Times are changing and, with them, many of the values Americans have held close and dear for generations. Money has become increasingly important, while traditional concepts such as patriotism, children, and religion are taking a backseat. 

 

A new poll I read over this weekend set me back on my heels. When asked about their values, 43 percent of Americans polled say money as a value is very important to them; more important in fact than traditional values such as having children, community involvement, religion, or patriotism.

 

The survey, conducted by a non-partisan research organization at the University of Chicago called NORC, and the conservative, Fox-owned, Wall Street Journal, revealed these eye-popping changes in the attitudes of Americans over the past 25 years.

 

For example, back in 1998, 70 percent of respondents said patriotism was important to them, while 62 percent felt religion was important. Those attitudes scores have plummeted with only 38 percent for patriotism, and 39 percent in favor of religion. The importance of community involvement dropped as well (from 47 percent to 27 percent), while the importance of having children and hard work has also fallen. The only area that saw an increase in the survey was the value of money.

 

If even some of these results are accurate (the margin of error was 4.1 percent), America is in trouble.

 

For many, that comes as no surprise. The division between Americans is wider than it has been in many decades. We have seemingly entered a period of hyper-polarization where people are becoming increasingly isolated. The pandemic contributed to that isolation severing our attachment and reliance on the community in many cases.

 

At the same time, trust in institutions is at all-time lows in the U.S., according to Gallup polling data. Corporate America, the media, the internet, Congress and the presidency, organized religion, hospitals, and even schools can no longer be relied upon when you need them. You are on your own, which makes money that much more important.

 

Over the last 25 years, several gut-wrenching events have assaulted our value system. The list is long: the World Trade Center terrorist attack, the 2008-2009 financial crisis, recession, several wars, the loss of U.S. jobs due to globalization, growing income inequality, ongoing religious scandals, the rise of American populism, the fracturing of political parties into divisive camps, rising civil disobedience, mass shootings, and of course the pandemic. 

 

Since then, supply chain disruptions, spiking inflation, higher interest rates, and a weakening banking system have rounded out the list of disruptions that have changed our lives forever.   

 

Is it any wonder that tolerance for others has fallen to 58 percent from 80 percent in just four years? Is it any surprise that community involvement has fallen off the cliff when the color of your skin or ethnicity is increasingly used to separate and segregate, rather than encourage what we have in common?

 

The very definition of some of our values is up for debate. Many are subject to new interpretations. Patriotism to the radical right means something altogether different from the patriotism that influenced my decision to join the Marine Corps and serve in Vietnam. I am sure organizations like Black Lives Matter, the Proud Boys, or Oath Keepers have very different views of what community involvement means to them.

 

And while all age groups including old fogies like me, saw their priorities and values change, younger Americans have even less attachment to the values that were (and still are) central to my life. I am sure that the rise of individualism and sense of entitlement that the media has fostered, and to some extent glorified, has impacted many of the values of younger generations. Patriotism, religion, having children, and community involvement scored much lower among young adults under 30 years of age compared to seniors, while the value attributed to money was higher.

 

The value of money is measured by what people are willing to exchange for it, and how much of it there is. Today, governments print money by boatloads, and yet demand keeps increasing. It seems more Americans than ever are willing to sell the soul of their nation in exchange for it.  One can only hope that sometime in the future Americans can be convinced to buy back into the traditional values that made America what it was.

 

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 present banking crisis has brought back memories of the 2008-2009 global financial crisis. So far, the financial contagion has been corralled, thanks to swift government action. The winners and losers, however, have changed.

 

Most readers are familiar with the term "too big to fail." It refers to the financial theory that asserts that certain corporations, particularly banks, and some other financial institutions, are so large and so interconnected that their failure would be disastrous to the greater economic system. As such, these entities must be supported by governments when they face potential failure.

 

Back in the day, when Britain ruled the world, the government had a hands-off attitude toward failing banks.  Over time, Parliament began to realize that the cost of bank failures in the Commonwealth was far greater than supporting them. Through the years (and many successive financial crises later), more and more governments worldwide began to get involved earlier and with more aggressiveness to avert bank failures.

