H. Russell Fraser, chairman of Fitch Investors Service Inc., believes that macroeconomic considerations must pay a far greater role in municipal analysis today.
Fraser, in his All-American Municipal Analysts Awards Address on Thursday afternoon, highlighted many examples of how important it is for municipal analysts to consider the macro, as well as the micro. "You cannot lose the forest for the trees," he quipped.
The tall timber that makes the world of municipal analysis so difficult to chop down to size include the following factors:
* Collapse in the commercial real estate sector has put a strain on the entire financial system, particularly banks;
* The Federal Reserve Board is "pushing on a string" and the old methods of easing interest rates will not spark an economic recovery in the near future;
* Consumers are "up to debt to their eyeballs" which means that consumers will spend their discretionary dollars to pay down debt;
* Individuals' disposable incomes are lower.
Historically, Fraser noted, the housing and automobile industries lead the nation's economy out of a recession. "Neither is ready to pull us out," he said.
Demographics are beginning to work against nation's economy as baby-boomers start to look for smaller homes as their children leave.
On the housing front, "we need a program for first-time and young buyers," Fraser said, adding, "there is a glut in recreational homes."
He stated, "So many cards are stacked against us, I don't see any easy way out of this recession."
Economic War with Japan and Germany
Fraser said, "We're in the middle of an economic war with Germany and Japan - I'm not Japan or German bashing - and they're good at what they do. They have different philosophies and techniques."
For examples, the Japanese culture essentially dictates that individuals work for the good of the group (company) and the group works for the good of the nation.
Long-term, the solution must be improving the nation's system of education. "50% of the students enrolled in Florida's high schools do not graduate," Fraser said, "that's an entire STATE."
Tragic on an individual level and on a national level. "Every business is hurt because dropouts are unproductive and those that do graduate largely are mediocre," Fraser said.
Fraser called for more creative solutions to the problems facing the nation's economy. Specifically, he noted the increased use of electric cars and the need for synthetic fibers for wood. "If we are the landlords or tenants of the earth, we certainly are not doing a very good job caring for it," he said.
Equally as important, "our nation's productivity will never sufficiently increase if we don't spend more on our infrastructure," he said.
While science and technology need to play a greater role in bringing the nation out of the current economic recession. But, the relative scarcity of well educated people in the sector, compared to other industrialized nations, hurts the nation's chances of achieving consistent and sustainable breakthroughs.
Thus, Fraser is not particularly hopeful for scientific breakthroughs to spark a recovery.
Fraser called for greater use of free trade to remove the restraints on America's economic engines.
"Free trade would stimulate the American economy by eliminating the activity in areas where we are not efficient and allow us to go to our strengths," Fraser said.
For example, the U.S. economy's traditional strengths are agriculture as well as food and kindred product sectors. "We're still the bread basket of the world," he said.
Affects on Micro Analysis
Because the economy will be in the "throughs of change," macroeconomic analysis plays an important role in municipal research, Fraser said.
Consider the impact of the Federal governments policies. When the Federal government is beneficient, the municipal sector experiences few problems.
"In the 1930s, the Federal government was not beneficient," Fraser noted, "and we had the golden era of defaults on municipal debt."
Additionally, there are so many different bond types that were never outstanding during the 1930s. "There were no tax allocation bonds, Mello0Roos district obligations, moral obligation bonds, etc." Fraser said.
These new types of securities do not have long historical records that permits analysts to see how they perform through all different types of economic scenarios.
Macroeconomic concerns will prompt investors to seek shorter maturities in the municipal bond sector, Fraser predicted. "We've already seen shorter maturities in the corporate sector because visability becomes very cloudy over ten years."
During the next year and a half, Fraser wouldn't be surprised to see long-term Treasury rates tumble from the currents at about 7.80% to the 6.25% - 6.11% range.
"If Treasury's yield about 6%," Fraser mused, "where do you think municipal bonds will be?"
Investors are not going to lock-up those rates for 30-years because "then when the recovery comes rates will rebound."
In summary, Fraser believes the nation must change its ways and seek out opportunities to do more with fewer resources.
"Municipalities are being asked to do more with far fewer tools, such as the elimination of arbitrage to bailout troubled credits, and greater macroeconomic uncertainties - municipal analysis is more important than ever."
