In the category of “somewhat better news that you can sink your teeth into” this morning, the US’ second quarter GDP was revised…drum-roll…upwardly. From the initial 1% estimate to the now 1.35% mark as tendered by the Commerce Department this morning. Construction spending and personal consumer spending were cited as prime factors in the adjustment of the economic metric. Still, if polled investors turn out to be correct, the crisis in the Old World might yet precipitate a contraction in a couple of extremely important economies (that of Europe and that of the USA) if not a global-scope one perhaps.
Anyway, predictions and perceptions good at one time are practically made to be disproved later, in more than one type of instance. Remember the famous prediction by Ms. Meredith Whitney (made less than one year ago) that we would be witnessing hundreds of billions of dollars in the municipals’ space? We do too.
Gloom-obsesses investors lapped up that dark Kool-Aid by the bucketful as it suited their mood at the time. Time for a reality check, says Bloomberg News’ Darrell Preston. It turns out that there was such a default, indeed; by…one (!) US municipality, in Alabama. That’s it. Certainly not the projected “hundreds of billions.” In fact, muni debt has returned 9.1% in the current year; not a shabby performance, by any metric, but one that many who followed the aforementioned doomsday prediction evidently missed out on.
In fact, third-quarter muni-bond issuance has experienced quite a jump as issuers were seen returning to the market after a fairly slow (but lacking the predicted implosion) first half of the year. Investors who sought safer investments that yield better than Treasurys continue to be attracted to their tax-exempt yields – currently higher than those offered by taxable Treasury bonds. About $28 billion of such instruments will likely be issued this month, fueled in part by New York and California bonds. The overall muni bond market is nearly $3 trillion in size and there have been recent efforts made to form a mutual bond-insurance company for debt being sold by states and local governments.
K.C. Fed President Thomas Hoenig retires this week. Some are looking forward to the man speaking more freely than even before from the safety and comfort of his favorite easy chair in coming months. Perhaps a book might be in order as well. Mr. Hoenig has had many a wise thing to say about Fed policy, even if most of the time his words sounded nearly as criticism-laden as one might expect of say, Ron Paul. NPR has a very interesting clip recorded with Mr. Hoenig recently; one that is well-worth your listening time. Here are some nuggets of brilliant observations made by Mr. Hoenig, leading off with one that he might most consistently be remember for:
“I have systematically opposed the use of money as a mechanism to solve all of our problems. You cannot tell me a business, a commodity, a service that trades well at the price of zero and allocates resources as well at the price of zero. Why would it do so with interest rates? It won't.”
“In a world of instant gratification, we have had two decades in this country of consuming more than we produce by a considerable margin.”
“Washington has become addicted to low interest rates, which has given lawmakers cover to paper over serious long term problems with short term fixes.”
“We need to add jobs, but the problem is you don't just add jobs. You produce things, you make things and from that, jobs come.”
“[Our] leaders need an attitude adjustment to think long term, to get serious about, among other things, the deficit. They should pass a broad package of spending cuts and tax hikes like the ones the Simpson-Bowles Commission outlined last year.”
At least in K.C., yesterday morning, such honest words got Mr. Hoenig a standing ovation and much applause. Here, here.
Jon Nadler is a Senior Metals Analyst at Kitco Metals Inc. North America