THIS IS AN ARCHIVE POST. CLICK HERE FOR THE CURRENT TSP ALLOCATION GUIDE UPDATE.
Welcome back for the last update of 2017.
This month I will write briefly about a few items of interest for Feds and investors, including the impact of the pending corporate tax cut bill, Bitcoin mania and the spending bill, then run through the economic numbers from November.
First up though, I want to again thank the folks who donated to support the site since my last update. I have big plans for the site in 2018 and those donations will make that a lot easier.
Bottom line up front: I will be sticking with an allocation of 100% TSP C Fund in both my existing balances and new contributions this month. That could change in the months ahead as I look again at international markets as we start the new year, and give some consideration to the S Fund as well.
Thrift Savings Plan Fund Returns
The stock market continued to move up nicely in November:
- TSP C Fund: 3.07%
- TSP S Fund: 2.90%
- TSP I Fund: 1.06%
- TSP F Fund: -0.11%
- TSP G Fund: 0.19%
And some pretty spectacular results for the TSP Funds year-to-date (through 12/08/2017):
- TSP C Fund: 20.71%
- TSP S Fund: 16.88%
- TSP I Fund: 22.55%
- TSP F Fund: 3.61%
- TSP G Fund: 2.18%
In the News
Before I continue in this section, let me repeat my disclaimer that this is a strictly non-partisan blog and I do not ever favor one candidate or party over another here. To the extent that I am talking about “politics”, it is for the purpose of explaining how what is going on in the political world effects my investment decisions. My opinions about the impact of particular policies on the economy or the stock market do not necessarily mean that I either support or oppose those policies (in many cases I support polices which are not good for my individual bottom line). If I poke fun at your chosen one, please don’t take it personally, I make fun of everyone. If you still get offended after all of those disclaimers, your time may be better spent sounding out the words on another website.
The Corporate Tax Cut
The Senate’s tax bill and its implications are way too complicated to cover in a paragraph or two, but a few quick points: (1) because it was so hastily written and so full of errors (retention of the Corporate AMT at existing rates, for example, actually raised corporate taxes by $189 billion, and some provisions as written would encourage business to move operations overseas), the House couldn’t just pass the Senate bill. Instead, it had to go to conference committee. And what will come out of there is still very much up in the air. (2) But unless major changes are made to the bill, there is no “middle-class tax cut” in this thing – any benefits which people at our salary levels accrue initially will time out and go away over the course of a few years. Nearly all benefits will go to the very wealthy.
Impact on housing markets will likely be the most notable effect because of the focus on capping deductions which benefit homeowners (a limit to deductions on $10,000 in property taxes and mortgage interest on only $500,000 of debt instead of the current $1 million) and limiting the number of tax payers itemizing deductions. Estimates are that tax bill would cut 3% off home prices nationally, but of course that would be spread very unevenly. The greatest impact would be in the Northeast, Chicago area, and California, with the very worst hit areas like Manhattan and Essex County, NJ, seeing up to a 10% drop in prices. I think actual declines are unlikely in most markets, instead prices will flatten for a year or two before resuming upward trends, but with an end result that prices will be lower than they otherwise would have been.
Impact on the stock market may be largely priced in at this point. As lower taxes are realized in quarterly earnings, that will give some relief to the high valuations we are seeing currently and give the market a little more room to the upside. There are arguments on all sides for which TSP fund might see the greater benefits. Small caps (the TSP S Fund) may see a slight edge because they do a higher percentage of their business domestically and therefore the US tax rates are more important to them. But the large caps (the TSP C Fund) are more likely to have huge cash hoards overseas which they will be able to repatriate at a lower rate, so those companies should also see a bump.
Markets appear happy with the selection of Jerome Powell as the replacement for Janet Yellen as the next Fed Chairman. Powell is seen as likely to continue Yellen’s policies to the degree possible. A number of other openings on the Board of Governors will, however, allow the possibility that more members with different views could stir the pot over the next term.
In the short run, I (along with absolutely everyone else) expect the Fed to raise rates 1/4 point next week. After that, I believe they will hold off until March before raising again. Both of those moves are expected and should have no impact on the market.
Government Spending Bill
Congress averted a shutdown on 12/8 by passing a spending measure to keep the government open until 12/22. I frankly don’t believe that they will be able to reach an agreement on both the tax bill and the spending bill before Christmas and we will see another continuing resolution pushing the budget until February. I expect a bit more brinksmanship this time around, however, but even a short shutdown would be unlikely to have more than one or two day impact on the market.
That said, it has been a very long time since we have had even a 3% correction, so a lot of nervous types will be looking for any excuse to pull out and we could see a very modest correction based on any sort of bad news at any time.
This budget process will bear close watching, however, as proposals coming in included higher contributions for FERS annuities (effectively resulting in an average $5000 pay cut for Feds), stripping COLAs from annuities after retirement (which could cost some Feds hundreds of thousands of dollars over the course of their retirement), and other nasty provisions.
The Mueller Files
The investigation into Russian interference with the 2016 Presidential Election continues apace with the guilty plea of Michael Flynn. I don’t know anything more than what is in the papers, but can guarantee Mueller didn’t assemble a dream team of prosecutors to extract a plea to one count of False Statement from Flynn. Flynn was the National Security Advisor for only 24 days, but he was part of the Trump campaign from early on and was a principal advisor with regular contact with senior members of the campaign and people very close to the President. His cooperation will open up a dozen avenues of investigation and the Special Counsel investigation is going to keep going for a long time.
As I have mentioned before, however, that really shouldn’t have an impact on our TSP investing unless we reach the point of a constitutional crisis.
To be clear, blockchain technology is awesome and will be used in many applications in the future. I’m just not convinced that a crypto currency with nothing standing behind it is the use which will go mainstream.
