For nearly two years economists and market strategists have predicted the economy will slow and slip into a recession as the Federal Reserve tightened available credit by repeatedly raising interest rates. Despite these forecasts, the economy is continuing to show impressive growth with the gross domestic product (“GDP”) growing a surprising 4.9% in the 3^rd quarter and the economy added 336,000 new jobs in September. Rapid economic growth tends to lead to widespread inflation, but recent data shows a slowdown in the rate at which prices are rising.

The cost of money continues to climb higher, and this is most evident in the steep rise in mortgage rates. The 30-year fixed rate is approaching 8.0%, more than one percent higher since June 30. These higher rates continue to dampen housing markets by reducing the affordability of new home purchases and limiting the number of existing homes being listed. Commercial real estate continues to deteriorate given the higher interest rates, remote work trends, and tight credit markets.

The adage to ‘not fight the Fed’ held true last quarter as both stocks and bonds lost ground. The S&P 500 Index fell 3.65% and the average intermediate bond fund lost 2.7% during the 3^rd quarter. The RCG Stable Fund returned 2.58% for the quarter and its current annual yield is 10.75%.

While mortgage rates jumped significantly during the quarter, the Federal Reserve held its benchmark Fed Funds rate steady. Labor strikes at UPS and by the UAW labor union resulted in large wage concessions and improved benefits for workers, which may cause workers in other industries to take notice. Wage inflation due to tight labor markets is watched closely by the Fed, and an acceleration in the rate of wage growth will likely cause future rate hikes to ease tight labor markets.

Consumer spending remains surprisingly strong, but higher debt levels and lower savings rates indicate a likely slowdown in the months ahead. We see the economies of China and Germany slowing and anticipate these sluggish economies to soon impact U.S. growth rates. Recent data from American Express indicates corporate spending volume is slowing faster than expected. We have written before how a slowdown in economic activity may benefit the foundational footing of the global economy by recalibrating supply and demand imbalances and help keep inflation in check.

The general economy has been quite resilient over the past year despite persistent inflation
pressures, rising interest rates, tight credit markets and a slumping China economy. Home
prices and labor markets have been pleasant surprises and have anchored the overall
economy. Home values – which usually represents a family’s single biggest asset – have
remained steady and have buoyed consumer confidence. Labor markets have also
unexpectedly outperformed all forecasts as seen by the addition of 2 million new jobs this year
alone. All eyes remain on the Federal Reserve later this month to see if interest rates are
pushed-up a notch.

The first and second quarters of 2022 witnessed slight declines in economic output, which led to
widespread anticipation of a prolonged and potentially deep recession. Prices were climbing
swiftly – along with interest rates – and many prognosticators warned of a sustained period of
stagflation accompanied by steep declines in asset values. Fast forward to today, and we see
the S&P 500 is up over 17% since the mid-year mark last year, unemployment is at record lows,
bond prices are stable, commodity prices are generally lower, and inflation is waning.
While the future is bright for the overall economy, banks have tightened credit at a time when
commercial real estate loans are coming due in big chunks. In the past few weeks, we have
learned that the biggest retail center in San Francisco defaulted on its $500 million loan, Jimmy
Buffet’s $310 million Margaritaville Resort in Times Square has declared bankruptcy, and
several large office towers in the southeast are on the brink of bankruptcy because of an
inability to refinance current loans. This is the beginning of an onslaught of CRE loans coming
due in the next three years and a potential catalyst that restricts credit further.

The RCG Stable Fund provides Collateralized Loan Obligations (CLOs) to businesses with
unencumbered assets which are used to secure a loan. The CLO market in the U.S. is $910
billion within the broader $12 trillion securitized loan market. Collateralized loans represent a
high yielding, scalable, floating-rate investment alternative with a history of stable credit
performance. The steady performance during the 2008 – 2011 financial crisis and COVID-19
cycles has supported growth in the CLO market, broadened its investor base and cultivated a
strong secondary market.

The Stable Fund has performed well since its inception in 2019 because of its credit and
structural research, analytical processes, and sophisticated structuring capabilities. The Fund’s
current yield has increased meaningfully as the Fed has increased rates and is now 10.75%.
Our focus on collateralizing variable rate loans with liquid corporate assets such as specialty
loan portfolios and inventory of finished goods has provided consistent loan portfolio
performance. We continue to see both strong loan demand and a favorable pricing environment.
due to tightening of available credit from traditional sources.