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Monthly Media Update – May

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Insight into the changing healthcare landscape in Washington, the introduction of a new market president and a unique perspective on trends in the bond market are just a few media coverage highlights from our associates this past month.

Stay informed on industry trends and noteworthy company news by visiting our UMB in the News section on umb.com, which is updated weekly for timely viewing.

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UMB Financial Corporation (Nasdaq: UMBF) is a diversified financial holding company headquartered in Kansas City, Mo., offering complete banking services, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska, Arizona and Texas, as well as two national specialty-lending businesses. Subsidiaries of the holding company include companies that offer services to mutual funds and alternative-investment entities and registered investment advisors that offer equity and fixed income strategies to institutions and individual investors.



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Is the Bond Market Wrong?

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After the surprise election results in 2016, domestic markets experienced the “Trump Bump,” which entailed a traditional risk-on shift—investors bought stocks and sold bonds to prepare for the presumed good times ahead. Stock values and interest rates both shot higher in anticipation of a boost to both economic activity and inflation.

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Trump Bump to Trump Slump

However, after a few months of treading water early in the New Year, interest rates began a steady decline. The 10-year Treasury note dropped from 2.60 percent to 2.25 percent in just a few weeks.

This occurred despite an early increase in overnight rates by the Federal Open Market Committee (FOMC) and clear messaging that they are prepared to continue the upward march in rates as part of a gradual “normalization.” All the while, stock prices remained resilient and repeatedly bumped up against all-time highs.

Debates and Head-Scratching

The drop in long-term rates created a flattening of the treasury yield curve, something that typically occurs near the end of a Fed tightening cycle, as the economy begins to slow down.

This rate drop and curve flattening has triggered a healthy debate throughout the

investment industry. It appears the bond market is signaling that the economy isn’t going to be nearly as strong as the equity market is discounting.

Historically, a flattening yield curve has been a strong, early indicator of economic deceleration—so the divergence between stock prices and interest rates has unleashed some serious head-scratching.

Disagreement Abounds

As a further complication, the Fed Funds futures market—the bond market’s estimate of where overnight rates are headed—is substantially below the FOMC’s estimates for where they’re planning to move rates. The FOMC expects overnight rates (and money market rates) to head to 1.50 percent in 2017 and rise to 2.20 percent in 2018, which is good news for savers. However, the futures market is placing overnight rates at only 1.25 percent and 1.50 percent in 2017 and 2018.

It appears that the bond market currently disagrees with both the FOMC and the stock market on the strength of the economy and the path of rates, raising the question, “Is the bond market wrong?”

Countering the Contrarian View

At this point, our answer is “yes, we believe the bond market is wrong.”  While it’s usually not fruitful to bet against the bond market, we believe several factors are causing it to paint a contrarian (versus the stock market) picture at this time:

  1. Assumption that the new administration will not get any stimulus plans enacted
    The bond market appears to be responding to the president’s early challenges with enacting campaign promises.
  2. Global interest rates
    Global interest rates are still well below the U.S. The glut of excess savings from around the world is still chasing U.S. rates whenever they rise, making it difficult for our rates to rise as much as they might otherwise.
  3. Normalization cycle
    Bond investors around the world are assuming the current Fed normalization cycle will play out in a similar manner to how the entire global financial crisis cycle has unwound—much slower than anyone anticipated. They are betting against any “upside surprises” for the economy or inflation, and it’s been a very long time since we’ve had either.
  4. Extreme caution in rising rates
    The bond market believes the FOMC will exhibit extreme caution in edging rates higher because it fears rising rates will tip the economy back toward a slowdown.The bond markets are not signaling that an economic slowdown is eminent, but rather that rate normalization will not be possible at the pace indicated by the Fed and most forecasters.

