It is 2026. A new Fed chief has been installed after committing to follow the president's demands to cut interest rates and keep them low. The Fed's first act is a one percent cut in interest rates. How will the markets react?

 

If history is any guide, the stock market would roar. Bond yields across the board might plummet. The economy would catch on fire. Home prices in the real estate market could climb as buyers take advantage of falling mortgage rates. 

It would be a time to break out the champagne because good times are here again.

 

However, history may not be an accurate reference point. In the above scenario, we would be living in a macroeconomic environment in which the independence of the Fed will have taken a back seat to our high public debt and deficits. Those twin issues would now be the new Feds' focal point dictating and constraining America's monetary policy.

 

The U.S. would have entered a regime where the central bank's usual objective of controlling inflation and sustaining employment becomes secondary to the U.S. Treasury's budget financing needs. To accommodate the government's borrowing, the Fed would be expected to keep interest rates low, and if necessary, buy government debt (quantitative easing) on an ongoing basis.

 

Welcome to a state of Fiscal Dominance. We have had our first taste of this condition when former U.S. Treasury Secretary Janet Yellen, increased the amount of short versus long dated debt the government issued from 25 percent to 50 percent. While yields on Treasury bills and notes fell, long-dated securities (the 10-, 20- and 30-year bond yields) rose. Why?

 

Holders of longer-term bonds were not so quick to buy more in the face of the government's new tactics. As a result, the Fed reversed their quantitative tightening program and bought back more Treasury bonds and sold less. At the same time, the U.S. economy began to decelerate in both real and nominal terms.

 

The same thing happened in Japan in the first decade of this century. The Japanese central bank began buying Japanese Government Bonds (JGB). The Bank of Japan is now the largest holder of the country's national debt worth $4.3 billion. Under fiscal dominance, it is not hard to imagine a future where the U.S. Federal Reserve Bank becomes a bigger and bigger buyer of our debt.

 

To be sure, keeping interest rates low in an economy as large as ours would put a lot of pressure on the financial system. It would require the central bank to inject massive liquidity (print money) in order to keep buying up T-bills and notes while utilizing quantitative easing to buy Treasuries on the long end. In a situation like that, there would have to be fall out. In past episodes of fiscal dominance (mostly in emerging markets), it was the currency that fell victim to these government policies.

 

Consider that the dollar year to date, is down around 10 percent. The combination of Donald Trump's trade policies, inflation, Americas' increasing deficit and debt, and the administrations' disruption of American foreign policy has created alarm and a building distrust from friend and foe alike. These set of circumstances have conspired to pressure the dollars' downward spiral.  

 

Notice too that neither Trump nor his cabinet have uttered a word about the dollar's decline. That may be because in general, taken alone, currency declines can be good for the value of real assets. However, an imploding currency, especially if we are talking about the worlds' reserve currency, would create an enormous flight of capital by foreigners who hold trillions of dollars in U.S. bonds and stocks. That has not happened yet.

 

If Trump were to manage a fiscal dominant regime in the coming year, I expect the decline in the dollar would continue. That would hurt export-driven economies like Europe, Japan and China. At some point they would be forced to cut their interest rates and drive down the worth of their currency to protect their own exports. Economists would refer to this as a competitive devaluation. In a world where all currencies were declining, investors would be actively looking for somewhere to preserve their assets.

 

We are already witnessing that trend in action. Higher prices for gold, silver, and other precious metals, as well as the recent price gains in crypto currencies are no accident. It appears to me that investors worldwide are already anticipating further declines in the U.S. currency and are hedging their bets and exposure to the U.S. dollar.

 

As for the stock market, there will be winners and losers. Real estate, commodities, precious metals and oil stocks should do well. Anything that tracks the rate of inflation higher would be attractive investments. Exporters could benefit from a lower dollar while those that depend on exports will not.

 

Rate sensitive sectors like technology, consumer discretionary, financial and growth stocks might not do as well. Given the greater role the government would play in the economy, infrastructure, defense, and healthcare could do better. Foreign stocks, especially real asset-rich emerging markets, could also outperform domestic equity as well.

