GOLD PRICES LEAD THE WAY AGAIN
In the past week gold prices have risen from $575 to $625 and look like they will head higher in the coming months.
If so, the Fed is now in a box and cannot escape raising rates again, and perhaps for several more times.
From the outset of Fed action, back in 2004 the gold market has led the way in forecasting future Fed action. As gold rises, so must the target rate for Fed Funds.
Once the gold market broke, back in May of 2006, it appeared the Fed had done its job and could stop raising rates. As the perception of this intent soaked into market thinking, the bond market stabilized, the stock market corrected, and a sigh of relief escaped from bullish traders.
That thinking is now in jeapordy, and the gold market is telling A/L managers to be very careful.
If the gold market is right, and inflation is still a powerful force, then the Fed is not done tightening, and short term rates are certainly headed higher.
TACTICS
At times like this the A/L department, and its senior managers play an important role in the profitability of the institution.
1. Be aware of all market action. Start with money numbers, then keep an eye on gold, bonds, stocks and other commodities. Watch inflation and output numbers. Don't leave your desk even to get a glass of water.
2. Communicate to senior management. Give the CEO the information necessary to implement the A/L management plan.
3. Review new business to see that sufficient spreads are being built into every deal. Highlight any new business that is not profitable right away.
4. As old loans roll off, make sure the assets are invested in Fed Funds or a equally short-term instruments. Both safety and yield are enhanced by shortening asset maturities. Remember, Fed Funds is the highest spot on the yield curve. Take advantage of that fact and take credit for making profits. Consider using a Funds broker like Tullet Prebon. Ask for Mark Edelsberg.
5. Review hedging programs and obtain conditional authority from senior management for quick action.
6. Encourage Board participation where needed. Sometimes, the board wants to know what the A/L department is doing, and if they do, make sure to tell them. The A/L department makes decisions that affect the entire institution, and the Board must know about them, and approve. People lose their jobs over these kinds of mistakes.
STRATEGY
Be foresighted. Look out several quarters and see what kinds of business is rolling off, what kinds of business is being done, and where the institution is heading.
Consider alternative revenue streams. As spread lending comes under fire from rising Fed Funds, consider fee based activities. Recommend this course of action to senior management.
Most important, ring the warning bell. Even if this is the bottom in bond prices, the top in gold, and the beginning of a massive bull market in stocks; even if your institution is heading for spectacular profits; and even if your A/L book is in great shape, there is still great uncertainty out there. Be careful. Be prudent. Be clear to senior management. The trouble is not over, yet.
