This week, the stock markets had one of their largest single-day rallies since 2012, after President Trump suddenly put some of his tariffs on hold for 90 days. He then gave back half of it the following day. Investors wonder if this was a bear market bounce or if it could mean something more.

 

Media sources are crediting the market melt-up to various factors. Some believe Trump decided to soften his stance on tariffs after spending the weekend huddled with his U.S. Treasury Secretary Scott Bessent. Bessent, who the business community believes is a voice of reason in a room full of tariff advocates, had urged the president to pause his reciprocal tariff deadline. He believes foreign nations, given more time, could come to the negotiating table with even better deals benefiting the U.S.

 

He may have a point since few of our trading partners understand the math behind these reciprocal tariffs. Are they about fentanyl, existing tariffs, hidden taxes and other barriers to American imports, their specific trade deficit with the U.S., or all the above? If it is only about reciprocal tariffs, then reducing one's tariff (as Vietnam already offered to do) is simple.

 

It is a different kettle of fish if, instead, Trump is demanding a total reduction of each country's trade deficit with America. That could involve passing legislation to reduce value-added taxes in some cases. In others, it might require far-reaching legislation to undo protectionist measures defending domestic industries for many countries. That would involve developing a consensus among several political parties that share power in governments. It may even require, in some instances, a referendum requiring a popular vote.

 

In any case, before this pause, a growing number of Wall Street research houses were not only ratcheting down their targets for the S&P 500 Index but also raising the probability that Trump's tariff policies could cause a recession this year.

 

Some believe the president was forced to announce a pause in the tariff schedule. Bond traders believed the fixed-income market in the middle of the week was coming unglued. On Wednesday night, the prices of U.S. Treasury bonds plummeted as foreign investors, especially in Japan, were dumping their holdings while the U.S. dollar plummeted.

 

Determining why treasury bonds, a haven in times of distress, experienced such sharp price declines is difficult at best. Who were the sellers? We know China is the second-largest holder of U.S. Treasury bonds after Japan. We also know that the only exception to Trump's reciprocal tariff pause was China. At this point our tariffs on China total 145 percent. China, on the other hand, has moved its U.S. tariff rate to 125 percent.

 

It could be that China is now reducing its holdings of our sovereign debt in response to the U.S. tariff threat. And this China/U.S. tariff war may continue. Charles Gasparino of Fox Business posted on X that the Trump administration is moving toward a possible delisting of Chinese public company shares on U.S. exchanges. If so, Chinese stocks listed here, are ignoring that possibility.

 

A better bet could be that the so-called "yen carry trade" may be unraveling. For decades, traders would borrow yen, exchange yen for dollars, and then invest those dollars into assets that could give them a better return (like U.S. stocks). However, the Japanese stock market has declined along with U.S. markets, while the yen has strengthened considerably against the dollar over the last few weeks. Some clients of large global financial institutions trying to unwind their yen carry trade could be in trouble.

 

How all these variables play out in the stock market is like putting together a jigsaw puzzle with missing pieces. Investors are so focused on this tariff issue that good news, like the cooler-than-expected data from both the Consumer Price Index and Producer Price Index, were largely ignored. So too was the approval of a budget plan in the House that reflects the president's agenda.

 

After this week's monumental bounce, some hopeful bulls believe the bottom is in. Others say that the extraordinary bounce in the averages is a classic sign of a bear market. They point out that if history is any guide, some of the biggest upswings in stocks occur in bear markets. If so, a 10-15 percent spike in the averages could happen at any moment depending on the president's next tweet on Truth Social. To me, until we see a successful conclusion to the tariff issue, which could take several months, I believe any rally would be an ideal time to trim portfolios and get more defensive.  

 

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.

Are we on the verge of an American economic and social revival as Donald Trump promises, or on the eve of destruction as his critics claim? That sounds extreme, but in this partisan world we live in binary events are all we care about. 

 

If all unfolds according to the Trump policy playbook, inflation will be lower, the country more substantial, and we will be able to grow our way out of this debt crisis through higher tax revenues from a booming economy. This land of plenty will take time to achieve, they warn, so for now, you must have faith in the narrative.

