It was supposed to be Agamemnon. Sixty percent plus tariffs on all Chinese products imported into the U.S. levied on Day One. What happened? Nothing.

 

Investors are still waiting for the first shoe to drop on the world's second-largest economy and America's No. 1 enemy. China has been the nation's punching bag ever since Donald Trump first acted against that country in his first term.

 

His actions resounded favorably with most Americans. China-bashing took on a life of its own. Decades of losing U.S. jobs and investment to China took its toll on both Democrats and Republicans. President Biden took up the baton and in the name of national security slapped all sorts of restrictions on high-tech exports to China.

 

TikTok is just the most recognized company among hundreds that were restricted, delisted, or blackballed because of ties to the Chinese army, intelligence departments, or just because someone decided to round out a list. Some countries have jumped on the bandwagon at U.S. insistence and the once miracle of export growth became a piranha with ties to our most hated enemies in North Korea, Iran, and Russia.

 

As a result, geopolitics has reduced the allocation of funds to China to almost zero for both U.S. and global financial institutions. The boards and trustees that run these institutions (many with ties to the government) passed down the word that China was off-limits for the foreseeable future. Many of these stocks, former darlings of both the investing public and the media, with names like Alibaba, Baidu, and Pinduduo (owner of Temu), are at valuations that practically give these companies away.

 

At the same time, the Chinese economy never quite recovered from the COVID-19 pandemic. Gross domestic product slowed, inflation rose and the country's main engine of domestic growth, the real estate market, succumbed to years of overbuilding. From a decade ago, annual growth rates of 10-12 percent per year, China's GDP is barely half that rate today.

 

The Chinese government finally began working to turn around their economy last year but rather than provide a bazooka of stimulus, both monetary and fiscal support has been applied at a more moderate but steady pace. After an initial spike in the stock market, when stimulus was first announced, stocks have since declined.

 

Donald Trump's campaign promise to slap 60 percent tariffs across the board on Chinese goods added further pressure to prices as investors prepared for the worst. It remains to be seen, however, if the worst fears of Wall Street will materialize.

 

In a column last year, I floated the possibility that Trump, if elected, might surprise us. Instead of continuing to punish China for wrongs real and imagined, we might work to settle some of our major differences with China. After all, who better to make peace than the man who started the tariff war in the first place?

 

I could be wrong but since his election, it appears that the president has gone out of his way to avoid the China-bashing that colored his first term. He even invited China's leader Xi Jinping to his inauguration. He rescued TikTok from a forced shutdown the day before his inauguration. He then suggested the government, along with another American buyer, could purchase half the company from its Chinese owners. 

 

Trump has said he could put a 10 percent tariff on certain Chinese products in February, such as solar panels and electric vehicles, but that is a far cry from his original intentions to tariff all goods.  I have also noticed that soybean prices have strengthened lately. Chinese authorities have notified Brazil that soybean import contracts may not be renewed this year. China switched its purchases to Brazil from the U.S. in retaliation for some of the tariffs levied on Chinese products in the past years.

 

The Chinese startup DeepSeek recently launched several artificial intelligence products, which experts say are on par or better than industry-leading models in the United States at a fraction of the cost. This could revolutionize the energy-intensive AI industry worldwide and allow the penetration of its usage to explode far faster than anyone imagined. It could also do so with significant savings in energy and investment.

 

DeepSeek could be a possible wild card in U.S./China relations since President Trump announced a $500 billion AI initiative only last week. He would also like to reduce the price of energy and this new addition to the AI world promises to do just that.

 

It would not surprise me to see a deal with China this year on a variety of fronts including their help in ending the war in Ukraine. I may be a cock-eyed optimist, but if so, we could see a thawing of relations on several fronts between the two nations. That could be a major positive for the Chinese stock market.

 

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.

As we step into the new year, stocks have soared in celebration as Donald Trump took the reins of office. This transition of power has brought a wave of optimism, which can continue, although a mild bout of profit-taking in the near term should be expected.

 

A flurry of Day One executive orders kept the markets busy parsing the meaning of this one or that one. However, the enthusiasm had more to do with what President Trump did not do than what he did. The greatest fear of investors was that the president would levy 10 percent tariffs across the board on all nations. Some nations, such as China, Mexico, and Canada, were expected to get hit by even higher duties on Day One. It didn't happen.

 

Most economists are convinced that tariffs would not only hurt economic growth both here and abroad but also fuel further growth of inflation. That does not mean that tariffs are off the board. The president indicated that tariffs on our North American trading partners could be announced by early February. China, however, not so much.