I first wrote about Bitcoin in December 2014:
I don’t like Bitcoin as an investment because an asset derives its value from either an ability to generate income (earnings) or through some intrinsic value. Anything else is speculative value. Scarcity is what makes something which has intrinsic value worth something, but scarcity alone does not convey value. The alleged purpose of Bitcoin is to create a currency which can be used to conduct transactions inexpensively and without government oversight – to buy and sell things. But that’s not what is happening. Instead, the overwhelming majority of Bitcoin transactions are speculative trades – people who are buying because they think the price is going to go up from people who are selling because they think the price is going to go down. They aren’t buying a product or paying for a service, they are just exchanging one (real) currency for one which exists only in computer code. Most of the people who own Bitcoin have never used it to buy something and probably never will. The futurist in me sees lots of different platforms for conducting transactions efficiently and privately, but this imaginary currency is not one of them.
Bitcoin has three big problems in my opinion:
- It is a purely speculative play with no underlying value, so at any point the market can decide to value it at pennies. (For what it is worth, I don’t think that is likely anytime soon, but neither do I see broad adoption.)
- The “rules” which control Bitcoin can be changed at any time, so the number of Bitcoin could be increased by a factor or two or three or 100 with obvious results to value.
- Bitcoin is not secure or insured, and there is a very real possibility of having your Bitcoins just disappear through fraud – 7% of all the Bitcoin in the entire world went poof during the Mt. Gox debacle, and I can’t imagine that will be the last time something happens along those lines.
All that said, if anyone wants to support the TSP Allocation Guide with a Bitcoin donation, I will set up an account faster than Rolling Stone fact-checks a story.
A single Bitcoin was worth about $400 when I wrote that. Today it is trading at $16,680 – a roughly 4000% gain. I wish I was smart enough for speculating. And I did finally set up that Bitcoin wallet: 1A3H2ieHRvnW7RSohuMW9ZYpcMHc3YRYXi
November’s Economic Numbers:
In this section I discuss the key indicator data I use in determining where I think we are in the economic cycle and what that data means to me in deciding how to allocate my Thrift Savings Plan balance. (These indicators are explained in some detail in How to Determine the Current Phase of the Business Cycle.)
Total nonfarm payroll employment increased by 228,000 in November, and the unemployment rate was unchanged at 4.1 percent. Employment continued to trend up in professional and business services, manufacturing, and health care.
The change in total nonfarm payroll employment for September was revised up from +18,000 to +38,000, and the change for October was revised down from +261,000 to +244,000. With these revisions, employment gains in September and October combined were 3,000 more than previously reported. After revisions, job gains have averaged 170,000 over the last 3 months.
Taking a look at the unemployment rate over the course of the year, you can clearly see that we are at the natural rate of unemployment and further improvements in the rate are unlikely. So we focus much more on wage growth at this stage in the business cycle.
In November, average hourly earnings for all employees on private nonfarm payrolls rose by 5 cents to $26.55. Over the year, average hourly earnings have risen by 64 cents, or 2.5 percent. That’s not impressive, but there was some good news as we are seeing a bit of a move from part-time to full-time jobs.
I obtain this data from the Bureau of Labor Statistics.
Purchasing Managers’ Index (PMI):
As usual, I pulled up the most recent report from the Institute for Supply Management. Any number above 50 indicates growth in manufacturing and anything over 43.2 indicates an expansion of the overall economy. The November PMI reading of 58.2 is a very strong number:
Manufacturing expanded in November as the PMI registered 58.2 percent, a decrease of 0.5 percentage point from the October reading of 58.7 percent.
A PMI above 43.3 percent, over a period of time, generally indicates an expansion of the overall economy. Therefore, the November PMI indicates growth for the 102nd consecutive month in the overall economy and the 15th straight month of growth in the manufacturing sector.
The past relationship between the PMI and the overall economy indicates that the average PMI for January through November (57.4 percent) corresponds to a 4.5 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI for November (58.2 percent) is annualized, it corresponds to a 4.7 percent increase in real GDP annually.
The last twelve months:
Yield spreads: The yield curve has made a parallel shift upward, with both short and long rates increasing. I get this information from the Cleveland Fed, who had this to say:
Using past values of the spread and GDP growth suggests that real GDP will grow at about a 1.4 percentage rate over the next year, even with October’s estimate and a bit above September’s 1.3 percent. Although the time horizons do not match exactly, the forecast, like other forecasts, does show moderate growth.
Using the yield curve to predict whether or not the economy will be in recession in the future, we estimate the expected chance of the economy being in a recession next October at 11.8 percent, just down from September’s 12.0 percent, which was a drop from the August probability of 12.5 percent. So the yield curve is optimistic about the recovery continuing, even if it is somewhat pessimistic with regard to the pace of growth over the next year.
Money supply growth rate: Money Supply M2 (which includes savings deposits, money market mutual funds and other time deposits which can be quickly converted into cash or checking deposits) increased from September to October.
Money Supply M2 in the United States increased to 13747.30 USD Billion in October from 13692.40 USD Billion in September of 2017.
The growth rate is what is meaningful here, and you can see that growth has accelerated over the past two months – a good sign for an expanding economy:
All of the above data leads me to believe that we remain in the Mid/Growth/Performing stage of the business cycle and so I am going to continue to allocate all of my balances and contributions to the TSP C Fund.
This month I have been reading a new book by famed investor Ray Dalio: Principles: Life and Work. The book talks equally about his investing philosophies (well worth studying as he runs the world’s largest and most successful hedge funds) and his management philosophies (which are interesting, but need to be taken with many grains of salt considering the turmoil his organization has gone through).
The Next Update
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