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The Retired Investor: Are Inflation Fears Real or Imagined?

By Bill SchmickiBerkshires columnist
If you have been grocery shopping lately, there is no question that prices and inflation are going higher. The same can be said for the price of a gallon of gas. But is it a transitory event, or are we at the beginning of an inflationary era not seen in decades?
 
Clearly, commodity prices, which are usually the harbinger of future inflation are soaring. Copper, oil, sugar, corn, steel, aluminum and lumber as well as many other food and material prices are hitting multi-year highs. But it is not just commodities that are seeing a price surge. Shipping costs are also skyrocketing. And there are parts shortages that are leading to higher prices, plus a global semiconductor shortage that is sending microchip prices climbing.
 
Against this backdrop, the U.S. economy is exploding higher with the growth rate. This quarter and next combined are expected to exceed 10 percent. The nation is reopening and with it the demand (and prices) for everything from airline tickets to rental vacation cottages. The back-to-the-office crowd, as an example, has retailers trying to keep up with the sudden heightened demand for everything from dress trousers to make-up.
 
And while all this activity is gathering momentum, the U.S. government is feeding more fuel to the fire. Both government spending and monetary stimulus are at historical levels. We would need to go back to the Roosevelt Era to find a similar period of spending in our history. But this governmental expansion has even dwarfed FDR's efforts.
 
Thanks to the pandemic, there have also been a growing number of supply shortages and logistical logjams worldwide. From diapers to toothpaste, consumer-related poduct scarcities are also contributing to rising prices. Time and again, during quarterly earnings calls over the last two weeks, corporate executives have complained about the mounting costs of almost every input to their businesses. Where they can, those costs will be passed on to the consumer through higher prices. The fear of inflation is no longer theoretical.
 
Up until now, if you listen to the Fed, the uptick in the rate of inflation is going according to plan. The need to expand GDP considerably will by necessity, mean that inflation will move higher. They expect inflation to run "hot," or at least hotter than would normally be the case.
 
Both the U.S. Treasury Secretary Janet Yellen, and Fed Chairman Jerome Powell, believe that a higher inflation rate will be necessary in order to get employment back to 2019 levels. Chairman Powell has said on many occasions that if inflation runs a little higher than their historical comfort level of around 2 percent that would be better than okay.
 
A higher rate of economic growth, they believe, will also address some of the potential scarring of the economy wrought by the pandemic. "Scarring" refers to the potential for permanent damage that may have occurred to the economy and the work force during the last year or so.
 
What has many investors concerned is that once the inflation genii is out of the bottle, it won't be that easy to put it back in again. Will a 2.5 percent inflation rate, for example, be a transitory event, or the harbinger of something more?  And if so, how much more?
 
Will the Fed be forced to hike interest rates, if inflation runs amuck? Will they take away the monetary punch bowel and with it the stock market and the economy?
 
One thing is clear. Until we know the truth, investors will be sleeping with one eye open. In recent days, several Fed members, in speeches around the country, have mentioned the "potential" for tapering in the near future — something opposite of the Fed's stated policy position. In addition, this week, Secretary Yellen also mentioned a possible need for higher rates ahead. That riled the markets, and she later walked back that statement. Investors dismissed it as a "slip." It is hard to believe that a veteran like Yellen would say anything in any circumstance.
 
 My own thinking is that what we are hearing are a series of trial balloons. It is usually the method by which the Fed and other official entities gauge and test the reaction to future policy changes. Could it be that, despite the central bank's belief that their lower-or-longer stance is the right approach, there may be the need to adjust if prices continue to ratchet too much higher? Afterall, when you allow things to heat up there is always the chance of being burned.     
 

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.

Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.
 
 
     

The Retired Investor: Empty Oceans

By Bill SchmickiBerkshires columnist
Oceans cover more than two-thirds of the earth's surface. For centuries, these bodies of water have supplied us with a bountiful harvest of ocean wildlife and millions of well-paying jobs. Unless something changes, however, the future of fisheries is in serious jeopardy.
 
The demand for fish is growing with aquaculture trends reaching a growth rate of 527 percent from 1990 to today. At the same time, fish consumption has doubled as well.
 
Declining fisheries, the destruction of the marine habitat, and the near-depression-like economic conditions of more and more coastal fishing communities, is no surprise to most of us. It has been going on for decades. And yet, the appetite for fish, especially among developing nations, keeps growing by more than 3 percent a year. Fish consumption accounts for one-sixth of the global population's intake of animal protein, and more than half in many emerging markets has doubled as well.
 
