Investors experienced a rare occurrence this week. All three main averages were down for three consecutive days. That was a good thing.

 

Readers are aware that the markets have been in a melt-up mode for the last few weeks and are both overextended and overbought. Under these conditions, any excuse, no matter how flimsy, can trigger a bout of profit-taking. A government shutdown could provide the turbulence for a much-needed market sell-off.

 

With only five days to go before such a potential event, investors are getting nervous. Doubly so, because the administration is asking federal agencies to consider mass firings (not just layoffs) if the shutdown happens, this is thought to be a political tactic to get Democrats on board in passing another budget continuing resolution. If so, it has fallen flat, as Democrats say, "Bring it on."

 

A lengthy shutdown would likely send the dollar lower still, and with it the yields on government debt. It just so happens that those are two critical tactical goals of the U.S. Treasury Secretary, Scott Bessent. He is struggling to sell billions in government debt without raising interest rates. A shutdown could help him there. Better still, the president could blame the Democrats for the shutdown, his firing of government employees, and a weaker dollar and yields. It may also help his pressure campaign against the Federal Reserve Bank.

 

Now that the FOMC meeting and subsequent interest rate cut are behind us, investors have immediately jumped to the conclusion that further cuts will take place through the end of the year. As it stands today, the betting on Polymarket indicates a 79 percent chance of a 25-basis point cut in October and a 68 percent chance of a similar size cut in December.

 

Now, Chairman Jerome Powell did not promise further cuts, although several Trump-appointed members of his committee continue to advocate for more cuts. The Personal Consumer Expenditures Index, released on Friday, indicated that inflation was rising, but moderately so. However, it is the employment data that most believe now takes precedence over inflation in the Fed's thinking. The jury is still out on labor weakness.

 

That brings us right back to the possible shutdown scenario where more job losses would add further pressure on the Fed to cut rates. If all this sounds like a conspiracy theory, rest assured, it is. I just figured I should add my two cents' worth to the conspiracy theory.

 

What happens when the Fed cuts rates in a growth economy? If one looks back through history, the stock market did exceptionally well. This week, the government's significant revision of its previous estimate for second-quarter growth bolstered the case for further growth.

 

Readers may recall that the first-quarter growth rate was an anemic 0.6 percent, caused by Trump's trade wars. Since then, the period from April to June, which was initially thought to have gained 3.3 percent, has now been upgraded to 3.8 percent due to an increase in consumer spending. For the first half of the year, the economy averaged  1.6 percent, which was not great, but is still much better than initially thought.

 

Tuesday will mark the end of the quarter. It would be highly unusual (but still possible) that we escape a downturn in October. Investors indeed evaded that happening in September. Even if we did have a pullback, it could be negligible compared to the gains we have accumulated this year. Remember that the anticipation of imminent monetary easing by the Fed can give a powerful boost to any stock market. The declining dollar and the relatively moderate range in bond yields to date have been the main macroeconomic trends supporting higher stock and commodity prices. Adding the Fed's easing into the equation, markets could see further upside ahead.

 

My call on precious metals has been remarkably successful, and now platinum is demanding its turn in the spotlight. China has performed well, as have emerging markets, AI plays, and increasingly speculative stocks on the ledger. Crypto, however, has given up some of its gains after substantial increases earlier in the quarter. Some argue that what happens to cryptocurrency happens to the stock market, but with a lag. 

 

I see some elements of the kind of stock action I experienced during the Dot-com bubble. Remember, however, it took many more months before that frothy exuberance ended in disaster. Don't chase, stay invested, and expect pullbacks.

 

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 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.

Investors await next week's Fed meeting. The markets have already baked in a 25-basis-point interest rate cut. The wild card will be if the Fed cuts even more than that. The latest economic data make that less than a coin toss.

 

The Consumer Price Index for August hit the highest monthly reading since January, with the 12-month inflation rate up from a low of 2.3 percent in April. And yet, the August Producer Price Index showed a 0.1 percent decline, which was below the anticipated 0.3 percent increase.

 

At the same time, initial jobless claims on Thursday surged this week by 27,000, reaching the highest rate since October 2021. In addition, the government's non-farm payroll revisions for the last year resulted in a net loss of 911,000 jobs. The stock market hit new highs on the news. However, the sudden spike in jobless claims was due to Texas floods last month.

 

These opposing trends leave the Federal Reserve Chairman Jerome Powell in a pickle. Does he bend to the will of the president, a growing group of Fed board members,  and the markets that are yammering for several interest rate cuts, or does he hold back and wait for more data? Investor sentiment indicates that inflation is within "acceptable" tolerance levels, while employment is not.

 

Now, unemployment at 4.3 percent remains at what economists consider full employment. The administration's draconian immigration policies could at least partially explain the weakness in the jobs data. But I also recognize that the implementation of artificial intelligence into the workplace is beginning to impact hiring numbers, especially among college-educated job seekers. The risk that job growth may lessen in the months ahead may justify at least one interest rate cut, but no more.

