TSP Planning Report August 2023
Facts:
- The G Fund rate for August 2023 increased to 4.125%.
- The Fed Funds interest rate increased to 5.33%.
- This month’s unemployment rate decreased from 3.6% to 3.5%.
- The 1st Estimate for Q2 GDP came in at 2.4%.
- PMI (Purchasing Managers Index) contracted for 2nd straight month, reading 49.0 this month (any reading below 50 represents contraction).
- The S&P 500 (C Fund) increased 3.21% in July. However, thus far in August, S&P 500 is down roughly 3%. YTD, S&P500 is up 15.7%
Assessment:
Looming Defaults:
The Fed raising interest rates is a sign that inflation still needs to be combatted.
But, that just exacerbates a growing looming real estate default. In the words of Fitch Ratings:
“In the U.S., actual high-yield (HY) and institutional leveraged loan (LL) default rates soared to 2.6% and 3.0% in the trailing 12 months (TTM) to July 2023, from 0.8% and 1.0% at mid-2022. We anticipate these rates to rise further as issuers face persisting macroeconomic challenges and higher costs of debt.”
Allow me to illustrate:
Typical commercial real estate loans have a 5-yr term. That means, in 5-yrs they need to be either satisfied or refinanced.
However, when it’s time to refinance, instead of holding a 4% mortgage from 2018, they are forced to refinance into an 8%+ mortgage in 2023. That, by itself, is a challenge. However, it gets worse.
Commercial real estate values have declined. A building that was bought for $10M in 2018, may now be worth $8M in 2023. Assuming a 20% LTV, the loan on that original $10M property was $8M. When it comes time to refinance, if the property is now valued at $8M, the LTV would only allow a loan of $6.4M. That means the property owner needs to somehow find $1.6M of cash just to refinance the original $8M loan.
When confronted with this decision – either cough up another $1.6M and refinance into costly 8%+ loans, or cut your losses and walk away – it’s not hard to foresee many owners walking away from their loans, and defaulting.
Bottom Line:
We are not in the clear. I was hoping that this month would provide more positive economic indicators, and I would be able to move heavier into stocks and adjust my TSP allocations. However, we’re not yet there, and I am sticking with my current recommended portfolios.
See this month’s recommended portfolios. DON’T JUST LOOK AT RATE OF RETURN. Always view the target return of each portfolio in context of its ranges of fluctuation.
Anyone who has more than 5 years before drawing income from their TSP should consider taking a more aggressive posture going forward and use my aggressive portfolios below. If you are within 5 years of retirement, you should email me to get a more customized recommendation.
If you have any questions, feel free to contact me.
Email me here – stephen@stephenzelcer.com
