As America's Pope Leo XIV  begins his reign at the head of the world's smallest country, this Catholic sovereign city-state's financial and economic challenges wait to be addressed. It may take more than American ingenuity to accomplish that.

 

Located in Rome, the Vatican encompasses 110 acres with a population of under 1,000 souls. However,  despite its size, the Vatican has had an outsized impact and influence on the financial world thanks to its investments in real estate, banking, and private enterprises.

 

Those new to the inner workings of the Catholic Church should know there is a difference between the Vatican and the Holy See. The Vatican is the physical area where the Holy See resides. The Holy See is the governing body of the nation. If you were to enter a financial contract with the territory, it would be with the Holy See.

 

The Holy See generates revenues from a variety of sources. It collects donations from the faithful worldwide (called Peter's Pence, a term dating back to the 8th century), as well as from interest and investments. Many of its investments are in real estate, where it holds land and churches around the globe.

 

Historically, the Holy See has primarily invested in Italian industries but has kept its stakes below 6 percent. Over the years, it has also expanded purchases overseas, but always in proven companies within strong industries. It also invests in stocks and bonds where it takes a long-term, buy-and-hold investment philosophy. However, as a faith-based entity, it will not make investments in companies that go against church values.

 

In contrast to the Holy See, Vatican City derives revenues from a few small industries. It employs a labor force of 4,800 people who interact with millions of tourists annually. These travelers visit the Vatican, its museum, the Sistine Chapel, and St. Peter's Basilica. The Vatican is thought to do a thriving business in admissions and sought-after sales of stamps, coins, and publications. How much exactly is a tightly kept secret.

 

Finally, the Institute for the Works of Religion, known as the Vatican Bank, rounds out the church's financial picture. Pope Pius XII founded this private bank in 1942. It has been the most controversial of the church's assets, plagued by scandal, accusations of mismanagement, money laundering, and fraud. 

 

In 2022, Pope Francis tried to clean up the bank's tarnished image. He strengthened the bank's role as the exclusive manager of the Holy Sees's financial assets and connected institutions. He followed that up in 2023 by overhauling the Vatican's oversight, auditing, and supervision functions of the bank and its employees. In 2023, the bank claimed $33.2 million in income and managed $5.9 billion in client assets.

 

It wasn't easy, and he fought every step of the way from within. The specifics of the church's finances have always been shrouded in secrecy, even from the pope himself, and tradition is difficult to change, especially within the church hierarchy.

 

Pope Francis hired outside managers to circumvent those barriers and implement his reforms. Most of these hires have since resigned, stymied by roadblocks thrown up within the church bureaucracy.

 

Next week, we will examine the state of finances within the Catholic Church today and the challenges the new pope will need to overcome to win the day for his worldwide congregation.

 

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 lifeblood of emerging markets has always been their exports within a framework of robust global trade. The advent of U.S. tariffs worldwide has placed these countries between a rock and a hard place.

 

The rock is clearly the size and extent of U.S. tariffs. These new tariffs have dwarfed the imposition of levies during the first Trump presidency. Back then, the U.S.-China trade war benefited some emerging market (EM) countries by attracting increased foreign direct investment and manufacturing as alternatives to Chinese trade.

 

It also meant increased exports in some cases, especially in agricultural products. In response to the U.S. tariffs on their goods, China hit back by raising their own barriers to U.S. imports. China reduced agricultural imports from the U.S. and increased its purchases of soybeans from Latin America.

 

In addition, since the last trade war, foreign direct investment into key emerging markets such as Mexico, Vietnam, and Indonesia have steadily increased. A large part of this new investment came from China and Hong Kong. Faced with a continued rise in U.S. tariffs and restrictions under the Biden presidency, China relocated some of its manufacturing to regions that had avoided U.S. tariffs. This allowed Chinese exporters to end run tariffs and continue selling to the U.S. market through other countries. Trump 2.0 is closing that loophole.

 

However, China has upped its trade game in response. As tariffs bite and domestic demand remains subdued, China pivots away from U.S. trade. Chinese imports into the U.S. have declined from 21 percent in 2018 to 14 percent in 2023. That total has dropped further since then. Economists estimate that total trade with the U.S. today only accounts for 2 percent of China's Gross Domestic Product. To compensate for the American market shortfall, China has turned its attention to exporting its excess capacity to other developed markets in direct competition with other EM exporters.