 

Here in the U.S., we learned our own lessons during the Great Depression when 9,000 banks failed taking with them $7 billion in depositors' assets. In the 1930s, remember, there was no such thing as a Federal Deposit Insurance Corp. (FDIC). The life savings of millions of Americans were wiped out by these bank failures. Years later, the New Deal legislation reformed and bolstered the framework of the financial sector in America.

 

While we still pride ourselves in believing in free markets and private capitalism, the reality is that a great many industries in the U.S. are private-public partnerships. A case in point is the banking industry. In the U.S., the government needs banks to create money and foster economic growth. The banks need the government to prevent bank runs and act as a lender of last resort. It is a symbiotic relationship.

 

The Great Financial Crisis almost tipped us into a second, worldwide depression.  The government's actions, or should I say reactions, to the crisis were ad hoc at best. Lehman Brothers went through a chaotic bankruptcy. JP Morgan was arm-twisted into buying a rival for an amount that kept its bondholders intact. Other institutions were kept alive through huge capital injections that left both shareholders and bondholders intact. 

 

None of these public actions truly solved the problems that got the banks into hot water in the first place. It required many years, and cost billions of extra dollars, before those issues were solved. At the same time, there was an enormous backlash by the tax-paying public against the bank bailouts and the government's actions to protect shareholders and bondholders. Since then, both banks and governments have learned several lessons.

 

The intervention in Europe to save Credit Suisse, and the U.S. actions in the case of Silicon Valley Bank (SVB) and Signature Bank were aimed at strengthening the overall financial system rather than leaving it weaker. Signature Bank was shut down. At Credit Suisse and SVB, senior executives were fired, while both bondholders and shareholders lost money.

 

On the other hand, the banks that acquired these troubled banks are ending up with hefty gains on their balance sheets. Both banks were effectively sold at a negative sale price, which was the difference between the amount that the acquiring bank is paying for its new assets and the book value of those assets.

 

It seems clear that the lessons learned from the Financial Crisis are that in the event of a bank failure, bond and shareholders' risk capital can, and in this case, did go to zero. Protecting depositors and the financial system has now become the top priority of the government and the banking system. And that is as it should be.

 

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

This week, gold briefly climbed above $2,000 per ounce. The precious metal is commonly thought of as an inflation hedge, but also serves a different function in times of financial stress. Gold can be a safety trade.

 

Gold is a highly speculative asset in the best of times. But, unlike bonds and stocks, it has one redeeming factor in times of economic slowdown, financial instability, and geopolitical tension. It does not carry the risk of an issuing entity collapsing, such as a bank or a government. There have been many examples of this throughout history.

 

The latest example was back in February 2022, during Russia's invasion of Ukraine. Gold spiked to $2,078 per ounce within the next month. Historically, gold has also functioned as an inflation hedge. In the aftermath of the Russian invasion, supply chain disruptions, especially in energy, food, and materials, pushed prices and the inflation rate higher. That aided and abetted the precious metals safety trade for a brief time.  

 

But gold's shine was diminished quickly when central banks around the world announced a tightening of monetary policy to combat rising inflation. Higher interest rates have always been kryptonite to the price of gold bullion. Gold bullion is stored for a fee, and that fee is based on the going rate of interest. Gold prices fell to $1,618 by November 2022. Higher interest rates ultimately trumped the safety trade.

 

As interest rate fears rose in 2023, gold continued to fall. It was largely dead money since the start of this year, trading at $1,832 per ounce just a month ago. The collapse of Silicon Valley Bank and Signature Bank in the U.S., and Credit Suisse's forced demise in Switzerland last week suddenly changed the calculus in gold investing.

 

As investors worried that money deposited in banks was suddenly at risk, they rushed into gold. The largest exchange-traded physical gold fund, for example, added 20 tons of gold to its ETF in a week. That was the largest single inflow of demand for gold since the Russian invasion. At the same time, yields on interest rates plummeted, as bond prices also jumped. The combination of lower rates and elevated risk provided a double boost to the gold price.

