March 24th, 2014
I go pretty far and wide this week. Everything from global affairs to employment and income data to why one sells assets. As a result, this week’s commentary may print/read a bit longer than usual.
How will what has and is occurring in Crimea impact the municipal market? Remember the old diddy “the knee bone’s connected to the shin bone …”? Let’s start with the premise that Mr. Putin is a pretty smart man. While the world is watching his Olympics and wows the world with spectacular opening and closing ceremonies (recall the tribute to the great history of the USSR, hmm), he is quietly preparing his troops to protect Russians living in Crimea. As he and his foreign minister tell us “we will not invade,” less than two weeks later Crimea votes to secede from Ukraine and become part of Russia. The US and our allies impose sanctions and, after being mocked by some of those against whom those sanctions were imposed, the US and its allies impose more sanctions only to have Mr. Putin slap back with sanctions of his own.
Next, Syria, home of a three year and counting brutal civil war where over 130,000 people have been killed, has told negotiators that unless the demand of the west to remove Mr. Assad is off the table they will not resume negotiations and keep doing what they are doing. Why? Because their best friend has been and is Mr. Putin. One more to add to the mix – Iran. Recall they are negotiating with the world about their desire to enrich uranium for the sole purpose of energy. The US and its allies, to get them to the table had imposed sanctions and then had to promise a package of incentives (who is the good negotiator here?). While Russia is part of the group negotiating with Iran, they have been the only nation amongst those negotiating with Iran to say they may be ok with what Iran has. With US and Russia relations the worst since the Cold War, might Russia and/or Iran use that as leverage?
So far, I’ve connected some global geo-political tensions but, you ask, how does this impact the US and our municipal bond market? Let’s start with sanctions – be they against Russian oligarchs or, perhaps if one were to suppose a situation where the sanctions were a tad more serious, the Russian petroleum industry (one of the largest in the world – Russia is a major provider of oil and natural gas to Europe and the Ukraine, amongst others). Such sanctions would resonate across the globe – impacting the Russian economy, European economy and our economy.
Let’s assume, for the moment, Mr. Putin doesn’t take being told “this is not how we behave in the 21st Century” and continues to thumb his nose at the world. Let’s assume further that the Russian troops massing on the border of Ukraine are not visiting for the view and the West gets serious and imposes real sanctions, impacting Russia but, given Europe’s dependency on Russia, the European continent and, therefore, much of the world. Now let’s come home and get a sense of how much our country relies on exports as a percentage of our State’s GDP.
DIVER Analytics, Map Module; US Census and BLS.
If exports were slowed, what would the impact be on the States? Some would suffer materially while others, natural gas producing States perhaps, might prosper (if we could get to a production level that could satisfy demand – ostensibly years off). Exports equal revenue for companies which equates to tax receipts. The production of exports also requires jobs. You get the point. The DIVER database tracks Exports Value, Export as a Percent of GDP and, importantly, the Top 15 Countries each State Exports to.
Turning to some data released last week and a thought around the Fed’s taper as the economy “improves” and employment is growing. First off, Job Growth. Yellow, green and blue show Job Growth year on year – 1,893 counties saw Job Growth (over 1,200 did not) and 1,009 counties saw Job Growth greater than 2%. While some blame the snow and cold weather, I’m not sure I buy it. Look at the map. And, for the record, every month there seems to be another reason why Job Growth or Home Sales did not meet economists’ expectations.
DIVER Analytics, Map Module; BLS.
Turning now to income. “Uneven Wages Restrain Recovery” was the title of a WSJ article last Friday. As far as I am concerned the title tells part of the story, the content hit on some very critical points around wage disparity. No, the WSJ did not focus on income redistribution. They did focus on a very basic tenant of economics – supply and demand. Workers in certain skilled jobs and locations are in higher demand and, therefore, command a premium. While those lacking skills in demand and/or not willing to relocate to where work is available are seeing inflation-adjusted wages increase by just over 1% for the past year. Look, if I was 6’2”, could bury three-pointers all day and play a little defense, I just might leave school after my freshman year to make the NBA average salary. More to the point, wages have been fairly stagnant for the past few years. We care because, in most States, income taxes are a prime source of revenue.
Focusing in on Average Weekly Wages, released last week for the third quarter of 2013, there is some good news: of the 3,218 counties, over 2,500 counties saw wage increases from the same period one year prior. Now the breakdown:
|Average Weekly Wages % Gain
||# of Counties
||% of Counties
|< or Equal to 0
|0 – <1
|1 – <2
|2 – <3
|3 – <4
|4 – < 5
DIVER Analytics, Filter Module; BLS.
One may want to take a close look at the correlation between wage and job growth. Just a thought.
While I’m on the subject of wages and the possible impact on tax receipts, I couldn’t help but notice another snippet last week that spoke to the prevalence of States and localities looking to sell assets not because they think it’s time to take a profit but because they can’t afford to raise taxes or cut spending further (and because, despite historically low rates, they don’t want to borrow more). Hmm, if I’m a buyer in those circumstances, who is holding the cards? In most cases when a municipality sells assets the buyers tend to be those greedy, profit-seeking folks from Wall Street and Hedge Funds. Nothing like dealing with shrewd business people when they have leverage.
Perhaps another reason for the sale of assets is that this is a way to help get pension and OPEB costs under control where management cannot wrestle changes from unions representing public sector employees (call me cynical and see our March 10 Commentary). Think of it this way, sell an asset and bring dollars on to the balance sheet, lease back the facility/operation and not have to deal with the employment-related issues (pensions, OPEB, contract negotiations) going forward. As a bondholder and tax-payer, this works for me. As an employee of one of these enterprises, time will tell. I am guessing the jobs stay but what becomes of pensions and other benefits remains to be seen.
The next few weeks see the DIVER team hitting the road with regularity. This week Gregg, Mike, Dalia and Pete will be at the BDA/Bond Buyer Muni Summit in Miami. Early next week, Tim and Dalia will be in Orlando for the SIFMA Legal and Compliance event while Gregg and Debra will be in Savannah for the Ascendant Compliance Conference. If you are at the events or in town, please swing by and say hello.
Have a great week,
Michael Craft, CFA, Managing Director, Credit
CLICK HERE to Subscribe to the Weekly Commentary