How quickly things can change. At the beginning of this year, credit unions were flush with cash and enjoying high yields in Market Daily accounts-with rates as high as 6.50%. Many credit unions were reluctant to give up such a high short-term rate and were uncertain as to the longer-term outlook for interest rates. So they chose to stand pat, leaving a great deal of cash in short-term accounts. We all know what happened next. The Fed pulled the plug on short rates and down they tumbled. In retrospect, instead of sitting in Market Daily, it would have been wiser to give up that short-term yield and ladder in longer-term investments. For example, using a simple fixed-term one-to-five-year ladder of certificates from the corporate I'm most familiar with, a credit union would have invested at an average rate of 5.78%. As for the Market Daily, if it averages 2.50% for the rest of this year, the average rate for all of 2001 will be 3.96%. That means a credit union that left $5 million in the Market Daily would be $91,000 behind of the credit union that invested on the ladder. From December 31 to June 30, 2001, WesCorp member credit unions' cash and short-term (three-month maturity or less) investments increased by approximately $4 billion. If only half of this had been invested longer term, those credit unions would have earned as much as $36 million more annually on their investment portfolios. Many have learned a valuable lesson-that a strategy of doing nothing but riding short-term rates carries a risk equal to an investment strategy that is overly aggressive. Another part of the lesson is not to allow opportunity to pass us by again. How does a credit union apply these lessons during the annual budget process currently underway? Last year at budget time, most credit unions were still experiencing strong loan growth, and any investable funds were being left in short-term accounts like the market daily, which were paying the highest rate on the yield curve. During last year's budget process, it was easy to plan for continued growth in loans and high short-term rates. A lot of planning was done on the basis of "what is – will be." Most credit unions, encouraged by "experts" in the financial community, were confident the economy would continue to grow and believed the Fed would keep a tight rein on monetary policy. Of course, we now know that wasn't to be the case. Loan growth slowed or stopped altogether, share growth boomed, and short rates plunged. This left many credit unions with unexpectedly large cash positions earning about half what had been forecast. Needless to say, many credit union managers are now more uncertain than ever as to what kind of budget to present to their boards for 2002. Not all of us are investment experts. So the best course, it seems to me, is to get guidance from the experts. These folks are all equipped to provide you with their opinions and counsel. Listen to what they have to say. Weigh it against what they recommended a month ago, six months ago and one year ago. That will help verify the strength of their ability to read the market and financial climate. Once you do your homework, the top candidates will become apparent. Most of the news we're hearing on the economy and business is pretty gloomy. This was the case before the September 11 attack, and the effects of the attack on the economy are expected to darken the short-term outlook. Layoffs are a constant topic of newspaper headlines, manufacturing remains mired in depression-like conditions, earnings continue to disappoint, and the equity markets can't seem to rally, regardless of the fact that the Fed has cut interest rates by a total of 400 basis points since the beginning of the year. Worldwide, economic conditions are weak and getting weaker. Japan is currently wallowing in economic woes. With the exception of Mexico, all major world equity indexes are down by double digits in percentage terms. Rates will go even lower, loan growth will be hard to come by, and liquid funds will continue to flow into credit union accounts. With conditions so negative, many are tempted to budget once again on the basis of "what is – will be." Currently, that does look like the path of least resistance. It's difficult to see what, if anything, can turn things around. There are, however, some positives to consider for next year. Fed policy tends to have a lag-effect of 12 to 18 months. This means the positive impact of the Fed's moves should start kicking in early next year. Business inventories are low, and any significant pickup in consumer demand or capital spending should provide a quick boost to the economy. Despite all the gloom, consumers have continued to provide a base of support. They have not totally gone into a shell, as have many businesses, and the tax cuts are helping. Home sales also remain stable. The fiscal stimulus on its way from Washington will also provide a large potential boost to the economy. Many economists are now projecting a quick and powerful economic rebound sooner rather than later in 2002. The Fed would still likely keep short-term rates low, but market rates could begin to rise. So, what scenario do you use in budgeting? Currently, WesCorp's ALCO is looking for the Fed to make one more 25-basis-point cut later this year. The consensus of the committee is that this will be the end of the Fed's moves, but a move to 2.00% wouldn't be surprising. That rate should hold at least until sometime in the second quarter of 2002. By that time, WesCorp expects economic conditions to have improved and bond rates to have risen somewhat in advance of the Fed increasing rates. We expect a gradual rather than a sharp rebound in the economy and rates. Since both the positive outlook and the negative for 2002 have strong credence and believability factors, the key to budgeting and structuring investments for next year is flexibility. Later in the year, the picture could come into sharper focus, but we could be well into 2002 before a clear course is set. The best course is to plan for the worst but prepare for better times.