Why we believe the bond markets are wrong:

  1. We believe the new administration will succeed in enacting tax cuts and infrastructure programs—both will involve compromise and delays, but they will ultimately be accomplished, and both should point toward higher rates.
  2. We believe the global savings glut is in the very early stages of abating, so the artificial “lid” on interest rates may be slowly dissipating.
  3. While the last decade has been one of extremely slow movements from the Fed, it appears wage pressure is building throughout our economy—a precursor to inflation. Economic momentum is turning upward in Europe as well. These trends will allow the Fed to push forward with rate normalization at the pace reflected in most forecasts.
  4. Interest rates are exceptionally and unsustainably low, particularly given that we are experiencing a modest global upturn. Even after the Fed’s projected upward adjustments, interest rates will still be exceptionally low—modestly higher rates are not a threat to the economy or a barrier to normalization. For these reasons, we believe the bond markets are not properly reflecting the most likely path for interest rates over the next two years. There are risks to this outlook, but the most likely outcome is an upward shift of roughly 1.00-1.50 percent over the next two years.

Interested in learning more about our Private Wealth Management division? See what we mean when we say, “Your story is our focus.


Mr. Kelley is managing director of fixed income at UMB and is responsible for overseeing the product development and management of the fixed income holdings for the Wealth Management division. Mr. Kelley earned a Master’s of Business Administration from Baker University in Kansas City.



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Market Minutes with KC Mathews

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Chief Investment Officer KC Mathews recently completed a two-day media briefing in New York City, where he shared his thoughts on current market conditions as well as information on his 2017 forecast with CNBC, CNN Money, and Bloomberg Radio. Listen to the brief podcast and read the articles below to learn more about what KC is expecting to see over the course of the year.

Also, read KC’s recent economic articles, which give more detailed information on where we’ve been and where we’re headed.

Follow UMB and KC Mathews on LinkedIn to stay informed of the latest economic trends.

Interested in learning more about our Private Wealth Management division? See what we mean when we say, “Your story is our focus.

When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.

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UMB Financial Corporation (Nasdaq: UMBF) is a diversified financial holding company headquartered in Kansas City, Mo., offering complete banking services, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska, Arizona and Texas, as well as two national specialty-lending businesses. Subsidiaries of the holding company include companies that offer services to mutual funds and alternative-investment entities and registered investment advisors that offer equity and fixed income strategies to institutions and individual investors.



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UMB Insights: How Will Senior Housing Look in 2037?

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Millennials may be all the rage these days, but Baby Boomers are still making an enormous impact on the U.S. economy, particularly in the senior housing market. By 2050, the population of individuals aged 65 or older will grow from 40 to 89 million, an increase of 120 percent.

And as Americans age, where and how they will live becomes a more pressing issue – an issue that will have a significant impact on the economy, construction industry and banking sector over the next 20 years.

Where will Boomers live?

Although staying in their homes is almost universally preferred among Baby Boomers, many aging Americans will transition to multi-housing developments that provide some assistance and allow them to live as independently as possible. Others, especially those with medical disabilities, will seek housing in environments that provide more intensive nursing support and other assistance.

The average age of a resident in a senior housing facility is in the ’80s. With the leading edge of Baby Boomers just now turning 70, the need for additional senior housing units is expected to accelerate over the next few decades. In fact, between 2015 and 2020, all 50 states forecast growth in the number of 75-year-old+ households. The increase in senior housing will come from sectors such as Alzheimer’s and Memory Care facilities, independent living centers, assisted living facilities, skilled nursing facilities, continuing care retirement communities, home health care and hospice care.

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What will their housing look like?

It is a common rule of thumb in the industry that Baby Boomers will typically choose a newer, more modern and home-like facility versus an older institutional facility. Therefore, the industry has moved from an institutional feel to a more home-like atmosphere, including eliminating long hallways and nursing stations and replacing them with single rooms, private baths, large rehab spaces, smaller cafeterias, snack bars, beauty salons, theater rooms and much more. As a result, when new competition hits the market and consumers choose with their feet, it becomes much harder for older facilities to maintain the occupancy levels needed to ensure financial success.

How will their preferences affect the economy?

So, what does this mean for the general economy? It means that there are significant opportunities for contractors, developers and lenders that are experienced in senior housing to help owners modernize existing facilities or build new housing options for seniors. Construction for many new facilities is already underway or in the approval phases and financing continues to be readily available for developers and operators in this sector.

What are the risks?

