Just a Member – Page 22

January 3, 2024January 3, 2024

The “Goldilocks” Interest Rate Curve

Yesterday the treasury market closed at these yields for the maturities listed:

Yield Maturity

5.50% Overnight

5.55% One month

5.46% Three month

5.24% Six month

4,80% One Year

4.33% Two Year

3.95% Ten year

This inverted yield curve, where short term rates exceed long term, can be an ideal time for asset management.

This is because return and liquidity are both optimized by staying short. If an asset or investment manager is matching with specific liabilities, the prospect of a duration gap between asset and liabilities can be minimized.

This is a Goldilocks ALM environment where return and liquidity are both optimized. By going long now, an investment manager will have a lower return versus staying short. That might seem like a surefire market bet as Chairman Powell has forecast several rate reductions this year. That is until inflation possibly comes back, and further reductions put on hold.

The Credit Union Opportunity

An additional advantage, besides reducing ALM mismatches, is that it allows balance sheet management to remain agile. Shorter maturities provide more opportunities to respond to market and/or liability changes.

A prime example is NCUA’s management of the $22 billion NCUSIF investment portfolio. The fund continued its 7 year ladder as rates went to near zero in 2019-2021. When the market turned, the entire portfolio was underwater, burdened with an average duration of almost three years.

Through October 2023, the year-to-date return on the Fund is 1.92% and the portfolio reports a $1.7 billion unrealized loss.

When looking at historical trends, a yield on the NCUSIF portfolio of just 2.5% would result in a breakeven, that is stable, equity ratio in almost all years.

Recognizing this liability target for asset returns, makes NCUSIF investment decisions easy in this rate environment. By moving from overnight to maturities up to two years, the yields would be more than sufficient income to maintain the Fund’s equity ratio at or above 1.3% for any scenario.

Many investment managers were surprised by the Fed’s rate reversal to counter inflation. Today’s interest rates provides a rare moment for stabilizing both liquidity and return for credit union portfolios and the NCUSIF.

January 2, 2024January 3, 2024

The New Year & “Auld Acquaintance”

The headline at the end of 2023 summarized the prior year outlooks: “Market Forecasts Missed Mark in 2023.” (WSJ December 31, 2023)

Most observers in 2023 thought a recession was inevitable. The Fed’s rapid rise in rates to counter inflations was intended to slow consumer demand. That reliable indicator, an inverted yield curve, had indicated negative growth was inevitable for almost six months entering the year. The economy would slow, unemployment rise and the stock market falter as a result.

Yet two of the three major market indices hit all-time highs and the S&P 500 fell just basis points short of its peak. The economy recorded a higher than normal average GDP growth. The consumer is still spending.

This macro-forecast miss should be a cautionary note as we enter 2024. Future forecasts, no matter the model used, are not facts. They are guesses often based on assumptions reflecting the users’ biases or their institution’s role in the economy.

What is Money for?

To justify an investment decision today by forecasting a hypothetical future can lead to poor outcomes. A current example is what will be the role of major head office complexes in an era of hybrid or remote work forces? Or, what is the value of assets acquired in a low interest rate environment versus the rate reset now occurring in the economy?

For credit unions, the preliminary numbers indicate that 2023will record the lowest share growth in decades. This balance sheet slowdown will influence many decisions about how and where to invest in the coming year.

Those investment decisions will reflect the values, not just priorities, of each credit union’s leadership team. Will the institution spend to buy growth from external sources? Will it invest in enhanced delivery capacity? Staff skills? Member education and well-being?

Each credit union has a different context and history in making this fundamental decision about how they will spend to enhance their role in the economy. As in the case of individual choices, that spend will reflect how leadership understands the institution’s purpose.

The slow growth in 2023 may motivate us to find something new to get back on a normal expansion. But it may be just as wise to identify what got the credit union to this point. Are those values still the ones to guide investment priorities for this year? That is, “don’t let be forgot the “auld acquaintance” of who you are and where you come from.”

December 29, 2023December 29, 2023

Two Endnotes Going Into 2024

Excerpts from two perspectives for sustaining success as we head into the New Year.

Dream or Die

“All social entities or movements need dreams, which can be defined as an indispensable capacity to envision a future for themselves that considers both the practical means at hand and a higher ideal. Societies that do not dream are doomed to die.

