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.

The good news is that early in this coming month we should see new highs in the stock market. The bad news is that we could also see some downside as well.

 

The equity markets' grind higher throughout June has been achieved by fewer and fewer stocks. Most of the gains have been concentrated in ten stocks or less. There have been a few days where the other 490 stocks of the S&P 500 index managed to mark up some gains, but if you weren't in AI or Fang stocks, you underperformed by a mile.

 

I have mentioned this before in several of my past columns. As we push higher, a feeling of caution seeps into my bones. On the surface, there is nothing that I can put my finger on, and yet my Spidey sense tells me to tread lightly. However, the macroeconomic data does not justify my worries.

 

Inflation, while sticky in some areas, continues to come down. The Personal Consumption Expenditure Price (PCE) for May was unchanged, as expected, while the core index which excludes food and energy, rose 0.1 percent compared to 0.3 percent in April.

 

I recognize that the official inflation data (CPI, PPI, PCE) is not the inflation that normal people are feeling. Grocery prices may be coming down but are still 200 percent higher than they were.  Prices at the pump are still high as is the cost of eating out. Most restaurant prices are so high that one could feed a family for several days on a single tab for two. Rents, insurance, and a bunch of other items are still in the stratosphere.

 

This has led to a slight decline in the rate of consumer spending, especially among lower-income consumers. However, the consumer spending averages have been held up by overspending by those in the upper income brackets. Fortunately, the continued health in the jobs market allows many to still make ends meet (for now).

 

Given the above scenario, the fact that the Fed is still waiting for more definitive data to cut interest rates should not impact the direction of the markets. Many argue that the Fed does not need to cut at all this year given the strength of the economy. They have a point.

 

The deficit is climbing exponentially and interest payments on our debt now equal what we spend on defense. And yet, billions of dollars of monthly Treasury auctions that make up the government's quarterly refunding needs have hardly moved the needle on the benchmark, U.S. ten-year Treasury bond. The U.S. dollar also remains well-bid.

 

What's not to like given the above scenario? The bull case I have laid out should give me comfort that new highs in the market are justified. And maybe they are, but why isn't the market broadening out? Why are investors flocking to only the best, cash-rich, mega companies in the world if everything is so good?

 

Maybe I am looking in the wrong place for clues to the future. I have just finished several columns on populism and its future impact on the country and the economy. From all the responses I received, I have identified one clear message--people are scared. They are afraid of the coming elections, worried about our climbing debt burden, of geo-political tensions, and much more.

 

We are entering the season where election politics begin to matter to the stock market. It may be that political uncertainty may begin to trump economics.  Last night’s disappointing debate performance by President Biden, for example, has many calling for him to bow out. In any case, I suspect that for market participants July will be less about dull markets and long vacations, and more about who said what and when.

 

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.

We are in the second or third year of a new regime change, according to my calculations. If this one follows the patterns of past periods, some clues of what might occur in the years ahead are available (at least from an economic and financial point of view).

 

Historically, it seems that the most recent period of populism (1964-1982) can give us a better guess of how the stock market might perform. Although there have been many changes in the financial markets since then, many fundamental instruments and assets remain the same.

 

As for the federal government, it has enacted various laws to reign in speculation in the banking system and to protect the consumer after the Financial Crisis of 2008-2009 but continues to preside over what most now believe is a form of state capitalism. The Federal Reserve Bank is largely the same, although with even more power to affect the economy since then. In any case, the Sixties and Seventies are the closest model we have.

 

In the period between 1964 and 1982, stocks went nowhere — except in election years.

 

In those presidential years, stocks on average were up more than 20 percent. This makes some sense from a behavioral perspective. I believe voters were seeking (and hoping) to elect a strong man who would harness government to effect change. This is based on a belief that the only chance to reign in the excesses of capitalism (the rich get richer, and the poor get poorer) is through government intervention. Nothing else is big enough.

 

However, we are an impatient people. We want immediate results. Campaign promises of a fast change in the status quo for the better are assumed.  Unfortunately, that kind of change, as I have said, takes time.

 

As a result, populism has not been good for incumbent presidents. Most presidents have only held single terms during those years. I guess that people are unhappy and quick to blame leaders if the pendulum doesn't swing fast enough. I call it the "throw the bums out" syndrome.

 

If the country truly decides to raise the living standards of most of the American population that has been left behind, it will do so after a lot of kicking and screaming from those who will resist change including most of my readers. The fact remains, however, that the policies of the last forty years must be cast aside. As I hope I have pointed out in this series of articles — they don't work. In their place, policies that put equity, fairness, equality, etc. first for years will require new ways of distributing wealth in this country.

