Money puzzle

NAVAJO COUNTY — Navajo County’s been doing well on its investments, but the storm warnings of another recession are starting to build up, the county’s financial advisor told the Board of Supervisors at its last meeting.

Navajo County manages investments for most of the school and fire districts in the region and those investments yielded a heartening $4 million in income this year.

However, gyrations in interest rates for all sorts of safe, short and long-term investments suggests the risk of a budget-destabilizing recession in the next year have increased significantly, Bob Moore, with Institutional Capital Management (ICM), told the supervisors.

Moore noted that all across the globe the interest rate paid on long-term bonds has fallen below the interest rate paid for short-term bonds, including Germany. The last time that happened, it signaled the onset of the devastating 2008 recession – from which Navajo County has still not recovered.

“That was the kind of precursor that was happening the last time everything fell apart,” said Navajo County Treasurer Debra Kester.

The interest rates the county got for $216 million in long-term and $20-million in short term investments peaked at about 3 percent and has now fallen to 1.5 percent, based on the market’s fears of the increased recession risk. The county operates a single investment pool for most of the districts in the region and divides up the interest payments and investment gains with all the agencies in the pool, said Kester.

The specter of a recession raises fresh fears for the county government, waiting anxiously to find out whether voters will approve a jail district tax that will boost county revenues by about $2.4 million, offsetting anticipated losses from the shutdown of a coal mine and coal-burning power plant. The county has trimmed its workforce by 16 percent since the last recession and would have likely had to cut another 20 percent if voters had rejected Prop. 421, county officials said.

Moore commented, “things are pretty wild these days, we’re dancing all over the place,” trying to keep up with the fluctuations of the investment market – roiled by tariffs, interest rate debates, trade disputes and political uncertainty.

Moore noted that so far the county-managed investment portfolio retains a high, Double-A rating, with most of the assets maturing within 1.3 years. “It’s all very liquid, all very high quality – the portfolio is doing very well.”

He hailed a presentation by Arizona Public Service (APS) earlier in the meeting detailing plans to bring redundant, high-speed internet to the region, with fiber optic cable strung atop the APS transmission lines all the way from Phoenix. “That’s very, very encouraging – a wonderful thing for entrepreneurs that want to start up new business and for your schools. When you put that together with long-term economic plans, the growth potential is exponential.”

However, the county may have to first weather another recession, if the warning signs bear their sickly fruit.

He offered a brief, dense lecture on the relationship between interest rates and recessions, with complicated charts to underscore his point.

“The two-year Treasury yield tells us where the market believes policy interest rates need to go,” he said.

Currently, the projections of the Federal Reserve Board have gotten increasingly out of synch with the projections of the financial experts, which accounts for the market rate for long-term bonds falling below the rate for short-term bonds.

“The last time that happened, we had a very, very nasty recession and a financial crisis and the only response the Fed had was to make money virtually free – which shows you how fast those interest rates drop. For a seven-year period, we had near-zero interest rates – then nine rate hikes after they put it on autopilot in 2016.”

The slow, steady, predictable increase in rates helped the county’s investment portfolio realize a steady return of 2 or 3 percent – producing the $4 million in income.

“But if you go to Germany now, the whole yield curve for government bonds is below zero – which means you’ll get back less money than you invest. And that’s true for one-third of governments across the globe. Some people are predicting we may be heading on the same path as Germany and Japan because of the weakness we’re seeing with the global economic slowdown in the Euro Zone, and with Brexit and the tremendous trade tensions and a trade war.”

He noted with interest rates already at 2.5 percent, the fed won’t “have much to work with” in terms of lowering interest rates should a recession threaten.

He said the big swings in the stock market reflect the uncertainty. “Who knows what tomorrow brings. We have a tremendous amount of uncertainty and people beginning to call the independence of the Federal Reserve Board into question by responding to political pressure. That’s kind of a big deal.”

Peter Aleshire covers county government and other topics for the Independent. He is the former editor of the Payson Roundup. Reach him at paleshire@payson.com

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