The Federal Reserve Bank's smoothing of the business cycle, which started in the 1990s, was meant to ensure price stability and the health of the labor market. It's top-down policies of reducing interest rates through the banking system and into the hands of the largest corporations was meant to benefit the whole economy.

 

The problem is that corporations and the minority of Americans that control them are not the whole economy. What did that matter, argued supply-side economists. This group, who championed Reaganomics in the 1980s and beyond, assured us that the benefits of the Federal Reserve Bank's policies would ‘trickle-down' throughout the entirety of U.S. society over time. They said the same thing about corporate tax cuts. Those assurances never materialized. Why? Times had changed, and neither the government nor the Fed realized their mistake.

 

As profit-seeking organizations, corporations do not seek to be fair, equitable, or distribute justice. They ignore that side of the pendulum swing (as they should). Corporations simply seek to reduce costs and expand revenues. If they are good at doing so, more and more profits are generated for themselves and their shareholders.

 

In the 1990s, and especially after the turn of this century, U.S. companies and their owners realized that by investing overseas where labor and taxes were much lower, they could reduce costs, widen profitability, and open new markets for their products. As a bonus, it could also help them to compete in an increasingly global marketplace with larger and larger companies.

 

In the ensuing years, U.S. jobs and industries were exported overseas leaving entire regional industries rusting into decay. It also drastically reduced the size of the great American middle class, which had acted as a buffer between the haves and have-nots within society. It also made any semblance of 'trickle-down' economics a sad joke. There was nothing fair or equitable about this trend and yet our politicians applauded the outcome. We were winning the market share war in China. And all it cost was money and giving them our greatest corporate trade and technology secrets.  After all, both parties' politicians reasoned, who doesn't want cheaper T-shirts (for those who could buy them) at Walmart?

 

In my Nov. 8, 2012, column "The Incredibly Shrinking Middle Classhttps://tinyl.io/Av8y" I wrote "Last month the Census Bureau found that the highest-earning 20 percent of households earned 51.1 percent of all income last year. That is the biggest share on record since 1967. The share earned by middle-income households fell to 14.3 percent, a record low. From 1979 to 2007, the incomes of the richest one percent of Americans soared 275 percent. That same 1 percent earned 23.5 percent of all income, the largest share since 1928. At that rate, the rich are 288 times richer than you the middle class."

 

At the same time, with the additional corporate profits rolling in, company managements invested in technology, especially labor-saving technology, that further reduced the need for human capital.  Companies got bigger, owners became billionaires, the stock market boomed, and those with enough money to invest (mostly Baby Boomers), were paid off in escalating stock prices, buybacks, and extra dividends. As for the bottom half of society, "Let them eat cake."

 

Today, income inequality is a worldwide phenomenon where the richest one percent own half the world's wealth, while the poorest half of the world own just 0.75 percent. Here at home, the bottom segment of American society has been suffering through the worst period of income inequality in American history, far higher than during America's colonial period.

 

In a column I wrote entitled "The Next Third World Nation" back in 2010, I asked this question, "What do Cote d'Ivoire, Uruguay and the United States have in common? Answer: all three nations have about the same level of income inequality. America now ranks lowest of all developed nations in terms of its income distribution." It has declined further over the ensuing 14 years.

 

It is no coincidence that the rise in populism here in the U.S. began about the same time. There was a gathering sense that the real people in this country were under attack by money-grubbing elites, many of whom were thought to be liberal or represent liberal-minded institutions. Movements such as Occupy Wall Street and the Republican Tea Party were early warning signs of the discontent that has now bubbled over among many Americans in the form of today's populism. 

 

Unfortunately, the same trickle-down mentality and government policies that created this inequality continue today. Trump, if elected, offers tax cuts for the wealthy. Biden is funneling billions into corporations as you read this.

 

Who suffers the most from the Fed's higher interest rate policies? The credit card holders, the family purchasing a used car, the first-time home buyer; that's who. Ask yourself who benefited the most from the trillions of dollars in spending over the last decade under the last two administrations. 

 

In my next column, I will tackle the issue of protectionism, which I believe is the cousin of today's populism, as well as the similarities and differences between the crisis we will face over the next decade and those of similar times in our nation's past. 