 

The question many readers might ask is will the country go along with this policy change? I suspect they would, given the era of populism we find ourselves in. In my May 2024 column "The Federal Reserve's Role in Today's Populism," I argued that the U.S. central bank's monetary policy is and has been a "top-down approach" where lowering interest rates primarily benefited the wealthiest segment of the population and the largest companies within it.

 

It was they who could borrow the most but needed it the least, who benefited while Americans at the other end of the scale could borrow not at all.  An independent Fed is a Fed that inadvertently fostered and increased income inequality among Americans in my opinion. Given that, I am guessing that a different approach to monetary policy might be greeted with open arms among a large segment of the population.

 

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 rhetoric is getting louder. Potential contenders to replace the head of the U.S. Central bank are lining up for that coveted position. The president's demand for lower interest rates is now almost a daily occurrence. Why?

 

Jerome Powell, the chairman of the U.S. central bank, is now on Donald Trump's sh*t list. The White House and its allies have intensified their assault on the Fed chairman. The president is actively asking his allies in Congress if he should fire Powell — if he can. Some members of his administration are using the Fed's over-budget $2.5 billion headquarters renovation to build a case for removing Powell sooner than next spring, when his term is set to end. Why now? What is so important that Trump can't wait a few months before the Fed lowers interest rates anyway?

 

From a financial perspective, the economy appears to be in no danger of recession. The latest non-farm payroll report for June was a robust upside surprise, signaling a healthy labor market. Inflation, while down over the last few months, is by no means defeated. And yet, the administration's urgency to reduce interest rates is palpable.

 

Some dismiss the president's rhetoric by explaining that the president has always been a "low interest rate kinda guy," which is a legacy of his years as a real estate mogul. OK, I can buy that, but Scot Bessent, the Treasury secretary, is a Wall Street money manager. He knows the interest-rate market like the back of his hand. He cares deeply about the ramifications of lowering interest rates in today's economic environment.

 

Some of Bessent's recent comments may hold the key to what is really going on. In a recent Bloomberg TV interview, he stated that President Trump had instructed him "not to do any debt beyond nine months or so" until a new Fed chair is installed. He explained his reasoning: "Why would we issue debt at current long-term rates?" With the government's interest payments exceeding $1 trillion annually, selling longer-term maturities that command higher interest rates would substantially increase those costs.

 

What this indicates to me is that there has been an essential shift in the country's policy toward borrowing, away from long-term debt such as 10, 20, or 30-year Treasury bonds and towards lower-interest, short-dated debt, such as Treasury bills with less than one-year maturities. Why does that matter?

 

Readers should be aware that interest rates on long-term debt are determined by the market, whereas the Federal Reserve sets those on short-term debt through adjustments to the Fed Funds rate. Historically, the Fed has acted independently of the rest of the government, doing what it thinks best to curb inflation and maintain employment, but times change.

 

The person who receives the nod to become the next Fed chairman will be determined by two things: his loyalty to the president and his willingness to reduce interest rates. Once appointed, he is expected to be at the beck and call of Donald Trump's interest rate demands. Given that the president has already instructed the Treasury to focus on issuing debt in the short-term market, the Fed will be able to effectively decide the interest rate the government pays on its debt.

 

Since interest rate payments are now the second-largest cost item after entitlements, the government's control of how much it pays for borrowing would save the government billions of dollars in interest expense. Since the issuance of long-term Treasuries is significantly lower, yields on that debt should drop due to supply and demand. However, interest rates on long-term bonds will depend on what the market decides is a fair yield, based on its growth and inflation expectations.

 

A friendly new Fed chairperson, working with the Treasury to maintain this new financing mix of lower interest rates and short-dated maturity issuance, could keep the nation's interest payments in check. In one fell swoop, the Fed and Treasury would reduce the budget deficit and stimulate the economy at the same time. But what happens if the bond buyers of our long-term debt don't go along with this scheme? There is a remedy for that as well.

 

Recall that last year,  the Fed cut interest rates by 50 basis points. The short end of the yield curve dropped as expected, but the longer-dated bonds (controlled by the markets) did the opposite. What was behind that rise in interest rates? Financial markets decided that the Fed cut could lead to higher inflation over the long term. Since then, yields on those bonds have remained higher than most expected.

 

Could that happen under this new regime at the Fed? It could, but there would be nothing to stop a less-independent central bank from buying longer-dated Treasury bonds on its own, thereby driving down long rates as well. They have done it before under the name of quantitative easing. If they wanted, they could even buy long-dated Treasury bonds at auction if needed§.

