Friday, October 24, 2014

Guest Post: Third Quarter Economic Commentary by Dorothy Jaworski

The Bond Guru Switches Teams
The surprise of September was the abrupt departure of the Bond Guru, Bill Gross, from PIMCO, the company that he helped found forty years ago.  Shock went through the bond markets, especially at
PIMCO, who found out about Gross’ exit along with the rest of us.  Between the September 26th surprise announcement and October 2nd, investors pulled nearly $24 billion from PIMCO funds and ETFs.  There is no way to know exactly how much money will ultimately move and land with Bill at Janus Capital, his new home.  And he doesn’t even have to stray far from the beautiful beaches and leisurely lifestyle of Newport Beach, California, because Denver-based Janus is opening an office in Newport Beach, California.  How about that?

She’s Getting Better at Press Conferences, But
The Federal Reserve has let the talk of rising interest rates hang over the markets like a fog.  We have seen several restless Fed governors, who keep dissenting to the Fed’s statements on policy to keep rates low for a “considerable time.”   Many in the markets thought that the Fed would drop these words from the September statement because they act like a promise to the markets, but the Fed retained them.  Following the meeting, Janet Yellen gave her press conference.  She was repeatedly asked about the words and their meaning and she kept saying over and over again that the Fed’s moves are “data dependent.”  She was not very convincing.  She could have said that returning to “normal” is taking longer than expected and the market projections that rates will rise in the middle of 2015 is about as good as any right now.  Markets build in assumptions for short term rates and this impacts long term rates, of course along with inflationary expectations.  She could have used some coaching to reassure investors.

Growth and Inflation
One would have to question a Fed that would raise rates when the US economy is the only one of the four largest world economies that is displaying any growth, albeit at a very slow 2%.  China, Japan, and Europe are all struggling.  Remember that we are five years in this recovery and we are only managing 2.2% average growth, compared to 4.6% after the prior ten economic recoveries.  Inflation is falling along with many commodity prices (except for gas prices, but I digress).  In China, consumer price inflation is -2.0%, in Europe, it is +1.0%, and here in the US, it is +1.7%.  It would not be unprecedented for the Fed to raise rates with falling inflation, as happened in 1994, but it would be unusual and fairly shocking.

Geopolitical tensions abound in the Russia-Ukraine conflict, Syria, Iraq and a US led group of allies fighting against the evil that is ISIS, and the Israel-Palestinian fighting.  The threat of the spread of Ebola is increasing tensions as well.  This is not an environment that screams for rates to rise; reality may be quite the contrary.

The Unemployment Rate
Much of the fear of Fed tightening springs from the decline in the unemployment rate to the Fed’s “goal.”  For the month of September, the unemployment rate fell to 5.9%, within the NAIRU band quoted by Fed Chair Yellen in her press conference.  NAIRU, or the non-accelerating inflation rate of unemployment, is the unemployment rate below which inflation will rise.  Oh, Phillips curvers, where have you been?

I have a couple comments when I look at the drop in the unemployment rate over the past two years.  First, the drop has been caused more by workers dropping out of the labor force than from job creation.  Job growth has established itself at an average above 200,000 per month, which is fairly good, but well below the pace of other recoveries when the economy was so much smaller.  The labor force participation rate has dropped to 62.7%, the lowest since 1978.  It is not just retirees lowering the rate, but it is young people, too.  Those Not in the Labor Force now total 92.6 million, which is a record.  Many of the jobs created are lower level or part-time, so wages are not rising dramatically.  I cannot believe that productivity will benefit from the structural shifts that we are seeing in employment and I believe we will continue to see sub-par growth in GDP.  I saw this quote on Bloomberg in September and it resonates:  “The economy always appears stronger if you ignore the weakness.”

