By Gayl Mileszko
Shock and Awe
Lightning bolts in the form of new orders and actions from the White House have been producing thunderous reactions, with both strikingly positive and negative charges, in the U.S. Capitol and across the land since President Trump was sworn into office last week. The President and his team have been rolling out one major move after another, reversing most of the policies of the past four years and quickly executing on some of the many promises made during the campaign. It feels like the latest in a series of unprecedented milestones that have marked this millennium — from 9/11 to the pandemic, the wars in Iraq and Afghanistan, the global financial crisis, massive central bank interventions, to Facebook and iPhones. The media are already exhausted in trying to cover all the intraday pressers. While Main Street watches with wide eyes, worried about various DOGE targets and funding cutoffs, some on Wall Street see the relentless rollout as too fast and furious, offering not enough time for traders, businesses and governments around the world to digest everything. Alas, America elected an electric leader who delights in shock and awe.
Separation of Church and State
Two miles from the White House, things are relatively calm. The nine justices on the U.S. Supreme Court have been in the spotlight many times in recent years, so they are likely much relieved to have the country’s focus on the Federal Reserve, the U.S. House and Senate and the Commander in Chief. That may change this Spring. The court just agreed to hear a major case on Friday. The case at hand presents as a constitutional challenge involving St. Isadore of Seville Catholic Virtual Charter School in Oklahoma, which seeks to plow new ground by becoming America’s first publicly funded religious charter school. The effort has had several years of ups and downs, involving approvals, reversals, resignations, Republican party splits, weigh-ins from the Archdiocese of Oklahoma City, parental and teacher groups and much more. This school has, in fact, never opened. But its fight has now landed in the highest court as a petition from the school board on appeal of the state supreme court’s ruling in June. The Oklahoma Attorney General, Gentner Drummond, takes the other side, arguing that charter schools are “state actors” not private organizations. If a religious charter school is permitted to open, he foresees that the floodgates would be opened, forcing taxpayers to fund “all manner of religious indoctrination including radical Islam and even the Church of Satan.”
How Many Options Should School Choice Include?
This is National School Choice Week. St. The board of St. Isadore along with the attorneys from Alliance Defending Freedom representing the school, believe that by keeping the school closed, the state is discriminating against religion and denying families an educational choice. They point to the First Amendment. But so does the American Federation of Teachers, which holds the polar opposite interpretation of what religious liberty and freedom mean in this case. In the background is the talk swirling about whether the state would have oversight over the Catholic curriculum. And, of course, there is the President’s vow to abolish the federal Department of Education. Oral arguments begin in April. We imagine that the courtroom will certainly be packed with supporters and opponents, however only 50 of the 439 seats in the Supreme Court are actually available to the general public. (The rest are set aside for special guests, select lawyers, clerks, and the media.) To add to the drama, Associate Justice Amy Coney Barrett, has already recused herself from the case, leaving the possibility that the decision could result in a 4-4 tie, indirectly preventing St. Isadore from opening as a charter school and leaving the whole church-state debate for another day.
DeepSeek Bombshell, More to Come
A different kind of lightning bolt, this one from China, struck the U.S. tech industry and global markets hard on Monday. The firm DeepSeek announced a much more cost-effective open-source artificial intelligence model said to be built in just two months at a cost of less than $6 million. This upended the big Stargate project announcement last week, involving plans by Oracle, SoftBank and Open AI to spend $500 billion to build out data centers and generate electricity. Investors were completely taken by surprise, first wondering if the Chinese firm’s claims were true, then fearing that they themselves had bet wrong on semiconductors, where the U.S. stood in the global competition, and the cost of AI infrastructure altogether. The DeepSeek news was not only a “wake-up” call for our tech sector, as President Trump stated, but something akin to a liver punch to Nvidia stock, which was one of the first to suffer. In fact, its market cap fell by nearly $600 billion, the largest single-day loss in stock market history. DeepSeek’s bombshell announcement came to drag down the equity market at large on Monday. But analysts promptly began looking under the hood; some quickly concluded that there was a lot more cost involved than what was reported, some speculated that Open AI’s model output was improperly used to boost results, and others cheered the introduction of a competitor to the hyperscalers. Nvidia recovered about half of its losses on Tuesday, but was hit hard again on Wednesday when Alibaba, the Chinese tech giant, announced that its latest AI model performs better than DeepSeek, Open AI and Meta. Lots more to come here that will impact all markets, so stay alert and seek out the advice of your HJ Sims representative.
Bonds Are the Haven
All of this upheaval in the AI world has led many investors once again into safer havens, mainly U.S. Treasuries and municipal bonds, for income and less volatility. The 10-year Treasury yield dropped from 4.62% on Friday to 4.49%, and stands at 4.54% at this writing. The 30-year AAA municipal general obligation benchmark yield fell from 4.02% to 3.96%. We are seeing heavy demand for munis from the retail sector and positive flows into mutual funds, with high yield funds taking in a net of $555 million last week. Cash on the sidelines amid all the volatility is at all-time highs. The Investment Company Institute last reported money market fund balances at $6.9 trillion of which $2.76 trillion was held by retail investors, including $122.5 billion in tax-exempts. Crane Data last reported the highest tax-exempt MMF yielding 2.40%.
Municipal Bonds
In the charter school market last week, the Noble Network of charter schools came to market with a $28.7 million BBB rating financing through the Illinois Finance Authority; the bonds maturing in 2039 priced with a coupon of 5.00% to yield 4.32%. For those unfamiliar, municipal bond yields had been askew since December of 2022; the 1-year benchmark has yielded more than the 14-year tenor at several points. The so-called yield curve finally began to normalize on January 8 of this year. This shift came at a great relief to underwriters, who were challenged for more than two years to price serial and term bonds to meet demand that hinged in part on Fed action, Treasury volatility, high money market fund rates, investor target dates, secondary offering levels, dealer inventories, and alternatives ranging from high yield corporate bonds to Bitcoin. Ahead of the Federal Open Market Committee meetings ended Wednesday, muni issuance has slowed but the number of bid-wanteds remain elevated, as holders seek to trade up for some higher yields.
Dark Cloud Over Tax-Exemption
The House Budget Committee along with the House Ways and Means Committee have spelled out several specific options for eliminating the tax-exemption for some or all municipal bonds. We encourage all borrowers and prospective borrowers of private activity bonds to become active in your respective associations, to elevate all lobbying efforts, and to work, at an individual level to help educate your representatives in Congress. Please reach out to colleagues, and neighbors, as well as others in your professional, nonprofit, corporate, faith, and other constituencies to share major examples of both the benefits of tax-exemption and the costs to taxpayers if it disappears on local, district, state and national levels. Contact your HJ Sims representative for more information on how to initiate or join campaigns to save the kinds of bonds that have been helping to build and rebuild America since 1812.
Late Winter Conference
We are counting down to the start of our conference for senior living and charter school operators and investors. The threats to tax-exemption, and our discussions over how best to repel them, will be a key theme running throughout our sessions. Our agenda, speakers, panelists, and attendees also offer amazing opportunities for learning and networking. The multiple activities on schedule also present unmatched opportunities to interact with colleagues. Discounted rates for the hotel end soon so finalize your plans quickly. Reach out to your HJ Sims representative with any questions about our 22nd annual Late Winter Conference at The Worthington Renaissance in Fort Worth from February 25 to 27.