 

There is a name for this kind of policy change. It's called Fiscal Dominance, something I witnessed countless times in several emerging market economies back in the day. It is a policy that subordinates a previously independent central bank to the needs of the Treasury. It typically occurs in a government that has abandoned budget discipline and resorts to printing money to finance its deficit. Sound familiar?

 

During my travels throughout South America in what was known as "the lost decade of the Eighties," Fiscal Dominance governments emerged everywhere. Their government leaders opted for stimulating growth this way but ignored the risks of price stability. What occurred was structurally higher inflation, currency debasement, and ultimately, a political crisis.

 

Can this happen here, and if so, what will be the impact on the financial markets? Next week, we will examine how a potential change in Fed leadership, influenced by the president and the U.S. Treasury, could impact bonds, the dollar, commodities, and the stock market.

 

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.

Older populations worldwide are experiencing a significant increase in skin cancer cases after years of cumulative sun exposure over multiple decades. In the U.S., invasive melanoma rates continue to rise sharply among those older than 60, especially among whites.

 

The American Cancer Society estimates that approximately 104,960 new cases of melanoma will be diagnosed by dermatologists this year. Is it any wonder that health experts predict the dermatology sector of healthcare will reach $3.59 billion over the next 10 years? Last week, I examined some of the reasons why skin care has been the overlooked stepchild of health care for an entire generation.

 

It was almost as if the Baby Boomer generation was bound and determined to do as much damage as they could to this vital part of their anatomy. I explained how the Sixties generation became sun worshipers searching for the perfect Beach Boys tan at a time when industry was decimating the ozone layer with chlorofluorocarbons.

 

As Baby Boomers stripped down and the ozone layer began to disappear, we found even better, faster ways to damage our skin than simply frying our baby oil-soaked skin in the sun for hours. The explosion of cheap package holidays and tours to exotic locations (noted for their tropical sun) made for a great tan that would be the envy of the neighborhood.

 

Tanning beds were introduced to North America in 1978 and gained popularity by the mid-1980s. At its peak, the industry was generating $2 billion annually; however, as the health risks of exposure to UV became apparent, revenue plateaued, remaining around $1.9 billion per year.

 

The dermatology industry argues that the use of these beds significantly increases the risk of developing skin cancer. In one study alone, 61 of 63 women were diagnosed with melanoma, the deadliest form of skin cancer, before 30 who used tanning beds. These beds can also compromise your immune system, cause clinical eye issues, and lead to photodamage, as well as accelerate photoaging or premature skin aging.

 

The facts are that as we age, the incidence of certain skin disorders increases, as exposure to the sun over a lifetime creates cumulative damage. That is another explanation for why my parents did not have my skin problems. Baby Boomers are living longer than previous generations, thanks to advancements in medicine and technology.

 

In my case, one or both of my parents may have had skin issues, but neither ever bothered to see a dermatologist. I know of several men in my generation or younger who have never had their skin checked out for skin cancer. To me, that is astounding since the median age of onset for melanoma is 55, with the highest incidence rates found in the 65-plus demographic. What's worse, people with paler skin are 20 times more likely to develop skin cancer than those with darker skin.

 

I also wondered if, as a teenager, exposure to the sun while in Vietnam for almost two years may have damaged my skin. No one wore sunscreen, nor was it issued to the troops. Would a similar exposure by U.S. service members in the Middle East also be a factor?

 

I know my father, who served in the 101st Airborne, only served in Europe during World War II, but what about the Marines in the Asian theater?

 

Interestingly, a large proportion of World War II patients with skin cancer were stationed in the Pacific. The Veterans Administration concluded that a few months to a few years of prolonged sun exposure in a high-intensity area may result in skin cancer many years after exposure. Similar findings by the Journal of the American Academy of Dermatology in 2018 indicated the same high risks applied to service members and veterans.

 

You would think that with all the new medical research on the causes and consequences of skin cancer, the younger generations of Americans would learn from our many mistakes. We never heard about SPF labels back in the day, but we do now. Not so. The American Academy of Dermatology found that Millennials and Gen Z, while more attentive to their overall health, tend to prioritize sun protection less.

