The latest rumored acquisition will be a 10 percent stake in Canada-based Lithium Americas. The Trump administration is considering the stake as part of negotiations over a $2.26 billion Department of Energy loan for the company's lithium project in Nevada. Expect more of the same as Washington intervenes in industries that it considers critical to national security.

 

Many would have you believe that today's shift toward state capitalism is sudden, unwarranted, and autocratic. However, for countless decades, this country has had a long and varied history of intervening in the American economy when it deems necessary.

 

The difference this time around is that Donald Trump is running roughshod over the consensus-building process that the country has historically required to legislate this kind of interference in the economy. For better or worse, depending on your affiliation, he is ignoring the rules and regulations that have both acted as guardrails and barriers to the kind of rapid-fire change we are experiencing today.

 

Others believe that the constant stream of executive orders occurring now is long overdue. To many, the U.S. is simply recognizing and responding to the fundamental transformation that has happened and is ongoing in this ever-changing world. We have exited a past that no longer applies, in exchange for what many hope is a promising new future.

 

At the same time, the role of government, in the view of a large segment of the population, has also undergone significant changes. According to numerous polls, many in the younger American generation believe that the economic and political systems in the U.S. no longer serve their interests in this rapidly changing set of circumstances. These are the victims of globalization, the 2008 Financial Crisis, the COVID pandemic, and the widening income inequality. 

 

I suspect that if asked, they might want their government to do even more in the years ahead. Many would like to replace what they see as the "Deep State" with government programs that will narrow income inequality, while at the same time preserving private ownership.

 

The downside of state capitalism is well known. Centrally planned economies of the Chinese variety usually get it wrong. Granted, we are still a long way from that particular model of control, but we are certainly moving in that direction. In many instances, government control reduces economic efficiency. That often leads to slower economic growth. Innovation and entrepreneurship suffer, replaced mainly by cronyism and corruption. Long-term results give way to short-term fixes.

 

Just last week, for example, the government invoked its golden share ownership of U.S. Steel (a condition of Nippon Steel's purchase of the company) to block the closing of the company's Granite City plant in Illinois. According to management, the work done at the plant should be transferred to more efficient locations; however, the government disagreed.

 

The 10 percent stake in Intel, engineered by the administration (after threatening to fire its CEO), has set into motion several interesting transactions involving other companies with ties to the government. Some question why Nvidia, the premier global semiconductor giant, suddenly decided to invest $5 billion in this troubled semiconductor company, when other companies might make more business sense. This deal occurred after Nvidia and Advanced Micro Devices agreed to pay the Trump administration a portion of their sales from artificial intelligence to China.

 

This week, the government announced a U.S.-based joint venture with investors to take control of TikTok, a Chinese-owned platform with 170 million American users. The deal coveted by nearly every media company in the U.S. ultimately fell into the hands of Oracle, among others. Oracle, run by its billionaire founder, Larry Ellison, is a close personal friend of the president. Over the weekend, the administration also announced sudden changes to the H-1B visa program that will directly impact many of the nation's largest technology companies.

 

The H-1B allows immigrants with highly specialized skills to work in the U.S. when companies cannot find U.S. citizens to perform the same job. The government, citing concerns that many companies abuse this program, is considering a one-time charge of $100,000 (up from $2,000) to obtain such a visa. This has thrown many companies, especially in the tech sector, into turmoil.

 

It is interesting to note that the Chinese, who followed this same path years ago, are now wrestling with the downside of many of the same issues today. As such, government officials over there are moving to liberalize many conditions and regulations. They are relinquishing more control to the private sector as a result. At some point in the future, it is entirely possible that the Chinese and American brands of state capitalism may converge.  

 

The advent of artificial intelligence promises both great opportunities and significant challenges for the future. As time passes, government intervention might steadily increase to safeguard the labor market. Legislators could direct AI initiatives toward areas perceived as most productive. However, history indicates that, over time, in this country, the pendulum swings from right to left, and economic systems tend to oscillate between more and less government involvement. Intervention follows a crisis, which is then followed by liberalization. Inefficiencies become apparent and market forces reassert themselves. We have seen this happen repeatedly in this country. Exactly when and how long it will take is the real question.

