There’s a bit of a process that goes into the creation of these messages. It all generally starts with Morgan Jones, our Marketing Manager. I’ll be sitting here at work minding my own business, when she suddenly pops up out of nowhere to inform me that my homework (that is, this letter) is due in a couple weeks. I’ll usually retort with something to the effect of, “that can’t be possible, I just wrote one”. To which she will politely point out that it’s been months since I turned in my last assignment. I’ve always suspected that the actual deadline is much later than the one I’m provided. However, she knows it takes me longer than it should to put this thing together, so I’m kept on a pretty short leash. This little routine got me thinking about the value of time, more specifically the concept of the time value of money. I really do need to find a hobby.
The concept of time value of money (TVM) is the idea that a sum of money is worth more in the present than that same amount of money will be at some future date. This financial principle relies on the assumption that money held right now can be spent or invested: purchasing something should result in immediate gratification and investing it will hopefully result in a larger amount of money later. Regarding that second point, future money also contains the additional risk that it never materializes for whatever reason (i.e. a bird in the hand). Time value of money further implies that folks will expect to be compensated when they lose the immediate use of their money or when they lock it up for some period of time. Purchasing a home provides shelter, but also the possibility of wealth in the form of value appreciation over the long term. People invest in stocks, bonds, or certificates of deposits with the hope that committing capital now will grow their original investment later. Whether we consciously know it or not, we use the TVM principle to evaluate and compare a wide range of opportunities every day.
Recently this fundamental concept has been turned on its head. Two factors are responsible: widespread inflation and the threat of economic recession. Since everyone has already read my previous President’s Message on the impact of inflation on hot dog prices, I won’t delve too deep on that topic here. Suffice to say, elevated levels of inflation will eat away at the value of money and its purchasing power, even if invested. This means the dollar you have in your pocket could be worth less in the future because it won’t buy as much as it does today. The second factor influences TVM more from the threat of a recession, than an actual recession. I’ll try to explain this (and consequently, try not to put everyone reading this to sleep) using the United States Treasury yield curve. When folks buy U.S. Treasury securities, they essentially provide a loan to the government that it is obligated to pay back. These ‘loans’ range in maturity from a month all the way out to 30 years. Recent treasury rates and corresponding maturities look something like this:
Based on TVM, the 10-year treasury rate should not be less than the 1-year rate, but it is. How can this be? The answer is because both the Federal Reserve and market participants who invest in treasuries have made it so. The Federal Reserve influences the shorter part of the curve by increasing (or lowering) short-term interest rates. As I’m sure most folks have noticed, there’s been quite a few rate increases of late, with the anticipation of more to come. The broader investing community has much more influence over the long end of the yield curve. If these market players become worried about potentially negative economic conditions (ex. a recession), they will invest heavily in the longer end, betting that the Federal Reserve will be forced to lower interest rates to re-stimulate the economy. So, the Federal Reserve increasing short-term interest rates to fight inflation, coupled with the market pushing down long-term rates in anticipation of a recession, has all but eliminated TVM in the current economic environment.
There’s no punchline here. The purpose of this message was to work through what is a widely embraced financial concept and point out that we’re currently living in a time where it’s broken down. I wish I had a better crystal ball to predict what will happen next, but I’ll borrow a quote from economist J.K. Galbraith in that regard, “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know”. Quoting dead economists? For the sake of the handful of folks who stayed awake long enough to get to the end of this, I’ll wrap it up.
Final Thought: You know things have gotten weird when your acupuncturist has an opinion about Federal Reserve interest rate policy.
Final Final Thought: Does acupuncture actually work? Heck if I know. Ask me in a few months.
Good luck and happy hunting,
As I write this, the talking heads on a business news channel are informing viewers that the rate of inflation in the United States jumped up to over 9% during the month of June. This marks the highest pace for inflation going all the way back to November of 1981. Simply defined, inflation is a broad increase in the price of goods and services in an economy, accompanied with a fall in the purchasing value of money. It's hard to ignore, because it's everywhere you turn: fuel, diapers, furniture, microchips, even hot dogs. The eye-watering prices at the pump are probably most evident, but I want to dig a little deeper into the pricing behavior on that last item - hotdogs. It's a topic that's a bit more on our minds around here at Community Bank, because after a 2-year hiatus we're dusting off the grills and getting the Customer Appreciation Barbeques at our branches back on track (click here for BBQ dates).
