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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

Like birds on a wire, stocks wobbled early this week neither moving higher nor lower. Higher jobless claims and an okay Treasury auction nudged the indexes towards the goal line with the S&P 500 Index above the 5,200 level for the first time in a month.

 

However, there is still a lot of indecision out there. Growth seems to be slowing. Inflation remains sticky. Consumer confidence is falling, and the Fed is on hold. Countering those negatives, there are some positives. Corporate earnings have been good. Yields remain in a range and the dollar has pulled back from highs. Neither the bulls nor the bears have enough data to end this stalemate. This week should resolve the matter.

 

The Producer Price Index will be announced on May 14 (estimate plus-0.22 percent), followed by the Consumer Price Index (estimated core CPI plus-0.31 percent) a day later. All eyes will be on those data points. Given that the last three months of inflation readings have shown an increase, investors are holding their breath to see if month four will reinforce the present trend of higher inflation. We will also hear from Jerome Powell, the Federal Reserve Chairman on Tuesday as well.

 

The implications for another hot result would put the lid on the coffin of any expected rate cuts this year by the Fed. The betting has already dropped to maybe one cut this year. That is largely due to the last GDP print (1.6 percent growth for the first quarter of 2024) which showed a weakening economy compared to the final quarter of 2023 (plus-3.4 percent).

 

The ramifications for the equity and bond markets could be serious. A weak inflation number in one or both indexes would be taken positively I imagine with stocks climbing, possibly to new highs, and bond yields falling. It would also be beneficial for the commodity space and could push precious metals and copper higher. On the other hand, hotter numbers would have the opposite effect.

 

No one knows for sure, but readers aren't paying me for "on the other hand" opinions. So, I will come down on the side of cooler numbers next week. I base my guess on things like used car prices that have come down by about 30 percent thus far in 2024 and are accelerating to the downside. Insurance premium increases have been the major culprit in the hotter CPI data thus far and I am expecting at least a leveling out of price increases in car insurance this month.

 

Corporate earnings this quarter have provided support for the markets thus far. Although most companies did beat analysts' earnings and sale estimates (81 percent) the reaction to these positive surprises has been less than stellar compared to prior quarters. Some believe that these results have already been discounted by investors. However, analysts are already increasing their estimates for the next quarter and the year overall. Three sectors, (energy, healthcare, and materials) have seen a reversal from negative to positive growth in their earnings per share momentum for the year.

 

The U.S. Treasury held two bond auctions this week. The $42 billion Ten-year Treasury auction met with tepid demand, while the government's $25 billion Thirty-year bond auction had enough bought demand to keep bond yields lower and the stock market supported.

 

The usual 'sell in May and go away' argument may not hold much water this year. April was a down month, and since 1928 when April is negative, May is up 74 percent of the time. It is a tricky time for the markets. Betting on which direction we head in the short term is tough and dependent on the inflation data. Longer-term, I am still quite positive about equities both here and abroad.

 

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

It was a week where macroeconomic data, corporate earnings, and the Federal Reserve dictated the direction of the markets on almost a daily basis. By the end of the week, the verdict was a plus for the bulls.

 

On Friday, the non-farm payrolls indicated that the labor market cooled notably in April. The U.S. economy added 175,000 new jobs which was a lot lower than the expected job gains of 240,000. The unemployment rate rose to 3.9 percent. What is bad news for the economy is good news for the stock market since weaker macroeconomic data means the Fed may cut interest rates sooner rather than later.

 

At the Federal Open Market Committee meeting on Wednesday, the central bank, as expected, maintained their higher for longer stance on interest rates as they await further data on the direction of inflation. He also laughed at the notion of stagflation seeing neither the "stag" nor the "inflation" required to indicate this economic condition.

 

The good news was that the central bank reduced the number of bonds they planned to sell into the debt markets. For months the Fed has been reducing the size of their balance sheet by selling government bonds. That has put pressure on bond prices. This quantitative tightening or QT has been part of the Fed's efforts to tame inflation.

 

Slowing down the rate of selling is good news but has much less impact than cutting interest rates. That, says the Fed's Chairman Jerome Powell, will have to wait until he sees more progress in bringing inflation back to its 2 percent target.

 

What has most concerned many investors is the possibility that if inflation remains sticky, the Fed will be forced to hike interest rates once again. Powell eased investors' concerns on that subject during the Q&A session after the meeting when he said, "It is unlikely the next policy move will be a hike."

 

On a positive note, first-quarter corporate earnings for the S&P 500 Index have been positive so far. More than 340 companies or 68 percent of the S&P 500, have reported. Overall, 80 percent are beating estimates and those that beat have done so by an average of 7 percent. Magnificent Seven stocks still have the power to move markets. The earnings disappoint of Meta on one day and the surprise beats by Amazon, Microsoft, and Apple sent markets up and down whip sawing traders in the process.