Since the 1980s, the global seafood catch has been falling. This is despite better fishing boats and improved underwater technology, such as GPS, fish finders, echo-sounders, and acoustic cameras. This has led to an annual 2 percent-per-year increase in a boat's capacity to capture fish. Thanks to this "technological creep," the 10-boat fishing fleet of a generation ago has the power of 20 vessels today.
 
At least a billion people, if not more, rely on fish as their primary protein source and tens of millions of people around the world depend on the sea for their livelihood. As such, several foreign governments have traditionally provided massive subsidies ($35-40 billion a year) to their fishing fleets in order to increase their ability to compete and catch more of the world's fish. The top five nations include China, the European Union, the U.S., Korea and Japan.
 
Global fishing fleets are taking too much wildlife from the sea and the laws and regulations that are meant to manage and conserve fisheries are either ignored or only selectively enforced. The fact that wild-capture fish prices continue to increase and are projected to rise by 23 percent over this decade makes flouting the law an easy excuse. There is not a day that goes by without some new violation of existing fishing regulations somewhere, and those illegal activities are increasing.
 
We all know this, but few realize how bad the problem has become. Most scientists expect that if the present situation continues, by 2050 there will be a complete collapse of all wild seafood that is fished today. Ninety percent of all tuna, marlin and sharks will be gone. Of the top 10 species that account for 30 percent of all fisheries production, six of them (anchoveta, mackerel, pollock, Japanese anchovy, blue whiting and Atlantic herring) are fully exploited or overexploited today.
 
The World Trade Organization (WTO) is where government leaders meet to negotiate the dos and don'ts of commercial fishing. Six years ago, negotiations began on eliminating government subsidies that are behind the excessive and illegal depletion of the world's fisheries. It has been a game of good intentions, but broken promises. Deadlines come and go, but like so many things at the WTO, nothing has changed.
 
China, India, and other Asian nations account for 85 percent of the world's commercial fishing employment. Those governments have only been interested in gaining exemptions, rather than enforcing more discipline among their fishing fleets. But there may be hope yet.
 
For one thing, there is a new director-general at the WTO, Ngozi Okonjo-Iweala. She has moved a successful fishery deal to the top of her agenda for 2021. She is pushing member trade minsters to agree and sign a deal by July.
 
At the same time, President Biden has placed environmental concerns at the top of his agenda. His U.S. Trade Representative Katherine Tai seems focused on the problem of overfishing and is backing the WTO's efforts to finally get members to take some actions. Let's hope, for all our sakes, that the world can finally come to its senses before our oceans end up depleted.
 

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.

Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.

 

     

The Retired Investor: Our Hospitals Are in Trouble

By Bill SchmickiBerkshires columnist
COVID-19 effectively put a halt to most elective surgeries. As the nation gets vaccinated, however, medical authorities have given the all-clear to resume those surgeries. But will patients come back?
 
The answer to that question is important to the nation's hospitals, whose bottom line has suffered as much as, or even more than, most of their patients. Last year, hospitals were forced to shut down surgery in order to create capacity for skyrocketing cases of the coronavirus. But even after beds opened up again (as a result of the reduction in new, serious Covid-19 cases), most patients are still putting off surgery, concerned that they might catch the coronavirus during a hospital stay.
 
In 2020, the nation's hospitals' revenues declined by $320 billion. At the same time, drug expenses increased by 17 percent, labor by 14percent and hospital supplies by 13 percent. This year, hospitals are expected to lose another $53 billion to $122 billion, which amounts to 4 to 10 percent of their total sales. In the meantime, costs continue to rise.
 
A recent health-care market research survey by Becker's Hospital Review, found that fully 68 percent of respondents, who are considered health-care leaders, believed patient fear will delay or limit demand for surgery for at least the next six months. In response, hospitals are working overtime to turn the way they do business on its head.
 
Since making patients feel safe must be their top concern, hospitals have implemented a number of changes in the way in which they operate. For instance, 68 percent of hospitals surveyed have reserved operating rooms and/or intensive care units just for Covid-19 patients. About 23 percent of these organizations have allotted an entire building, including parking lots, to ensure coronavirus patients are isolated from other patients. That increases the feeling of safety but cuts down on the number of non-COVID patients that can be served at any one time. As a result, more than 70 percent of hospitals are running at less than 75 percent capacity.
 
