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News
Market Comment
Productivity in labor markets, producing more while working less, is the driver behind rising living standards. However, in the past 24 months the tradeoff between efficiency and jobs and the resultant productivity gains has not been an easy pill to swallow for most Americans.
In 2009 the U.S. experienced productivity gains of 2.5%. Although this seems like reason for celebration a closer look at the underlying numbers shows that many 9 to 5ers were not very happy at all. The main reason for the productivity gain was due to fewer hours being worked, making each worker still fortunate enough to have a job, that much more productive. Some researchers expect productivity in the U.S. to fall by 1.50% over the next decade, not due to an expanding work force but to a slowdown in technological advances. Places like China and India still have not exhausted the benefits of large technology investments so European and Asian productivity gains could far outstrip gains in the U.S. making foreign production costs cheaper and jobs in the U.S. more expensive. With unemployment in the U.S. hovering near 10%, gains in productivity may not improve the standard of living for the typical American worker as once hoped.
As applications for new unemployment benefits rise, another troubling sign is beginning to emerge. According to Fidelity Investments, one of the largest managers of 401(K) accounts, a record number of individuals made hardship withdrawals and borrowed from their retirement accounts. Especially disturbing is that, according to Fidelity, 45% of those who took hardship withdrawals in 2008 took another one in 2009.
Statistics such as these do not bode well for those first entering the workforce. As the unemployed and underemployed continue to drain their retirement savings, current workers will delay retirement and remain in the workforce longer limiting employment prospects for the next generation of workers. Another possibility is that current workers will be permanently removed from the workforce, living on fewer resources and possibly requiring more government assistance. The next generation’s job prospects may improve but at a cost of higher taxes to support retirees with limited resources. Either way, a stubbornly high unemployment rate (some economists and researchers expect unemployment to remain above 7% for the next 3-5 years) seems the biggest barrier to the economy’s recovery.
Banking
There have been 118 bank failures in the U.S. so far this year. There were 140 bank failures in 2009.
Often times, as a precursor to actual failure, a bank is issued a reprimand from the FDIC, state financial institution regulator or both. There are several types of reprimands with various degrees of severity that could be issued but some of the more common are;
Cease & Desist Order – an order that among other things, may order a bank to “cease and desist” from engaging in unsafe and unsound practices. A C&D alerts the bank to specific failings and assigns a timeline to correct them.
Consent Order – often the first form of communication a troubled bank will receive, a consent order is an acknowledgement of deficiencies indentified by regulators and the banks written consent to correct those deficiencies in a certain period of time.
Termination of Insurance – uncommon but a very serious concern for a bank, this order may be applied when an insured depository is conducting unsafe practices or in an unsound condition to continue operating as an insured financial institution. Insurance may also be terminated if the bank is convicted of violating laws related to money laundering or reporting certain types of transactions.
Public depositors can find information on these orders and the banks that have been issued orders at
www.FDIC.GOV
Money Markets
The Federal Reserve Bank has targeted the fed funds rate between 0.00% and 0.25% since December 2008. At the end of the first quarter the 2 year Treasury note was yielding just over 1%. Could rates go much lower? Yes! On July 30 the 2 year Treasury note yielded 0.55%. In an effort to prevent a “double-dip” recession the Fed has indicated time and again they intend to keep rates at these levels for the foreseeable future. Bill Gross, Pacific Investment Management Company CEO (Mr. Gross manages the world’s largest bond fund valued at approximately $239 billion) expects rates to remain at these levels for the next 2-3 years. However, this is not the time to accept diminished returns. With proper planning, local governments have several options that could improve yields by 50 basis points over current money market yields, without increasing overall risk. If you would like to discuss these options please contact Ken Herdeman (262-796-6164), kherdeman@bankersbankusa.com or Brian Mann (651-697-8565), bmann@bankersbankusa.com.
August 2010
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BBE Community Investment Partners, LLC
375 Bishops Way – Brookfield, WI 53005 – 262.796.6164
3060 Centre Pointe Dr – Roseville, MN 55113 – 651.697.8568
www.cip-llc.com
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