On the flip side of this successful outlook, there are concerns and challenges that need to be monitored and addressed. Even though the senior housing industry is one of the fastest growing segments in the U.S. economy and there are many desirable lending and development opportunities, builders, developers and lenders must effectively mitigate the risks inherent in the industry.

Characteristics of the long-term care business require that successful participants maintain industry-specific knowledge and utilize best practices for each project. For the benefit of all parties involved, it is important that everyone tied to senior housing projects remain prudent and evaluate all risk related to each project. Doing so will mean a stronger economy with more housing options available for Baby Boomers of all ages.


Richard Ziegner is executive vice president and director of healthcare banking at UMB Bank where he is responsible for leading the bank’s efforts in the healthcare sector and providing capital and financial solutions to healthcare providers. He graduated from the University of Arizona in Tucson, Ariz. with a Bachelor of Science degree in finance and earned his Master of Business Administration degree from Northern Arizona University in Flagstaff, Ariz.



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How to Prepare for Ag Challenges in 2017

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For those in the ag business, it’s no secret that 2015 and 2016 were challenging years. And 2017 is looking like it might follow suit. In an industry known for its optimism, you could be hard-pressed to find anyone overly positive about what lies ahead this year.

Producers, in particular, are going to face more challenges in 2017 given the current commodity prices and over supply of crops. In light of those challenges, here are a few steps they can take to prepare for 2017 and beyond.

1. Know Your Numbers: As lenders work with you to project what the next year will look like, it will help to be prepared with key data points, including:

  • Planting intentions – Know your acres, crop type and fertilizer application plans
  • Working capital needs – Know what is changing and ways to improve working capital
  • Break-even analysis – Know your input costs, conservative bushel projections and sales triggers
  • Expense management – Know what specific changes are being made in your operation to endure lower prices and what further trimming can be done
  • Balance sheet basics – Have a good understanding of your current amount of working capital, overall debt-to-equity ratio and value of unencumbered real estate
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2. Be a Tough Negotiator: With the significant price changes in the grain complex, those who sell to farmers are having a harder time making the next sale. This means you have an opportunity to attain better prices when you spend money.

  • Cash rents – In general, landowners will need to make some concessions on cash rents. Be willing to negotiate but not afraid to walk away if the math doesn’t work for you at renewal time.
  • Equipment – There are definitely deals to be had on used iron, but only do what makes sense for your operation. Also, aggressive lease terms are being offered and in many cases may lower cost, or improve cash flow, throughout your operation.
  • Basic purchases – Those who sell you crop insurance, seed, fertilizer, chemical, parts, equipment and more will need to know that farmers are carefully weighing each purchase. Loyalty to such suppliers is wonderful but it is also okay to encourage competition for your spending dollars.

3. Sell Items that Aren’t Contributing: The truth is there are some things that just need to go. Whether it is a poor piece of land that isn’t producing, a tractor that might not be essential or a trailer that is collecting dust, take stock of what you have and determine what needs to go.

During this period in which some producers will have limited working capital and struggle to service debt, it is imperative to critically examine your assets. Working capital and liquidity have become – and will continue to be – critically important in the coming years. Any asset sale that bolsters your liquidity position will improve your ability to endure the current commodity prices and thriving as we look forward to better days.


Lance Albin is vice president, agribusiness commercial lending officer at UMB Bank and has more than nine years of experience in agriculture financing. He has a master’s degree in business administration from Fort Hays State University. UMB Bank is one of the Top 25 Farm Lenders in the United States serving farmers/ranchers, producers, processors, manufacturers and dealers throughout the Midwest and Mississippi Delta regions.



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St. Louis Snapshot: Q&A with Peter Blumeyer

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In the early months of the year, bankers are looking ahead and considering challenges the industry might face as well as where the industry could be going. The Risk Management Association recently hosted a Bank Presidents’ Fireside Chat to gain insight and industry perspectives for 2017. Following are a few of the comments shared by UMB Bank St. Louis President Peter Blumeyer, who served as one of the panelists.

What is your outlook for the year?

As we begin 2017, the banking industry is very competitive. We believe C&I, manufacturing and distribution will be the most competitive industries for lending this year. We have set high goals and will work very hard to compete in this market. We will also keep a keen eye on the talent in the market. We want to ensure we hire people who can compete in this industry while providing them a fruitful career.

