Most people think of stocks when financial markets are mentioned. That is where the action is and where the big money is made. That may be so, but investors should not ignore the promise of the bond market.

 

In my graduate school days, a required subject was Modern Portfolio Theory. Its author, Harry Markowitz, who, back in the '50s, proposed that the optimal portfolio for most risk-adjusted investors was 60 percent U.S. stocks and 40 percent U.S. Treasury bonds. The idea was that these two asset classes were negatively correlated, meaning that if stocks went down, bond prices would increase and vice versa. Over time, this diversification would produce better returns than putting all your eggs in one basket.

 

For most of my career, this investment theory worked well. However, over the past decade, interest rates were at or near zero. This made the bonds side of this equation a drag on overall performance. As a result, more and more fund managers reduced their bond weighting as stocks continued to rise. And then came COVID.

 

During the initial COVID market crash, both bonds and stocks fell together. In the subsequent market rally, both asset classes went up simultaneously. They lost again when the Federal Reserve Bank started hiking interest rates. In 2022, the 60/40 portfolio suffered a 17.5 percent decline. That was its worst performance since 1937 and its fourth worst in 200 years.

 

Both prices of bonds and stocks rose together once again as inflation peaked.  Investors started positioning for a time when interest rates would come down. In this period the Fed stopped tightening and inflation was beginning to weaken. In the meantime, stocks were increasingly being priced as if they were bonds.

 

The formula was the same for both asset classes. The present value of a stock (or a bond) was calculated as the worth of its future cash flows (earnings and dividends, or in the case of bonds, interest payments), discounted at prevailing interest rates. Therefore, when those interest rates go down, the value of the stock rises just like a bond. The reverse happens when rates rise.

 

It appears that inflation and the global central bank response to combat it (coordinated interest rate hikes) had forced the correlation between stocks and bonds to become much closer. This we know to be true. In a study they completed this year, Morgan Stanley, the brokerage firm, found that whenever U.S. inflation exceeded 2.4 percent over the last 150 years, there was an increase in the correlation between stocks and bonds. It also led to heightened volatility in both asset classes. 

 

Morgan Stanley (and others) believe the past few years were an anomaly. It was a period where inflation spiked, driving the correlation between bonds and stocks together. If we fast forward to today, the picture has changed. Thanks to the Fed's tightening program over the past two years, interest rates are now high enough to provide a healthy return to a bondholder. In addition, the market expects the Fed to begin cutting interest rates as early as September. If and when they do, and rates start to fall, bonds will rise in price giving holders significant capital gains in addition to interest payments.

 

Stocks, on the other hand, are already close to record highs and extended. In the best of all worlds, If the Fed cuts rates, equities should continue to gain, but likely at a slower rate than the price appreciation of bonds.

 

If this were to happen, one would expect the 60/40 portfolio should come back into vogue. Vanguard, one of the world's leading fund managers, expects U.S. bonds to yield between 4.8-5.8 percent over the next ten years, compared to 4.2-6.2 percent for stocks. If they are right, taken together, a 60/40 portfolio may just be the optimal approach for a moderate-risk investor.

 

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.

Have you ever wondered how much your time and effort were worth as a stay-at-home spouse? Chores like child care, laundry, home repairs, and meal preparations rarely come with a bill attached, but what if they did? You may be about to find out.

 

All the above chores plus many more, from driving the kids to school or soccer practice to treating illnesses among family members are critical to the functioning of the U.S. economy. However, none of that essential work is measured.

 

ScienceDirect defines household production as "the production of goods and services by the members of a household, for their consumption, using their capital and their unpaid labor."

 

The concept is recognized worldwide (including the U.S.), as an alternative economy to the labor market. In many nations, the household economy absorbs more labor and at least one-third of the physical capital used in the market economy. Because this work isn't tracked through marketplace transactions, it is excluded from U.S. Gross Domestic Product (GDP). Three years ago, thanks to the labor dislocations spawned by COVID-19, the Department of Labor decided to change that. 

 

As part of an initiative to come up with a major new input to their understanding of consumer expenditures, the DOL commissioned a group of economists at Bard College to figure out how the government could put a dollar and cents value on household activity. Overall, the survey examined how much Americans spend on everything that costs money. It excludes activities that don't cost money but do cost time.