 

The currency markets immediately began to sell the dollar, which has been a winning trade (up 10 percent) over the last several months. Foreign nations have been willing to see (or orchestrate) their currencies decline to reduce the impact of the expected 10 percent tariffs Trump promised during his campaign. See how that works?

 

As a result, the yield on U.S. bonds fell in tandem with the dollar. Those developments partially explain the rally in equities this week. Of course, this trade can reverse in the blink of an eye. The president has not said tariffs are off the table. I believe it is just a question of when some countries will be targeted for tariffs. Trump has made it clear that tariffs are a negotiating tactic. There is no reason to think he would drop this tool in the days and weeks ahead. However, do not tariff trade. That is a losing proposition for those who tried that during Trump's first term.

 

Next week, the Federal Reserve meets on Jan. 29. Expectations are that the FOMC will stand pat, keep interest rates where they are, and take a wait-and-see attitude toward the future. Bond investors are not expecting any more than one or maybe two interest rate cuts (if any) during 2025. Many of the president's policies could boost economic growth and possibly inflation and the Fed will want to see how the government's economic policies unfold. 

 

Investors are focusing almost solely on Donald Trump. In a Davos speech on Thursday, for example, the president said that interest rates around the world should be "dropped immediately" and that the price of oil should also be lowered. Taking those statements as gospel, I think is a mistake.

 

A U.S. president may be able to jawbone an easier interest rate policy from a Fed chairman. It has been done before, for example, under Richard Nixon's administration, but he has zero influence on other central bankers worldwide. As for the oil price, OPEC-plus is not about to reverse policy quickly, nor would Saudi Arabia agree without some kind of multi-billion-dollar trade deal since that nation needs Brent Crude at $90 a barrel or higher to balance its budget.

 

After living and investing through Trump's first term, I learned that much of what the president says should be taken with more than a grain of salt. I consider his many pronouncements as more of a wish list, some outrageous, others as catalysts for change. He announced his new initiative called Stargate this week. It is an artificial intelligence infrastructure project, which is a joint venture formed by OpenAI, Oracle, and SoftBank. It is a great idea that promises big dividends for our country.

 

The three companies, he said, would invest $500 billion in AI infrastructure. Yet Elon Musk, the world's richest man and a close Trump adviser, who was also an early investor in AI, responded to the announcement by expressing some doubt.

 

He posted on his social platform X that these venture partners "…don't actually have the money," to accomplish the president's goal. His critique enraged many of the president’s yes-men, but the beauty of Musk is that he can speak his mind with impunity. That may get him in trouble down the road with his new-found, best bud but not right now.

 

The point is that investors should not take everything the president says as gospel. Instead, consider his statements more of a directional outline of where he wants the nation and the world to go. It doesn't mean that what he wants he gets, as his first term demonstrated.

 

As for the markets, I am looking for a small pullback in the markets over the next few days leading up to the FOMC on Wednesday. I would consider that a gift. It would be a dip worth buying before the market resumes its climb to new highs.

 

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.

Eggs, fruit, vegetables, chocolate, cereal, and all kinds of protein — wherever you look — prices are rising faster at grocery stores than anyone may have imagined. The bad news is that consumers can expect this trend to continue.

 

Food prices jumped by 1.8 percent year-over-year at the close of 2024. That was the fastest increase in over a year, according to the Labor Department. In the last two months of the year, grocery prices climbed by 0.4 percent in November and 0.3 percent in December. Expectations are that January will see another rise.

 

Most voters will immediately point to corporate greed, grocery gauging, or as a last resort, the outgoing Biden administration as reasons for accelerating food prices. But before you join the blame game consider that there is a far more insidious and dangerous trend that some of us are denying, while others are simply ignoring. Climate change is the main engine behind these price increases, and it is only going to get worse.

 

The weather changes are hitting the production of food from all sides. Bird flu was practically non-existent two decades ago. Today, waves of the disease are becoming a yearly occurrence. Avian flu is decimating egg supplies and forcing wholesale prices to go higher and higher. Prices are up 37 percent from last year with as much as a 14 percent increase in December alone.

 

Historic droughts, floods, and disease have already caused a major decline in the world's supply of meat, pork, and chicken. The Agriculture Department expects even higher prices for these areas in 2025.

 

Soft commodities have also been subject to massive carnage because of climate change. In this area, we can also throw in insect damage along with floods, frost, fire, and dry weather. Everything from grains, cocoa, sugar, coffee, and more has seen prices double rather than quadruple as supplies have plummeted. This translates into climbing prices for cereal, candy, ice cream, milk, and hundreds of other products.

