For more than a year, consumers have been contending with higher food prices. The latest read of April's Consumer Price Index, however, gave some hope that relief may be around the corner.

 

Headline inflation rose 0.4 percent last month but a look under the hood revealed that the "food at home index" declined. This was the second month in a row that prices for fruit, vegetables, meat, and eggs among other items, fell.

 

That may be so, but I certainly am not seeing those price declines in my shopping bill. Let's take eggs for example. You may remember that in December 2022, we were paying as much as $5.46 on average for a dozen eggs. The culprit behind those soaring prices was a historic outbreak of avian influenza or bird flu that coincided with the winter holidays. The epidemic killed millions of egg-laying hens. Since then, influenza has subsided and there have been no new cases detected at commercial farms since December 2022.

 

The industry has bounced back since then and as it has the price of wholesale eggs has fallen. At the end of April, the benchmark Midwest Large White Egg price has fallen to $1.22 per dozen. That is a 78 percent decrease in five months. Some produce analysts expect we could soon see egg prices dip further to below $1 a dozen.

 

The average consumer paid $3.45 for a dozen large Grade A eggs last quarter, according to government data. That is down from January's $4.82, but still more than double the $2.05 the prior year.

 

While this may be good news for some consumers, a trip to my local supermarket tells me retailers have certainly not passed on those price savings to customers. Retailers can sell their eggs at whatever the market will bear. Here in the Berkshires, we are way above the so-called "average" egg prices. At Price Chopper, for example, a dozen cage-free Grade A large eggs are going for $5.39 a dozen, while organic eggs are $8.99. That is a markup of 441 percent and 736 percent.

 

I know there are other costs that retailers need to cover — transportation, labor, etc. — and there is always a lag effect between a decline in wholesale prices and the price we pay at the check-out counter. We could see price cuts in the months ahead for eggs and other products but the jury is still out when it comes to beef.

 

 Beef prices remain in the stratosphere. There are reasons for this situation. A continuous and extreme series of droughts in the U.S. in recent years has made maintaining cattle herds expensive or, in many cases, impossible to maintain. Herds (including breeding cows) were slaughtered, which has resulted in a growing scarcity of beef products. This year will be the first significant drop in beef production since 2015. Less beef supply usually means higher prices if demand remains the same.

 

There is some evidence, however, that beef prices may have reached a level where consumers are beginning to cut back on their beef purchases. Tyson Foods, which processes 20 percent of the nation's beef, poultry, and pork, saw its first fiscal quarter net income drop more than 70 percent based on weaker results in all three of those product areas. Analysts believe some consumers are substituting more chicken and pork for beef in their diets. Tyson was caught between higher live cattle prices and less consumer demand and was forced to reduce prices somewhat. Will this trend continue?

 

That remains to be seen. Demand for beef usually picks up about now (during the grilling season), so this summer will be key to determining the consumers' appetite for continued purchases of high-priced hamburgers and steak. If so, we can expect meat processors and retailers to charge even higher prices in the fall and winter for meat. However, if the economy begins to slow, consumers might cut back even more on their spending across the board and that could keep beef prices flat or even slightly lower.

 

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.

Bears and bulls are battling for supremacy, which is keeping stocks moving in a tight range. The question is which way will the markets break?

 

On the plus side, inflation does appear to be falling, or at least not going higher. Both the Consumer Price Index and the Producer Price Index came in as expected for April. Investors interpreted the data as a bit of a positive in the fight to control inflation. The trend is definitely down compared to last year's numbers.

 

Bears, on the other hand, were encouraged by the rising fears of a default on the nation's debt in less than three weeks. In addition, the ongoing regional bank contagion is alive and well. Pacific West Bank, a regional bank, reported that almost 10 percent of deposits flowed out of the bank's doors last week.

 

The focus on corporate earnings has taken a step back now that the mega stocks have been reported. Results are still coming in better than expected overall, but guidance is checkered. Companies in some sectors are seeing a troubled future, while others claim it is business as usual.

 

Just a handful of stocks (FANG+) have been supporting the equity market for months and that still seems to be the trend. For the markets to move higher, we would need to see both an expansion of the number of stocks that are participating in an up move (breath) and overall market volume must increase as well.

 

Early last month, in a separate column on the debt ceiling, I warned that readers could expect the debt ceiling would begin to concern Washington, the media, and the financial markets. This week was the first meeting of the key players: the president, and leaders of both parties in Congress. I expect the rhetoric to escalate, and fear-mongering will move to center stage. The beginning of the horse-trading process is expected to occur early next week when both sides meet again.