About hotdogs and inflation. It’s hard to believe, but I’ve worked for Community Bank for a little over 20 years now. This got me thinking - what was the cost of a hotdog when I started at the Bank in 2001 compared to 2022? Luckily there's this little contraption called the Internet where the answer to this most critical question resides. According to Mr. Google, the average price for hotdogs in 2001 was $2.27 per lb. Fast forward to 2022, and it’s now $5.22 per lb. That's an increase of 130%! To throw a few more numbers at it, competitive eater (yes, that’s a job) Joey Chestnut recently won the 2022 Nathan’s Hot Dog Eating Contest by eating 63 hot dogs in 10 minutes. At 10 hot dogs per pound, that works out to a cost of $32.88 in 2022, versus $14.30 in 2001. Imagine if he showed up and did this at all 10 of our Customer Appreciation BBQ's. Consequently, he won't be getting an invite.
Many folks have little experience in facing the challenges created by elevated levels of inflation. Afterall, the country hasn’t experienced this in 40 years. While it impacts everyone differently, here are some general recommendations that will hopefully help take the edge off.
First, put together a budget. For several of our customers, this can be a difficult exercise, and an even harder one to stick to once it’s completed. Nevertheless, in an economic environment where costs are skyrocketing, a budget can be crucial in identifying where expenses are increasing, and to support spending decisions. If you need help getting started, check out our new My Financial Toolkit service that we offer through our online banking platform. Alternatively, just give us a call and we’d be happy to assist.
Second, try to pay-off your floating (variable) debt. What in the world? Isn’t Community Bank in the business of lending money? Of course we are, but we’re also in the business of helping our customers make smart financial decisions. If you haven’t noticed, interest rates have gone up. Fast. That means many debt instruments tied to a variable rate – credit cards, HELOC’s, lines of credit – are much more expensive now than they were even a recently as a few months ago. Again, everyone’s financial situation is different, but prioritizing the payment of your variable debt over your debt with fixed interest rates should get a hard look right now.
Lastly, maintain a good old-fashioned savings account. Honestly, this is a good idea even during non-inflationary times. I know, easier said than done in an environment where inflation leaves a painful mark. However, setting aside money now will help to cushion any future unexpected expenses or other painful financial situations.
This country will likely feel the effects of inflation for a good long while. With that said, following a few of these time-tested practices will help you navigate through it. Hope to see everyone (except Joey Chestnut) at our BBQ's this summer. The rainy weather appears to be over for now - get out there and enjoy some sunshine.
If you are a small business owner, you’ve had quite the wild ride over the last couple years. What began with COVID-specific challenges, cascaded into persistent supply chain struggles, widespread labor disruptions, and inflation – the degree of which hasn’t been seen in nearly 40 years. I could spill plenty of ink trying to tackle all these issues at once, but I’d have to quit my day job. Plus, I can’t really add anything to the COVID-19 discussion that hasn’t already been written or debated ad nauseam. However, I will take a poke at what is going on in the disjointed labor market, and touch on a few areas where Community Bank can help our small businesses navigate through some of these challenges. So, lets jump into it.
To use technical terms, the labor market has gone insane. According to the U.S Bureau of Labor Statistics, at the end of 2021 there were around 160 million people employed, and about 16 million open jobs. Counting on all my toes and fingers, that means about one out of 10 positions in a US company was unfilled. With the unemployment rate now back down to around 4%, competition between employers to fill that seat is fierce. At the same time, the number of folks voluntarily leaving their jobs has never been higher, with a record 4.5 million workers quitting in November 2021 alone. Possible reasons for what is now commonly known as the Great Resignation are many. A desire for more flexible working conditions, better salary and benefits, or simply poor treatment by their employer during the pandemic, are just a few of the frequently cited explanations. This is a local phenomenon as much as a national one, as there are plenty of storefront windows along our main streets wallpapered with ‘Help Wanted’ signs. Confronted with these staffing dilemmas, employers are forced to do more with less.
Do more with less. Not necessarily a foreign concept for most small business owners. But also not ideal, as it typically imposes some strain on existing resources and employees. Those same employees that all the other businesses are trying to steal away, remember? Doing more with less also implies that time management becomes a much more critical component to the operation of the business. Here’s where Community Bank can help. We have continued to enhance our suite of small business solutions. Our cash management and remote deposit capture solutions help customers process transactions whenever it is convenient, in the comfort of their own office. Our digital banking solutions assist customers with managing their business on the fly. Our recent integration with Autobooks provide customers with automated bookkeeping capabilities, digital invoicing, and enhanced vendor management solutions. These are just a few examples of products and services that Community Bank can provide that help keep your business running smoothly. Too busy to learn more? That pesky time management thing again, huh? Don’t worry, your Community Bankers are always ready to assist, and will be here when you’re ready to move forward. Just say the word, and we’ll get to work.
As always good luck and happy hunting,