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

Tariffs are a form of tax applied on imports from other countries. The costs of these tariffs are mostly passed on to consumers in the form of higher prices for the targeted goods. In an inflationary environment, tariffs simply make things worse. Tell that to the candidates.

 

Historically, tariffs have been used to protect domestic industries like steel or aluminum manufacturers. They can and have often been used to strike back against other countries' unfair trade practices. They often lead to reduced trade, retaliation, and higher prices.

 

In today's political landscape, those economic findings have fallen on deaf ears. Both candidates for president are attempting to out-tariff each other. "Getting tough on China" seems to appeal to voters in swing states.

 

This week, President Biden said he plans to increase tariffs on Chinese EVs to 100 percent. He also doubled tariffs on Chinese-made solar cells and semiconductors to 50 percent. He also trebled existing tariffs on steel and aluminum products to 25 percent. Altogether, the new tariffs apply to $18 billion in Chinese products.

 

Donald Trump, the Republican candidate, who is credited with starting the tariff wars during his administration, fired back. "I will put a 200 percent tax on every car that comes from these plants," referring to Chinese vehicles that are attempting to find a back door for its exports by manufacturing in Mexico. Will we hear 300 percent by Robert F. Kennedy Jr.?

 

The rhetoric on Chinese electric vehicles is just that. China does not sell EVs in America. Their export markets are in Asia and Europe where consumers can buy a vehicle from China at affordable price (under $25,000). That is a far cry from the sticker prices offered by Tesla and the Big Three auto companies. The Biden tariffs in other areas are meant to protect U.S. green industry companies, as well as to support investment initiatives in domestic semiconductors.  

 

After World War II, tariffs had fallen out of favor given the negative economic impact of that practice. Trump resurrected the practice because it played well among his constituency. For most of Trump's presidency, the threat and actual levying of tariffs became a hallmark of his administration. Markets rode up and down with every utterance of the word tariff.

 

To bring a wide swath of factory jobs back to the U.S., Trump imposed $360 billion worth of tariffs on Chinese products. He also levied tariffs on several export products from the European Union and other countries. By the end of his term, none of those manufacturing jobs appeared. Consumers ended up paying more for a whole lot of goods and farmers were decimated to the point where the government had to give billions in handouts to keep many from going under. In the end, the trade balance between China and the U.S. remained about the same.

 

This time around, never a man to choose facts over fiction, Trump has promised to redouble his efforts. He wants to erect barriers to investment between the U.S. and China along with complete bans on imports of steel, electronics, and pharmaceuticals. He has also proposed an additional 10 percent tariff on all imports to the U.S., not just those from China. Hello, higher inflation.

 

Don't look to Biden, however, for a more rational approach. Biden had initially promised to roll back Trump tariffs on China if elected. Instead, once in office, he kept those tariffs and imposed even more restrictions on trade between the two countries as well, effectively doubling down on what Trump started. While the White House spin is that their tariffs are more focused and targeted than Trump's efforts, I see little difference.

 

What I do see, however, is a country whose economy is becoming more and more like China's form of state capitalism. The myth of free-market capitalism where efficiency and profits determine the allocation of capital is fast disappearing in the United States. If they ever did, neither candidate believes in that concept today Maybe that is a good thing.

 

Both men have actively pulled all the levers of government, be it regulations, tariffs, taxes, subsidies, or rhetoric to force the U.S. economy to conform to their vision of national interest.

 

We have seen this in action. The banning or sale of TikTok, the refusal to allow U.S. Steel to be purchased by a Japanese company and giving away billions to companies like Intel to build semiconductor factories in the U.S., are just some of a long list of government interventions in the economy under Biden.

 

Trump did the same. He pressured companies to keep factories open here as opposed to going overseas. He defended Boeing by raising tariffs on Canadian competitor, Bombardier. Steel tariffs were imposed on foreign producers including our best trading partners to protect our industry. I could go on, but you get the picture.

 

Don't get me wrong, and don't confuse economics with a country's political system. U.S. state capitalism is not socialism and likely never will be. It does, however, change the playing field for companies and their management.

 

The expectations that the government is trying to change how business behaves has already had an impact in the boardroom. Pressuring investments for or against ESG, denying acquisitions, launching investigations, browbeating and more are levers that are moving investment choices from maximum return to focusing on political expedience. It becomes more about who you know in the corridors of power. It is also an atmosphere where crony capitalism can thrive and grow.

