financial planner Stephen Zelcer

TSP Planning Report March 2023

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TSP Planning Report March 2023

March 2023 TSP Planning Report:
 
Facts:
  • The G Fund rate for March 2023 increased back to 4.125%.  It was 3.625% last month.
  • The Fed Funds interest rate increased to 4.83%.  It was .08% just over a year ago. 
  • This month’s unemployment rate increased from 3.4% to 3.6%.  
  • PMI (Purchasing Managers Index) contracted for the 4th month in a row.  This month’s reading came in at 47.7. (Any reading below a score of 50 means contraction). 
  • The S&P 500 (C Fund) decreased -2.44% in February. YTD, S&P500 is up 3.81%
  • The 3rd estimate of Q4 (2022) GDP has come out, showing a 2.7% growth in GDP.  
  
Assessment:
PMI contracting –
As noted above, PMI (Purchasing Managers Index) contracted for the 4th month in a row. Clearly there is less demand for products and materials.  This is usually a “leading” indicator, meaning its a forecast of things to come, not of past.  This metric forecasts that there will be less sales taking place in the coming months.  This obviously doesn’t bode well for products-based businesses.  
 
Bank Failures –
A few banks have collapsed in the past couple of weeks.  Much speculation is circulating whether these banks are forecasting future economic problems for all banks, or are these bank failures merely isolated incidences.  
 
The argument that these Bank Failures are isolated incidences:
Silicon Valley Bank’s (SVB) customer base consisted of tech companies, including start-ups – companies that raid their cash reserves often, because their company expenses are not yet supported by their cashflow.  
Raiding cash reserves is not a problem, until the bank no longer has your cash.  
 
Why wouldn’t the bank have your cash?  As a bank, it is not required to keep all its cash liquid and available.  A good chunk of its cash was invested. Again, having your cash invested is also not a problem, unless the investments are either hard to liquidate or have lost significant value. SVB invested heavily in long-duration US government bonds, which has plummeted as interest rates have risen over the last year.  (There’s an inverse relationship between bond values and interest rates.  As interest rates rise, bond values decrease, and vis versa.)
 
Usually when a bank run low on cash, they can liquidate their investments, but in this case the investments had lost value so liquidating them wouldn’t provide as much cash as needed.  So, SVB decided to raise capital.  On March 6th, SVB announced a $1.75 billion capital raising.
 
In retrospect, it turns out this capital raising announcement sealed their fate.  This announcement alarmed depositors, because it suggested the bank didn’t have money – it needed capital – and customers started to withdraw their money, especially money in excess of FDIC coverage. 94% of SVB deposits were above the $250,000 FDIC insured limit.
 
So, the SVB meltdown was the confluence of 3 SVB specific factors: SVB’s client base being cash-reliant and uninsured, SVB’s portfolio being invested in bonds which suffered due to the steep rise in interest rates, and SVB’s own actions to raise capital which raised flags.
 
How much of the above factors apply to other banks?
 
What happened at Credit Suisse (CS)?
Credit Suisse was declining for a quite some time.  Its reputation has been harmed by a few scandals – including being convicted of allowing drug dealers to launder money in Bulgaria, involvement in a Mozambique corruption case, a spying scandal involving a former employee and an executive, and a massive client data leak to the media – driving customers away.  In 2022, 123 billion Swiss francs ($134B USD) were withdrawn by customers, and CS reported a yearly loss of 7.3bn Swiss francs ($7.96B USD). Supposedly, CS just started a three-year restructuring plan.
 
So, all the above was happening before SVB collapsed. Then, after SVB collapsed, CS admitted that it had found “material weaknesses” in its financial reporting, which sent investors and clients into a panic. Then Saudi National Bank, CS biggest shareholder, said that it would “absolutely not” provide more liquidity if CS needed it. (Saudi National Bank had also said that they fully believe in Credit Suisse’s strategy, and that CS was unlikely to need their liquidity money. But that didn’t calm investors.)
 
What were the “material weaknesses” that CS found? Not clear.  They seemed to be inefficient processes which causes faulty reporting and misstatements of account balances and disclosures. Price Waterhouse Coopers described it as “did not design and maintain an effective risk assessment process.”
 
Looking at the above laundry list, which of these applies to other banks?  
 
Does CS’s problems even apply to SVB, or vis versa?
SVB & CS are regulated by different governments, so it’s not likely that there’s any relationship between their respective meltdowns.  
Furthermore, their problems were different:
  • SVB’s problems had nothing to do with their reputation as a bank, and seemingly were just the result of a short-term liquidity crunch.  
  • SVB’s illiquidity was tied to the nature of their client base, and investments in declining assets. CS’s illiquidity was not primarily the result of declining investments, but simply they have less deposits.
  • CS’s problems were drawn out over a long time, and were prompted mostly by their declining reputation – people no longer liked the bank.  
The argument that these Bank Failures are NOT isolated incidences:
Regardless of the above arguments, a run on one bank causes fear – and fear is contagious.  This fear can cause even the most solid banks to have a run on their money.  
 
Not Liquid is not the same as not having your money:
Even if the banks experience a run, that doesn’t (necessarily) mean they don’t have your money, but that your money is tied up in transactions and is currently not liquid.  Not Liquid is not the same as not having your money.  This is similar to equity in your home.  The money is there, just inaccessible until you sell the house or get a loan against the house.  
So, too, here with the banks.  Your money is there, just not liquid. Once people see that their money is not lost but just simply not immediately accessible, there will be a slowing in their demand of their money, and slowly the banks will regain their liquidity.  
 
Beware of gov’t intervention:
However, there’s always the threat of the government pumping more money into these banks to raise their liquidity.  This, as it always has, causes inflation.  Furthermore, government involvement invites government regulation which usually invites inefficiency, fraud, and elevated costs.  That usually exacerbates a situation which would cool off naturally.  
 
G fund – 
In previous reports I would tout: If you are seeking 4% yields, you don’t need much stock, because as of today the G fund is yielding 4%. 
However, that’s not so accurate, since the Fed has suspended investments in the G fund.  So right now the G fund is yielding 0%.  Yikes!
However, I kept my portfolios assuming the G fund would yield what it’s “supposed to,” meaning, 4%. I did so because once the debt ceiling is raised, which always seems to happen, the G Fund securities are reconstructed, and interest is paid, as if the suspension never happened.  
I wrote a long explanation about this HERE – https://stephenzelcer.com/what-are-the-alternatives-to-the-g-fund/
 

 

Bottom Line:
I was pretty pessimistic for 2022, and I continue my pessimism for 2023.  
If you have G fund in your conservative bucket, based on my conservative bucket strategy, you should consider alternatives to the G fund.  I write about it in my article above.  Please contact me for a specific recommendation.
 
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

Click here to download my portfolios.

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