 

In a recent survey, 70 percent of respondents did not understand the skin cancer risks associated with sunburns, and nearly 60 percent believe in sun tanning myths. The younger generations believed that base tans were healthy and said they would rather tan and look great, even if that meant they wouldn't look good later. They also believed that tanning beds are safer than sun exposure.

 

Some say skin cancer is part and parcel of our culture now. The phrase "Beauty is only skin deep" was first stated by Sir Thomas Overbury in his poem "A Wife," written in 1613. Tell that to the marketing world today, who argue the opposite. As such, most Americans grew up believing that the better you look, the more successful, happy, wealthy, and so on, you are. 

 

That has spawned an insatiable demand for aesthetic appearance. Aging Baby Boomers want to turn back the clock. Younger generations view skin as simply another cosmetic to alter or do with as they please. Technological advancements promise a wide range of innovations. Bikinis have gotten smaller. Tans are still "in" unless, of course, you are like me and have had several bouts of biopsies, laser treatments, surgery, and more. As any parent of a teenager will tell you, trying to get people to cover up who don't want to is pointless. No wonder dermatology is a growth business with no end in sight.

 

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 dermatology sector in health care is expected to grow by almost 7 percent per year between now and 2034. That is good news, but the increasing incidences and prevalence of skin disorders are behind the industry's torrid growth rate.

 

The global market was estimated to top $1.4 billion last year, with North America being the fastest-growing market, followed by the Asia-Pacific. Skin cancer, warts, infections, dermatitis, psoriasis, and acne are among the primary disorders treated using a variety of therapeutic strategies, including cryosurgery, laser therapy, photodynamic therapy, radiation, and vitiligo therapies.

 

Over the past decade, like many other health-care areas, acquisition and investment activity in dermatology has skyrocketed, fueled by private equity, family offices, and institutional investors.

 

I am practically an expert in the area, given the number of times I have been scraped, cut, fried, and zapped over the last several years. As I wait for yet another biopsy on two spots, one on the crown of my head and the other on my forehead, I wonder how come I have all these unrelenting skin treatments when my parents had none, so I did a little research on the subject.

 

Each year in the U.S., an estimated 6.1 million people are treated for skin cancer, and that number is growing. With names such as basal cell carcinoma and squamous cell carcinoma, the most common forms are usually treatable. Most of these maladies are caused by overexposure to ultraviolet radiation from the sun and indoor tanning devices.

 

We know that the thinning of the ozone layer, where 90 percent of the earth's ozone sits between six and 31 miles above the surface, is partially responsible. This allows harmful ultraviolet rays (UVA) to penetrate the earth's surface and damage the middle layer of our skin. Unfortunately, it was only in the late 1970s that people realized that man-made chemicals, specifically chlorofluorocarbons, were destroying the ozone.

 

As a Baby Boomer, I recall the 1950s at Barnegat Bay on the Jersey Shore with my family. That's when suntan lotion became "a thing." We kids had to slop Coppertone on, although my parents rarely used it. It did little good anyway since I still managed to get a glowing red sunburn that ended in my peeling away large sections of white dead skin weeks later.

 

Reflecting on the past, I realized that basting in the sun only gained popularity in the late 1950s, at least in this country. It was then that the modern bikini became the rage for American women, shortly after Brigitte Bardot modeled a floral version on the beach at the Cannes Film Festival in 1953.

 

Before that, having a summer tan was the mark of a lower-class individual or an outside day laborer, while pale skin signified anything but. Having a tan became high on everyone's agenda. A tan was healthy, sexy and signified someone on the move.

 

I also recall that every male in America wore a hat of some kind while I was in grammar school. It was only after John F. Kennedy first appeared bareheaded at his 1961 inauguration that wardrobes began to change. He is credited with the death of the men's hat as males of all ages gladly exposed their scalps to the rays of the sun in perpetuity.  

 

The point is that, in general, people wore far more clothes back then than we do both summer and winter. Next week, I will expand on this combination of culture, science and events that conspired to create today's epidemic of skin cancer.

 

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.

Stablecoins have become a hot topic lately. The supply of this digital currency has grown from $2 billion to $200 billion, and it is beginning to transition from the digital to the conventional world of finance. The Senate's passage of the GENIUS Act this month sets the stage for stablecoins to further integrate into the global economy.

