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Half My Kingdom for a Glass of Water

Learning Opportunities

Will water become the next great commodity embraced by capitalism, like gold? You may be thinking, "How can that be? It comes down free in buckets, usually when I am planning something outdoors. Seventy percent of the earth is covered in water. You must be crazy." Possibly, but only three percent of all water is fresh (potable) water, safe to drink. Currently, over one billion people lack access to safe drinking water. Johannesburg, the largest city in South Africa, ran out of water in May. Sao Paulo, Brazil, one of the 10 largest metro areas in the world, has a water reserve of just four percent. Mexico City endures days without sufficient water.

The UN projects that by 2030, demand for water will exceed supply by 40 percent. The Pentagon is already tracking and modeling for water shortages, globally and domestically. The Defense Department uses the euphemism "water security." Already, 12 companies that sell water are listed on the New York Stock Exchange. If the UN's projections are correct, a rewrite of Shakespeare's play might have Richard III selling half his kingdom, not for free and not delivered by a municipality, but, rather, for profit by an entrepreneurial capitalist.

Other Key Indicators this Week:

Consumer Price Index – CPI rose 0.2 percent, 2.8 percent year-over-year. Inflation accelerated in May to the fastest pace in more than six years. This reinforced the Fed’s outlook for gradual interest rate hikes, while eroding wage gains that remain relatively tepid, despite an 18-year low in unemployment. The pick-up in inflation is a reflection of gains in gas prices.

Producer Price Index – Higher energy prices also contributed to a boost in PPI. With oil backing off its highs and trading more range bound, gas prices may moderate. Higher energy prices provided a significant boost to the PPI in May.

Strategically for Credit Unions:

A few credit unions have asked about recent comments heard regarding a recession around 2020. While the source of the comments is unknown, there is no quantitative data to back up that speculation, at least for now. The economy is currently on solid footing, but there are a few concerns: For example, the U.S. is very deep (almost 10 years) into an economic expansion. The stimulus from the tax cut is increasing the deficit. Interest rates are projected to increase twice more this year and several times in 2019. Employment is constrained as employers try to fill positions, and trade wars threaten over tariffs.

Credit unions may want to consider adding in some fixed coupon investments in the three-year sector (or longer) to get higher coupons on the books. And, consider adding in some higher coupon amortizing investments, such as MBS pools. This combination will hedge the portfolio. If a slight recession should hit in 2020, the credit union will have higher fixed coupons still on the books. The amortizing instruments provide monthly cash flow, which will allow the credit union, in the interim, to reinvest proceeds into a rising rate environment until a potential recession slows the economy and the Fed has to lower rates.

Allen Schiliro – Senior Investment Officer

Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy, and it may be incomplete or condensed. This is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.