General John F. Kelly’s arrival as the Chief of Staff at the White House is hopefully a harbinger of more positive action in the effort to formulate more fiscal policy achievements. The market continues to long for an infrastructure plan that we can work with to complete the critical projects that do not have adequate funding. I cannot recall a time when state & local public construction dropped by 5.1% in June. The month is typically one of the busiest for weather sensitive projects. If all of the fiscal policy goals are delayed until next year, we will then have to contend with the beginnings of the positioning for the mid-term elections with more politicians being less sanguine about taking risks on formulating new and innovative policies in an election year.
Generals are used to responsiveness in their chain of command. Orders emanate from the top and the lower ranks do their best to execute on plan. Politicians are not cut from the same cloth. They often wander off on different tangents with the express purpose of trying to act on the hopes and desires expressed by their respective electorates. As we have witnessed, there can be real chasms among legislators on point. One only has to think of the recent healthcare experience in order to fully appreciate just how difficult forming a consensus can be.
Certainly, the staff may become more “disciplined.” It would be ideal if meetings take place on schedule and more importantly that the correct people on any given topic are in the room.
My concern is that the ideas will not always flow to the top in a militaristic setting. Generals are presumed to be very good at managing up. Many talented individuals in business would not be considered as adept in this talent department. But managing in cooperation with individuals who are empowered often works much better.
Over the years, Generals have been given tough assignments in the public sector. Big urban school districts with large capital plans come to mind. The challenge has not been to execute on plan but the bigger challenge has been to get the buy in from the participants in the process and to get the politics “right.” In many cases the individuals with military experience are brought in to overcome the odds and to counteract indifference. We all hope for the best in these situations. The only challenge is that the tenure of the managers with the background is often short. The politics can just overwhelm many with the strongest constitutions.
Some of what looms on the calendar cannot be ignored for too long. We recall the events in 2011 surrounding the debt ceiling consideration and it was not comfortable. There was talk about whether the federal government would be forced into default in the absence of a debt ceiling. It is easy to dismiss these ruminations and there is a conviction not to let that development take place, but what is being done? And what does that mean for municipals? In some respects, despite the low rates, we have been in the golden age in the municipal market. Deals are completed in very efficient fashion. We even collectively yearn for more supply so the market would not function as smoothly and there would be more opportunity for higher returns.
Traders appreciate volatility because they can work both sides of a trade. Volatility has been dwelling around all-time lows of late. There is no expectation that volatility will pick up, but, there is that uneasiness that if the pace of adopting all of the fiscal goals in Washington does not accelerate, bad things will happen.
Setting fiscal policy to generate growth has been cited by the Federal Reserve and many others as the important element in moving the economy to a higher threshold. The Fed by definition is responsible for monetary policy and has used just about all of its major tools to coax greater growth and to move inflation towards the 2% stated target. We are still not in a position to consistently outpace the 2% mark on inflation. Calling the anticipated inflation pattern has been quite vexing in the current environment.
It is true that the equity markets have been setting aside any serious concerns about the developments in Washington to meet new daily highs. Fixed Income markets have been reacting to events taking place on the global stage versus just focusing on the domestic side. Municipals have continued to respond more to flows and to relative value. Yet, municipal rates remain near the lows due, in part, to the ebbs and flows of supply. Total municipal issuance year-to-date through July of $222.2 billion represents a drop of 13.2% from last year’s pace for the period. This drop is due to refundings primarily. However, if we had a few more clear ideas coming out of Washington that would affect our market, we would probably have more activity and issuance.
We hope for the best for the General and it is evident that he is skilled at navigating complex organizations. We just want to remind him to not make Infrastructure last. The economic growth can get a measurable boost if contracts for our municipal public finance projects are let soon.