Financial adviser: Inflation could be next

Expert briefs county on portfolio, broader economic outlook

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By the numbers

Routt County portfolio

2008 performance versus benchmarks

Routt County: 3.63 percent yield

Colotrust: 2.58 percent yield

1-year Treasury: 1.58 percent yield

2-year Treasury: 3.97 percent yield

2-year agency: 4.34 percent yield

Routt County characteristics

Dec. 31: $35.8 million value, 2.28 percent yield

Jan. 31: $33.8 million value, 2.17 percent yield

— A federal economic stimulus bill will do limited good independent of other factors, and the global economic downturn ultimately may be replaced with a period of inflation, financial adviser Scott Prickett told Routt County officials Tuesday.

Prickett is a registered investment adviser with Davidson Fixed Income Management. He briefed the Routt County Board of Commissioners on the county's investment portfolio Tuesday. Prickett spoke not only to the county's specific holdings but also the state of the broader national economy.

Prickett said a $787 billion economic stimulus bill signed by President Barack Obama in Denver on Tuesday will have only a limited impact on the economy until the housing market finds a bottom and labor markets quit bleeding. The national unemployment rate was 7.6 percent in January, according to U.S. Bureau of Labor Statistics, up from 7.2 percent in December and 4.9 percent in January 2008. Standard & Poor's reported last month that its S&P/Case-Shiller Home Prices Indices for November showed record declines. Its 10-city index tied the previous month's record decline of 19.1 percent, and the 20-city index set a new record decline of 18.2 percent.

"We don't believe the recovery is going to occur until first and foremost we have relief in housing," Prickett said.

Commissioner Diane Mitsch Bush noted that the stimulus bill will send about $400 million to Colorado for highway projects alone. Although that won't create a tremendous number of jobs, she said, "every job helps."

In its 2008 adopted budget, the county assumed a 4.75 percent rate of return on its investments. The actual 2008 return was 3.63 percent, Prickett reported. Between Nov. 1 and Jan. 31, the county's yield has dipped to 2.74 percent. Prickett said the Federal Reserve has indicated it will leave its core interest rate between zero and 0.25 percent for the "foreseeable future," and agreed with Finance Director Dan Strnad that the county should plan for a yield of only 1 percent in 2009. Strnad said that he built the 2009 adopted budget on a 1.8 percent yield and that the difference will represent a $300,000 shortfall.

Because of paltry interest rates, Prickett said his strategy with the county's portfolio is to "stay as short as possible with as much yield as possible." By favoring investments that mature quickly, Prickett said he hopes to take advantage of what he thinks will follow the recession: a period of inflation that will be reflected in higher interest rates.

"When that occurs, we're going to see interest rates skyrocket," Prickett said. "I don't know when that's going to occur, but I'm confident it is going to occur."

Prickett said it also is possible that the period of inflation could turn into hyperinflation or - much worse - stagflation, a difficult-to-reverse situation in which economic stagnation and inflation occur simultaneously.

"Just 18 months ago, people thought there's no way this could happen," Prickett said. "The good news is I think the county's portfolio is structured nicely. It's conservative."

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