The Aug. 1 tariff deadline has been pushed back again by Donald Trump, but only for a week. The latest non-farm payroll report for July was weaker, and both the May and June numbers were revised downward. Investors were not expecting that news, and stocks tumbled as a result.

 

The U.S. economy added 73,000 jobs, below the expected 104,000. It was enough to move up the unemployment rate to 4.2 percent. At the same time, May's job gains were revised downward from 144,000 to just 19,000 jobs, and June's number came in at only 14,000 job gains versus the initial report of 147,000. It is hard to believe that errors of this magnitude are unintentional.

 

The jobs data made the president's threats of even higher tariffs on numerous countries beginning Aug. 7 that much more worrisome. The week started positively on the trade front. After two days of positive negotiations between China and the U.S. in Stockholm, markets had expected that the Aug. 12 deadline for a resumption of massive tariffs would be extended. However, negotiators made it clear that the final decision would be up to President Trump, who has yet to agree to any extension.

 

A last-minute deal with South Korea produced an agreement for a 15 percent tariff plus a commitment to invest $350 billion in the U.S. Like all the other investment promises, the details and timelines for when and what remain fuzzy. Korean negotiators say that this agreement was a purely verbal understanding with nothing in writing.

 

Trump's Canada, Brazil, and India talks have still not been finalized, and the president continued to insist the Aug. 1 deadline won't be extended beyond Thursday evening. Yet, on Friday morning, the deadline has been extended again by one week. In the case of Mexico, he agreed to extend the completion of a trade deal by another 90 days.

 

As for corporate earnings this week, both Microsoft and Meta beat second-quarter earnings handily on Wednesday. They predicted a rosy future ahead for their efforts in cloud computing and AI. Meta shot up more than 11 percent as they beat earnings estimates and guidance for the year. Microsoft jumped almost 5 percent and joined Nvidia in a league of their own as both companies' market capitalization surpassed $4 trillion each. Neither Amazon nor Apple fared as well, and all these stocks gave back some of their gains on Friday.

 

By Thursday, the seven largest U.S. companies had reached a combined market value of $20 trillion. Earnings for these companies have generated nearly $600 billion and now account for 30 percent (up from 8 percent 15 years ago) of the S&P 500's combined $2 trillion in net income.

 

The seven are trading for 33.7 times current earnings and have pushed the overall price/earnings of the market to more than 27 times. The capital expenditures at Microsoft, Apple, Amazon, Google, Meta, and Broadcom are consuming a significant portion of the cash they earn from operations, and Nvidia is a major beneficiary for some of that capex.

 

Overall earnings continue to beat estimates and have, until now, added fuel to the rally that seemingly never ends. Until Friday, investors have been looking past the tariff issues, expecting another TACO at the last moment. It helped that in the previous two weeks; the U.S. negotiated a framework for deals in both the European Union and Japan.

 

In addition, they have seen little evidence year to date that tariffs have had any impact on economic growth, and neither has the Fed. This week's FOMC meeting was a disappointment because the Fed is still insisting that it needs more data before deciding to cut interest rates. The jobs report for June may change that perception, at least when it comes to employment.

 

Over in the bond market, the U.S. Treasury announced it will need to raise $1 trillion in the three months to September just to keep the government running. That does not account for any of the new spending authorized by Congress in their recent tax and spending bill. Much of that fund raising will be targeted at bills and notes between a week and a year while keeping the size of its auctions of longer-dated bonds steady.

 

This is a continuation of the strategy under former U.S. Secretary of the Treasury Janet Yellen. It is a ploy to keep long-term interest rates from shooting through the roof as Congress spends more and more. The risk is that each time that this short-term debt matures, which is at least once a year, it must be replaced by new debt issued at current interest rates. If rates were to rise, the Treasuries debt burden would rise with it.

 

I urge readers to read my recent two-part series  on fiscal dominance, "What is really behind the move to replace Jerome Powell." It will give you an understanding of why it is critical that the administration has more control over the Federal Reserve Bank.  

 

As readers know, I have been warning that stocks were overextended and in need of a timeout. We began that pullback this week. Before it is over, we could see a 4-5 percent decline in the S&P 500. I expect a few more days of volatility as investors figure out how serious Trump's new tariff deadline could be.