 

At the same time, imports from China have exploded higher throughout emerging markets. And it is not just intermediate goods that make up more of the advanced products they routinely re-exported to America. Final goods from China are now flooding into EM countries, which are displacing local industries and jobs.

 

This surge of "Made in China" imports has forced several countries to raise tariffs (with the urging of the U.S.) on Chinese imports. Their domestic companies simply could not compete against this flood of cheaper-than-cheap imports.

 

In desperation, Mexico has raised tariffs on textile and apparel imports from China to 35 percent. Thailand and Malaysia have levied a 7 percent and 10 percent value-added tax. Even Russia, which relies on China's trade, recently imposed restrictions on Chinese auto imports for the same reasons.

 

Many EM nations acknowledge that China still plays a crucial role in their medium-term growth and development, especially in Asian countries. This places them in a hard place to preserve their domestic industries while maintaining good relations with the world's No. 2 economy.

 

And yet, Southeast Asia nations were also among the hardest hit on "Liberation Day." On July 4, when the 90-day temporary reduction expires, that region's tariffs will skyrocket to almost 50 percent. That will be a devastating blow to EM economies. Many economists predict that the gross domestic product among EM countries could be cut in half if those tariffs are implemented.

 

The implicit message from both of the world's leading economies is that emerging markets should decide which side to back. The rock and the hard place for many nations will be choosing between the U.S. and China. Retribution for picking the wrong partner could be costly on several fronts.

 

Chinese President X Jinping calls on his trading partners to "uphold the common interests of developing nations." He argues that the "Global South," a term referring to a collection of countries (that now number 134 nations), should pull together. This so-called "Group of 77," mainly in the southern hemisphere, are considered developing or less developed countries than those in the Global North.

 

These nations, mainly in Africa, Asia, Latin America, and Oceania, often have lower income levels or share common political and economic interests. Many of these countries are now developing trade and other strategic alliances, often with the support of China.  

 

In contrast to China, the U.S., over the last 100 days, has made it clear that "America First" means just that on both the geopolitical and economic front. Relationships between America's traditional allies and trading partners have been upended.

 

Given the U.S. backpedaling in its support for Ukraine, Canada, Mexico, and others, many nations worldwide, including those in emerging markets, have concluded that while powerful, the U.S. has become an unreliable partner. They walk a fine line between these two powers and have little room for error.

 

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 the flow of container ships to the U.S. slows and the number of trucks needed to distribute Chinese goods declines, retail shelves will soon begin to empty. Unless the tariff war is reversed, consumers should expect shortages.

 

Tariffs (so the story goes) will fuel a U.S. manufacturing renaissance, leading to higher middle-class wages and more stable families and communities. This manufacturing resurgence will promote research, development and innovation leading to economy-wide productivity gains.

 

History and most economists indicate that tariffs will not deliver the desired benefits. But let's not be naysayers. After all, most Americans believe that our trade relations with the world have been overly generous since at least World War II and need some right-sizing. The problem is that even if all of what the administration hopes for comes true, it will take years, if not decades, to achieve. In the meantime, we have to deal with the impact of tariffs in 2025.

 

The economy has already begun to slow due to tariffs registering its first down quarter since 2022. By the end of May, we should begin to see layoffs in the transportation and retail sectors. As tariffs set in within a few months, the first signs of scarcity will show up in toys, low-cost clothing, foot ware, dog toys, and budget home goods. Unfortunately, many American big box retailers are also our most popular go-to stores. Most of them, such as Walmart, IKEA, and Home Depot, have significant imports from China.

 

Last year, China accounted for 37 percent of all U.S. apparel imports and 58 percent of U.S. footwear imports. According to the American Apparel and Footwear Association, the average tariff rate for those imports from China was roughly 18.5 percent, although additional duties have substantially increased that number. If you add another 145 percent to 160 percent in duties, the total can be above 200 percent.

 

It is one reason my wife just ordered a new pair of hiking shoes from Amazon. She worries that they won't be available or, if they are, the costs will double before the end of the summer.

 

A neighbor who regularly purchases heavily discounted consumer goods from Temu, an online marketplace operated by the Chinese e-commerce company PDD Holdings, canceled her latest order after the price of her product rose from $10 to $40, including shipping.

 

That should come as no surprise. Chinese companies that benefited from the de-minimis tax exemption, a loophole that allowed shipments worth less than $800 to enter the U.S. duty-free, have been closed. Chinese companies have already jacked up their prices, in many cases, by more than 300 percent. American shoppers who are regular users of Chinese e-commerce sites will struggle to find replacement items that are close to the same price.