 

My Consumer Price Index inflation forecast proved accurate as annual inflation accelerated to 2.9 percent in August, after holding at 2.7 percent in both June and July. This time around, housing prices were the culprit, while tariffs were not a factor. Further rate cuts would reinforce my expectations that inflation will continue to climb through the end of the year.

 

One wild card in that equation could be the Supreme Court ruling in November on Trump's emergency powers tariff case. A decision against him would likely unravel or delay much of the future price pressure that existing tariffs are creating. I suspect the Fed would want to at least wait until then before moving on to further monetary loosening. Markets appear to be entering a melt-up stage. The Fed is potentially beginning a cutting cycle while the economy is in a moderate growth phase. Nothing could be more bullish if this turns out to be true. We will know more on Wednesday when the Fed meets, and Chairman Jerome Powell gives us the central bank's latest view of both inflation and employment.

 

Worldwide, most equity markets are overbought but could remain that way longer than most can imagine. At this point, my advice is to stay invested, enjoy the ride, but expect a pullback.

 

I will be on vacation next week, so there will be no columns while I am away.

 

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 first week of September saw record highs in the stock market, but bad news on Main Street had investors rethink their investment case. The payroll report had a lot to do with that.

 

The non-farm payrolls report for August, released on Friday morning, was another downside surprise following last month's disappointing report. Employers added just 22,000 jobs for August, far fewer than forecast, while the headline rate of unemployment rose to 4.3 percent.

 

Economists were looking for an already subdued gain of 73,000 new jobs. Even worse, the downward revisions to the employment numbers for past months continued to show additional losses. All in all, over the last three months, the U.S economy created fewer than 8,000 new jobs — the worst record since December 2020.

 

Readers may recall that our president fired the head of the Bureau of Labor Statistics and replaced her with a loyalty pick after last month's data. Will he do it again? Unfortunately, changing personnel cannot conceal the obvious: job growth under Donald Trump is much less than the markets had hoped. I expect that losses will continue in the months ahead.

 

However, I do not expect these labor losses to herald a recession. The fundamental issue behind these numbers is immigration, or lack thereof. I have written in the past that job gains because of our immigration policies have buoyed the job market ever since the pandemic. Trump has reversed these policies at the behest of American voters. And now we must live with the results.

 

The good news is that it has all but cemented expectations that the Federal Reserve Bank will cut interest rates at its Sept. 17 meeting. It is simply a question of how much.

 

Given the choice between staving off further unemployment or reducing inflation, the Fed has opted for preserving jobs, at least for now. And while I continue to believe inflation will rise with the Consumer Price Index for August hitting 2.7 percent, 2.8 percent for September, and by as much as 3.1 percent by the end of the year, markets don't care quite yet. The latest sentiment data has an increasing chance for as many as three rate cuts in total by the end of 2025. I find that doubtful in the face of my inflation expectations.

 

So, what happens if I am right and the expected September rate cut turns out to be a one-and-done move by the Fed? I suspect equity markets are not going to like that one bit. Politically, President Trump will take to the airways with increased vehemence, threatening to bring fire and brimstone down on the Fed, and another uproar will ensue, and then life will go on.

 

But let's not get ahead of ourselves. Stephen Miran, the president's choice to replace Adriana Kugler as Fed governor, testified before the Senate Banking Committee confirmation hearing on Thursday. He passed muster and will likely take a seat on the Fed's board in the weeks ahead.

 

Miran testified during the hearing that he thought "Independence of monetary policy is a critical element for its success." Stocks moved higher on his words, although honestly, what did anyone expect him to say? How would "Senators, I am committed to doing whatever the president decides on interest rates during my four-month tenure on the Fed, while still working for the president," have played out before a political body already nervous over the president's move to pack the Fed with his people?

 

In anticipation, equities moved higher. Suddenly, the prevailing sentiment that the president was being given a bad rap for his words about the Fed changed. He really didn't intend to nominate "yes" men, after all, said the spinners. It's all about the narrative these days, isn’t it.

 

Moving on to "Trump's Tariff Troubles," I suggest you read yesterday's column on the subject. The Court of International Trade had announced last week that the president had exceeded his authority in using the Emergency Powers Act to levy reciprocal tariffs on our trading partners. This was after a lower court's decision weeks ago that said the same thing. Surprise, surprise, the administration immediately petitioned the Supreme Court to reverse the decision. In any case, the tariffs will still stand until October. After that, it is anyone's guess. However, that is over a month away, and markets have their hands full simply focusing on whether the Fed will cut by 25 or 50 basis points.

 

I envision a scenario where investors will seek further justification next week for the Fed to cut three times this year, with the first cut expected to be 50 basis points, based on the job market numbers. Markets will be anxious awaiting the Consumer Price Index, to be announced on September 11. It should be hotter than expected. If so, based on the CPI data, three cuts "for sure" become two "maybes." By the time the next CPI numbers (also hotter) roll around, it will be clear that inflation is rising, while job growth is slowing. That will put both investors and the Fed in a bind with no good choices.

 

In this environment, it is no wonder that September can be choppy, especially in the next two weeks. I advised readers to expect it, and so far, the month is living up to its reputation.

 

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.