“We have no knowledge of any human community where men do fail to dream,” writes Irving Kristol. “Which is to say, we know of no human community whose members do not have a vision of perfection—a vision in which the frustrations inherent in our human condition are annulled and transcended.”*

Source: *Kristol, Two Cheers for Capitalism, pg 153

JPMorgan’s $4 Trillion Balance Sheet Widens Lead Over Rivals – Firm has added the equivalent of one Wells Fargo since financial crisis

“As the spring bloodbath among regional banks began, nervous depositors with more than $50 billion began showing up at JPMorgan’s door. Bank executives went on to raise expectations for net interest income four times throughout the year, eventually pulling in so much cash that managers have taken to warning of “over-earning.”

“That’s put JPMorgan on track for the biggest annual profit in the history of American banking. Analysts predict that by the end of this month, its annual net income will be 36% higher than last year.

“By comparison, the combined earnings of the next five largest banks looks to be about 1%. For JPMorgan and its chief executive, Jamie Dimon, it was a year like no other.” (Source: Bloomberg, December 27, 2023)

As we turn the calendar’s page, which approach will be your credit union’s priority?

December 28, 2023December 28, 2023

Credit Unions and Popular Culture

Yesterday’s post on The Bank of Dave was a tru-ish movie about an actual effort to organize a local financial institution focused on the needs of the town of Burnley. Dave Fishwick, a real person, was the hero. The antagonists were regulatory bureaucrats, lawyers and of course entrenched financial institutions.

As in It’s a Wonderful Life, the founder Dave is portrayed as someone serving the common good versus personal profit. The movie’s message is that this person’s purpose is one that present day society should honor and support.

How are credit unions portrayed in popular American culture? Are there any movies, books, plays or other artistic recognition of their special history?

Last night I attended a performance of The Seafarer, a play about Irish life by Conor McPherson. The scene is Christmas eve. The four personal friends drink for camaraderie and to cover the darkness in their lives.

A fifth character (Lockhart), the devil in disguise, enters to participate in a poker game, the main action (after drinking) of the second act.

This inebriated poker rounds are a metaphor for Lockhart’s stated intention of capturing the soul of Sharky, a character trying to give up drinking.

During the final betting round, the stakes go higher, and all raise with the last money they have on hand. At that moment the lead character challenges one of the other players, “Where are you going to get your stake? From the credit union?”

In the midst of this realistic-surrealistic tale is a direct reference to a financial reality an Irish audience would understand. The play was written in 2006 as credit unions were becoming more widely available in Ireland, a generation-long process.

Similarly, The Bank of Dave is set in the post 2008/9 financial crisis in Great Britain when consumer lending was unavailable. Current day viewers would be familiar with the real circumstances motivating Dave’s initiative.

American Culture and Credit Unions

Where and how are credit unions referenced currently or in past American literature? Is there a Norman Rockwell painting that illustrates this financial opportunity for a common person? Or a story of a local entrepreneur lifting up the community with a cooperative charter?

Is the credit union story so prosaic that the occasional coverage in the business section of the paper or on CNN/MSNBC captures our public reputation and contributions?

Have the many remarkable achievements of local credit unions been so taken for granted, that they are now just another ready option in the financial marketplace?

Have credit unions so lost their unique cooperative character that American culture and ordinary citizens, no longer see them as doing something special?

December 27, 2023December 27, 2023

A Credit Union-Like Story: The Bank of Dave

Just released and streaming on Netflix is a movie The Bank of Dave. Set in Burnley in the north of England, it is the story of a local van seller who sought the first new banking license to be issued in 150 years in the UK. It is a contemporary version of Frank Capra’s It’s a Wonderful Life.

Dave’s intent is “not about me making money” but creating jobs and the quality of life for the whole community. Profits will go to charity.

For the Financial Regulatory Board, the question is not can it succeed, but rather should it exist?

All the incumbents want to preserve the status quo where a few, large “financial supermarkets” dominate the economy. Dave’s local proposal is not the “right sized bank.”

Dave must overcome established bureaucratic opposition, a very high capital requirement (twelve million pounds) and entrenched scepticism that a new financial model is necessary.

You can read the status of his efforts today in this article about the movie, Dave Fishwick’s life and his ongoing campaign.

Although he faced resistance at every step, Dave eventually made good on his dream, opening Burnley Savings and Loans in 2011, and using “Bank on Dave!” as the company’s slogan.