 

At this time of year, U.S. retailers would normally increase orders for the back-to-school season and the winter holidays. Not this year. The president's tariffs on China have caused companies to pull back on orders and cancel existing orders. The abruptness of the tariff hikes has left most companies little to no time to plan for alternative sources to import these goods. The National Retail Federation expects imports to drop by 20 percent in the second half of the year if tariffs continue at their current rate.  

 

Low-margin, fast-moving goods  will disappear first since the retail industry is built on speed and scale, where inventories of these items are replaced "just in time." Think tees, socks, kids' clothing, and basics. Consumer electronics will also feel the heat since many of the cheaper components are made in China. And nearly all dog toys are made in China, so stock up now unless you want to start buying marrow bones.

 

According to the New York Times story "Your Home Without China," other essential items we use daily are imported almost entirely from China (90 percent plus). They include first-aid kits, alarm clocks, toasters, baby strollers, thermoses, microwaves, children's books, charcoal grills, umbrellas and parasols, combs, flashlights, fireworks, bathroom scales, and bamboo shelves. The list goes on. By the end of the article, I realized that a good part of our daily life and its gadgets would not be possible without China.

 

What should readers do to get a jump on the coming tariffs? I suggest buying items that you already planned to purchase now. Washing machines, dryers, ovens, and electronics top that list. Most, if not all, those products are made overseas and will be subject to tariffs. To save money, switch to less expensive brands and models. In addition, shop for older models, one or two years old. For many products, seek out American-made options manufactured in the U.S.

 

Resist the temptation to panic shop unless you can't live without that matching set of dishes or some other item and are convinced there are no substitutes anywhere in the world. Holding off on discretionary purchases such as a vacation, front-row seats to an expensive concert, or frivolous spending may also be a good idea. Many economists are predicting a recession by the end of the year because of these tariffs, so it might be a good idea to wait until it's clear how tariffs will affect your personal finances. 

 

At this point, even if Donald Trump has a change of heart and reduced Chinese tariffs across the board, the disruption that has already occurred in supply chains will take weeks, if not months, to unravel. We learned that lesson during the COVID pandemic. My advice is to prepare for the worst and hope for the best.

 

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.

What to do in times of uncertainty?

 

Trillions of dollars in hard-earning savings have been erased from retirement accounts in what seems to be a blink of an eye. One year's worth of savings gone in a matter of weeks. The decision to sell, buy, or hold has never been more difficult.

 

In the private sector, more than 50 percent of Americans own stocks in their tax-deferred retirement accounts. That total has been increasing, thanks to the market gains since the pandemic and new federal and state rules that require more companies to offer employees access to 401(k)s through the workplace. Congress has also authorized a new rule that goes into effect this year requiring new 401(k) plans to use automatic enrollment.

 

The problem, however, with most tax-deferred plans is how to manage them. Unlike pension funds, which are managed by professionals, individual investors are on their own. That works well during bull markets where you can set it and forget, but in times like these many realize they are out of their depth.

 

Through the years, I have advised many readers to hire a registered investment adviser, especially for those nearing retirement age. And yet, there are still savers who resist hiring a professional money management firm. I am aware that many who prefer to handle their own investments read my columns religiously, however, that is no substitute for active management. 

 

Over the past few weeks, I have fielded many calls and emails like the one above. Readers want to know how and what to do with their investments. My first bit of advice is don't panic. Second, stop checking your account every day. The more you lose, the more the temptation to sell everything becomes to stop the emotional pain of steep losses.  The rest depends on your risk tolerance and age.

 

I asked my former colleague, Scott Little, an investment advisor at Berkshire Money Management, what he is telling his clients. Here is what he is saying.

 

 "One thing holds true for most people. None are going to be using all their money all at once. A retiree may live 20, 30, or even 40 years in retirement, using their savings gradually along the way. Someone in a new career may have 30-40 years to feed their investments before they begin needing their investments to begin feeding them. Even a parent saving for college may have years before substantial funds are needed to pay tuition."

 

That is sage advice. If you are five years or more away from retirement, hold fast unless you can't sleep at night. In which case, it is an indication that you are invested too heavily in one asset class, like stocks. Diversification occurs when you are invested in several asset classes outside of stocks in areas such as bonds and commodities. You can also be diversified by investing some money overseas as opposed to putting all your eggs in U.S. equity.