 

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.

Over the last nine months, a 10 percent position in a huge semiconductor giant, a 15 percent stake in a materials company, plus a golden share in one of America's venerable steel producers have been swallowed up. No, the buyer isn't Warren Buffett; it is the United States government.

 

I am old enough to remember the opening of China a generation ago under President Richard Nixon. The nation was rabidly anti-communist, but the prevailing wisdom was that, given enough time, the Chinese government would become more liberal, and its economy would begin to resemble our own country's capitalism.

 

This "power of example" idea has worked, but in the opposite direction. As a recent Wall Street Journal article pointed out, the U.S. economy is moving ever closer toward state capitalism. Although it may differ from the Chinese version in certain areas, there is no question that this administration is intent on exerting more political control over the U.S. economy than their predecessors.

 

I find this trend neither surprising nor something to worry about. I have long maintained that the so-called U.S. free market economy, so many conservatives touted as the bedrock of capitalism and democracy, is a myth. One need look no further back than the 1930s to understand how the U.S. government has interceded time after time to assist the economy when things went wonky and even when it didn't.

 

The failing economy of the Great Depression led to a prolonged period of government intervention, culminating in the New Deal. During World War II, the government basically controlled production as it put the economy on a wartime footing. Fast forward to modern times, when the government commandeered the financial system during the Financial Crisis or the shutdown of the country's labor force, followed by massive fiscal and monetary stimulation of the economy during the COVID Pandemic.

 

Almost every administration, regardless of party, has worked to expand the government's role in the economy. Over the last few decades, as globalism became the leading form of economic growth, governments worldwide did what they could to ensure that their corporations came out on top. The U.S. did more. American corporations, aided and abetted by succeeding administrations, grew larger, succeeding in commanding an increasing market share of trade at the expense of foreign competitors. As a result, our financial markets became the go-to destination for investment.

 

Since then, the competition has increased. The lines between a country's economic and political systems have blurred worldwide. Increasingly, especially in autocratic societies such as China, military might is believed to come down to who has the best AI chip or strategic metal supplies. Here in the U.S., secure supply chains, safeguarding strategic industries, and reinvigorating critical industries weakened by globalization have all become significant economic and political concerns.

 

If one were to apply a check list of state capitalism characteristics here in the U.S., we would find in just the last six months: government ownership of private companies (Intel, MP metals), strategic control of key industries through golden shares (U.S. Steel), direct influence over corporate leadership appointments (demands Intel CEO be fired), targeted industrial policies (AI and semiconductors), revenue-sharing arrangements between private companies and government (Nvidia/AMD 15 percent revenue share, Japanese trade deal). Add to this list the upheaval in the federal regulatory area, and we see a government exerting its powers to achieve political and economic objectives at lightning speed. 

 

Next week, we will examine the whys and wherefores of this trend, the downside of this trend toward state capitalism, and what, if anything, we can do about it.

 

The Court of International Trade waited until the market's close on Friday afternoon before ruining the administration's Labor Day weekend. The court judges said the president had exceeded his authority in using the Emergency Powers Act to levy reciprocal tariffs on the world. Is this a good or a bad thing?

 

It depends on where you sit. The court did not halt the tariffs but instead ruled they would remain in place until mid-October. In a 7-4 decision, the appellate court backed a lower court's decision finding that the law Trump used to justify his policies, the International Emergency Economic Powers Act, did not give him the power to impose tariffs, duties, or the power to tax. 

 

The president responded by calling for an immediate hearing by the Supreme Court. "It's an economic emergency," he exclaimed, "If we don't win that decision, you'll see a reverberation like maybe you've never seen before." While the administration appeals to the Supreme Court, the hope is that the courts will allow tariffs to continue to be collected until the Court hears the case.