 

For the politicians, it is a huge opportunity to shine among their partisan voters, to appear strong, dedicated to principles, and concerned about the country's future. They won't give up that chance until they absolutely must. That's why this bickering will drag on up to the eleventh hour or even beyond. 

 

Underneath this farce is a simple truth. Imagine a credit card bill, or mortgage payment that is due on June 1. Most people would not even blink in considering whether to pay at least the minimum amount due. Sure, you may have a discussion afterward on how to reduce your spending or refinance a mortgage, but you won't skip a payment. But in Washington politics, that argument is beside the point because it is not about the debt, it is about them and their political future.

 

The sad, sad truth is that without turmoil in financial markets, the politicians on both sides have no incentive to agree. That could mean by next week, or the week after, we can expect to see a period of downside in the markets, punctuated by spikes higher as market participants hang on every word uttered in this increasingly acrimonious debate. That could mean a 10-15 percent decline in the markets between the last weeks of May into June. 

 

I am already getting calls from concerned investors on how to manage through this volatile couple of weeks. For long-term investors, my advice is to do nothing. In the end, the debt ceiling will be passed. Those most against it now will vote for it in the end and then try and hide their vote from their constituents.

 

If you feel you will need some cash in the short term, a three-month CD could be a safe bet. The yield on those instruments is almost 5.25 percent, the last I looked, which is a great rate.  U.S. Treasury bills, notes, and bonds are also an alternative, although, with the risk of government default, some investors are shunning these instruments despite yields on the short end that are 5 percent or more.  In any case, prepare for an uncomfortable few weeks, but we will come out the other side just fine.

 

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 U.S. Federal Reserve Bank has been battling inflation for well over a year. A key variable in their efforts has been to slow the economy enough to reduce employment. The opposite is happening, thanks to the Baby Boomers.

 

Historically, the Fed has used interest rates successfully to manipulate employment. Their use harkens back to a theory John Maynard Keynes espoused in his 1936 treatise, "The General Theory of Employment, Interest, and Money." Keynes argued that there exists an inverse relationship between unemployment and inflation and that governments should manipulate fiscal and economic policy to ensure a balance between the two. So far, it is not working too well in 2023.

 

The April 2023 payroll report was only the latest in a series of strong employment gains that flies in the face of the Fed's efforts. The U.S. is experiencing one of the strongest labor markets in decades, if not ever. The economy has added 666,000 jobs over the last three months, while the Fed continues to raise interest rates. The headline unemployment rate fell to 3.4 percent, its lowest level in 50 years. Wages are also growing again, up 0.5 percent, after declining steadily since November 2022. What is going on?

 

The short answer is that there are simply not enough workers to go around. The labor force participation rate among prime-age workers, those aged 25-53, is at 83.3 percent. That is higher than it was pre-COVID. The prime-age women's labor force participation rate hit 77 percent as well. I believe that demographics has thrown a monkey wrench into Keynes' theory.

 

Baby Boomers have always been a force to reckon with for both good and bad. The percentage of Americans aged 55 and over has doubled over the last twenty years and continues to grow. The fact is that more and more Americans are getting too old to work.

 

This trend is nothing new and has been in place for several years. COVID-19 and the subsequent Pandemic simply accelerated the pace of retirements. Moody's Investment Services estimates that 70 percent of the decline in the labor force since the end of 2019 was due to aging workers, like me. That comes to about 1.4 million Americans who have retired. In addition, declining fertility rates and increasing life expectancy are also contributing to this labor shortfall and we are not alone. G20 countries are all experiencing a decline in working-age populations. Korea, Germany, and the U.S. are expected to see the sharpest declines over the next 10 years.

 

How this will impact individual sectors of the economy varies. Industries that depend on knowledge and experience (human capital) will be hit hard. This brain drain will impact productivity for years as it did when boomers first entered the workforce in the 1970s and 1980s.

 

In industries where demographics create demand, such as an aging population for health care services, labor shortages could continue for many years. On the lower end of the pay scale, the scarcity of workers should accelerate the adoption of automation. That is already beginning to occur in the fast food and banking services areas. Finally, Artificial Intelligence (AI) over the next five years, is predicted to reduce the need for labor in some job areas.

 

However, not all is gloom and doom. Black Americans are benefiting from the imbalance in labor as their unemployment rate has fallen below 5 percent for the first time in history. The pre-pandemic all-time low was 5.3 percent in August 2019. Women have also benefited, although long-standing pay gaps and occupational segregation remain.