 

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 unemployment rate in the Gen Z population, those born between 1997 and 2012, is edging up to 7 percent compared to the nation's overall employment rate of 4.3 percent. That is the highest gap the country has seen in 30 years. For entry-level college grads, aged 22 to 27, the number is roughly 5.8 percent — the highest level in a dozen years.

 

Fed officials and private sector economists have been quick to point out that the uncertainty created by the Trump administration's tariff increases is a major cause of reluctance among businesses to hire young, inexperienced workers. That makes some sense since entry-level jobs are the first to go in times of economic uncertainty.

 

Job openings in June fell to a post-pandemic low, but the rate of layoffs also stood near a record low, which is a good sign for the broader U.S. economy. Companies are reluctant to cut jobs because of the chronic labor shortage. They are worried they won't be able to rehire enough experienced people when the economy speeds up.

 

Young Gen Z workers are struggling to find jobs. Economists blame the uncertainty of tariffs, and, among white-collar workers, artificial intelligence is also taking its toll on entry-level college grads.

 

One interesting development is that the unemployment rate is just about the same regardless of whether the applicant holds a college degree. If one looks at overall job openings, there are still millions of jobs available, but many of them do not require a college degree. Corporations are realizing that an automatic college-level degree requirement for many entry-level jobs in their screening process is superfluous.

 

Over many years of writing these columns, I have addressed this subject on several occasions. I urged readers and their children alike to reconsider the worth of a trade school education versus a college degree. For those interested, check out my Feb. 14 and 21, two-part, 2013 columns "Trade Schools Versus College." 

 

Fast-forward to today, where at least some readers have taken my words to heart. The overall share of young college students has declined by about 1.2 million between 2011 and 2022, according to Pew Research Center. Enrollment at two-year vocational public schools has increased by 20 percent since 2020. It appears that we are finally realizing that vocational careers are enormous opportunities that pay exceptionally well.

 

History still says individuals with a bachelor's degree earn $1 million more over their lifetimes than those with a high school diploma and $500,000 more than those with an associate's degree. Of course, the area of study in college is important as well. Over the last decade or so, for example, many students realized that jobs for graduates with a liberal arts degree were scarce. Those who were lucky enough to land an entry-level position found that their salaries were less than what high school grads were making in fast food chains. This convinced many students to find more lucrative fields of study.

 

"You can't go wrong with a degree in technology" became the mantra of the day as college enrollment surged in programs leading to entry-level jobs in computer system design, related tech fields, and mathematical and computer sciences. Unfortunately, over the last few years, these areas have been among the first to feel the brunt of the increased adoption of artificial intelligence systems.

 

The professions where hiring is still exhibiting some modest gains are in health care, government, restaurants, and hotels. We all know that government jobs, thanks to DOGE, are among the riskiest fields to enter, while restaurants and hotels rarely require an upper-level education degree. Health-care occupations are projected to grow much faster than the rate of all professions, around 1.9 million openings each year, according to the Bureau of Labor Statistics. It is also recession-resistant, as more Baby Boomers require more health care.

 

Gen Z, at 70 million people, accounts for 20.81 percent of the U.S. population. Politically, this age group has traditionally leaned left, but that shifted somewhat during the last presidential election. For the first time ever, Gen Z voters backed more Republicans (47 percent) than Democrats (46 percent). The shift is widely attributed to economic frustration, discontent with President Biden, and the GOP's outreach to young people on social media.

 

However, over the last few months, support for the GOP has wavered, according to the latest data by the Pew Research Center. Gen Z has swung back to favoring Democrats by 49 percent, while Republican support has dropped to 43 percent. 

 

How much of that dissatisfaction is due to the economic frustration of unhappy college grads remains to be seen. Last year, according to the World Population Review, there were more than 20 million students enrolled in colleges and universities in the U.S. Just a quarter of that total would be more than enough to swing sentiment, especially in a period of populism and partisanship. Remember that in a populist era, voters are quick to reject candidates and political parties that fail to deliver and deliver quickly on their promises. 

 

The good news for college grads, if there is any, is that the economy is still growing. If the Trump plan to grow the economy at 3 percent per year pans out, and immigration continues to slow, there will still be plenty of jobs for Gen Z college grads. They may not be in their chosen field, but a job is a job. And if they really want to make money, try plumbing or electrical work.  

 

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.

Markets have made significant progress since April. The announcement by the White House that Japanese tariffs would only be levied at 15 percent instead of 25 percent sent U.S. markets on a tear. Imagine if they were 10 percent.