 

On a macroeconomic front, moving from a top-down to a bottoms-up approach by the Fed and the government is going to be an inefficient process. That means we will have to sacrifice optimum economic performance and settle instead for slower growth. I am hoping the rollout of artificial intelligence with all its promise in the years ahead could help alleviate the negative consequences of moving the pendulum back to the center.

 

A bottoms-up approach will likely be inflationary as well because people do not use capital efficiently. They try and better their circumstances in the here and now. Few will wait or save for the opportunities to seek better investment returns, etc. Families will splurge, buying things they don't need with new-found wealth. 

 

If you think the deficit is bad now, once this redistribution begins look out below. Just think how much wealth would have to be redistributed to make America whole again. The debt will skyrocket, and the dollar will plummet. The U.S. will need to take a page out of the emerging market handbook and inflate our way out of a coming debt crisis. If you throw in the country's present love affair with tariffs, we are practically guaranteed a higher inflation rate for years to come.  It will be a messy process at best with a lot of money wasted. 

 

I believe the country has yet to embrace the need for policy change at the level necessary to swing the pendulum. Oh, some of them know what I know, but are simply afraid for their political lives to face the tough choices ahead.  I am sure that just reading this column, many investors are shuddering with the picture I am painting.

 

But what choice do we have? Our government has spent $9 trillion — 10 times the amount of the New Deal — and people are still angry. Tariffs have been tried and have failed throughout our history. Tax cuts for the rich and corporations, more regulations instead of less, trickle down, investment tax credits, higher interest rates, no interest rates, buy America, hate China, these are all 40-year-old bankrupt policies that both sides of the political spectrum are still counting on to fix a problem that requires new thought and direction, and so are you.

 

I see nothing new in the promises of our candidates and suspect that it will take more time, more crises, before individuals yet unknown rise up with policies that will satisfy most Americans. They will have to be courageous and think outside of the box. Some will follow, and most will dig in their heels because they believe they will stand to lose more than they gain.

 

However, it can be done because we have done it before. Out of the chaos of the Civil War, an entire minority of Americans (which represented 20 percent of the labor force at the time), were freed from slavery. The wrenching crisis that was the Great Depression resulted in Roosevelt's New Deal, which transformed American society and gave us benefits that are still viable today. Out of the marches, death, and disillusionment of the Sixties came the programs of the New Society that once again set America on a new path.

 

This one may last beyond my lifetime. It won't be pleasant and by its nature, the road forward will be bumpy, but it is the system that our forefathers created, and it has worked so far. The question is whether we will have the patience, courage, ability to compromise, and willingness to embrace the change necessary to see this through. What say you?

 

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.

It was a slow week for news but that didn't stop the bulls from pushing the equity markets to new highs. But the number of stocks that are pushing stocks higher are fewer and fewer.

 

Day after day, and week after week. the S&P 600 and NASDAQ have made a series of new highs. Under the hood, however, just about all the gains have been led by ten stocks in the technology sector. Many investors saw no end to the gains and continued to pile into the Magnificent Seven and the AI Five. The stampede has been led by everyone's favorite stock, Nvidia.

 

This leading semiconductor stock now boasts more than a $3.35 trillion valuation. It is now the most valuable company in the S&P 500 Index. Some analysts are predicting the company's valuation will rise to $5 trillion over the next 12 months.

 

Traders were sure that the stock would take a breather after its 10-for-one stock split on May 22, but that was not to be. The shares continued to rise almost every day since then. The Bulls even have a new nickname, "Evergreen," for the semiconductor giant since it rarely has a red day.

 

Nivida and a couple of other stocks like Microsoft, Apple, Netflix, Broadcom, Google, and Meta now account for so much of the NASDAQ 100 and the S&P 500 Indexes, that where they go, so goes the market. The performance of just about everything else is dismal in comparison. Why just AI stocks and their counterparts?

 

Part of the attraction is that Wall Street can justify any price to buy into these stocks because the sky is the limit when it comes to the future of artificial intelligence. Every tech company can either claim to be in AI or will soon claim a higher valuation. It reminds me of the days when a company could lift its share price by adding dot com to its name. 

 

Around the globe, equity analysts keep upping their estimates on how much companies will spend on AI in the years ahead. To them, the internet boom was small potatoes to what unfolds in the AI universe. There is no way to prove (or disprove) these predictions.

 

On Friday, Nvidia's weighting in the $71 billion Technology Select Sector SPDR Exchange Traded Fund (symbol XLK) was expected to substantially increase via a rebalancing of that fund. This additional buying power from XLK had goosed the stock price this week in anticipation.

