Covenant Weekly Synopsis as of September 11, 2015

September 14, 2015

After a tough run in August (-6%) and the beginning of September (-3%), equity markets rebounded last week with developed and emerging market equity indices posting gains of +2% to +3%. In spite of these advances, global equity indices remain broadly negative on the month. Interest rates were relatively unchanged last week, and the yield on the 10-year UST is 2.19%. Energy commodities declined as WTI crude fell by more than 4% to $44.76 per barrel and natural gas dropped by 1%.

Decision Time (again): This week, the Federal Open Market Committee (FOMC) meets again to discuss the economy and appropriate monetary policy. The question of whether the FOMC will raise rates or not this week (for the first time in nine years) has been asked of hundreds of analysts and if you thought the level of discussion on this topic in mainstream media circles was overbearing last week, it will be downright annoying this week. There are compelling arguments supported by current economic data points for why the FOMC should raise and for why the FOMC should not raise interest rates this week. However, the decision as to the timing of the first rate hike is misleading in its importance… the truly important factor for the economy is the rate at which future hikes may be implemented. With nearly unanimous agreement amongst members of the FOMC and non-FOMC economists that the path of interest rates will be shallow (i.e. interest rates will rise very gradually), remind me why the timing of the first hike is so important again?

Political Entrepreneurs Needed: Had the opportunity to hear ABC News Analyst Matthew Dowd speak at an event last week and his comments on modern day politics resonated strongly with me. You see, for a long time I have believed the problem with the political system and politicians is simply that we do not have enough people in office that want to be there for the right reason: namely to lead and to continue to advance the ideals of America. Rather, in my view, most politicians seek to be elected because of two key perks of the job: power and respect. Moreover, to continually be re-elected (and keep their political career on track) politicians avoid introducing revolutionary ideas that might seem controversial even if they are in the best long-term interest of America and American citizens. This dynamic has created a void of true leadership and a widening gap between what most believe America should be and where we are today as a society. Compare today’s politicians to America’s Founding Fathers like George Washington, John Adams, Thomas Jefferson and Benjamin Franklin. These were wealthy and successfully people who would continue to be wealthy under British rule and had little incentive to change anything. However, they were willing to risk everything, including their lives, to rebel against Britain in an effort to start a new nation that would offer the potential for success to a larger portion of the population. As Matt remarked, these political entrepreneurs were willing to pursue the ultimate start-up….a new nation. Importantly, they were willing to lead the process toward becoming a new nation. Unfortunately, since the original formation of our nation, political entrepreneurial vigor has been on the decline. Today our political leaders are largely followers – they use study groups to determine where their community or voter base wants to go on particular issues, and champion those causes in a well-choreographed illusion of leadership. To close the gap between the ideal America and where we are today, Americans needs to identify, support and elect to office the next wave of political entrepreneurs to lead this country. We don’t need a new nation this time around, but we do need visionary leaders.

Weekly Economic Data Summary: Job openings in July reached an all-time high of 5.8mm; the number of workers employed reached a record level of 122mm; and the number of part-time workers reached its lowest levels in four years implying that full-time employment is available for those that seek it. Equity market volatility negatively impacted the Consumer Confidence index which fell to a 12-month low of 85.7 (note that at this level the index is in-line with its long-term average).

Be good,

Jp