 

The bull case continues with tax cuts, government spending reductions, and tariffs that will supercharge the economy, but only after a period of pain unfolds. It is an unorthodox multi-faceted approach. It carries a great deal of risk, and several of its main pillars fly in the face of most economists' wisdom.

 

I wrote last week about how both the demand and supply sides of this economic equation face pitfalls. Many of the country's future growth hinges on the success of supply-side economics that have only increased income inequality in this country for decades. This week, we look at the supposed benefits of tax cuts and tariffs. 

 

The much-heralded tax cuts of 2017-2018 during Trump's first administration, were supposed to benefit rich and poor alike. However, the trickle-down assurances of people like Larry Kudlow, Trump's former economic adviser, never occurred. Roughly 90 percent of  Trump's last round of tax cuts benefited the wealthy and corporations.

 

This time around, despite the media and the administration's use of the word tax cuts, the present plan is only to extend the existing tax cuts first passed during his first. As such, both individual and corporate tax rates will remain the same. There is no economic impact therefore unless the extension of tax cuts fails to pass the House. If so, then we will experience a tax hike. I think the risk of that is small.

 

The good news is that some lessons were learned, and some lower-income Americans may get a reduction in taxes this time around. Trump has promised no taxes on tips, overtime pay, and Social Security benefits for retirees. At the same time, Congress is actually toying with the possibility of increasing taxes on millionaires to 40 percent.

 

Given that tax cuts may not provide the economic stimulus needed, the focus on tariffs becomes more important. Tariffs "are going to raise $600 billion a year, about $6 trillion over a 10-year period," according to Trump's chief trade adviser, Peter Navarro. That may be a revenue source to offset spending and tax cuts, but it comes with baggage.

 

As I have written many times in the past, tariffs are taxes. They are paid for by American companies and individuals that buy imported goods. Those taxes accrue to the government just like your income taxes. That means Americans are facing a hefty tariff tax increase. How large? It would be the largest tax hike since 1951, representing 2 percent of Gross Domestic Product if they are implemented.

 

Tariffs will not only hurt consumers but will also slow the growth rate of the economy. If our trading partners retaliate in kind, the damage will be greater. In this case, the global economy will also slow. This negative feedback loop could feed upon itself. The recent tariff on Chinese goods is an example of what might happen with other nations.

 

The total tariff rate on imported goods from China is now 70 percent. China recently retaliated by slapping a 34 percent tariff on American goods. In return, the U.S. increased our tariffs again by 50 percent last week, totaling 104 percent. China then upped its tariff again and so did we. Fortunately, this kind of tit-for-tat action has not spread among the other nations we trade with.

 

Just yesterday, the president announced a 90-day pause on those reciprocal tariffs he announced last Wednesday and instead settled for a much milder 10 percent tariff across the board. His one exception was China. He increased tariffs to 125 percent on that country's imports. His comments indicated that the pause was always part of his tariff plan.

 

Clearly, other elements of the administration's plan are working. The dollar has declined as has interest rates. Both help American exporters and will help the trade deficit. The oil price has also plummeted. That will go a long way in reigning in inflation. If the economy slows further, in the absence of more fiscal spending, inflation should remain modest. Those are remarkable achievements in such a short time.

 

The challenge will be reviving a faltering economy. That will depend on a successful conclusion to the tariff question. Many doubt the wisdom of Trump's actions. Corporations, financiers, and business leaders, along with Democrats, have warned that we are on the eve of destruction if the president did not relent on his tough stance on tariffs. It seems clear that he was listening.

 

This was a massive turnaround in Trump's recent attitude, which I suspect has more to do with the 20 percent-plus fall in the stock market and a near-meltdown this week in the credit markets. What is true is that the ultimate success or failure of much of this economic program lies squarely on the shoulders of Donald Trump, the negotiator-in-chief. He seems comfortable in that role and relishes it.

 

No plan is foolproof. Sometimes, against all odds, one approach will work, or if it doesn't, another one will. I am not sure that this burn-it-down approach to economics will succeed, nor will a return to growth come about as quickly as planned. I am guessing Trump feels the same way. He knows the time it will take to carry out these plans is in years, not weeks or months, even if he is successful in all his trade objectives.

