While you have been watching Tesla stock on the up and down roller coaster, you have found some solace in the stability in the municipal space. It is true that yields are up measurably and that funds are not cascading into mutual funds of late. But new issuance is orderly and there is a bit more trading in the secondary. What has been most noteworthy is that the appearance of credit problems has been much less than anticipated.
Markets are worried about incipient inflation while the general populace is concerned about just getting by daily. Although a focus on inflation is necessary, we have some time. After all, the $1.9 trillion is not flowing yet. It does appear that the Treasury is sincere about making certain the dollars flow quickly once the bill is signed.
Some $350 billion is allocated to States and Localities. Besides certain minimums that are specified, funds will be distributed to states according to their unemployment rates. Another allocation of $130 billion is dedicated to schools. There will also be funds for transportation and many other categories.
I believe that after all the criticism about how much of the spending is allegedly not for Covid-19 related reasons that the funds should be spent very wisely. There should be a careful distribution and accounting for how the funds are being applied. We should not fall back on the old reliable that funds are fungible once they hit the books. My other thought here is that all functions have been affected by the pandemic and should be considered eligible for assistance.
As for pensions, it is true the unfunded liability has been built up over time and Covid-19 has only affected one year’s activity. Returns were certainly affected negatively in the Spring of last year. But markets have recovered and have reached new highs on the equity side. This performance should be reflected in the returns on pension fund assets in time.
State and local positions have been pared by over 1 million positions. Treasurer Yellen has said that one of the shortcomings of the 2008-2009 period that not enough was done to prop up the state and local sector. Some have maintained that the support should have been less than the $350 billion this time around. One might say that the amount is an exceptionally large insurance policy.
There is no doubt that the stimulus will stoke GDP growth. Estimates have varied in a range, but it is reasonable to assume that high single digits should prevail. These growth rates will serve to fill state coffers.
There appears to be more concern about finances on the local side. Spending has been elevated due to coping with the pandemic. The stimulus will help plug gaps. Property taxes have been holding up quite well. However, one may expect property tax appeals to accelerate especially where there is a concentration of office properties in the tax base. Appeals can take a considerable amount of time so the effect of any adjustments may not be realized for some time.
Saving the core business centers is related to the reopening theme. I am not certain how many companies will and can pay $100 million to cancel an office building contract.
Any approach to the return to the office will include a relatively good measure of flexibility. This flexibility should include some number of days in the office once the vaccination rate is higher and the herd immunity takes hold.
We have also stressed the importance of corporate culture. I am just not certain about how you achieve that goal solely on Zoom. It has been mentioned that new recruits may have difficulty acclimating if not having the benefit of being in person. This may not be entirely true because the latest generation is much more accustomed to working and communicating with the technology of today.
In the meantime, we will be on the look out for inflation. I certainly do not choose to return to the days of stagflation or when we experienced high unemployment and high inflation simultaneously. That circumstance was quite painful and required Paul Volcker to address.
The variable that is less straightforward is how does confidence grow in the business community. We have had an abundance of confidence in the equity markets. I am talking about the confidence that empowers managers to do more hiring. The latter has been on the upswing but more needs to be done.
On the market side, the municipal yield has steepened much more in the ten-year range than it has for the thirty-year maturity since mid-February. The thirty year has even moderated a bit of late. Rates will keep moving higher, but we will not have truly clear signals until after tax time.
I just hope that some willpower is remaining after the stimulus bill to put up an infrastructure bill. I know most prefer to think big in the billions. But after so many false starts on infrastructure I would be positive about starting with a smaller base with enhancements over time than achieving nothing. Yes, I appreciate that the moves must be made early in an administration.
I just do not want to settle for one and done.
John Hallacy
John Hallacy Consulting LLC
03/10/21
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