 

Who ultimately wins the high court case is a toss-up. Republicans appointed six of the nine justices and have backed several recent questionable initiatives by this administration, but not all decisions have been in Trump's favor. Historically, the Supreme Court has been critical of presidents whom they perceive have overreached on policies not directly authorized by Congress. In this case, the appeals court ruled that imposing tariffs is not within the president's mandate and that "the power of the purse belongs to Congress."

 

However, make no mistake, the Trump administration does have several backup plans. In response to Friday's ruling, U.S. Treasury Secretary Scot Bessent said he is preparing a legal brief for the solicitor general that stresses the need to tackle long-standing trade imbalances and curb fentanyl entering the U.S. If that fails, there are other options in the works.

 

Several months ago, after the first ruling against the use of IEEPA, the president's team crafted a two-prong response to a loss in the courts. The first would be a stopgap measure that would impose tariffs under a provision of the Trade Act of 1974. The action would impose up to a 15 percent tariff for 150 days that would address trade imbalances with a wide swath of countries. The administration might also consider using the Smoot-Hawley Tariff Act of 1930. That has a provision that allows tariffs on nations that discriminate against the U.S.

 

The second step would involve going through Congress, although this would take longer and require a great deal of negotiating. But in the end, tariffs would still survive as one of the pillars of the Trump administration. The congressional process would require a lengthy notification and comment process (a polite term for back-room horse trading) among the nation's legislators.

 

It is the traditional method of implementing tariffs within government, which has been used many times in the past. The downside to this approach, however, would be that individual politicians would no longer have the cover of a president to blame for the tariffs. Given that the polls suggest that many voters are against these tariffs, voting for tariffs in the face of dissatisfaction could be political dynamite for members of Congress and senators in states that will suffer the brunt of many of these tariffs.

 

In the meantime, as this tariff drama unfolds, American businesses have no way of determining what costs to eat and what to pass through to customers for their imported goods. Companies are in a political and economic limbo. Overseas, U.S. trading partners, of which there are dozens, face a lengthening period of indecision on how and when to trade with the U.S. The longer this situation persists, the less likely countries will be to trade with us. The confusion will undoubtedly create economic fallout and slower growth.

 

If the tariffs were to be overturned, the results would have both negative and positive effects. The president is predicting a 1930s-style Depression will happen without his tariffs. No one in their right mind is predicting that. In many ways, the reverse might be true. Consumers will benefit from paying less for imported goods than they would otherwise. Many American businesses would see their costs drop and profits rise under the same reasoning. The inflation rate would likely be lower, which would be a real shot in the arm for most working-class people. On the negative side, some companies that have benefited from tariffs thus far would see a reversal in their fortunes, but they are few and far between.

 

From a big-picture economic view, the existing tariffs are a tax and, as such, have generated more than $300 billion in government revenues thus far, which reduced the country's deficit by a like amount. If tariffs go away, what happens to the deficit?

 

Well, Trump and the ruling party could call a spade a spade. They could finally admit that without the tariff taxes, the only straightforward approach to reducing the deficit would require an across-the-board tax hike. We already know that is not going to happen, so the deficit will climb based on the spending that is coming down the pike, thanks to the passage of Trump's latest spending bill. Worse still, what if the courts rule the money must be returned?

 

Bessent has warned that rescinding the tariffs would be a "dangerous diplomatic embarrassment." The only embarrassment I see is that an over-confident administration thought they could shortcut the system and succeed. They did the same thing with DOGE and with several other initiatives. Hopefully (but not likely), the administration can learn a lesson or two from this drama. "Rome was not built in a day," nor will this country be transformed in a matter of months, no matter how much some would like it to 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.

September into mid-October has historically been a dicey period for equities overall. Of course, history doesn't mean much when the financial system is wrestling with so many "firsts." Rather than red, it appears markets are waving a yellow flag of caution.

 

Wherever investors look, gut-wrenching changes are occurring in the economy, including trade and even the independence of our monetary system. However, at the same time, there are plenty of positive developments among these changes. Depending on your perspective, the cup is either half full or half empty.

