Note To Joe Q Public On Fed Policy: Promise In September, Deliver In December by Danielle DiMartino Booth, Money Strong
“Do you remember the 21st night of September?”
So begins Earth, Wind and Fire’s classic anthem to the disco era. The words are simple, some even nonsensical, but then there’s that beat. In the words of National Public Radio, it’s “the song that never ends.” Forever timeless, ‘September’ endlessly infuses energy at wedding receptions, with some couples even choosing the 21st of September to say, “I do.” What is it about that one joyous cadence-rich melody that continues to deliver equal measures of both happiness and hope? There may be no clear cut answer other than how good it makes you feel, but it is one sure fire way to crowd the dance floor. “September” is so infectiously irresistible even hardened partisan politicos can’t help but bust a move — it roused the crowds of faithful at both the Republican and Democratic national conventions in 2008.
Note To Joe Q Public On Fed Policy
The beat was no less infectiously irresistible for then-struggling songwriter Allee Willis who caught the break of a lifetime when she was asked by EW&F’s leader Maurice White to co-write the band’s next album. As she recalls upon opening the door to the session, “They had just written the intro to ‘September.’ And I just thought, ‘Dear God, let this be what they want me to write! Cause it was the happiest sounding song in the world.”
The rest is history made in studio in 1978. With their creative juices flowing, this team closed their eyes, saw clear blue skies and then a star-filled night to be danced away. Willis does recall one niggle with the lyrics — that constant “ba-dee-ya”, that essentially meaningless refrain. When she insisted it be changed, White put his foot down to the benefit of generations of dancers who can’t help but break into their boogying best the minute they hear the song. “I learned the greatest lesson in songwriting from him,” Willis said of White, “which was never let the lyric get in the way of the groove.”
We have to wonder what Atlanta Federal Reserve Dennis Lockhart will remember when he next hears, “Do you remember the 21st night of September?” The date happens to coincide with his last September Fed meeting, marking the third at which markets had been set up for a hike only to be told to sit tight and wait for December.
In the event history escapes you, or you’d rather forget, both the 2013 and 2015 September Federal Open Market Committee meetings concluded with promises of more to come, in December, that is. Four years ago, the markets had been beaten into submission after throwing a hissy fit for good measure. The doctorate holders at the Fed were finally prepared to reduce the addictive Quantitative Easing drip from its $85 billion per month rate, and investors were ready for it. Taper anyone?
Then of course, something gave Committee members pause, and they blinked. The follow through on the threat would not arrive until the stockings were hung by the chimney with care. As for last September, the markets were braced for the Fed to lift rates off the zero floor for the first time in seven years. The Chinese, however, had taken offense to such potential action and forced the FOMC’s hand, to the market’s surprise. Taking a cue from 2013’s script, they stood and delivered just in time for the holidays.
And this year? It seems that investors have begun to feel as if it just might now be them rather than Feb Officials suffering the existential crisis. That’s the only way one can describe being on the receiving end of what has to be FedSpeak at its absolute peak in the contradictory department. Will they? Won’t they? “He said…” “She said…!”
One Fed official in particular has become vociferous in his hawkish implorations. Boston Fed President Eric Rosengren has spotted a bubble in commercial real estate and is officially worried. The problem is, that train left the station long ago when insurance companies buckled under the strains of a low interest rate world and lowered their minimum acceptable return bogeys. All manner of institutional investors followed suit and the rest is history.
And it’s not just commercial real estate. Fill in the blank with the name of the asset class and valuations are as stretched as they’ve ever been or perilously close if you can get an accurate measurement.
Take the lowest hanging fruit – U.S. stocks. Just imagine what the real price-to-earnings ratio would be if you could scrub it clean of the last few years of share count reduction to say nothing of interest expenses being kept at artificially low levels care of the Fed. Remember, we’re talking earnings PER share here, folks. Then for good measure, consider the starting point for your valuation fix: the aggregate stock market capitalization vis-à-vis the size of the U.S. economy, which is higher than at any time since the dotcom boom. Get the picture?
Take the next turn into Corporate Bond-ville. There’s precious little to see unless you factor in actual defaults and what Standard & Poor’s calls the “weakest links,” as in most likely to be the defaults of tomorrow. Both of those gauges of stress are at their highest levels since 2009 and it’s way more than an energy story; only one in four weakest links are tied to yesteryear’s shale credit spree.
As for the toniest enclaves, filled with occupants sporting investment grade (IG) credit ratings, Bloomberg’s Sally Bakewell deserves a full round of applause for her reporting on the dangers lurking in IG bonds. In a recent article cleverly titled, “Leverage Soars to New Heights as Corporate Bond Deluge Rolls On,” Bakewell notes alarm bells ringing on both the buy and sell sides of the Street even as bond issuance celebrates its fifth consecutive year of $1 trillion-plus issuance.
For starters, a recent Morgan Stanley report warned of the perils of Corporate America’s overall leverage sitting at a record 2.4 times earnings. Take this as gospel: sell side analysts are not in the habit of pouring water on a smoking hot party, not unless they’re so worried they can’t help themselves (it makes the investment bankers upstairs a bit testy). For a bit of context, the leverage ratio most recently troughed at 1.7-times back in 2010 as the economy was emerging from recession.
As for the longer history of the gauge, the only time the ratio has been this high is in the aftermath of the stock market implosion of 2000. (Yes, Virginia, credit booms really do get served the last drink at the end of the cycle, peaking after stocks and the economy have already rolled over.) That last bit apparently has Morgan Stanley’s analysts quite concerned: “Leverage tends to rise most in a recession – so the fact that it is this high in a ‘healthy economy’ is even more concerning. Mistakes are both more likely and more costly.”
As for the buyside, Bakewell was