 

The World Economic Forum recently polled over 900 experts across academia, business, government, international organizations, and civil society to determine what experts viewed as the most severe global risks over the next two and 10 years. Extreme weather ranked No. 2 over the next two years right behind misinformation and disinformation. Over the next decade, climate change ranked No. 1.

 

"It's climate change, what can you do," said an increasing number of my acquaintances with a shrug of their shoulders and a shake of their head. Gone are the days when people were actively concerned unless, of course, they became victims of a weather event. It is no longer even a voting issue as it was back in 2020. Despite increased and recent natural disasters, climate initiatives ranked lower than other major ballot issues, according to Pew Research Center data. 

 

One would think the growing cost alone of weather damage would sway American attitudes. Just two recent disasters, for example, Hurricane Helene and the Los Angeles fires will cost the country upwards of $500 billion. That is more than four times the outlay for Social Security last year, 60 percent of the Department of Defense budget and 32 percent of all the Medicare/Medicaid outlays for 2024.

 

During the presidential election, Kamala Harris proposed price controls on groceries, while Donald Trump promised to provide relief on the inflation front. He specifically singled out reducing grocery prices but never offered a strategy for pulling that off. He has recently backpedaled on that promise acknowledging that it will be difficult to stem rising grocery prices but has not explained why.

 

The answer is simple. In today's Populist America, there is little room for more sacrifice from a generation that has been left out. Answering the growing threat of climate change would require an enormous redirection of resources. That time has not yet arrived, but it will.

 

I believe that over the next five years, weather disasters will accelerate at an increasing rate and food production will continue to decline. The result will be higher and higher prices and fewer and fewer choices at the grocery store. At some point, the costs of doing nothing will become so great that we will be forced to act. One thing is clear. Making America great again will become more and more difficult in the face of a Mother Nature which has run increasingly amuck.

 

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.

"Day One" arrives on Monday and investors are waiting with bated breath to hear what and how the new administration will handle the myriad problems that beset the nation. No one knows how that day will go, and the stock market reflects that.

 

Stocks are up since the beginning of the year but not by much. Granted the total gains for the first five days of January were positive and that is a good sign for those who take stock in those kinds of portents. Normally if the S&P 500 Index finishes with gains by the close of the fifth day of the year (and it did), the "rule of the first five days" says a gain for the entire year is likely.

 

Over the last decade, this rule worked in five cases where stocks gained in the first five days. Since 1950, the market has been up 13 percent on average in those years when the 5-day rule was in force. For me, I would rather see positive developments in inflation, bond yields, and the dollar before declaring the year a win or loss for investors.

 

This week, we did have some "good news" on the inflation front. The Consumer Price Index and the Producer Price Index for December were better than analysts feared. Make no mistake, the inflation rate is still climbing just not as fast as some may have expected.

 

Inflation has been moving in the wrong for the last three months and I see it climbing again in January.  However, the data was enough to halt the steady climb higher in the U.S. Treasury, 10-year bond, at least for a day or two.  Yields have been climbing, and stocks have been declining since the beginning of December. Prior to that, stocks and bond yields were going up at the same time. What changed?

 

Expectations that the Trump Administration's tariff policies, tax cuts, and increased government spending in areas such as defense would contribute to rising inflation, rising deficits, and more debt. The argument that all these policies would allow the economy to grow its way out of the present debt and deficit crisis has left the bond market saying, "Show me."

 

It is why the financial markets are marking time, trading in a range until more information is forthcoming. Traders want to see the new regime put some flesh on the bones of Trump 2.0. The good news is that this time around, the new administration appears far better prepared to take the helm, with a better organization and hopefully a group of well-thought-out initiatives.

 

Expectations are elevated by at least half the voting population and the business community. Both small business and corporate surveys indicate a rising tide of support for the future direction of the country under Donald Trump. However, there are just as many Americans who fear this is the end of the world as they know it.

 

It appears that partisanship is alive and well and beginning to muddy what has historically been areas of reliable economic data. In the most recent University of Michigan Consumer Survey, for example, Republicans have become more optimistic about the economy and inflation, while Democrats have become more pessimistic.

 

The American Association for Individual Investors survey this week showed the highest percentage of bears in a long time while bullish sentiment hit the lowest level since 2023. Normally, I would see this as a bullish contrarian indicator but without knowing the partisan divide among participants, the data could be skewed meaningfully.

 

In any case, next week should determine the market's direction at least in the short term. The market's risk gauge, the volatility Index (VIX), does not show any increase in buying into the event which means that any volatility coming into Monday will be from the market reacting to what is said or not said about programs and policies during the day.