How has UMB Bank dealt with the extended period of extremely low interest rates?

We continue to operate in a sustained low interest rate environment that has impacted our net interest margin and continues to challenge our industry. However, we have actively positioned UMB to benefit as rates begin to rise. As a result, whenever the Federal Reserve does drive the short end of the rate curve higher, the nimble position of our earning assets is expected to produce a lift in interest income. We have a solid balance sheet and take pride in our extraordinary credit quality and are well positioned for when interest rates begin to move up.

Are there any new trends developing, positive or negative, in lending?

One negative trend we are experiencing is aggression. As mentioned above, the market is very competitive as every bank looks for new deals and areas to grow. We are seeing customers hone in on the aggressive competitive nature. They might ask for more money with a lower rate or try and compare different term sheets. This can work in their favor as they search for the best rate, but it’s also a risky situation. If a customer tries to piecemeal a deal, it might not be very attainable for the banker to create.

A positive trend is the market is healing. We are slowly coming back from the recession, which is very exciting. Companies have access to the money they need to grow their business and perform their capital expenditures. This is even better for our economy as more growth is added to St. Louis. It is encouraging to see, and at UMB, we are excited to support this growth.

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UMB Financial Corporation (Nasdaq: UMBF) is a diversified financial holding company headquartered in Kansas City, Mo., offering complete banking services, payment solutions, asset servicing and institutional investment management to customers. UMB operates banking and wealth management centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska, Arizona and Texas, as well as two national specialty-lending businesses. Subsidiaries of the holding company include companies that offer services to mutual funds and alternative-investment entities and registered investment advisors that offer equity and fixed income strategies to institutions and individual investors.



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Will the Rational Bubble Become Irrational?

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In my last article, “Riding the Rational Bubble,” I shared that given the economic conditions we have experienced over the last six years, financial bubbles could be developing. Alan Greenspan said, “Long-term economic stability with low inflation will result in a bubble.” If he is right, get ready for a financial bubble, because that is exactly what we have seen over the past seven years. Since 2010, the U.S. economy has been stable, with real GDP growing at an annual 2.2 percent average. Inflation during that period has been low, with the consumer price index growing at
1.7 percent on average over that same period.

However, bubbles alone aren’t necessarily damaging to an economy. Take the stock market debacle of 1987—late in the year the market tumbled 24 percent in one day, but fundamentally the economy didn’t change. Bubbles with leverage, on the other hand, can be dangerous.

Since the Great Recession, the U.S. economy has been stimulated by aggressive monetary policy, with little impact on growing the economy, yet perhaps with significant impact on stabilizing the economy. With the new administration, we will experience a paradigm shift moving from aggressive monetary policy and weak fiscal policy to the opposite—aggressive fiscal policy and diminishing monetary policy stimulus. Could this exacerbate financial bubbles and change rational bubbles to irrational ones?

At present, we see three potential bubbles worth watching: 1) sovereign debt, 2) the stock market, and 3) interest rates. At this time we think interest rates could be the first irrational bubble, with sovereign debt following suit if not dealt with over the longer-term.

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Sovereign Debt

The U.S. national debt is $19.8 trillion or 105 percent of our GDP. On the surface that looks like a bubble that will end badly. However, $5.4 trillion, or 27 percent, of that debt is intragovernmental holdings. Therefore, if evaluating debt held by the public, debt to GDP is only 75 percent.

This model has been the recent strategy to combat slowing economic growth around the world. Japan’s debt to GDP stands at 229 percent. Again, on the surface it seems like a bubble, yet 40 percent of their debt is held by the Bank of Japan. What matters is who owns the debt.

Professors Carmen Reinhart and Kenneth Rogoff and economist Vincent Reinhart studied the debt- to-GDP ratios of advanced economies. Their conclusion was when countries have a debt to GDP ratio that exceeds 90 percent for at least five years, it has a negative effect on the economy. High levels of public debt are associated with lower growth. In total government debt, the U.S. passed the 90 percent debt- to-GDP ratio in 2010; but when we consider just the debt in the public’s hands, we still have a way to go.