Speaking of productivity, we are in the midst of another period where we will pour trillions of dollars of our precious earnings into protecting our computer systems and networks from the scourge of hacking.  I have listed this as a risk to the economy in the past but I didn’t realize the extent to which cybercrime would reach new heights.  The evidence was revealed by JP Morgan in the first week of October.  Hackers got into their bank systems and stole names, addresses, and email addresses (but supposedly not account data) of 76 million households and 7 million businesses.  No system is sacred anymore.   Witness the Acme announcement of a major hack at their stores recently.  We are just getting over Home Depot’s admission of 60 million credit and debit card numbers being stolen over the course of months, eclipsing Target’s data breach.  So, nothing is sacred online.  The complete waste of time and money is an ever-increasing drag on GDP.  Add this to the purported estimates of regulatory costs of $1.86 trillion on our economy, and 2% growth seems like a gift.

Our Bank’s Senior Vice President of Deposit Operations and Information Technology, Karen Shinn, knows all too well the risk and costs of these breaches to banks.  She works continuously with our vendors and has implemented fraud detection tools to protect our customers’ debit cards.  But customers can work closely with the Bank, too, by being vigilant about their personal information and by notifying us right away about any unusual activity.  Hacking prevention and network protection expenses will continue to filter into the costs of every company.  Maybe this will be the inflation that the Fed and ECB so desperately desire.

Last Word
Dr. Charles Plosser, President of the Philadelphia Federal Reserve, recently announced his retirement as of March, 2015.  Thank you for all that you have done for our Philadelphia region over your years here!

Thanks for reading!  10/09/14

Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy has been with First Federal of Bucks County since November, 2004. She is the author of Just Another Good Soldier, which details the 11th Infantry Regiment's WWII crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure.

Friday, October 10, 2014

vBlog: How to break down organizational silos in financial institutions

There are a number of challenges that nearly every financial institution faces, in my experience. Regulatory over-reach, check. Compliance woes. Got it. Branch under-utilization. Ditto. 

One such omnipresent challenge is how to blow up thick-walled organizational silos to serve the customer well over several banking and neo-banking disciplines. The below video highlights some of my ideas on how bankers can break down barriers to win more of their customers' business.

What are your ideas?

~ Jeff

Note: Here is the YouTube link of the above video in case you can't view it in the Blogger application.

Saturday, October 04, 2014

Disruptive technology will not kill banks

So said John Authers in a recent Financial Times article. And I believe him. Bankers have been killing banks for decades. We do it by dismissing change. We do it by implementing "me too" or business as usual strategies in a changing world. We do it by accepting mediocrity. We do it by relying on the payments system or the difficulty in switching banks to retain customers. We engage in hubris.

We don't need no stinking disruptors to do it for us! 

But wait! There may be something to disruptors pillaging bank customers. I remember the days soon after leaving the military in the 1990's that banks were hesitant to enter investment sales for fear of disintermediation of their deposits. Now the amount of money in US registered investment companies exceeds that in FDIC insured banks. Was Vanguard a disruptor?

The branch is king, and if you don't have one in a market, you will not succeed there. But wait, ING Direct grew to $92 billion in assets until ING Group divested it to Capital One. Do you think your bank customers had an Orange account? Was ING Direct a disruptor?

Simple sold to BBVA, touting 120,000 accounts. Were any of them your potential customers? Lending Club funded $5 billion in loans since its founding in 2007. How many loans did you fund in that time? And Quicken Loans... don't they appear at the top of mortgage and home equity rankings? No worries, I bet they're somebody else's customers.

Everywhere we turn we have disruptors pilfering our business. The other day I was in a strategy discussion formulating the tasks to execute strategy. The cash management specialist wanted to advance the product set so corporate customers could use their own interface with the banking core system instead of using the bank's online banking tool. Aside from the cyber security of it, let's think of the implications from a corporate accounting system that wants to interact directly with the bank's core.

Is that testimony to banks not keeping pace with corporate needs? How long before those corporate accounting system providers strike a deal with some regional or national bank to provide seamless views to corporate customers? No worries, probably not your customers.

We are allowing our potential future customer base to be so narrow as to almost guarantee our extinction. 

I don't want to be the doom and gloom guy. Just trying to jolt my readers into action.

As Auther says, banks still provide access to the payment system. Banks remain centers of communities and the number one source for capital for small business. They remain trusted by customers.

But it won't last forever. And it may not last for long. So let's disrupt ourselves!

~ Jeff