 

A stablecoin, for those who have yet to dip their toes into the digital world is a cryptocurrency without the notorious volatility typically associated with that asset class. Their value is generally pegged or tied to that of another currency, such as the U.S. dollar, a commodity like gold, or another financial asset, such as a U.S. Treasury bond or bill.

 

Stablecoins can act as a medium of exchange. To do so, a stablecoin, like any other currency, must remain relatively stable, assuring those who accept it that it will retain purchasing power in the short term. That is where the need for collateral comes in. 

 

There are four types of stablecoins, depending on the types of collateral they have chosen. Fiat-collateralized stablecoins maintain a reserve of a fiat currency such as the U.S. dollar or, in some cases, U.S. Treasury debt instruments. As such, stablecoins have become one of the largest holders of U.S. Treasuries in the world. 

 

Other collateral choices include commodity-backed stablecoins, pegged to the market value of individual commodities such as gold, silver, or oil. Crypto-collateralized stablecoins, backed by cryptocurrencies and algorithmic stablecoins, are computer-driven and strive to keep the stablecoin's value stable by controlling its supply.

 

Until now, the stablecoin universe has been considered the exclusive domain of crypto enthusiasts who require a digital cash equivalent to finance their trades. The GENIUS Act, short for Guiding and Establishing National Innovation for U.S. Stablecoins, just passed by the Senate, is intended to open this market to the conventional financial world.

 

The act aims to establish a clear federal framework for stablecoins, introducing strict reserve, licensing, and consumer protection standards. Rather than speculative instruments, the act would treat stablecoins as a payment infrastructure with full reserve backing and monthly audits for issuers to ensure stability and reliability. The legislation now goes to the House, where the act could pass by the end of August.

 

If the act passes, the benefits will likely first accrue to the crypto investor, who can use these stablecoins as a cash management tool. For example, it could be a place to store their profits from Bitcoin or Ethereum, Solano, etc., without converting those gains back into a fiat currency.  The investor could even receive an interest rate return, as many of these stablecoins now offer annual yields similar to those of money-market mutual funds. If a new opportunity in the crypto universe comes along, he could then use these stablecoins to acquire it with his stablecoins.

 

If the GENIUS Act becomes law, it would be logical to transition this digital asset into conventional finance. These coins, for example, could be used similarly to debit-card-based payments. In the brave new world of digitalization, stablecoins offer some real advantages.

 

It all comes down to time and money. In today's conventional transfer of funds between two or more parties, intermediaries charge a fee based on the amount transferred and typically require a waiting period before the transaction is complete. Some sums of money can take days to settle or more or are limited to being transacted only during specific windows of opportunity, such as bank working days.

 

Blockchain technology eliminates most of that. Stablecoins enable near-instant transfers, improved settlement speeds, and reconciliation of business payments almost instantly. Internal branch-to-branch or book transfers for banks, as well as intercompany settlements, would also be much faster and cheaper than straight money transfers. Many transactions could be significantly less expensive because they bypass intermediaries.

 

Additionally, stablecoins can utilize contract technology to facilitate automated payments under predefined conditions and events. Real-time transaction tracking would become commonplace, and stablecoins could be used across various platforms, wallets, and networks. A well-regulated digital entity could trigger significant changes in the way money is transferred among governments, banks, merchants, technology platforms, and digital wallets, as well as between traditional and decentralized financial systems.

 

For consumers, three obvious benefits include online shopping and sending and receiving money internationally, as well as paying utilities, subscription services, rent, and, at some point, even mortgage payments.

 

There has been a complete turnaround in the government's attitude toward all things crypto, largely thanks to President Trump and his administration. In the case of stablecoins, the U.S. Treasury has been particularly enthusiastic over the prospect of institutionalizing the acceptance of these coins. Since most stablecoins are pegged to the dollar (over 90 percent), they help to cement and maintain the dollar's dominant role in the global economy. A growth industry, such as stablecoins, could also increase the use of U.S. Treasuries as collateral. That would open up a vast new market for our sovereign debt, something that would likely keep long-term bond yields in check for the foreseeable future. In any case, stablecoins are part of the new digital frontier, and I expect to see their use sprout throughout society in the years 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.