 

And speaking of those U.S. equity eggs, thanks to the overconcentration by both mutual funds and exchange-traded equity funds in a small group of mega-stocks called the Magnificent Seven, diversification among equity holdings is practically non-existent. And unfortunately, the Mag 7 is getting hit the hardest in this decline.

 

For those comfortable taking on more risk, especially if you are young, middle-aged, or even if retirement is closing in on you. Most of you are still in the accumulation stage of retirement planning. Downturns like this are a real opportunity. The contribution process in employer-sponsored accounts is a perfect vehicle for dollar-cost averaging. Since most contributions are made monthly, gradually increasing your contributions while increasing your allocation to equity makes sense. History shows that downturns like this have been the best opportunities to increase wealth.

 

I recognize that not all of us have the risk appetite to buy stocks ''when the blood is running in the streets." In that case, rebalance your holdings into more defensive stocks like utilities or dividend-paying securities as well as more fixed income.  

 

What if you are retired? Many retirees' greatest fear is that the markets will continue to decline. The worry is that with no income coming in at some point, your money will run out. I knew several retired investors who sold at the bottom during the Financial Crisis of 2008-2009, many on the advice of their brokers. It was the worst thing they could have done. For those who did, It required almost five years to recoup those losses.

 

Rather than panic, devise a plan instead. For example, a plan of action might be to keep a year's worth of cash out of the market, says Scott Little. While the downturn continues, spend down the cash and allow your more growth-oriented investments time to recover. As markets become less volatile over time, use that opportunity to replenish your cash and prepare for the next year. You might also want to reexamine your risk profile. The best way to do that is with a third party, either an advisor or a financial planner.

 

Retirement accounts by their nature are long-term investments. At the same time, investing in stocks is a volatile proposition but the risk-reward ratio is worth it. Stocks will have periods where you can expect to see 20 percent,  30 percent, even 40 percent declines. And yet the equity markets have always come back. The trick is to stay invested.  

 

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.

You may have weathered the Financial Crisis and the COVID-19 pandemic sell-off, some may even remember the Dot.Com boom and bust, but this time around feels different. That's because it is.

 

In my entire career, I have never seen the stock market move 8.3 percent in 34 minutes on a rumor. That is what happened a few days back. To put that in perspective, the S&P 500 Index gains in minutes an entire year's performance. The following day it gave back half of that. Sure, we can blame these moves on computer-driven trading, algorithms, options, and the like but it doesn't change what happened and could easily happen again. 

 

If you feel the markets over the last few months are more akin to a roulette wheel in Las Vegas, you wouldn't be far wrong. In an atmosphere of radical uncertainty, daily turns in stocks and bonds become random events like a Lotto game.

 

Most market-moving events can be assigned a numerical probability to a set of outcomes which could then be calculated and priced. The Dot.Com era comes to mind. Valuations on some stocks were so high that their prices could not be justified.

 

Uncertainty enters the picture when we cannot assign a number to the probability of an outcome. It can still be modeled however by using history, similar events, stress tests, etc. We call them educated guesses. The pandemic falls into this category, although not at first. The race for vaccines, enforced isolation, and masking-up to slow the spread were all elements of educated guesswork. 

 

Today we live in a world where we aren't even sure what the outcomes are, or any idea of what probability to assign to each one. "Radical uncertainty concerns events whose determinants are insufficiently understood for probabilities to be known or forecasting possible." That was the conclusion of John Kay and Mervyn King in 2020 in their book "Radical Uncertainty: Decision-making Beyond the Numbers."

 

They argued that in certain instances there exists a deeper kind of uncertainty for which historical data provides no useful guidance to future outcomes. Fast-forward to today. Most people recognize that a massive change in our economic and political system is underway.

 

The tariff wars are but one element of this upheaval. In a world where tariffs can be raised by more than 100 percent, they are without precedent in the modern world. In addition, the unpredictability created when tariffs are announced, and then changed, in some cases several times, are examples of what we see as a world gone amuck.

 

Markets behave differently under these circumstances.  Volatility, which usually occurs infrequently, becomes a permanent and daily feature of financial markets. As a result, investors and traders insist on a higher premium for the risks they can't even identify. That, in turn, drives valuations lower, while cash increases as fewer investors are willing to chance buying into this volatility.

 

Now that you know how markets have changed, next week I will examine, how you should navigate through these trying times based on your age and risk tolerance.   

 

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.