 

"The largest deal ever made," according to the president, means that Japan will pay a 15 percent tariff to sell goods to us, while we will pay nothing to sell goods to them.

 

In reality, Americans will pay 15 percent more to buy goods from Japan, and the Japanese will pay nothing to purchase goods from us.

 

Japan exported $141.52 billion to the U.S. last year. President Trump's tariff deal will therefore cost American corporations and consumers an extra $21.22 billion annually. If you believe that Japanese exporters will pay this tax, I have some oceanfront property in Arizona that I want to sell you. The amount consumers are willing to pay versus what corporations pay will depend on the circumstances. Currently, corporations are absorbing most of the additional costs.

 

These tariffs were supposed to protect U.S. automakers, but General Motors just took a $1.1 billion hit to its second-quarter earnings from Trump's tariffs. They expect the tariff impact to worsen in the third quarter and estimate a $4 billion-$5 billion tariff loss for the year. The American Automotive Policy Council, which represents the Big Three automakers (General Motors, Ford, and Stellantis), says the agreement puts their companies at a competitive disadvantage since they face a 50 percent tariff on steel and aluminum and a 25 percent tariff on parts and finished vehicles under the agreements with Canada and Mexico.

 

What sold the deal to Donald Trump was the $550 billion the Japanese have supposedly promised to invest in the U.S. Actually, it is not investment per se, but government loan agreements and guarantees to support investments. That is what Japan is offering, but the investment part of this agreement is just a policy goal, and not a legally enforceable commitment. This will also result in a larger trade deficit in the U.S. balance of payments, in case anyone cares.

 

Trump claims that the U.S. will receive 90 percent of the profits. On Friday, the Japanese disputed this, stating that the profit split will be based on contributions made by both parties. I can see where the president gets his numbers, since it will be Americans borrowing the money and making the investments, they deserve the lion's share of any profits.

 

Japan will provide the loans, acting as a banker on these infrastructure projects, and make its money on the interest charged. That is not a bad deal for Japan. It is similar to China's Belt and Road initiatives. For years, China has provided loans to indebted, emerging market economies to build global infrastructure projects. In this case, the U.S. (also a debt-ridden country) acts as the emerging market.

 

When all is said and done, if we assume that this deal will provide a blueprint for global agreements in the future, a tariff rate of 15 percent, worldwide could be the worse America may have to endure. If so, investors may have avoided the worst. They have, but it would still be a heck of an increase from the 2.4 percent rate we had in January. It will be a massive anti-growth tax bite for the economy.

 

U.S. Treasury Secretary Scott Bessent argues that the pro-growth elements of Trump's tax and deregulatory agenda will offset the damage caused by tariffs. Buried in the One Big Beautiful Bill fine print are several tax offsets to help corporations weather the hits to their profit margins. The 100 percent equipment and factory expensing, for example, helps offset some of the tariff expenses.

 

The same can be said for high-tax bracket individuals, who could see substantial extra tax benefits due to the increase in SALT tax deductions. For married joint filers, the deduction soared from $10,00 to $40,000. This allows high-income earners and business owners to deduct a larger portion of their state and local taxes ( another $30,000) from their federal taxable income. As for the rest of us, prepare for a lower standard of living.

 

Two more tariff deals were also announced: one with the Philippines and the other with Indonesia. Both countries will be saddled with 19 percent tariffs on their total exports to the U.S. of $14.5 billion. That is an additional $2.75 billion that Americans will need to absorb.

 

Second-quarter corporate earnings thus far have been good enough to "beat" Wall Street estimates. Overall, of the 164 companies ( 33 percent of the S&P 500) reporting so far, 84 percent are beating estimates. Earnings, combined with reasonable economic data, have supported stocks this week as well.

 

Markets continue to grind higher as we await news on a trade deal with the European Union and the Fed's Open Market Committee meeting at the end of next week. President Trump gives the odds of a trade deal with the EU as 50/50, and markets are betting that there will be no interest rate cuts by the Fed in July.

 

Historically, August marks the beginning of a challenging period for markets that lasts into October. Days of record highs have stretched markets to the breaking point, but most traders believe that any pullback in stocks would be 2-3 percent at most. That would barely be a blip in the scheme of things.