 

Last month, the resulting Integrating Nonmarket Consumption into the Bureau of Labor Statistics Consumer Expenditure Survey was published by four researchers, Ajit Zacharias, Fernando Rios-Avila, Nancy Folbre, and Thomas Masterson. Chief among their findings was that women performed 78 percent of the total value of unpaid production in 2019.

 

I'm betting that most readers are not surprised that women are responsible for the lion's share of household production. What is as important is that the study promises to give the country insight into how worthwhile this unpaid labor is but is also critical to the continuing functioning of the economy.

 

For years, mainstream America argued unpaid work was not an economic issue. Sadly, I still hear it all the time (mostly by men) that it is a woman's moral duty, borne out of love, to take care of the household. During the pandemic, I wrote several columns on women as the unsung heroes throughout the lockdown. To me, they were the engine that kept the economy running.

 

So many of them were expected to not only continue to work at home, or even in the office while assuming the additional burdens of at-home education, child care, homemaking, etc. But it goes beyond that effort.

 

There is a thing called cognitive labor as well. It is invisible but requires an enormous amount of effort, especially in periods of societal crisis like in the pandemic. A Harvard sociologist, Allison Daminger, breaks it down into four parts: Anticipating needs, identifying options for meeting those needs, deciding among the options, and monitoring the results. It is how shit gets done in most households and I believe women do most of it.

 

The Bard economists looked at realms of data from the Census as well as other sources to determine how Americans spend their time. They then paired this data with DOL numbers on how much each work category costs. How much, for example, is the going rate for six hours of child care? What are the wages for the typical caregiver? Was the rate higher for simply reading to a child versus supervisory work?

 

Other areas from laundry to cooking and everything in between were studied and included in the research. The object was to convert the hours spent on tasks into a measurable value. They also looked at the unpaid contribution of members outside the household like grandparents, sisters, or aunts.

 

The DOL is hoping that this additional data will bring all of us closer to determining the true cost of living for Americans. It could also explain and give further insight into the pay gap between genders and the lower labor participation rates between men and women. For example, people tasked with household production have fewer hours for paid work, on average, and can be expected to earn lower incomes as a result.

 

The next step will be for the DOL to evaluate the methodology of the report, and if that passes its' economic litmus tests, they intend to add a household production measurement to its consumer expenditures data by next year.  In America, it is all about the buck. Unfortunately, most of us measure one's worth by this dollar and cents metric. Putting a price tag on household production would provide a great leap forward to appreciating those of us who toil without pay in the interests of the family.

 

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.

Starting Sept. 23, there is good news for savers who want a fair shake when looking for investment advice. Let's hope that the new Department of Labor rules are here to stay.

 

If the DOLs are enacted, more professionals than ever before will be required to act as fiduciaries when clients pay them for investment advice on Individual Retirement Accounts IRA). This will add another level of protection to an instrument that for many represents a lifetime of retirement savings.

 

What, you might ask, is a fiduciary? It is someone responsible for managing money or property for someone, who must put that client's interests ahead of their own. Such a person (or organization) is legally and ethically obligated to act in the best interests of another person or entity.

 

Many people fail to understand that the rules governing financial professionals vary, depending on where they work and what products they sell. They just assume that a 'trusted adviser' is just that. The goal of the legislation is to minimize conflicts of interest and to end the practice of selling goods and services that simply line the pockets of the seller at the expense of the buyer. Through the years, I have seen this done more times than I care to count with upper management in many Wall Street firms encouraging the practice and rewarding the perpetrators with fat bonuses.

 

In my own career, there were times that I was not required to act as a fiduciary, but I adhered to the letter of the law anyway. As a registered investment adviser at my former firm, Berkshire Money Management, it was a requirement. In my opinion, the financial services business is built on trust and anything that furthers that goal makes absolute sense to me.

 

This is not the first time that the DOL has attempted to update ERISA, the federal retirement law that was first enacted in 1974. That law governs the gambit of retirement savings vehicles.  For more than a decade, the financial services sector has managed to delay or remove legislation through three successive administrations. I recall writing about this back in the Obama administration in 2016 when stringent rules appeared to be on the verge of implementation, only to be tossed out by the Trump administration two years later.