 

Most American investors are so hyper-focused on U.S. equities that what happens overseas is sometimes ignored. It seems to me, for example, that investors, as well as the financial media, have written off China as a basket case. I am not so sure that is the case. FXI, the largest China exchange-traded fund (ETF), is up 20 percent since the Chinese New Year.

 

There is also a stealth rally going on behind the scenes in Chinese large-cap technology, as represented by the KWEB ETF, which holds companies like Alibaba, Baidu, and JD.com, among others.

 

The tech sector (up 30 percent year-to-date) has outperformed its counterparts in the U.S. market. Bank of America's manager survey recently noted that the most crowded trades were long U.S. technology, followed by short China technology. It could be that some global investors are selling high-priced tech stocks in the U.S., India, and Japan and using the proceeds to buy these cheap tech stocks in China.

 

As for the overall market, the index averages have been a chop fest this week. As I expected, earlier in the week we did sell-off, dropping almost 100 points on the S&P 500 Index before recovering. As a result, we have made little headway for the week, tacking on at most 32 points on the S&P 500. I expect we need to climb a little higher (5,181) before I can sound the all-clear for the rest of the month.

 

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 number of U.S. workers who claimed union membership increased ever so slightly last year from 14.3 million in 2022 to 14.4 million. However, as a share of the American workforce, union membership hit a new low. Today only one in 10 workers in America wear the union badge.

 

Back in 1983, union membership was as high as 20.1 percent, according to the Bureau of Labor Statistics. Yet, every day we hear of some effort to unionize workers across a wide spectrum of companies and industries. Starbucks, CVS, and Amazon come to mind. In 2023, the United Auto Workers (UAW) occupied headlines for months as they negotiated new contracts with General Motors, Ford, and Stellantis — and won.

 

It turned out that these hard-fought labor agreements marked the biggest win for the auto unions in 40 years. This was followed by wins by UPS workers and Hollywood writers in their labor contracts. These victories on the labor front have inspired and galvanized efforts to organize across the nation. Even the live performers at Disneyland are organizing a vote to join the Actor's Equity Association.

 

The UAW, emboldened by their victories last year, has set its sights on the South where unions have been a non-starter historically. This region of the country has opposed unions from legal, business, political, and cultural standpoints. But that has not deterred the UAW.

 

Last month the first crack in that southern wall of opposition appeared when Volkswagen workers in Chattanooga, Tenn., voted to become the only non-Detroit automotive assembly plant to be unionized. This was the third time since 2014 that unions fought for the right to organize at that plant.

 

Also in April, the UAW reached a deal with Daimler Truck in North Carolina that averted a strike and gave workers a 25 percent increase in wages over the next four years. The agreement also included profit sharing, automatic cost-of-living increases, and equalized pay among workers at all of Daimler's North Carolina factories. Next month, the Mercedes-Benz plant in Tuscaloosa, Ala., will be voting to unionize as well.

 

Governors in Alabama, Georgia, Mississippi, South Carolina, Tennessee and Texas are fighting back. They have been denouncing the UAW and its efforts. In most of these states, "right to work" laws do make it more difficult for unions to collect dues, but not impossible.

 

However, countering that pressure are the results of a Gallup Poll that indicates an overwhelming majority of Americans (7 out of 10) approve of labor unions. Another poll by the UAW last year indicated that 91 percent of Democrats, 69 percent of independents, and 52 percent of Republicans supported unions and their goals. And well they should, given that a study by the Center for American Progress indicated that there is a large wealth gap between workers in unions and those non-union workers across all education levels.

 

They found union workers make 10-15 percent more than their non-organized brethren. The median wealth of those in unions was $338,482 compared to $199,948 for nonunion workers. However, many other benefits accrue to union workers over time. Job security, defined benefit retirement plans, better health care, and even higher homeownership rates.

 

Unionized workers lacking a high school degree make more than three times the wealth of their nonunion peers. Those with some college education, like nurses or dental hygienists, earn 2.5 times more. Unionized teachers, college professors, journalists, and government employees also do better than their nonunionized peers.

 

While the overall number of union members is still tiny compared to the overall workforce, unions do tend to have an outsized influence on the fortunes of the workforce. Their battle for better pay and benefits has had a trickle-down effect. Their gains have been known to impact and influence the economic well-being of most U.S. workers over time.

 

Some point out that the union's success of late may have more to do with the tightness of the labor market than the prowess of unions. Companies, worried about attrition, may be more willing to negotiate rather than suffer employee departures or suffer strikes. Whatever the case, I will always be on the side of the worker and as such applaud the recent trend and hope it continues.

 

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.