The Message and Credit Unions

Dave in life and in the film is a pillar of the community. His dream is political, not just financial. Banking should not be reserved for the rich and powerful. Rather in a community, it is the ordinary people who define what that institution should be.

His goal is to have a bank that “looks after the community.” He wants a better way, than the current system, of helping each other where and how we can. That is Dave’s vision of what community is about.

The parallels with the credit union story are many. This includes the entrenched resistance to new charters and the ever present temptation to leave behind those that created the institutions which dominate markets today.

The Bank of Dave is a timeless story about money and who gets to control its use and distribution. It is a reminder that financial institutions are built first on trust in the people who lead them.

When that trust and connection is lacking, then others will move to fill the needs that are no longer served.

If you still need convincing about the Dave’s of this world, here is an interview with this real Dave.

December 26, 2023December 26, 2023

The Bells on Christmas Day-In Ukraine

From James Russell Lowell’s poem:

I heard the bells on Christmas dayTheir old familiar carols playAnd mild and sweet their songs repeatOf peace on Earth, good will to men. . .

And in despair I bowed my head“There is no peace on Earth, ” I saidFor hate is strong and mocks the songOf peace on Earth, good will to men. . .

Ukrainian Christmas Scenes

This year Ukraine moved the celebration of Orthodox Christmas to December 25.

“The trident, or “,” remains one of Ukraine’s most iconic symbols. Shaped like a spear with three prongs, its history goes back centuries. Volodymyr the Great included the symbol on coins when he ruled Kyiv from 980 to 1015.” (wikipedia)

McDonald’s deliveries.

A tree of shell canisters.

A video report from the Kiev Independent that captures the spirit of hope.

Then rang the bells more loud and deepGod is not dead, nor doth He sleep(Peace on Earth)(Peace on Earth)The wrong shall fail, the right prevailWith peace on Earth, good will to men

Then ringing, singing on its wayThe world revolved from night to dayA voice, a chime, a chant sublimeOf peace on Earth, good will to men

December 25, 2023December 25, 2023

For Christmas Day

We live in a time, as in many eras, of no peace and human needs most plentiful. How is it that we can be merry? Or have hope?

The poem by Rossetti speaks to this mixed reality especially jarring this year.

A Rose Has Thorns as well as Honey

by Christina Rossetti

A rose has thorns as well as honey,
I’ll not have her for love or money;
An iris grows so straight and fine,
That she shall be no friend of mine;
Snowdrops like the snow would chill me;
Nightshade would caress and kill me;
Crocus like a spear would fright me;
Dragon’s-mouth might bark or bite me;
Convolvulus but blooms to die;
A wind-flower suggests a sigh;
Love-lies-bleeding makes me sad;
And poppy-juice would drive me mad:—
But give me holly, bold and jolly,
Honest, prickly, shining holly;
Pluck me holly leaf and berry
For the day when I make merry.

The Rose’s Honey: The most recorded Christmas carol, a moment where all is calm and bright.

Love’s Thorns-Making Merry

A different way to celebrate the season’s complex reality: Fairytale of New York, by Shane MacGowan.

An Irish Christmas story performed two weeks ago at the composer’s funeral. (from wikipedia) “Shane Patrick MacGowan (25 December 1957 – 30 November 2023) was a British-born Irish^[a] singer-songwriter and musician best known as the lead vocalist and primary lyricist of Celtic punk band the Pogues.”

My colleagues Ed Callahan and Bucky Sebastian always told me Irish funerals were to be joyous events. At this service two weeks ago the congregation sings and dances to this ballad of an all too human realty this time of year.

Please share your joy with all you meet today by giving each a Christmas Hug.

Christmas eve’s rising moon.

December 22, 2023December 23, 2023

Bethesda’s Christmas North Pole

St. John’s Episcopal Church, Norwood Parish, has sponsored an Opportunity Shop since the early 1950’s.

All the merchandise is donated by the public. The employees are volunteers. The entire net income is donated to local charities.

The shop attracts items that are unusual, in good shape and often found nowhere else. Most are inexpensive. Christmas items will be 50% off on Friday and 75% on Saturday.

A simple sign for a community resource

The shop offers all manner of gifts: CD’s, books, clothing/shoes, kitchen and tableware, jewelry, dozens of framed paintings/prints, electronics and lamps, and collector’s items such as carved wooden sculptures. The examples below are only for Christmas-themed items.

A collection of dolls