 

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 is 2026. A new Fed chief has been installed after committing to follow the president's demands to cut interest rates and keep them low. The Fed's first act is a one percent cut in interest rates. How will the markets react?

 

If history is any guide, the stock market would roar. Bond yields across the board might plummet. The economy would catch on fire. Home prices in the real estate market could climb as buyers take advantage of falling mortgage rates. 

It would be a time to break out the champagne because good times are here again.

 

However, history may not be an accurate reference point. In the above scenario, we would be living in a macroeconomic environment in which the independence of the Fed will have taken a back seat to our high public debt and deficits. Those twin issues would now be the new Feds' focal point dictating and constraining America's monetary policy.

 

The U.S. would have entered a regime where the central bank's usual objective of controlling inflation and sustaining employment becomes secondary to the U.S. Treasury's budget financing needs. To accommodate the government's borrowing, the Fed would be expected to keep interest rates low, and if necessary, buy government debt (quantitative easing) on an ongoing basis.

 

Welcome to a state of Fiscal Dominance. We have had our first taste of this condition when former U.S. Treasury Secretary Janet Yellen, increased the amount of short versus long dated debt the government issued from 25 percent to 50 percent. While yields on Treasury bills and notes fell, long-dated securities (the 10-, 20- and 30-year bond yields) rose. Why?

 

Holders of longer-term bonds were not so quick to buy more in the face of the government's new tactics. As a result, the Fed reversed their quantitative tightening program and bought back more Treasury bonds and sold less. At the same time, the U.S. economy began to decelerate in both real and nominal terms.

 

The same thing happened in Japan in the first decade of this century. The Japanese central bank began buying Japanese Government Bonds (JGB). The Bank of Japan is now the largest holder of the country's national debt worth $4.3 billion. Under fiscal dominance, it is not hard to imagine a future where the U.S. Federal Reserve Bank becomes a bigger and bigger buyer of our debt.

 

To be sure, keeping interest rates low in an economy as large as ours would put a lot of pressure on the financial system. It would require the central bank to inject massive liquidity (print money) in order to keep buying up T-bills and notes while utilizing quantitative easing to buy Treasuries on the long end. In a situation like that, there would have to be fall out. In past episodes of fiscal dominance (mostly in emerging markets), it was the currency that fell victim to these government policies.

 

Consider that the dollar year to date, is down around 10 percent. The combination of Donald Trump's trade policies, inflation, Americas' increasing deficit and debt, and the administrations' disruption of American foreign policy has created alarm and a building distrust from friend and foe alike. These set of circumstances have conspired to pressure the dollars' downward spiral.  

 

Notice too that neither Trump nor his cabinet have uttered a word about the dollar's decline. That may be because in general, taken alone, currency declines can be good for the value of real assets. However, an imploding currency, especially if we are talking about the worlds' reserve currency, would create an enormous flight of capital by foreigners who hold trillions of dollars in U.S. bonds and stocks. That has not happened yet.

 

If Trump were to manage a fiscal dominant regime in the coming year, I expect the decline in the dollar would continue. That would hurt export-driven economies like Europe, Japan and China. At some point they would be forced to cut their interest rates and drive down the worth of their currency to protect their own exports. Economists would refer to this as a competitive devaluation. In a world where all currencies were declining, investors would be actively looking for somewhere to preserve their assets.

 

We are already witnessing that trend in action. Higher prices for gold, silver, and other precious metals, as well as the recent price gains in crypto currencies are no accident. It appears to me that investors worldwide are already anticipating further declines in the U.S. currency and are hedging their bets and exposure to the U.S. dollar.

 

As for the stock market, there will be winners and losers. Real estate, commodities, precious metals and oil stocks should do well. Anything that tracks the rate of inflation higher would be attractive investments. Exporters could benefit from a lower dollar while those that depend on exports will not.

 

Rate sensitive sectors like technology, consumer discretionary, financial and growth stocks might not do as well. Given the greater role the government would play in the economy, infrastructure, defense, and healthcare could do better. Foreign stocks, especially real asset-rich emerging markets, could also outperform domestic equity as well.

 

The question many readers might ask is will the country go along with this policy change? I suspect they would, given the era of populism we find ourselves in. In my May 2024 column "The Federal Reserve's Role in Today's Populism," I argued that the U.S. central bank's monetary policy is and has been a "top-down approach" where lowering interest rates primarily benefited the wealthiest segment of the population and the largest companies within it.