 

This time around some of the loopholes in the existing rules have been addressed. In the past, for example, before being deemed a fiduciary, a financial professional had to meet a five-part test. One part of that test stated that advice must be given regularly. If a recommendation was only given one-time, as in the sale of an annuity or advice on what to do with the lump sum rollover of a 401(k) at retirement into an IRA, then the fiduciary rule did not apply. It may not sound like much of a difference, but the rollover market alone was worth almost $1 trillion last year.

 

The new rules would also include just about all financial professionals and the products they sell. Stockbrokers and insurance brokers would join the ranks of investment managers required to act as fiduciaries. It would also cast a wide net of product offerings, everything from stocks, bonds, mutual funds, annuities, and other insurance products, even illiquid real estate investments.

 

To screen for conflicts of interest among products and people, financial professionals would be required to have "policies and procedures in place to manage conflicts of interest and ensure providers follow these guidelines." 

 

I have long been an advocate of requiring the entire financial services industry to embrace the role of fiduciary in all their dealings with the public. However, that has not been the case thus far within the industry. This time around, I am hoping the new rules will stick, but I have also learned not to underestimate the financial services sector's lobbying power.

 

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 in America have been used to accomplish specific goals throughout history. Until the Civil War, tariffs were a revenue generator for the government. After the Civil War, they were used to protect U.S. industries and during the Great Depression, tariffs evolved as a negotiating tool between nations, especially after World War II.

 

In the postwar years, tariffs built stronger trade relations between nations. Reciprocity rather than protectionism or revenue was the guiding principle behind our trade negotiations with other countries and economic regions. That idea still holds sway under certain circumstances, but tariffs have become an offensive policy tool as well.

 

I remain convinced that tariffs are simply another tax that corporations and consumers pay to finance the policy goals of the government. Many may believe that tariffs are worth the price if it means more jobs for Americans but that has not been the case. The overall loss of jobs because of tariffs far outweighs the gains in tariff-protected industries, especially in a situation where retaliatory tariffs are levied on the U.S.  

 

Tariffs in today's world are being used by both political parties to accomplish an even greater spectrum of goals than simply job protection. Under the former administration, tariffs were both a weapon to help revive the domestic manufacturing sector as well as to reduce American dependence on China in a variety of economic sectors.

 

Since then, under President Biden, the goals of tariffs have been broadened further to include national security, and self-sufficiency, and to support our efforts in the green energy transition.

 

His approach is better, he claims, because it is targeted and selective. It also involves convincing allies to join him to coordinate tariffs on Chinese goods.  He argues his tariffs on foreign electric vehicles and solar panels allow our U.S. producers to gain a foothold in this area. The restrictions on semiconductor imports are both an attempt to build up the country's self-sufficiency in an area that is important to both military defense and increase made-in-America manufacturing in areas such as artificial intelligence. He has also restricted what U.S. industries can sell to China, especially in the technology sector.

 

 Former President Trump has doubled down on his first-term tariffs. He has advanced ideas that would include a new 60 percent tariff on all Chinese imports, plus a 10 percent across-the-board tariff on imports from around the world. He has also reached back into America's past when tariffs were revenue generators. His idea is to use tariff revenue to replace the income tax.

 

I do applaud him for a novel idea. However, it would require a huge increase in tariffs to accomplish such a feat. To put this into perspective, when tariffs were the main source of government revenues, federal spending was about 2 percent of GDP. Today that number is 23 percent. Total individual income generates more than $2.2 trillion in federal revenues while total import revenues are less than $100 billion. The required increase in tariffs would stifle trade and likely precipitate a worldwide recession.

 

I also suspect that Trump may be using the threat of higher across-the-board tariffs to exact concessions from both China as well as the rest of the world. He has done it before and could do it again and our trading partners know it.

 

In any case, all these tariff efforts by both parties are playing well with American voters whether Republican, Democrat, or independents. It appears that few care that we are already paying $230 billion in tariff-related price increases. A further 60 percent tariff on Chinese goods would increase prices by another $230 billion.