That level of separation also incurs costs that would otherwise be saved. Additional cleaning, maintaining PPE, and conducting testing, as well as the need for higher numbers of employees to accomplish all of the above, hurt the bottom line. As readers might imagine, the demand for additional cost savings is of paramount importance. That is where virtual care solutions come in.
 
Virtual health care reduces cancellations, streamlines surgical operations, provides less time in the physical hospital setting, and reduces costs dramatically. Many hospitals had already been employing some level of virtual care, but it was mostly confined to information gathering and storage. The bad news is that few hospitals have the appropriate tools necessary to effectively deliver virtual care at the scale required.
 
There are no easy answers to the dilemma hospitals face, outside of more aid from the federal government. The Provider Relief Fund, which was included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act is currently helping hospitals to stay afloat. But the $100 billion fund is not nearly enough, according to the American Hospital Association. Given the present trend, I have to agree that it won' t be enough to keep the doors open in many emergency rooms, let alone surgical centers.
 
What's worse, most medical experts believe that we should expect additional coronavirus-type threats in our future. Prior to the pandemic, we already knew that our healthcare system was broken. It is clear to me that we can no longer deny the obvious. The hospital system may be the wakeup call that we all needed to finally overhaul the healthcare system in the U.S.; at least I hope so.
 

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.

Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.

 

     

The Retired Investor: A Highway of Opportunity

By Bill SchmickiBerkshires columnist
Most Americans seem excited and hopeful about the prospects for the Biden Administration's infrastructure plan. Local politicians as well as their construction buddies are salivating at the possible promise of getting their share of this multi-trillion-dollar prize. But looking beyond the pork barrel, we might want to consider how innovation and technology could help America regain its first-class status in infrastructure.
 
As of 2019, the United States is ranked 13th in the quality of its infrastructure after countries like Singapore, Japan, Germany, and the United Kingdom among others. Of course, it may not be a fair comparison since the U.S. has to rebuild and maintain 4 million miles of roads, streets, tunnels, bridges and other structures, while a nation like Singapore is smaller than New York City.
 
The sheer size of our infrastructure is made even more difficult by how many fingers are in the nation's pie. All of this infrastructure is essentially owned, operated, and maintained by state and local highway agencies. At the local level, about 40,000 individual governmental units of varying sizes and populations are responsible for 75 percent of the nation's highway mileage.
 
 In turn, these agencies contract with thousands of private companies that furnish products, services, and equipment to build, maintain, and operate the system. This private sector portion is comprised of highway contractors and consultants, material and equipment manufacturers and suppliers, plus all the professional, trade, and industry assortations that proliferate at the national, state, and local levels. We are talking about many thousands of individual businesses from the largest multinational corporations to single-person operations.
 
Over and above this vast public and private sector army sits the federal government, which provides funding in the form of financial assistance to the states, as well as certain regulations, policies and guidelines.
 
As one can imagine, like in every army, there are traditional ways of thinking and doing and when it comes to infrastructure, even more so. When thinking about infrastructure, more often than not, familiar terms like "shovel ready," "pothole repair," and "black topping," accompanied by long traffic delays and detours comes to mind.
 
But while we have largely delayed or ignored our infrastructure, other countries have been achieving technological breakthroughs and new innovations for years. My hope is that the U.S. will be able to take advantage of some of these advances in our own infrastructure plan in the coming decade.
 
Software programs, for example, are changing the way infrastructure projects are being designed. New building information modeling programs enable three-dimensional, computer-generated designs that allow professionals at all stages, from architects to engineers to building managers, to collaborate on a project. Among other things, using these state-of-the-art programs decreases errors, gives much greater predictability when it comes to costs, and would help to deliver projects that are on time and on budget.
 
Another innovation is the application of 3D printing to construction and design. 3D printing is poised to totally disrupt the construction site, according to many construction experts. A Dutch company, for example, designed and built the world's first 3D-printed steel bridge recently. The use of 3D technology not only can reduce costs, but aid in constructing safer, more durable projects.
 
Plastic roads is another concept that promises to replace traditional asphalt as a primary material in road construction. Advantages over asphalt include quicker installation time, triple the service life, and an effective way to recycle the plastic that is filling up our oceans and landfills.
 