 

The economy continues to grow, with the second-quarter GDP revised higher to 3.3 percent from 3 percent, after shrinking 0.5 percent in the first three months of the year. Most of those results were driven by changes in imports. The historically high tariffs announced by the Trump administration prompted businesses to import foreign goods ahead of their implementation. Imports, which are subtracted from GDP, caused the decline in the first quarter. That trend reversed in the second quarter as imports fell by almost 30 percent.

 

Economists expect the impact of the tariff taxes to begin to show up in earnest in the prices of a wide range of consumer goods. That, in turn, may fuel future inflation. A precursor to that was the most recent Producer Price Index, released a week ago, and the Personal Consumer Expenditures Index, announced on Friday. The PCE data for July came in as expected. Prices rose 2.6 percent year-over-year. Core inflation, which excludes food and energy, ticked higher from 2.8 percent to 2.9 percent.

 

Despite those indications of higher inflation, investors are expecting the Federal Reserve Bank to cut interest rates at their Sept. 17 meeting. There is a greater than 70 percent chance of one cut in September, with as many as two more by the end of the year. However, two data points, the August non-farm payroll employment report and the August Consumer Price Index, will be released before the Fed meeting.

 

Wall Street economists are forecasting an inflation rate of 2.8-2.9 percent for the CPI, and the consensus for the employment numbers is for additional job losses. If these forecasts prove accurate, the Fed will need to decide what is more important: employment or inflation. The markets are betting that employment losses will outweigh inflation gains, and thus, there is a high probability of an interest rate cut.

 

Last week, I argued that one interest rate cut is all we can expect. I would be a "hawkish cut" with no more waiting in the wings. I am guessing that a rising inflation rate, which I expect to top 3.15 percent by the end of the year, will deter Fed officials from further easing of monetary policy unless another historical change were to occur.

 

I assume readers are aware by now of the feud between President Trump, Fed Chair Jerome Powell, and now Lisa Cook, a voting member of the Fed Board of Governors appointed by President Biden. President Trump's decision to fire her for "cause," followed by Cook's countersuit, will be decided in the courts. If he wins, Trump would then be free to appoint yet another administration-friendly voting member to the central bank board. That would give him majority control of the six-member voting board.

 

The financial markets, both here and abroad, believe that if Trump succeeds in his effort to control the Fed, it will undermine the independence of the Federal Reserve Board and, with it, any trust in its actions. The Fed's independence from the U.S. Treasury was established by Congress in 1952.

 

For the most part, the concern over Fed independence is primarily a concern of Wall Street. It is surprising, given the financial community's backing of the President's re-election and their continued financial support of his cause. What they fail to realize is that this administration, according to U.S. Treasury Secretary Bessent, is focused on Main Street rather than Wall Street.

 

In this case, the populists among us do not view the Federal Reserve Bank as a friend, nor have they seen beneficial results from its years of independence. As I explained last year in my four-part series of columns on regime change and the rise of populism, for decades, the Fed, through its top-down economic policies, benefited those who could borrow, but not those who couldn't.

 

It unknowingly fostered decades of widening income inequality, the main angry engine of growth behind today's populism. Rather than independence, many Americans see the Fed as simply another tool of the deep state. Don't look to them to rescue the Fed. The reasons behind the president's push for control of monetary policy go far beyond simply reducing interest rates or replacing Jerome Powell. Please read my July column, "What is really behind the move to replace Fed Chair Jerome Powell," for a better understanding of the ramifications of this historical challenge.

 

Between labor weakness, higher inflation fears, tariff issues, and now this Fed scare, you might wonder why markets continue to make new highs almost daily. It is because U.S. markets have become increasingly short-term in their focus. The options markets, as I have written in the past, increasingly determine the direction of the market. The tail wagging the dog syndrome, if you will. Given that more than 60 percent of the trade on the options market involves zero-dated options that expire at the close of each day, the reasoning is straightforward. 

 

Look no further than the middle of September when the Fed meets. The overwhelming odds are in favor of a cut. Lower interest rates are good for the stock market. Since Jerome Powell, President Trump, and the markets want the same thing--to see interest rates reduced in September — why worry about something else that may or may not happen until it does?