 

Compared to AI, therefore, the rest of the stock market is a humdrum place. Why buy anything else when all the action is in stocks like Nvidia? To me, however, that is an increasingly risky bet that relies on the greater fool theory that there will always be someone else to buy my stock at a higher price. 

 

In the meantime, the overall market remains supported by traders who are convinced that the Fed will have to cut interest rates multiple times before the end of the year. The Fed, of course, continues to say no way. Over the last two weeks, members of the Federal Open Market Committee have warned the financial markets that there are no immediate plans to cut interest rates.

 

Traders are not buying it. The bulls remain convinced that the central bank will soon see that inflation is trending lower, unemployment is rising, and growth is moderating. While the data still doesn't confirm any of these assumptions, animal spirits tend to ignore the facts sometimes in favor of price momentum. I suspect that if the Fed does not say categorically "There will be no cuts this year," the markets will hear what they want to hear. In the meantime, the idea that a rate cut is just around the corner will continue to drive bullish sentiment. Until it doesn't.

 

Markets are stretched but everyone knows and ignores it. Seasonally, it is a bullish period for the markets. I am riding the market higher but peeling off positions as stocks climb. I expect a pullback in the market anytime now, so be prepared. It won't be anything more than a 3-5 percent decline but it will feel far worse. I think we then bounce before a possible steeper decline in July.

 

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

 

This is year three of a 15-year period where change will occur throughout America. It won't be an easy time for any of us. Stress, conflict, dissatisfaction, economic and political turmoil. It all lies ahead, but there is a silver lining.

 

In the case of regime change fueled by populism, American history may not repeat itself, but it does come damn close. Throughout our history, we have seen the pendulum swing from right to left and back again as discontent and bad times (the absence of fairness, equality, and equity) alternated with boom times and capitalism (winner-take-all mentality).

 

The only time the pendulum broke down was during the Civil War and it could again if compromise gives way. You probably never heard of the Wide Awake Movement. It was a grassroots anti-slavery movement that had its birth in Hartford, Conn., in February of 1860. The movement spread rapidly.

 

By the end of that summer, there were a half-million uniformed members under arms protesting slavery in a nation of 31 million. In response, those who disagreed with that stance formed armed groups of their own. They also numbered in the hundreds of thousands with names like the Minutemen and the National Volunteers. Americans on both sides failed to compromise, to see the other side's point of view. The pendulum had swung too far, so the system broke down.

 

In 1891, the People's Party was founded as America's farmers had had enough. It represented a populist agrarian movement that pitted a growing number of the nation's landless tenant farmers against the Eastern establishment and banking elite. That finally wound down by 1908 after much-needed reforms.

 

Fast forward to the Great Depression, millions of Americans out of work, and the rise of the labor union. That period encompassed almost 15 years. Then came the Vietnam Era along with a boatload of grievances from many segments of the population. Is any of this getting through to you? Populism is, and always has been, part of this nation's fabric.

 

Each of these periods represents a regime change of about 15 years. Why so long? It requires a huge effort, and a great deal of time to move the pendulum to the middle and even more to swing to the other side. It does not occur without crisis (real or imagined), and conflict. All the regime changes I have examined are filled with them. Economics and politics both play their part.

 

Why, might you ask, are conflicts necessary? Conflicts make people realize that "something must be done." Conflicts are necessary to move the pendulum. History is rife with examples. It required a Civil War to end slavery. World War II to finally pull us out of the Great Depression and confront the horrors of the Nazi's extermination of millions. The Vietnam War to recognize a new generation. But make no mistake, a shooting war-type conflict has not always been necessary to effect change here at home.

 

 Domestic conflicts were also plentiful — and just as traumatic. The suppression of labor unions by businesses and the nation's police forces in the 1930s comes to mind. Some of us remember the 1960s. I lived through Kent State and other student demonstrations, marches for racial equality, the burning of Watts, assassinations (the Kennedys, Martin Luther King, etc.), and much more. All of the above created a crisis and triggered change.

 

 Economics has always played a major part in populism. In the post-Civil War era, the decimation of the southern agrarian economies was a wrenching blow to a large swath of the nation's population. In the 1930s, we suffered through thousands of bank failures, drought, historical unemployment, tariffs, and the rise of communism and Nazi Socialism, which threatened capitalism and free markets. The regime change that occurred from the mid-1960s to the 1970s culminated in a period of skyrocketing interest rates, inflation, and gas lines at the pump.

 

The response to my columns thus far on populism has been heart-warming. Thank you, readers, for your interest and continued encouragement. Next week, I will conclude this series with a glimpse of what we can expect in the years ahead, at least from a financial and economic perspective.

 

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.