 

On an individual level, the Peterson Institute for International Economics calculates if Trump carried through on his promises the average middle-income family would pay $1,700 a year in higher prices on top of the $1,000 per annum they are already paying.

 

I don't think Preside Biden's tariff schemes are any better despite his selective approach. However, what I think isn't important. It is up to an informed electorate to decide if tariffs are the way to go.

 

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.

In this era of populism, tariffs have become as American as apple pie. Politicians are bending over backward to out-tariff their rivals. Voters are applauding the effort, and yet it is the consumer who will pay higher prices as a result.

 

I can understand how voters might disagree, given that party politicians continue to deny the obvious. "The notion that tariffs are a tax on U.S. consumers is a lie pushed by outsources and the Chinese Communist Party," declared a spokesperson for the Republican National Committee. 

 

I am neither an outsourcer nor a Chinese Communist, but I am convinced that tariffs are a tax on all of us.

 

When the U.S. levies a tariff on an imported good, the cost of the tariff comes directly out of the bank account of an American importer when the foreign-made product arrives at an American port. The importer then has a choice. It can either eat the cost or pass all or some of that added expense to the buyer of the imported goods. That buyer can be either a retailer or a consumer. How much of the extra cost is absorbed by the retailer and how much is paid by the consumer is hard to determine.

 

Historically, U.S. tariffs have been around since the days we declared independence. Tariffs generated most of the country's revenues and at one point represented 90 percent of federal revenues. That began to change when the Industrial Revolution took hold in the U.S. during the Civil War.

 

Tariffs were then levied to protect American industry, chiefly northern manufacturers from overseas imports. The Republican Party slapped tariffs on various goods from several countries in Europe and elsewhere. This period reached its zenith during the Great Depression when world economies were failing. Tariff wars exploded globally as countries rushed to protect industries within their borders.

 

Instead, these tariffs resulted in even less global growth and only worsened the state of the world's economies.

 

It was the passage of the Reciprocal Trade Agreements Act in 1934 that introduced the concept of reciprocity that began to reverse the global decline. The act allowed the president to horse trade on a global basis by negotiating lower duties if other nations did the same. After WWII, reciprocity became the dominant go-to trade policy. Over the ensuing decades, trade deals expanded from a country-to-country agreement to regional trade alliances that granted "free trade" to some while targeting duties and tariffs on others. The North Atlantic Free Trade Agreement is just one example of this practice.

 

After multiple decades, this era came to an abrupt halt when former president Donald Trump initiated a wave of tariffs on a variety of goods on China. He promised that the tariffs would level the playing field between the two countries, while bringing manufacturing jobs back home. He soon expanded his tariff offensive by placing tariffs on additional products and at the same time applying them to several additional countries.

 

His successor, Joe Biden, not only let stand the China tariffs but added to them. The costs to American consumers and companies not only increased as a result, but the jobs promised never materialized. The U.S. Customs and Border Protection estimates that Americans have paid more than $230 billion to date for tariffs that Trump imposed, and Biden extended.

 

A bipartisan working paper from the National Bureau of Economic Research found that the tariffs had no impact on the number of jobs in the affected industries. However, the tariffs did result in other countries imposing their retaliatory tariffs on U.S. products. That not only hurt consumers here at home but made the goods we exported abroad more expensive. In addition, those retaliatory tariffs lowered the number of jobs within the U.S. industries that were impacted.

 

The Chinese retaliatory 25 percent tariffs on U.S. cotton, soybean, and sorghum devastated large numbers of our farmers. The situation was so bad that the Trump Administration was forced to offset the damage by offering farmers $23 billion in taxpayer money.

 

J.P. Morgan economists estimated that the Trump tariffs on $300 billion of Chinese-made goods cost the average American household about $1,000 per year. We are still paying more today for a variety of imported goods from China including MAGA baseball caps, luggage, and shoes.

 

Next week, I will discuss the present effort to expand trade barriers and tariffs as a policy tool that is being used to advance several separate goals. Each of these tariff initiatives has serious ramifications for both American industry and consumers.

 

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.