 

The narrative continues to be bullish. Most market participants accept the government's assurances that all is well with the greatest economy, the lowest inflation, and the brightest future that anyone could imagine. Some might say investors are whistling past the graveyard.

 

The higher we go, the more perilous becomes the path we walk, and the narrower it becomes. Friday's PCE data came in as expected, but the markets still sold off. Traders had expected better-than-expected data, but they didn't get it. Nvidia's earnings were impressive, but the stock still sold off because the results were not strong enough to justify the hype.

 

I urge readers to pay special attention to the macroeconomic data in the next two weeks. The yellow flag is waving. Until unemployment rises dramatically or inflation surpasses a certain threshold, investors will continue to push stocks higher. The S&P 500 could reach 6,550-6,570, but not more than that without a correction.

 

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.

Risks and rewards in adding new investments to your tax-deferred investment accounts

 

An executive order instructing the U.S. Labor Department to consider the pros and cons of adding several new investment choices to your tax-deferred investment accounts is underway. A decision on the president's order won't happen overnight. 

 

Last week, I covered the benefits of adding private equity, real estate, and digital assets to the existing mix of stocks and bonds in retirement accounts. Backers of this initiative cheer the president's executive order and say it will expand the investment opportunities for retirees. It also offers much more diversification than simply stocks or bonds. Why, they say, should investors lose out on the spectacular returns that private investments, real estate, and cryptocurrencies offer? Anyone who has looked at the performance of Bitcoin or Ethereum this year might agree.

 

Technically, private market investments are already allowed in 401(k) plans. In addition, there are also ways to invest in crypto, and there is now a long list of exchange-traded funds offering investments in the digital currency space. Why, therefore, haven't those employers that provide tax-deferred accounts embraced these assets? The short answer is risk.

 

The risks in some of these investments are much higher than in your ordinary stock or mutual fund. In some cases, if you are in the wrong asset, savers can lose a hug chink of their retirement savings. In the private markets, for example, there is a lot less transparency and liquidity. Information can be scarce in analyzing a private company, and if there are periods of financial panic, markets to offload your investments can dry up or disappear entirely.

 

Management fees are also much higher than in the public equity markets, sometimes as much as two or three times the typical fee on a mutual fund holding stocks and bonds. Employers who would offer these assets could be held liable for losses. The issue for many savers is a potential lack of restraint in investing in risky assets. Without proper guardrails, such as limiting exposure to 5-10 percent of the portfolio, investors could be exposed to unnecessary risk and significant losses unless they were protected by some conditions set forth by the Labor Department, for example. 

 

We all know the history of cryptocurrencies. Digital assets have had several periods of deep declines. Prices have more than halved at times and then gained little over several years before once again climbing. Just last week, some of the most popular cryptocurrencies, Bitcoin and Ethereum, saw wild swings in their prices, both up and down. There have also been digital hacks of account holders' assets, fraud, and some crypto kings are languishing in prison to this day.

 

Both the Labor Department and the Securities and Exchange Commission have roles to play in allowing access to these alternative investments. The Labor Department, which governs tax-deferred retirement accounts, needs to establish rules and regulations, a so-called safe harbor, for plan fiduciaries that would protect them from lawsuits. Plan sponsors, in turn, would need to select investment options designed to protect retirees, like limiting the amount savers could accumulate, ensuring these investments provided the required liquidity, and determining if the fees charged were in line with the returns of these assets.

 

The SEC's role would be to ensure the expansion of registered closed-end funds managed by registered investment advisors that invest in private equity and private credit funds. These funds need to be registered and listed on exchanges, providing the liquidity necessary to ensure functioning markets in downturns.

 

Even if Labor and the SEC were to green-light these added investments, the rules and regulations would require months to write, and that may be an optimistic appraisal. Neither of these government bodies is noted for its ability to make swift decisions about anything. In which case, by the time they get around to deciding on this initiative and enacting it, we may have a new president in office.

 

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.