 

All-in-all, we Baby Boomers are still causing havoc--even in retirement. However, a simple solution to this labor shortage (and inflation) can be solved with a stroke of the pen. If we need more field workers, waiters, waitresses, babysitters, nurses, doctors, internet technicians, plumbers, electricians, technicians, bricklayers, etc., they are available and dying to enter this country. All Washington needs to do is jettison their immigration policies, but I wouldn't hold my breath. 

 

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 Federal Reserve Bank raised interest again, even as another regional bank saw its stock price collapse. Investors are asking when enough tightening is enough.

 

The key Fed funds interest rate was hiked by another 0.25  percent, which increased its benchmark rate to between 5 percent and 5.25 percent. That was the 10th hike in 14 months and has pushed interest rates to a 16-year high.

 

The stock market sold down after Chairman Jerome Powell made it clear (again) that fighting inflation is the Fed's number one objective. Powell did hold out some hope that this hike could be the last, although that decision, he said, would be data-dependent and be decided from meeting to meeting. Nothing he said was concrete enough for investors to truly believe that a pause in rate hikes is in the offing.

 

The bulls were hoping that the meeting would either result in no interest hike or be a one-and-done event. Neither occurred, which has ramifications for the economy, employment, and the ongoing regional banking crisis. The banks lead the market declines and well they should.

 

Beginning in March, with the collapse of Silicon Valley Bank, the markets realized that the rapid rise in interest rates had created both a danger for many banks and an investment opportunity for the public. Main Street could now buy high-yielding U.S. Treasury bills and CDs instead of keeping their money in checking and saving accounts with little to no returns. I have written extensively on the subject in my columns over the last several weeks.

 

As the Fed continues to raise interest rates, the yield on these alternative investments also rises. The yield on a three-month U.S. Treasury bill, for example, rose from 5.10 percent to 5.25 percent the day after the Fed's interest rate hike. This has had a serious detrimental impact on banks overall and regional banks as more and more investors pull their deposits.

 

But that is not all. The $5.7 trillion commercial real estate sector (CRE) is also in trouble. Thanks to high-interest rates, the Pandemic, and the subsequent trend toward working from home, many urban centers are facing a historically high vacancy rate. It is so bad that many cities are considering converting empty office buildings into living spaces.  This trend is spreading across the nation.

 

Smaller regional banks hold 4.4 times more exposure to the U.S. CRE than larger banks, according to a recent report from JPMorgan Private Bank. Citigroup also found that banks represent 54 percent of the overall CRE market, with small lenders holding 70 percent of CRE loans. Between the drain on deposits, and now the risks in real estate, is it any wonder that the regional bank index has lost 34 percent of its value over the last month?

 

Within hours after the Fed hiked rates on Wednesday afternoon, the regional bank, PacWest, reported that it was considering strategic options including a sale. The bank's stock tumbled 60 percent on Thursday and took the regional bank index and the stock market down with it. Gold, silver, and Bitcoin (all areas I have featured in the last few months) spiked higher in a rush for safety with spot gold hitting a high of $2,085.

 

As I said last week, where the market would finish the week would depend on the Fed's decision on interest rates. In hindsight, Chairman Powell had it right. The non-farm payroll data released on Friday showed that 253,000 jobs were added in April. The unemployment rate dropped to 3.4 percent, while the expectation was that the rate would rise to 3.6 percent.  The Fed wants to see job gains fall, but they are going the other way.

 

The Fed needs to see the unemployment rate closer to 4-4.5  percent percent to reach its inflation target of 2 percent. We are nowhere near that level, so to me, the Fed's stance on monetary policy seems vindicated.

 

So where does all this bearishness indicate to me? For me, I think the markets will bounce back next week. We may even break the range we have been in for almost a month. That is a contrarian call, since most traders are what I called "beared up."

 

I believe we can still see my target on the S&P 500 Index of 4,325 give or take a few points. After that, likely in the second half of the month, I believe we will see a substantial pullback. Precious metals, on the other hand, are likely to now see a bout of profit-taking after a spectacular run.

 

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.

 

American capitalism has long applauded and rewarded economic efficiency. Faster turnaround times, producing the same results with fewer workers, and doing more with less are the name of the game. Most times it works but sometimes it doesn't.

 

Over the past few years, that mantra of efficiency and profit growth has worked well for big freight operators in the railroad business. Wall Street has rewarded their efforts with higher stock prices and rail companies have returned the favor with generous dividends and stock buybacks.

