Self Inflicted Pain
Given the recent moves in the market there may not be much to celebrate except for somewhat higher yields on the bond side. If we were going to celebrate any significant event, we would not be doing it with champagne or Chateau Haut Brion. A 200% tariff increase on these products will dissuade most from partaking. Clearly, this is a first world problem. But many in the production and sales chain will be affected. Best to go back to world class Napa valley products or bourbon. I suppose they have a lot of the good stuff in the cellar at Mar-A-Lago.
Rates have risen moderately once again with the ten year Treasury at 4.31% that is off the low of 3.35% for the 52 week period. The high of 5% appears high but we know that gap could be closed very quickly. The Fed has a lot more to ponder including a somewhat slowing economy. The federal layoffs are having some effect on the data. However, the Fed is less likely to act at this upcoming meeting. Many pundits are now calling for more than one easing this year. This could be more probable given the negative wealth effect that is present due to the current equity market downturn. On the other hand, employment has not taken a real hit yet. The words recession and stagflation are appearing more in the media. It is not a foregone conclusion that either appears soon if at all.
We have been reading about the congressional oversight of the District of Columbia’s budget. Having worked with the District during the crisis of the 1990’s, it was clear that Home Rule is always an important consideration there. But given all the tax exempt property and the presence of the federal government in the District, the federal payment has always been an important financial factor. We are not certain what is being discussed in committe. But any increases in fees, fines, and property taxes as an offset to potential cuts in support are not easy to achieve. Perhaps, with the federal government unloading office properties some of these properties will find their way back to the tax rolls.
We have been exhausted about discussing the debt ceiling in the past, but we are at a critical juncture once again. Clearly votes from the minority party in the Senate are required to approve a continuing resolution. If approval is not secured, we have the weekend to further negotiate. No one wins if the USA does not tend to its debts. Ratings may be in the balance once again. If not resolved quickly, the probability of a rating adjustment is much greater this time.
A potential elimination of the tax exemption is more serious this time. We are well aware of many of the fine lobbying efforts underway. But not a lot of the perspective has been picked up in the mainstream media. Issuer attestations would be most helpful here. I have also not heard much about the “inefficient subsidy” argument this time around. But it will be raised before this debate is over.
April 2 is a key date for tariffs. I used to believe that the Ides of March were problematic. Now we have April to look forward to for direction about the future. Tracking exceptions and carve outs will be quite important. Autos and steel are directly affected but there are many others.
All of the uncertainty is leading to some slowing in sales. Sales tax bonds may be directly affected. However, most sales tax bonds have coverage well in excess of requirement.
The downturn in equities if it persists will certainly affect state revenues over time. High income and wealth states will be most affected. Without gains to be had, tax receipts are bound to be lower. Combine that factor with a slowing economy and fund balances may be drawn down for the first time in some years.
John Hallacy
John Hallacy Consulting LLC
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