 

Investors need to realize, however, that in any safety trade, there is an implied risk premium that is embedded in the asset, in this case, the value of gold. The greater the risk, the higher the premium. Market Risk Advisory, a Japanese-based research firm, figures that based on historical interest rates, the price of gold should currently be trading around $880 per ounce in a riskless world. That would mean that the present risk premium, plus the impact of the decline in yields, is more than $1,000 per ounce of gold.

 

This week, due to the actions of the Federal Reserve Bank, the U.S. Treasury, the FDIC, as well as similar institutions in Europe, the fear of the investing public had been somewhat reduced. As a result, stocks went up and yields on most government and corporate bonds fell. As that happened, the price of gold fell more than $42 per ounce or 2.12 percent in just one day.

 

Does that mean that if the perceived risk of additional problems in the banking sector diminishes, the price of gold will fall further? It should--all else being equal — but all else is never equal.

 

Many believe that it will take some time before the banking sector returns to normal. U.S. Treasury Secretary Janet Yellen has said that she has not considered or discussed "blanket insurance" to U.S. banking deposits without approval by Congress. As such, some risk premium will likely remain in the price of gold going forward.

 

There is also the question of interest rates. The fear of financial contagion could deter further interest rises by the Fed in the months ahead. In addition, if the Fed feels they have tightened enough to slow the economy and reduce inflation, that would relieve the rate pressure on the price of gold. The direction of the U.S. dollar is also important to watch since gold has an inverse relationship with the greenback. The bottom line, there are more than enough reasons that could keep gold in play in the months ahead.

 

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 recent calamity in the banking sector is complicated, but one issue stands out. Even the safest of investments have risk.

 

Understanding the relationship between bond prices and interest rates is extremely important. Bonds, overall, are considered safer investments than stocks and history indicates that bonds have been less volatile than stocks most of the time. However, when interest rates rise, bonds can get hurt for a variety of reasons, and credit risk is at the top of the list.

 

Credit risk refers to the possibility that a corporation (or a government entity) could default on a bond they have issued. That happens when the issuer fails to pay back the principal or cannot make interest payments. Normally, U.S. government bonds, called Treasuries, have lower credit risk. Presently, however, even Treasuries have some credit risk. If Congress refuses to increase the debt limit by this summer and allows the country to default, the consequences for our government debt could be grave.

 

However, all bonds have interest rate and duration risk. Bond prices and interest rates move in opposite directions. As interest rates fall (as they have for much of the past decade), the value of fixed-income investments rise. Since last year, interest rates have risen substantially due to the Federal Reserve Bank's efforts to combat inflation.

 

This is where duration risk comes in. Let's say you have long-dated U.S. Treasury bonds that do not come to maturity for 10, 20 or even 30 years from now. If you hold them to maturity, you will receive your principal investment back plus whatever interest rate coupon was promised. However, if rates rise (as they are doing now), and for whatever reason, you sell your bonds before their maturity date, you could end up receiving less than what you paid for your bond.

 

In general, duration is expressed in terms of years and generally bonds with long maturities and low coupons have the longest duration. These bonds are more sensitive to a change in market interest rates and thus are more volatile in a changing interest rate environment. Over the last year, the Fed has increased interest rates at its fastest pace in recent history, which has caused the price of bond holdings to decline substantially.

 

Enter the Silicon Valley Bank (SVB) stage left. SVB, like most banks, relies on a mixture of short-term and long-term financing. The short-term side largely consists of customer deposits. A bank's assets typically consist of long-term loans that get paid back with interest over time as well as bonds the bank purchases that pay out over the term of the bond.

 

More than half of SVB's assets at the end of last year were "safe" bonds issued by the U.S. government or federal mortgage institutions, which they had purchased before the Fed's tightening policies began. Safe from default risk, maybe, but not from the climbing interest rates. And most, if not all, of those bonds, were low coupon, and long-term in nature — a classic case of duration risk.

 

The nightmare that all banks fear is a bank run. Think of "It's a Wonderful Life" and George Bailey's Building and Loan, a small community bank in Bedford Falls. Depression-era depositors, fearing for their financial lives, rushed to take their money out of Bailey's bank. Few depositors understood how credit and loans work. They thought their money was simply sitting in the safe. George tried to explain the concept but ended up making good for his customers by giving them his honeymoon money.

