IRVINE, Calif. - Sure, deposits are coming in at a fast clip as members seek a safe haven from the stock market. But strong auto sales have kept your loan staff busy. The mortgage department is bustling as home sales remain strong. So no worries, right? Wrong, says Peter Navarro....
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IRVINE, Calif. – Sure, deposits are coming in at a fast clip as members seek a safe haven from the stock market. But strong auto sales have kept your loan staff busy. The mortgage department is bustling as home sales remain strong. So no worries, right? Wrong, says Peter Navarro. A business professor at the University of California-Irvine with a Ph.D. in economics from Harvard, Navarro appears regularly at sessions held by various California credit unions to advise members about coping with today’s economy. He’s the author of “If It’s Raining in Brazil, Buy Starbucks.” He figures credit union executives may need to think a little more deeply about what’s happening and, even more important, what is likely to occur. “What I do is try to use my awareness of the macroeconomic environment to determine which way the stock market is heading,” Navarro explains. “If I know which way the stock market is heading, I also know which way the business cycle is moving.” Navarro believes there are two kinds of CEOs. One takes a micro view of the world. They focus their energy on managing the business. The second type is the macro manager who is interested in understanding the constantly changing environment in which the business operates. That macro manager gears decisions to key points in business cycles. “Frankly, it would be a delightful surprise to know that everybody in the credit union industry was of that ilk, but I suspect not,” Navarro says. “We got fat, dumb and happy in the 90s. It was simply too easy to make money and manage businesses. Since the bear market of 2000 it’s been very difficult. In some cases credit unions have prospered more than other industries because – in a way – they got lucky. As fast as investors were moving out of the stock market, they were moving into the housing market.” As he speaks with people in the credit union industry, he is struck by how dependent many credit unions are on two highly cyclical activities – autos and housing. “It’s really important for credit unions to understand two things. One is if they are highly dependent on those industries for their revenue stream, and they haven’t hedged their risks or diversified their portfolios, they are going to suffer hard times just as regularly as clockwork,” Navarro warns. “I think a lot of senior credit union managers have gotten complacent about that fact because both the auto and housing markets have been very strong. It’s a very problematic issue for credit unions,” said Navarro. Autos and housing, he continues, always lead the nation into recession and lead it out. There’s only a short period in the business cycle when those sectors outperform the market. The rest of the time they underperform. He sees the past year or so as highly unusual. The housing sector has proven very resilient. However, he cautions, all good things must come to an end. So credit unions face two challenges. One is how to hedge their dependence on the housing and auto sectors for revenue and somehow diversify their revenue stream. “The second challenge, I think, is to earn a better return on the portfolio of funds which they have in investment vehicles as opposed to mortgages and auto. Every credit union has a certain amount of cash on hand they allocate to an investment portfolio,” Navarro says. ” My sense is there are a lot of credit unions that don’t invest very well. They either take the safest route possible and invest in very low-risk, low-return instruments, or in some cases they might get some exposure to riskier assets but may not manage that as well as they should.” If you were sitting down with Navarro to discuss these issues, he says the first thing he would do is determine how financially literate you are. Do you really understand the business cycle and how the stock market predicts that cycle? Do you understand how various sectors such as autos and housing perform at various points in the cycle? Then the question becomes how to meet the two goals of diversifying and earning a better return. “ To be honest,” Navarro says, “I’m in the process of trying to think through that. Credit unions, almost by definition, are in the process of taking in money from their members and recycling that money by helping their members buy autos and houses. “I believe, however, there are other opportunities. There’s the whole notion of cross-selling that the big banks and credit card companies engage in. If credit unions are going to compete in that world, they need to learn how to do that.” As for hedging, Navarro points out that as you anticipate a downturn in autos and housing, you can move more cash perhaps into the financial asset management side and find hedging instruments. “I suspect there are more than a few credit union executives who are going to get caught with too much in the bond market when the stock market turns. They’ll wind up having bought at the top of the bond market and sold at the bottom of the stock market. “We’re not there yet, but these are the kinds of dangers that lurk if you don’t take a macro view of the world,” he says. -
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