Blockchain technology can also be applied to infrastructure long before the first 3D blueprint is drawn up. Remember that army of private and public sector entities? Imagine how long it usually takes the government to actually contract out and procure all the processes involved in even one project. That's where blockchain comes in. The technology would be ideal in its ability to eliminate the layers and layers of contracts and middlemen that sit between the conception and delivery of just about any infrastructure project.
 
These are just some of the advances that are available to the U.S. The challenge will be to overcome the skepticism and resistance to change that confronts all of us. I'm hoping that with the correct approach, our effort to rebuild America could be the envy of the world. 
 

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.

Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.

 

 

     

The Retired Investor: Water Becoming a Rare Commodity

By Bill SchmickiBerkshires columnist

America is running out of water. During the next 50 years, the nation could see its fresh water supply reduced by one third. But if you think that's a problem for the next generation, you are wrong. This year alone, as many as 83 out of 204 U.S. water basins could begin to feel the brunt of these shortages.

 And don't think these shortages will only affect those regions that we would expect to be dry. The central and southern Great Plains, the Southwest and central Rocky Mountain states, as well as the South, Midwest, and parts of California are all in danger. The twin culprits are rising temperatures and changing rainfall patterns brought on by climate change.

The wettest regions of the country are getting wetter, while the driest areas are getting dryer. At the same time, we are seeing more intense concentrations of rainfall that make capturing and using that water more difficult. If you combine that with temperature changes that are expected to heat up the nation by 5.7 degrees in the years ahead, you have a perfect storm for water shortages.

But that's only the tip of the iceberg. The demand for clean, fresh water is also increasing. Population growth alone is setting us on a path where we are going to need to make hard choices between water use for drinking, irrigation (37% of water usage is for agriculture) and manufacturing. We already are fighting over water in many states. The Colorado River is just one example of the ongoing controversary of water use and state's rights.

However, most Americans simply assume that if push comes to shove, there will always be enough clean tap water in most of the major cities and towns, at least in places like the Northeast, where I live. Think again. Our drinking water has been contaminated by industry, weakening government oversight, and aging infrastructure for years and years. Did you know, for example, that a water main breaks in the U.S. approximately every two minutes?

Leaking lead from aging pipes in New Jersey, radioactive waste in the ground water in Arizona and New Mexico from uranium mines, hookworm disease in Alabama from sewage pipes, mining spills in Kentucky, chemicals in the South Carolina water supply—these are just some of a long list of calamities that are popping up more and more frequently throughout the country.

In the middle of this crisis, the demographics of the U.S. population are changing. Some cities and communities are getting bigger and richer, while others in areas such as the upper Midwest, the Great Plains, and the Mississippi Delta are dealing with fewer resources and declining populations. Unfortunately, these trends will mean increasingly unaffordable water for certain segments of the population going forward. Today, for example, in some areas of North Carolina, a low-income family of six people needs to work 4 to 5 days each month just to cover their water bill.

Utility disasters, such as the massive lead-tainted water crisis in Flint, Michigan in 2015, are expected to grow in frequency and with increasing economic impact. This week's latest calamity involves a Florida reservoir in the Tampa Bay area on the brink of collapse. It was leaking toxic wastewater and could have devastated much of the region's environment and economy. It was narrowly averted, although environmentalists had been warning of the danger for years.

The truth is that many cities and states face huge upgrades in their water infrastructure and have for many years. The only way to obtain the money is to raise taxes or borrow the funds through municipal bond offerings.  If you live in a big city or state with a prosperous population, that may be costly but still possible. But what do you do if your utilities are serving a shrinking or stagnant population with lower income prospects?

Given the dilemma we face as a nation in this area, the Biden Administration's infrastructure proposal seems to be on the right track in proposing $45 billion in grants to help water utilities replace lead water lines and another $56 billion for water and sewer projects. It seems clear to me that preserving our water supply, both now and in the future, is every bit as important as fixing our roads and bridges. As for our growing water shortage, let's hope we all finally take climate change seriously.

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.

Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of OPI, Inc. or a solicitation to become a client of OPI. The reader should not assume that any strategies or specific investments discussed are employed, bought, sold, or held by OPI. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct. Investments in securities are not insured, protected, or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements, and we can give no assurance that such beliefs and expectations will prove to be correct.
     
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