 

As for today's populist generations, especially those most impacted by income inequality, some of the policies I outlined above are different from the same supply-side, trickle-down B.S. that created this level of income inequality in the first place. Others are not. Yet, the country demands change and change it will get. I am willing to give it a chance, despite my misgivings, knowing full well that any change is uncomfortable, if not painful.

 

However, I am older, made more than my share of mistakes, and have acquired the patience to see what happens over the long term. Let's face it, we live in a country that has lived well beyond its means for decades. Change is long overdue, even if it isn't the change you had hoped for.

 

I am rooting for the country and its future generations, not for any party or politician. I am hoping that Trump's voters, Wall Street, and the country at large will have the willingness, fortitude, and patience required to weather the changes and challenges we face now and into the future.

 

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.

Stocks fell to kick off the second quarter following the worst quarterly performance for equities in the past three years. The culprit was Wednesday evening's "Liberation Day" announcement of tariffs far worse than the markets expected.

 

By now, most readers know that the president not only levied a 10 percent tariff on all nations across the board, but he also added reciprocal tariffs to that total on individual nations. China was signaled out for the harshest treatment with a combined 54 percent total round of tariffs. In response, China announced 34 percent tariffs on U.S. goods.

 

As I warned readers last week, these tariffs would be "extensive, explicit and enforced."

 

The announcements have triggered a two-day sell-off in equities around the world, but it is the U.S. stock markets that are bearing the brunt of the losses. Over $3 trillion was wiped off the value of the S&P 500 Index thus far. Some investors found that confusing since the assumption was that these tariffs would hurt foreign markets far more than our own and were nothing more than a bargaining chip.

 

Neither assumption is true. This year's market decline should not be dismissed as a mere blip in a bull market. To be clear, this is not just a correction, it is a confirmation and a direct result of a significant regime change. It is a shift in our political and economic system which I have been writing about for years.

 

The present tariff actions are the latest manifestation of this shift. We the people will be the victim of this tariff war at least in the short to mid-term. The architects of this event, starting at the top, have repeatedly warned us that not only has the game changed but a period of discomfort, pain, detox, or whatever you want to call it is to be expected. It is a case of short-term pain for long-term gain.

 

One only needs to do the numbers to realize it is the American consumer and corporations who will bear the brunt of these tariffs. Some consumers are already stocking up on household items in preparation for shortages and price hikes. Tariffs, despite the president's denial, are a tax on those who purchase imported goods. Trump's chief trade adviser, Peter Navarro, said this week, "tariffs are going to raise $600 billion a year, about $6 trillion over a 10-year period."

 

That money is coming straight out of corporate profits. If instead, companies pass on those added tariff costs to you, the consumer, you are on the hook for this new tax. It will cost the average American family between $3,800 and $4,600 annually. Whether you call it a tariff, or a tax is all the same to me.

 

That money will go directly into the government's coffers. It will hit the working class the hardest — dropping disposable income by 2.3 percent. This will be the steepest tax increase since 1951. This kind of sudden shock to the system will have an immediate impact on all the metrics that comprise the state of the economy. Inflation will rise. Economic growth will slow. Unemployment will increase. The dollar and interest rates will fall. And financial markets, in turn, will reflect that by declining as well.

 

And this is not the only shock the U.S. may endure. We have yet to hear from three of our largest trading partners, Europe, Japan, and Korea. Will they follow China and retaliate, do nothing, or negotiate? Depending on their response, will President Trump escalate the tariff war or reduce tensions?

 

Could Trump's tariffs cause a recession? That depends on what is negotiated by whom and for how long. It seems clear that whatever happens, this trade crisis will be with us for some time. The clock will be ticking while we wait. The longer it lasts, the higher the probability of recession.

