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Hindsight, Foresight and Insight

MARKET CONDITIONS IN 2018

s we move through the new year, it’s import- respect to how far and how fast they can raise rates with-
ant for bankers to take note of some positive out choking too much growth out of the economy.
differences from 12 months ago. For exam- In essence, policymakers must be cognizant of what
A ple, we have new leadership at the Federal the market is telling them about their policy stance and
Reserve, including a chairman and vice chairman who whether it’s appropriate for the underlying conditions.
are more supportive of regulatory relief for smaller They ignore market signals at their peril. As Kaplan said,
banks. The U.S. economy also comes into the new year “The history of inversions is such that it has tended to
with greater momentum and potential for faster growth be a pretty reliable forward indicator of recession. Now,
on the heels of recently passed tax reform. As for the this time may be different, but I wouldn’t count on it.” Successful strategies require INSIGHT. The Baker April 12-13, 2018
banking system, loan demand is healthy, cost of funds Kaplan certainly is not alone in sounding this alarm, Group has long been known for its proven software and products, Destin, Florida
remains low, asset quality is solid and we have stronger as the very same concerns have been expressed by his col- The Henderson
capital positions generally than we’ve had in years. The leagues James Bullard in St. Louis and Neel Kashkari in but it takes insight to make sound, strategic decisions. For financial
bottom line is that banks are producing the best returns Minneapolis. Still, the expected policy stance of the Fed institutions, insight can be defined as the ability to see what others 200 Henderson Resort Way
for the industry since the recession began 10 years ago. is to raise rates three or four more times in 2018, presum- may not see. Destin, FL 32541
All of this is decidedly good news. Still, we must keep ably bringing the Funds rate to 2.25 percent to 2.50 per- 855.741.2777
our eye on potential risks lurking in the current environ- cent. Now, if the yield on the 10-year U.S. Treasury note Successful financial institution managers know the importance of
ment. Liquidity, for example, is much tighter than it has remains close to its late-2017 level of around 2.45 percent, achieving a high-performance plan. Establishing such a plan requires
been, and pricing power on loans is weak due to compe- then we’ll be facing a curve that’s flat as a pancake. At that not only sound data and accurate information, but also an insightful
tition for good credits. The Fed funds rate is three-quar- point, it wouldn’t take much of a rally lower in the 10-year partner; The Baker Group is that partner.
ters of a percent above its level a year ago, but earning as- yield for the inversion to have begun, and Fed funds will Agenda
set yields are sticking at lower levels and the yield curve have reached its terminal rate for this cycle. The Baker Group’s Interest Rate Risk and Investment Strategies Thursday Friday
is flatter than it’s been in eight years. So, we seem to be sitting at a point in the cycle where Seminar was developed specifically for managers of financial Breakfast Breakfast
It should also be kept in mind that the economic cy- there’s plenty of good news coupled with plenty of future Seminar Seminar
cle itself is getting old. Weak though it has been, this risks. It feels like it did in the beginning of 2007. Back institutions. Designed to meet the challenges of 2018, it is an in- Lunch Conclusion
recovery has also been quite lengthy by historical stan- then, mistakes were made on credit quality, funding depth examination of current topics including: Seminar Golf
dards, and may be due for a setback—not necessarily an- choices and security selection in the investment portfo- Dinner
other “Great Recession,” but a cleansing pullback at least. lio. Investment officers who were hungry for yield were • Market Conditions and the Banking Environment
Remember, the magnitude of the bust typically mirrors sold high-risk, private-label, mortgage-backed securities, • Interest Rates, Liquidity, and Balance Sheet Strategies: Guest Speaker
the magnitude of the boom, and the boom hasn’t been TRUPs and preferred stock, all of which ended badly in Everything’s a Cycle
very loud for this recovery. Nonetheless, Fed policymak- the crisis. Hopefully, some lessons were learned. • Modeling Interest Rate Risk: Best Practices and Christopher Thornberg — Founding Partner of
ers may find themselves having to go slower with their As always, today’s performance reflects yesterday’s Regulatory Compliance Beacon Economics, LLC
rate hikes than they previously planned if they want to decisions, and the returns we enjoy tomorrow are deter- • Investment Strategy and Security Selection for Each
keep the party going. And this brings us back around to mined by the choices we make today. Like a chess match, Rate Environment Who Should Attend
the yield-curve issue. bank management involves cautious and thoughtful • Municipal Bonds and the Pension Crisis: How to Develop Financial institutions’ CEOs, CFOs, investment
In the past four years, the shape of the yield curve has consideration several moves ahead. At The Baker Group, a Process to Protect Your Portfolio officers, board members, and those who are
flattened substantially as the Fed has raised short-term we like to say “Anticipate, don’t predict.” H directly or indirectly responsible for financial
rates while long-term rates have remained sluggishly low • Techniques for Managing MBS to Minimize Prepay Volatility management functions will benefit from this
due to weak growth and a dearth of inflation. This effect Jeffrey F. Caughron is a managing director with The Baker • Liquidity, Cash Flow, and the Bond Portfolio
is not lost on some policymakers. Dallas Fed President Group, where he serves as president and chief executive officer. He seminar. There is no cost for this seminar.
Robert Kaplan recently noted that the flatter yield curve has worked in financial markets and the securities industry since For your convenience, register online at
has a limiting effect on Fed flexibility, particularly with 1985. Contact him at 800/937-2257, [email protected]. GoBaker.com/florida. Call Skoshi Heron CPE credits will be earned for your
at 888.990.0010 for more information. attendance.
The Baker Group is one of the nation’s largest independently owned securities firms specializing in
investment portfolio management for community financial institutions. Since 1979, it has helped clients
improve decision-making, manage interest rate risk and maximize investment portfolio performance. Member: FINRA and SIPC Oklahoma City, OK | Atlanta, GA
www.GoBaker.com Austin, TX | Indianapolis, IN
800.937.2257 Salt Lake City, UT | Springfield, IL
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