The sovereign debt bubble has been developing over many years; I don’t think it will burst in the next few years, but do believe it will become more problematic. President Trump’s fiscal policy may deflate one bubble and exacerbate another. Lower taxes and regulation may jump-start corporate earnings and keep equity valuations in check. However, more than likely, it will increase the national debt. Sooner or later there may be a day of reckoning, but I have been in the investment business for 27 years, and over the years the common question has always been, “What about the debt?” In hindsight, perhaps the best response would have been, “So what about the debt?” The reality is that even though the economy grew and the debt levels increased, investors continued to make money.

The Stock Market

Since the beginning of 2009 to the end of 2016, the S&P 500 has moved up nicely—190 percent to be exact. But that alone doesn’t put it in bubble territory. When you analyze the valuation of the S&P 500, it is clearly not in bubble territory. In fact, I would argue that it is fairly valued. Today the market trades at 17.5 times forward earnings, far from the near 30 times earnings we saw in the tech bubble in the late 1990s.

Bubbles with debt are dangerous. Margin debt, or leverage in buying stocks, is now at previous peaks relative to GDP. If the market traded at a lofty valuation, along with this leverage, it would be a red flag, and an irrational bubble would be looming. That is not the case today as valuations remain rational.

Last year we were concerned with an earnings recession due to the contraction of oil prices and the U.S. dollar headwinds. In the first and second quarters of 2016, earnings contracted, putting the market’s valuation in question. However, earnings did rebound in the second half of the year, and we expect earnings growth for calendar year 2016 to be in the 2-4 percent range. This year, given the economy’s momentum, we anticipate corporate earnings to grow around 9 percent, not assuming any of President Trump’s growth initiatives. If President Trump is successful in implementing his proposed fiscal policy initiatives swiftly, the risk to our earnings forecast is to the upside. This should keep valuations in check and avoid an irrational bubble.

Interest Rates

The U.S. bond market has been in a bull market for more than 35 years. In 1981, the yield on the 10-year Treasury was 15.8 percent. Over the next 35 years, interest rates came down to virtually zero. In August of 2016, the yield on the 10-year Treasury fell to 1.3 percent, partly due to loose monetary policy and quantitative easing. This has become an irrational bubble. Why have Fed Funds been at virtually zero with a stable economy growing at 2 percent? This is not solely a U.S. problem—global growth has slowed and the central bankers in Europe and Japan have pushed interest rates down to zero in an attempt to stimulate their economies, putting additional downward pressure on interest rates in the United States.

President Trump has suggested the economy will grow faster than 3 percent. We think 2.5-3 percent is more realistic. If the president’s forecast comes to fruition, inflation expectations will move higher, ending the longest bull market I have seen in my career. As long as we don’t experience a surprise inflation spike or runaway inflation, the Federal Open Market Committee will be able to manage this bubble deflation by moving short-term interest rates higher on a moderate glide path.

Conclusion

As economies and markets ebb and flow, financial bubbles come and go; they’re just part of the cycle. Many times it is difficult to identify bubbles until they pop. As a friend once told me, “All peaks aren’t bubbles, yet all bubbles have peaks.”

Conditions are conducive for bubbles to develop; we have to be mindful of that. Risk-based assets may perform well this year, and we remain cautiously optimistic. Yet, as always, we never lose sight of the risk that is present.

 

UMB Investment Management is a division within UMB Bank, n.a. that manages active portfolios for employee benefit plans, endowments and foundations, fiduciary accounts and individuals. UMB Financial Services, Inc.* is a subsidiary of UMB Financial Corporation. UMB Financial Services, Inc is not a bank and is separate from UMB Bank, n.a.

This content is provided for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities. Statements in this report are based on the opinions of UMB Investment Management and the information available at the time this report was published.

All opinions represent our judgments as of the date of this report and are subject to change at any time without notice. You should not use this report as a substitute for your own judgment, and you should consult professional advisors before making any tax, legal, financial planning or investment decisions. This report contains no investment recommendations and you should not interpret the statements in this report as investment, tax, legal, or financial planning advice. UMB Investment Management obtained information used in this report from third-party sources it believes to be reliable, but this information is not necessarily comprehensive and UMB Investment Management does not guarantee that it is accurate.

