"Data dependent" is a term that Janet Yellen probably
used ten times in her speech two weeks ago, and one that between Ben Bernanke
and herself, has been uttered hundreds of times since the financial crisis.
Easing accommodations will be dependent upon the growth of the economy.
Since the 2008 recession, the economy has recovered slowly but surely.
Observe the following, since March 2009:
- The Industrial Production Index has risen approximately 24% (+4%
in the last year)
- The ISM Manufacturing Index has risen by approximately 64% (+4%
in the last year)
- New Housing Starts has risen by approximately 95% (+8% in the
last year)
- The Case-Shiller Index has risen approximately 20% (+8% in the
last year)
- The Unemployment Rate has fallen from approximately 8.7% to 6.1%
- GDP has risen from approximately -0.5% annually to +4.6% annualized
(as of Q2)
- The St. Louis Fed Financial Stress Index has fallen
approximately 130%
- The Consumer Sentiment Index has risen
approximately 40% (+2% in the last year)
You can choose to believe all, some or none
of these figures. That being said, although
many or most of these may be unsustainable, if easing accommodations is “data
dependent”, What Are They Waiting For!?
Maybe the Fed has no intention of ever
returning to a market driven, supply & demand focused economy where the level
and length of government intervention is the only important driving
factor. Maybe they are just afraid to
find out how the market reacts upon completion of the Taper and true withdrawal
of liquidity from the system. After all,
it has been six years of zero-interest rate policy and six years of awash
liquidity, where there is no precedent for what comes next.
I expect that the end of Taper and the
eventual withdrawal of liquidity will not go as smoothly as Chairwoman Yellen hopes
it will. Additionally, I think there is
a possibility that without outside liquidity and support, the economy will not
be quite as “strong” as it has been. In
the last 4-5 years, US HY issuance has been unprecedented, but with the
background of the tepid growth environment there are many companies that have
deteriorated significantly across many metrics.
We expect that will be exacerbated in a less liquid environment, one in
which capital markets will be much more difficult and expensive to access and
one in which we think might be on the horizon.
Enjoy your Sunday,
Richard Travia
Director of Research
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