state level, 20 states have already approved laws that exempt, or at least decouple, businesses from Section 280E of the federal tax code. These state exemptions have already saved millions for some large operators in state taxes. However, as it stands, the state-level exemptions do not affect the federal taxes owed by marijuana companies, and businesses are still not allowed to deduct these expenses toward their federal income taxes. 

 

For many states that still follow federal guidelines and therefore enforce Section 280E, a change of the federal level in scheduling would result in a cascade of changes at the state level, at least for the medical marijuana business. It is not known how, or if, a rescheduling will impact recreational marijuana use.  

 

A Schedule III designation does not need to go through Congress to become law. That is a good thing, but reclassifying marijuana would not broadly legalize, or even decriminalize the drug. The next obvious step toward those goals would be the passage of the SAFE Banking Act, which was introduced in 2017 and passed the House seven times with bipartisan support since 2019.

 

The Senate has been the holdup, but that may be changing. The Senate Banking, Housing, and Urban Affairs Committee is expected to hold a markup session for the bill sometime next week. This markup process is a key step in advancing the bill. It allows senators to debate and consider amendments to the bill. Scuttlebutt says both sides of the aisle on the committee support the bill and, if so, that would give the Senate at large a sign that progress toward passage is in the works.

 

One caveat to these positive developments is that we are dealing with the government here. Hopes have been dashed too many times in the past for investors to blindly step into these stocks with fingers crossed only to have them broken. The nation might see a full vote on the Senate floor by this fall, or it may not, and even then, there is no guarantee it will pass, so buyers beware.

 

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.

Oct. 1, 2023, is the deadline to avert yet another government shutdown. At this point, the chances are high that partisan politics will once again disappoint the country and most voters.

 

The truth is that the U.S. has a long history of dysfunctional shutdowns. There have been 20 such incidents since 1976. The longest single shut down in history occurred from Dec. 22, 2018, until Jan. 25, 2019.

 

The credit or blame for that debacle goes to former President Donald Trump. Trump held government workers and the nation hostage to fund his pet folly, a border wall between the U.S. and Mexico. How important was that issue? The subject has disappeared entirely from the political realm with even the most radically conservative right-wingers dropping the issue as an embarrassment.

 

As the House of Congress returns to business this week, far-right Republicans have made it clear to Speaker Kevin McCarthy that there is no way they will support legislation to keep the government open unless they see substantial spending cuts, including less aid to Ukraine, tough new border policies, and in the case of Rep. Marjorie Taylor Greene and others, an impeachment inquiry against President Biden.

 

Behind the scenes presidential candidate Trump has been orchestrating a Biden impeachment effort among members of the Freedom Caucus and just had dinner this past weekend with his henchwoman Greene on the subject. Speaker McCarthy caved in to the impeachment demand on Tuesday, hoping to appease his opponents, but that was not enough to satisfy their demands. 

 

Readers may recall that this same group of dissidents sabotaged the debt-ceiling talks and were largely responsible for the subsequent downgrading of the nation's debt by the credit agencies. Americans will pay for their actions in the form of higher interest rates for U.S. government debt for decades to come.

 

On Tuesday, Rep. Matt Gaetz, the Florida Republican, delivered a floor speech that outlined the conservative case for ousting the speaker. He and others in his group, the "Freedom Caucus," believe McCarthy failed to honor the promises he made to win the speakership. They are disappointed with his handling of the budget process and his reluctance to investigate President Biden and his family. Gaetz, by the way, is the guy the Department of Justice refused to prosecute for sex trafficking with underage women (although a Gaetz associate was sentenced to 11 years in prison for the crime).

 

Economists believe that a shutdown normally reduces economic growth by 0.15 percent for each week it lasts. Why? Federal government spending amounts to roughly one-quarter of Gross Domestic Product. A shutdown will immediately reduce that spending. If a shutdown is short, whatever loss of spending that occurs is usually made up once the government is back in action. "Short" is the key word here.

 

A Moody's economist, Mark Zandi, estimates that if for some reason this shutdown were to last a lot longer, for example, a full quarter, the impact would be a 1.2 percent hit to fourth-quarter economic growth. How likely is such a historically unprecedented event to occur?

 

The House would need to pass 12 appropriations bills in the next nine working days to fund the government before the deadline. It has not passed a single one thus far. The U.S. Senate is already preparing to pass a short-term funding bill (called a continuing resolution) to give legislators time to hammer out a full-year agreement. The thinking is that unless that happens a shutdown is almost guaranteed. Unfortunately, there is no guarantee that the hard-liners will even agree to that.  Gaetz made it clear that any attempt to pass a resolution by McCarthy would trigger a move to remove him from office immediately. The hard-liners suspect that a short-term resolution would only lead to a bigger spending bill that would thwart their objectives. 

 

Lending credence to that suspicion is the fact that several Biden administration priorities including an additional $24 billion for Kyiv, $4 billion for his border security program, and $12 billion for a FEMA disaster relief fund are already part of the resolution that would be passed by the Senate.

 

Further complicating the problem is the position of the speaker, himself. Many of the Freedom Caucus are threatening to depose the speaker if he does not give in to their demands or attempts to turn to Democrats for the votes, he may need to avoid a shutdown. If McCarthy were ousted, it would almost guarantee a protracted shutdown in my opinion.

 

Normally, government shutdowns do not have much of an impact on financial markets, however. There have been exceptions such as the 4 percent decline in stocks during the Trump debacle. That could happen again if the antics in Congress were to escalate further.

 

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.