 

Truth be told, America has had a long-lasting love affair with railroads that dates back almost 200 years. For most of that time, railroads and those that owned them were a symbol of the "can do" spirit of the nation. For decades, railroads flourished as their steel highways penetrated more and more of the nation carrying passengers and freight throughout the land.

 

In the 1950s, that began to change. The expansion of the U.S. highway system triggered a resurgence in the trucking industry. Inroads by long-haul truckers posed a threat to an industry that had grown fat and happy for way too long. That ushered in a long period of consolidation with fewer and fewer competitors.

 

As rail operators entered the 21st century, company management began to pay much more attention to productivity and efficiency. The number of employees was reduced, costs came down and profits began to rise and so did their stock prices. Over the last six years, railroads outdid themselves vying to become the most efficient, lowest-cost operator in the business. Today, only a handful of major companies remain and most of them are publicly traded companies in North America. They remain darlings of Wall Street for the most part and have spent as much in stock buybacks and dividends as they have invested in their businesses.

 

One obvious way to improve efficiency was simply to make freight trains longer since the railroad industry makes its money by the weight and distance of the cargo it hauls. You would think that workers could just string together a couple miles of cars together and off we go from point A to point B. After all, a long train makes in one trip what a short train would make in several, but it is not as easy as that. Trains must be assembled to distribute weight and cargo risk. Another issue is the length of railroad sidings. Many were never built to accommodate longer trains.

 

In any case, none of this was an issue for me until Feb. 3. It was on that date that 38 cars of a Norfolk Southern freight train carrying hazardous materials derailed in East Palestine, Ohio. It is now three months later, since the fiery derailment, which caused about half the 5,000 residents of the town to be evacuated. At the time, officials decided to burn vinyl chloride from five tanker cars in the accident to prevent a catastrophic explosion.

 

Tens of thousands of tons of contaminated soil must now be excavated as well as the removal of toxic chemicals from two creeks. This will take months, leaving the inhabitants in limbo. The only thing positive that can be said about the disaster is that it has kicked off a national debate on rail safety.

 

In 2022, there were more than 1,164 train derailments in the U.S., according to the Federal Railroad Administration. That equates to roughly three derailments per day. That may sound like a lot, but most of these derailments occur within the confines of rail yards.

 

 If you listen to the railroad industry, it is the safest period in the history of train transportation. The numbers appear to be on their side. Only 16 people, for example, were injured by derailments last year. Compare that to how many people are injured in car accidents each year. Since the late 1970s, derailments have dropped by 75 percent. Consider that in 1978 alone, there were 8,763 derailments, which killed 41 people.

 

Where do long trains fit into this equation? To be sure, there have been plenty of long train derailments, some serious. Are long trains riskier than short ones? The industry claims that long trains have improved rail safety. The Association of American Railroads, the industry lobby, also notes that regulators have never cited length as the direct cause of an accident.

 

The Federal Railroad Administration (FRA) does say it lacks evidence that long trains pose a particular risk. They do fail to mention that the FRA does not require companies to provide certain information after accidents and derailments such as the length of the train. I would guess that does make it difficult to assess the extent of the danger.

 

As for me, I walk our dog every night along a major railroad track. It is close enough to our condo that the trials and tribulations of the people of East Palestine are with me every night. It devils my footsteps as I witness the long procession of car after car groaning and squealing its way into the city. The line of faint lights floating by sometimes requires half an hour or more to pass by in the night.

 

I confess that I worry that a derailment could spew toxic gas or chemicals throughout my neighborhood with no warning. I am sure I am not alone. Long freight trains traverse the nation. They are bearing God knows what through our communities. Long trains block traffic crossings for long periods. They are delaying everything from fire trucks to first responders, school buses, foot traffic, and daily commutes.

 

It is bad enough when the train is moving, but a resting line of cars can be an enormous temptation. In this country where "do not cross" does not apply to one too busy or important, the risk of sneaking under or between cars is an accident waiting to happen.  

 

On the other hand, moving goods by rail is probably the safest way of moving cargo and people across the country. A single train with 100 cars of coal or grain would require hundreds of trucks to do the same job. It is much more fuel efficient and is therefore reducing our country's carbon emissions as more freight shifts from the trucking industry to rail.

 

I believe that somewhere there should be a balanced solution between the industry's need for 2-3-mile-long trains and the need for life-saving solutions for our communities. All we must do is find them.

 

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.