 

In the case of SVB, the same thing occurred, although, unlike George Bailey, the management of the bank could not make their depositors whole. For most depositors, there was no need to stand in line. A simple electronic transfer via computer transferred millions out of the bank in seconds. As a result, SVB was forced to sell bonds at a loss to satisfy depositor demands until it couldn't. The rest is history.

 

What may some readers have in common with SVB? In today's market, there has been a mad rush to capture higher interest returns after years of an interest rate famine. The U.S. Treasury markets, especially on the short end, have seen yields of 5 percent or above for six-month, one-year, and two-year notes and bills.

 

Putting excess cash into these high-yielding instruments and intending to hold them to maturity is a reasonable financial strategy. However, if you need to sell them to raise cash for an emergency may leave you open to losses. Remember that a bond's yield is not the same as the interest rate coupon promised at maturity on that instrument.

 

A six-month note may have been issued with a fixed 1.75 percent coupon, however, because of the Fed's recent interest rate hikes, the price of the note has declined. As it does the yield has climbed. 

 

You are in effect, buying that note at a discount to the original purchase price. If you hold the instrument to maturity, you will receive the full-face value of the note when it was issued, plus the coupon. That is ideal. But remember, yields will go up and down over time in an inverse relationship with the instrument's price depending on market conditions. If things change and you need to sell early, you may face the same issues as SVB. That is the risk you are taking when you buy Treasuries.

 

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.

Coats to protect your pets from severe weather, or orange safety vests during hunting season are fairly common but today, the fashion industry has embraced the concept and taken pet clothing to new heights.

 

Canine couture is a big business. The pet clothing business market is growing by 4.5-5 percent per year, and by 2030 should exceed $9.15 billion annually, according to Brainy Insights, a research firm that tracks sales in the pet industry. The U.S. accounts for 30 percent of global sales and hit almost $2 billion in 2022.

 

I divide the pet clothing market into two segments: clothes that are practical, and clothes that are indulgent. Practical items have a surprisingly long history. Ancient Greek armies, for example, would fasten leather boots on their horses to protect them from the snow. Greyhound and whippet owners have long-used coats to keep their pets warm in cold weather. Police horses and dogs are often dressed in fluorescent coverings.

 

Certain kinds of animals benefit from wearing coats, boots, and rain gear. Dogs that are old, thin, tiny, elderly, have thin coats, or are ill often need protection from severe temperatures, rain, and snow. Therapy jackets and those that are used for medical conditions such as hip dysplasia, and canine arthritis or to protect an incision from the aftermath of surgery are useful protective clothing. 

 

Our dog, Atreyu (a poodle), has an insulated coat, which came in handy this winter in sub-zero temperatures. He also wears an orange vest during hunting seasons. Boots, on the other hand, while useful, (due to the heavy use of salt in our area during snow season), are a no-go. As it is, this dog is such a drama queen that he balks and runs when he sees his coat come out of the closet.

 

Canine couture, however, is an entirely different world. It is here that I believe that our tendency to anthropomorphize our pets has run rampant. Anthropomorphism is the tendency to map human traits and emotions onto animals. For many, assigning human characteristics to our pets helps them to make sense of the world around them.

 

For others seeing our pets as human-like fulfills a social need. They believe that dressing dogs, cats, and other animals in trendy, high-fashion clothing allows the pet and the owner to stand out and gain social status among certain groups. In short, you are dressing your pet for success. Doing so today, however, may cost you more than dressing yourself.

 

A deluge of high-end fashion houses has jumped into the pet clothing business with specially designed pet collections. Dior, Prada, Versace, and Fendi, among many others, offer everything from designer purses to matching people/pet outfits for all occasions.

 

Their success has spawned all sorts of marketing efforts. Tika, an Italian greyhound model, has over a million Instagram followers and has been a big celebrity at New York City's Fashion Week. Boobie Billie, an Italian sighthound/Chihuahua, another Instagram favorite, has launched a luxury clothing line. Dozens of lesser-known pet celebrities are modeling for various brands and establishing followings on social media. Dog agencies are springing up and signing these four-legged stars to contracts. The rates vary per dog, but these new influencers have millions of followers.

 

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.