All investments involve risk, including the possible loss of principal. Past performance is no guarantee of future results. Neither UMB Investment Management nor its affiliates, directors, officers, employees or agents accepts any liability for any loss or damage arising out of your use of all or any part of this report.

“UMB” – Reg. U.S. Pat. & Tm. Off. Copyright © 2017. UMB Financial Corporation. All Rights Reserved.

Securities offered through UMB Financial Services, Inc. Member FINRA, SIPC or the Investment Banking Division of UMB Bank, n.a.

*Insurance products offered through UMB Insurance Inc.

You may not have an account with all of these entities.

Contact your UMB Representative if you have any questions.

*Securities and Insurance products are:

Not FDIC Insured * No Bank Guarantee * Not a Deposit * Not Insured by any Government Agency * May Lose Value


K.C. Mathews joined UMB in 2002. As executive vice president and chief investment officer, Mr. Mathews is responsible for the development, execution and oversight of UMB’s investment strategy. He is chairman of the Trust Investment, Asset Allocation and Trust Policy Committees. Mr. Mathews has more than 20 years of diverse experience in the investment industry. Prior to joining UMB, he served as vice president and manager of the portfolio management group at Bank of Oklahoma for nine years. Mr. Mathews earned a bachelor’s degree from the University of Minnesota and a master’s degree in business administration from the University of Notre Dame. Mr. Mathews attended the ABA National Trust School at Northwestern University and is a Chartered Financial Analyst and member of the CFA Institute. He is past president of the Kansas City CFA Society and a past president of the Oklahoma Society of Financial Analysts.



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Focus Items for Small Business Owners

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In December, the NFIB Small Business Optimism Index‡ had its highest reading in 12 years. In the report seven of the 10 index components rose, including small business owners expecting better business conditions and higher sales.

Optimism is currently at a high point allowing for owners to focus on their next big idea, their bottom line and how they can make things better for their employees. Their bankers should be thinking about those things, too.

If you’re a small business owner, make sure you’re talking with your financial partner about these business-critical items as you venture into 2017 and beyond.

Top Talent Identification and Retention
Companies requiring vocational talent can face challenges finding the right type of employee. As businesses look to expand, growth can be difficult without a sound workforce and could potentially force companies to outsource to other cities or move operations entirely.

As part of their talent acquisition and retention efforts, small businesses should ensure they are offering solid compensation and benefits to build and retain a strong workforce.

Business Growth
With an ultimate goal of growing their company, small businesses need to evaluate what other potential clients exist and if there are new segments where they can introduce their product or service.

Companies that did not survive the 2008 economic downturn left behind certain voids that need to be filled. Existing companies should evaluate this as an opportunity to expand to a new business target.

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Employee compensation and benefits
Currently, there are two big issues that could pose a threat to small businesses: the minimum wage discussion and health care. If minimum wage increases, many businesses will face challenges with revenue and cash flow, particularly if they employ lower-wage workers. With no offsetting revenue increase, this would affect a company’s cash flow and could create unprecedented challenges within the business.

The other topic of note for business owners is healthcare. The rules and regulations of the Affordable Care Act may change with the current administration discussing extensive healthcare reform. This could mean an extra expense without incurring any additional revenue for small businesses.

Fraud and Protection
Fraud continues to be a top concern among business owners, and the latest statistics prove it is a legitimate fear. In the 2016 Association for Financial Professionals Payments Fraud and Control survey, 62 percent of companies were subject to fraud during the survey period, and wire fraud has nearly doubled from 14 percent to 27 percent.

The truth is, businesses can plug one gap and another one opens up somewhere else. The key is to stay vigilant with your employees, train them and understand the latest tactics that are being used to commit fraud.

 

When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.


Dominic is a executive vice president for the Business Banking division at UMB. He joined UMB in 2013 and has more than 20 years of experience in the financial services industry.



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VTO takes Anthony Rutledge back in time

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For one associate, UMB’s volunteer time off (VTO) program* recently reconnected him to his past.