 

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.

A combination of anti-business government policies, worsening U.S.-Sino relations, and several draconian actions by Chinese authorities have cast a pall over foreign investment and the Chinese stock market. Chinese equities have lost $7 trillion since the market's peak in 2021. That interests me.

 

On Wall Street, the Chinese stock market is now considered "uninvestable." Main Street and the politicians who represent them are just as negative. Anti-China rhetoric and U.S. actions, from the attempt to force a sale of TikTok to forbidding Chinese nationals from buying land here, is just the tip of the iceberg.

 

It is as if we are already at war with China. In a recent opinion piece in the New York Times, Rory Truex, an associate professor at Princeton University who focuses on Chinese authoritarianism, says it best.

 

"America's collective national body is suffering from a chronic case of China anxiety. Nearly anything with the word 'Chinese' in front of it now triggers a fear response in our political system, muddling our ability to properly gauge and contextualize threats."

 

That attitude usually spells opportunity in the investment world. I do not dispute the gravity or seriousness of that country's political and economic issues. Much of the malaise in China is of their own making. The zero-COVID policies gutted their economy. The government authorities, unlike those of the Western world, did little to help the country recover. The impact of the Trump trade wars lingers on with no resolution. The lifetime appointment of Xi Jinping created an even more rigid authoritarian government. I believe Xi's one-man rule felt threatened by the success of China's successful free-market-oriented companies. Policies were promulgated that stripped those companies of their entrepreneurial spirit, increased the government's control with management, trod on shareholder rights, and, as a result, sent their share prices to historic lows.

 

The Chinese support of Russia's invasion of Ukraine cemented the growing anti-China policies in Europe. In the U.S. these negative attitudes gathered even more steam as China grew closer to Russia. Is it any wonder that "uninvestable" became the new watchword for China?

 

However, what so many Americans forget is that hundreds of U.S. companies have huge investments in China. China revenues, for example, account for 19 percent of Apple's sales, while 44 percent of its suppliers' production sites are based in China. Caterpillar, Tesla, McDonald's, Nike, and Starbucks; I could go on, but you get the point.

 

Bank of America's manager survey recently noted that the most crowded trades in the global stock markets were to go long on U.S. technology, followed by shorting China technology. In January, the mainland and Hong Kong experienced a meltdown as even Chinese investors threw in the towel.

 

However, since Feb. 2, stocks began making a comeback. There were no big announcements of government stimulus but there was a visible relaxation of many of the policies that brought on the crisis of confidence in the first place. As a result, China technology is now beating both U.S. technology and U.S. large caps by more than 20 percent. The overall market has gained more than that. And yet most global investors remain underweight in the world's second-largest economy.

 

In international investing, I have learned to pay attention to what the locals are doing. Chinese investors are, without question, already buying Chinese stocks. The "National Team," i.e. investors associated with the country's sovereign wealth funds, are buying mega-cap Shanghai and Shenzhen-listed stocks. Mainland investors are buying Hong Kong-listed stocks as well.

 

American investors are only beginning to take notice. By types of investors, momentum traders like hedge funds and some individual investors that can move quickly are starting to dip their toes into these waters. If this rally persists, more institutions will begin to see this rebound as something more than a dead-cat bounce. In this case, institutional investment committees will meet to discuss changing their "underweight" positions and may up their investment stance to neutral.

 

But institutions move slowly, and this will take time. However, active fund managers that track their performance against world indexes are already behind the eight ball thanks to the recent rally and their underweight China stance. At some point, (likely when Chinese stocks experience a minor pullback), some of these funds will start buying.

 

In any case, we could be looking at the beginning of a longer-term reversal in the Chinese stock market. Now, Chinese equities are experiencing a sharp bout of profit-taking after ten up days in a row. This is normal and could be an opportunity to get in.

 

Granted, buying equities in China is not for the faint of heart. I would say it is about as risky as buying cryptocurrencies, maybe more. Since most emerging markets funds have some portion of their funds invested in China, that may be a less risky way to go if you decide to take a flyer on China, even if it is "uninvestable."

 

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.