 

In the meantime, congratulations to the Trump team for accomplishing some of their objectives in record time. Treasury Secretary Scott Bessent had made it clear a month ago that Trump wanted the ten-year U.S. Treasury bond yield lower and oil prices down. Given the 16 percent decline in oil prices over the last two days and a bond yield of under 4 percent, I would say mission accomplished. Of course, equity markets had to go into free fall to accomplish that, but neither Trump nor Bessent seem concerned about what happens to the stock market in the short term.

 

How will stock markets handle this? Look at this week's market action for a clue. The volatility has been through the roof. The S&P 500 Index is now down 16 percent from the highs. I had cautioned that we could see a drop of between 10-13 percent in the S&P 500 Index and maybe even as low as 20 percent. Now what?

 

Could we see further downside, yes, we could,yes but could we also see instead a 10 percent spike higher in the averages in a day or two? Either is possible because the fortunes of the market and the economy are and will continue to be Trump-dependent.

 

Given that the president strives to always be at the center of attention, this situation suits his personality perfectly. Many on Wall Street believe Trump's plan is to force the economy lower for the next nine months while blaming the Biden administration for the decline. At that point, his supply-side efforts such as maintaining the 2018 tax cuts, deregulation, etc., will kick in. That should boost the economy just in time for the mid-term elections — if all goes as planned. If it doesn't, the risk would be a recession.

 

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.

Transforming a government-heavy economy into one where the private sector leads not only takes time but also requires a period of detoxification, according to U.S. Treasury Secretary Scott Bessent. The idea that pain may need to come before any gains has caught the nation and the stock market by surprise. 

 

Last week, I explained that "the administration's first objective, is to slow demand in the real economy. Keynesian demand-side economics says the best way to do that is to reduce spending. Doing so, they believe, will also slow inflation. How do they do that? By distributing less money to the greatest number of people possible. That means slowing wage growth and providing fewer social services to Americans in the median income level and below."

 

This "pain trade," also includes the president's tariff agenda. The result will be slower growth, less inflation, and fewer jobs. As the demand side of the equation craters the economy, President Trump's strategy will be to increase stimulus into the private sector to expand the industry.

 

The game plan, according to their script, is to maintain massive corporate tax cuts while reducing taxes even further by gutting the Internal Revenue Service and corporate financial oversight. Tariffs will play their part by forcing foreign companies to invest in new plant and equipment in the U.S. Part and parcel of this will be deregulation wherever possible to allow corporations to increase profitability. The president's "Drill, Baby Drill" is an offshoot of this idea.

 

If this sounds familiar, it should, because this is classic supply-side economics. This well-worn supply-side theory is supposed to increase the economy's productive capacity by reducing taxes and deregulation, which should boost investment, job creation, overall economic growth, and more tax revenues.

 

If successful, once again (if history is any guide), money will flow to the top 0.1 percent of top wage earners, who don't need it. They won't spend it either. Instead, they will save or invest it. In this case, this kind of stimulus is not inflationary. These are policies that have been used by both Republicans and Democrats for decades.

 

In this equation, however, the demand-side policies in the works will take effect much faster than the supply-side stimulus. That should cause a deflationary environment six months out. This is why Wall Street economists are predicting either stagflation or even recession. At that point, the Federal Reserve Bank will be called on to loosen monetary policy by cutting interest rates and switching from quantitative tightening to quantitative easing.

 

One might ask what happens if the Fed does not cooperate? We could easily see the economy tip over into recession. However, there is a long history of Fed bullying by presidents, when they wanted lower interest rates. I would expect that tradition would come into play quickly.

 

And what if the Fed plays along? Then the same dynamics would reward some borrowers. Once again, who benefits? Ask yourself who can borrow the most from banks when interest rates fall. Why the top one percent, as well as large corporations, that's who. And what have they done in the past with those borrowings — invested overseas?

 

If on the other hand, they are forced by some mechanism to invest here at home, the most lucrative areas with the best returns are labor-saving areas like artificial intelligence and robotics. If you believe for one moment that corporations will hire unskilled and under-educated workers, train, and pay them a meaningful salary, plus benefits, when a robot or software program could easily do the same job, I have a bridge to sell you.

 

Next week, I will outline the risks and rewards of this economic plan not only for the stock market, but for the well-being of those who are worried about their own economic future.

 

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.