 

We are stuck between levels that indicate that the S&P 500 Index could regain the old highs or fall back below 5,800 based on the events around the inauguration and its aftermath. We do know that Donald Trump is quite adept at pumping up his audience. If the S&P remains above 5,848,  we should be okay.

 

I apologize for missing last week's column. In this difficult time, I wanted to be there for readers but another bout of COVID kept me in bed most of last week and this week. A special shout out to my loving wife Barbara for taking such good care of me.

 

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 grew up with tales of $500 toilet seats and bridges to nowhere when describing the abuses of government spending. In a few days, Americans will get our first taste of what it will mean to make our government efficient once again.

 

The Department of Government Efficiency (DOGE) is not an official government department. That would require an act of Congress. Since members of that august body have been the major contributors to decades of inefficient use of government funds, it probably was a good idea to bypass a vote on making DOGE "official."

 

Instead, it will operate as an advisory body, run by two of President-elect Trump's closest allies with a direct line to the Oval Office. Billionaires Elon Musk and Vivek Ramaswamy will serve as volunteers and not federal employees or officials. They will assist the president in recruiting a team of professionals who will provide guidance to the White House on spending cuts and compile a list of regulations they believe are outside of various agencies' legal authority.

 

Both men floated the idea of saving the country $2 trillion in savings or around a third of annual federal government spending by slashing federal regulations, overseeing mass layoffs, and shutting down some agencies entirely. That played well to the populist wave of voter sentiment but has since been paired back by half after winning the election. Their job, even with the newly reduced target of $ 1 trillion in savings is still formidable.

 

Just about everyone is for more government efficiency, if it does not come out of their backyard. Reduce defense but don't touch Social Security. Get rid of the education department but keep consumer protection. Everyone's interests are supposedly represented by lawmakers in Congress. Given that the House is almost evenly split and rife with factions in both parties, consensus on the passage of spending cuts will surely test both the persuasive abilities of Trump and his unofficial volunteers.

 

Their success or failure will have far-reaching effects on the stock market and the economy. Over the last decade, government spending has gone through the roof. The U.S. spent $6.75 trillion, an increase of $617 billion over 2023. That spending was 23.4 percent of Gross Domestic Product. Some argue that if you include the 13 percent spent by states and local governments, plus annual compliance costs to comply with federal regulations, the total is far higher.

 

As a result, the country's deficit is expected to grow to $1.8 trillion last year and to total $2 trillion in 2025 unless something changes, according to the Congressional Budget Office. Total debt is now running at $6 trillion, or more than 125 percent debt to GDP ratio which means that the U.S. government has more debt than the size of the entire economy. We are fast becoming what is called a "banana republic country." It is one of the main reasons why the benchmark 10-year U.S. Treasury bond’s yield has exploded in the last few weeks.

 

Given this backdrop, reducing the size of government while increasing its efficiency generally leads to positive effects on economic growth, which is extremely important for reducing the deficit and debt. According to most economic theories, a smaller government with effective operations can often stimulate private investment and innovation. That should lead to faster economic expansion over time, more tax revenues, and less need to borrow. How that all plays out depends on how the government is scaled down and which programs are affected.

 

Few in the media are talking about what will happen to the economy in the event DOGE is successful in reducing spending. Sure, according to economic theory, a more efficient government will lead to higher growth but over what time frame? My own opinion is that in the short run (the next year or two) slashing government employment, programs, and agencies will hurt the economy more than it helps it.

 

Let's be conservative and guess that all-in, Musk and his men, succeed in pairing $800 billion from the government's 23.5 percent share of the economy. What happens to GDP? It doesn't take a rocket scientist to figure out that we could see a substantial decline in economic growth. It would probably mean higher unemployment too since the federal government employs more than 3 million people or 1.87 percent of the civilian workforce.

 

This slower growth would hurt corporate revenues and profits and possibly translate into a lower stock market, all else being equal.

 

The upside would be a leveling off in interest rates, some relief on our mounting debt burden and deficit, and maybe less inflation. At the same time, other policy initiatives from the new administration such as tax cuts, tariffs, and immigrant efforts could contribute to even slower growth or achieve the opposite.

 

In any case, over the next two to three weeks, I would pay close attention to the balloons floated by the DOGE boys. See what initiatives create the most blowback and what ideas may stick. Deep cuts in Medicaid, for example, which represent 10 percent of the federal budget, would hurt blue states the most, as well as hospitals in general. That suggestion and many others would cause a great deal of outrage. It is a question of whether the country is willing to accept short-term pain in exchange for long-term gain. 

 

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.