Twenty years ago, UMB associate Anthony Rutledge was a third grade student at Meadow Lane Elementary School. His class participated in the School of Economics, which provides students with a hands-on experience focused on implementing real economic principles. Students create their own business—from determining operating expenses to selling goods and managing money.

As a student, Anthony spent weeks preparing for School of Economics and when the big day came, he worked as an accountant. Through helping “business owners” track money, pay off loan debt and pay rent, Anthony was hooked.

Fast forward to the present, and Anthony, a customer relationship manager for UMB, found himself back at School of Economics—this time, as a volunteer.

THEN                                                         NOW

Anthony Rutledge as a student attending the School of EconomicsAnthony Rutledge volunteering in 2016

 

 

 

 

 

 

 

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“I wanted to give back to something that I enjoyed as a student. Most kids do not understand why they have to do something, and showing how what they’ve learned translates into how I, and the other UMB volunteers, make our living is very rewarding,” Anthony explains.

The VTO program empowers many to give back to organizations that have helped shape them. According to Anthony, “most of us would not have the opportunities we’ve had, or be where we are today, if someone hadn’t volunteered to help us in one way or another.”

*All full-time UMB associates (and part-time associates who work at least 20-hours per week) receive two paid days each year to volunteer at qualifying organizations of his or her choice. Learn more about our community involvement and associate benefits.

 

When you click links marked with the “‡” symbol, you will leave UMB’s website and go to websites that are not controlled by or affiliated with UMB. We have provided these links for your convenience. However, we do not endorse or guarantee any products or services you may view on other sites. Other websites may not follow the same privacy policies and security procedures that UMB does, so please review their policies and procedures carefully.


Jen Houston joined UMB in 2015 as community relations manager. In her role, she works to create volunteer opportunities and to be a resource for associates looking to get involved in their communities. Jen holds a Bachelor of Journalism degree and a Bachelor of Arts degree in Spanish from the University of Missouri – Columbia. She also holds a Master of Business Administration degree, with an emphasis in leading and managing people, from the University of Missouri – Kansas City, in addition to completing the Multimedia Studies Certificate Program at the Kansas City Art Institute.



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Riding the rational bubble

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Don Ho’s famous song “Tiny Bubbles” went something like this:

Tiny bubbles, in the wine

Make me happy, make me feel fine.

Tiny bubbles make we warm all over

With a feeling that I’m gonna love you till the end of time.

Don Ho’s lyrics perfectly capture the way we typically feel about asset bubbles. Asset bubbles are formed when assets become over-inflated and prices rise beyond any real sustainable value. As asset bubbles are developing and asset prices are increasing, we feel fine and warm all over, buoyed by hope the bubbles never end. Unfortunately, they are typically followed by a crash. They don’t last until the end of time. Many empirical examples exist going back to the 1600s when “tulip mania,” a speculative bubble in tulip bulbs in the Netherlands, resulted in a collapse. More recently, the Dot-com bubble of the late 1990s burst when shares of Internet-related companies soared to astronomically high prices.

I spoke to CNBC about my take on this recently:

I also sat down with Gregg Greenberg at The Street to discuss asset bubbles.

the-street

 

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How to spot an asset bubble

Identifying bubbles can be difficult. Bubbles have historically emerged in periods of productivity where structural change enhancements and/or a low interest rate environment were present. Examples include the railway boom, the electricity boom and the Internet boom. So the question of the day is: Are we experiencing an asset bubble? Clearly we are not experiencing a productivity boom similar to those that have promoted bubbles in the past. However, we are experiencing the other end of the equation—historically low interest rates. Quantitative easing (QE) has failed to promote economic activity as expected, but it has driven interest rates to virtually zero for six years. Given that backdrop, asset bubbles are to be expected.

So are we in an asset bubble or is a bubble developing? I believe that a bubble is developing, caused by aggressive monetary policy around the globe. Presently the valuation of the market is rational, with the current price earnings (PE) ratio 20 times the last 12 months earnings and the current yield on the 10-year Treasury at 1.5 percent. Looking back, we now know there was a bubble in the equity market in early 2000. At that time the PE ratio was 30 times trailing earnings and the yield on the 10-year Treasury was 6.8 percent. Keep in mind that low interest rates and low inflation should support a higher multiple, so today 20 times trailing earnings would be defined as rational.