 

It was they who could borrow the most but needed it the least, who benefited while Americans at the other end of the scale could borrow not at all.  An independent Fed is a Fed that inadvertently fostered and increased income inequality among Americans in my opinion. Given that, I am guessing that a different approach to monetary policy might be greeted with open arms among a large segment of the population.

 

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.

 

Watching paint dry, grass grow, or the markets' action, same, same so far this month. The S&P 500 Index is up about one percent since the beginning of July, not bad, but the big events won't happen until the end of the month.

 

It isn't as if there is no news flow. The president continues to send letters to more than 100 countries. However, few of them have any significant trade with the U.S. Trump continues to boast about tariff revenues, stating, "$113 billion was collected for the first time during the fiscal year."  Given that this money is coming out of  U.S. corporate profits, which they will then pass on to American consumers, this tariff tax is not a good thing.

 

Trump also allowed Nvidia to resume selling semiconductor chips to China (wipe on, wipe off) and, in his spare time, wants to fire (not fire) Fed Chairman Jerome Powell. The controversy over replacing Powell has many market participants worried. Exactly why that may be the case is the subject of my recent column, "What is really behind the move to replace Jerome Powell." I discuss Fiscal Dominance and its ramifications for markets.

 

As the capital swelters, along with the rest of the country, inside Congress, we are finishing up crypto week. Three separate bills—the GENIUS Act, the CLARITY Act. And the Anti-CBDC Act has been passed by the House. The Genesis Act establishing federal regulations for dollar-pegged stablecoins now goes to the Oval Office to be signed into law. The other two bills, if passed by the Senate, establish a market structure for digital assets and prevent the creation of a central bank digital currency. 

 

Passage was supposed to be a lay-up, according to the crypto community, but various Republican factions held it up for a variety of reasons. The president managed to intervene and carried the legislation over the goal line. Crypto is where most of the money was made in a slow market this week.

 

Cryptocurrencies experienced a significant price surge this week, except for Bitcoin, which remained on the sidelines after gaining 12 percent over the last month. Ethereum, on the other hand, gained 20 percent, while lesser-known coin names like Solana (+6.3 percent) and XRP (+23 percent) also participated. These cryptocurrencies, along with various companies that trade or mine digital assets, such as Coinbase (+12 percent) and Robinhood (+13 percent), outperformed most other sectors of the market.

 

Crypto bulls claimed the legislation will forever alter the perception and demand for crypto among institutional investors worldwide. Social media was full of posts predicting Bitcoin prices of $1 million or more. Ignore that. The passage of these last two bills by the Senate will be beneficial for the asset class. It will make it a safer bet for more investors. The question is whether the run-up preceding the passage of these two acts will trigger a typical "sell on the news" reaction in the cryptocurrency markets. If so, I would be a buyer of that pullback, as my Bitcoin target is $145,000.

 

On the macroeconomic front, we have seen some solid data this week. Retail sales were up 0.6 percent last month. Weekly jobless claims were lower at 221,000 applicants, while the ratio of export to import prices remained tame. As for the inflation data, the Consumer Price Index came in higher than the Street estimated, while the Producer Price Index was cooler for June. This month's CPI will show slightly weaker data but then rise again into December.

 

As I mentioned last week, Volatility Control Funds have been supporting the markets, and now attention will switch to second-quarter earnings. As readers are aware, many of these earnings announcements are meaningless. Wall Street analysts deliberately reduce their expectations for the companies they favor so corporate managements can "beat" those estimates. 

 

This system enables trading desks to book extra profits by capitalizing on FOMO chasers. Traders regularly buy company stocks before the expected results and then book their gains by selling to the retail crowd. It is always a wonder to me why investors fail to learn that chasing these so-called earnings surprises is usually a losing game. 

 

In any case, markets are extended but continue to forge ahead. Investors remain convinced that Trump's Aug. 1 tariff deadline is another mirage. If so, markets continue to rally. If not, sayonara to the stock market. The bond market remains neutral on prospects for tariffs.

 

Polymarket, the digital prediction market, places less than a 50 percent chance that any of the largest U.S. trading partners will come to a tariff agreement before Aug. 1. The highest is India (41 percent chance), while Germany has the lowest (3 percent). There may be a handful of tiny countries that could announce deals this coming week, but nothing consequential. As usual, Donald Trump holds the cards on the markets' next direction.

 

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.