Can we ride the bubble?

There is vast array of academic research that would suggest the answer is yes. As asset bubbles form, many attempt to profit from the irrational exuberance of others, in effect promoting further growth of the bubble. I labeled today’s bubble “rational” because we don’t know the counter-factual argument. What if Ben Bernanke didn’t execute on QE? Would we have fallen into a recession? I don’t know; no one does and more importantly, it never happened. It appears to be rational that The Federal Reserve (Fed) would lower interest rates and keep them low for quite some time. In addition, by analyzing the global economy, one could conclude that low interest rates are rational and the bubble will remain in place for some time

When does the rational bubble become irrational?

Again, history provides us some indication. For example, tulip mania manifested over four years and the “South Sea Bubble,” a British stock bubble centered on trading rights purchased by the South Sea Company in the year 1716, also lasted four years. Interestingly, Isaac Newton found himself caught up in this bubble and apparently lost money in the ensuing crash. His famous quote, “I can calculate the movement of stars, but not the madness of men,” sums up the irrational behavior in a bubble. Another famous example, Black Monday – or the stock market crash of 1987 – ended the bull market run that started in 1982. I always get a kick out of the November 1987 Time Magazine cover titled: “The Crash—After a wild week on Wall Street, the world is different.” I respectfully disagree. The world didn’t change because of a stock market debacle. Lastly, the Dot-com bubble I referenced earlier began in the late 1990s and developed over a five-year period. The bottom line is that history tells us most asset bubbles come and go within a three- to five-year period. Rational bubbles become irrational when valuations can’t be justified. I do not believe we are there yet.

Are we in an asset bubble?

Admittedly, the challenge in determining the duration of a bubble is defining the anchor points. When did the bubble actually begin and when did it end? Typically these anchor points are a bit fuzzy. Nevertheless, it appears that historically, bubbles have lasted three to five years.

I know what you’re thinking: interest rates have been low for six years and the stock market has gone up since mid-2009. Does this mean we are in a bubble and will it burst? As I mentioned, it is extremely difficult to determine when exactly a bubble begins to develop. One key indicator to consider is that bubbles typically begin when we see an economic recovery turn into an expansion phase.

After the Great Recession in 2008 to 2009, the Fed lowered interest rates to stabilize the economy and right the ship. However, GDP growth has looked tortoise-like from 2010 to 2013 rather than showing a more robust economic recovery that could then lead to the development of an asset bubble. I believe the rational bubble we are in today likely began around 2014 when GDP held steady at 2.4 percent, followed by 2.4 percent again in 2015.

Stock market valuations have increased but are nowhere near levels we have seen them prior to past crashes. Interest rates are low and are expected to remain low for quite some time, yet inflation remains in check. It all appears to be rational. This signals investors to stay invested, buy quality companies and monitor the situation carefully.

Will the bubble burst?

The previous examples I cited were situations where a bubble has become irrational and eventually burst, though not all asset bubbles end badly. We may experience the frequent development of asset bubbles over the years, but most remain rational and eventually dissipate as the markets correct. This may be precisely the situation we find ourselves in today.

 

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K.C. Mathews joined UMB in 2002. As executive vice president and chief investment officer, Mr. Mathews is responsible for the development, execution and oversight of UMB’s investment strategy. He is chairman of the Trust Investment, Asset Allocation and Trust Policy Committees. Mr. Mathews has more than 20 years of diverse experience in the investment industry. Prior to joining UMB, he served as vice president and manager of the portfolio management group at Bank of Oklahoma for nine years. Mr. Mathews earned a bachelor’s degree from the University of Minnesota and a master’s degree in business administration from the University of Notre Dame. Mr. Mathews attended the ABA National Trust School at Northwestern University and is a Chartered Financial Analyst and member of the CFA Institute. He is past president of the Kansas City CFA Society and a past president of the Oklahoma Society of Financial Analysts.



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