by Bryan Perry

August 31, 2021

This past Friday, Fed Chairman Jerome Powell delivered an amazingly dovish speech at Jackson Hole that caught the market pleasantly flat-footed. Within the body of his speech, Powell stated,

“My view is that the ‘substantial further progress’ test has been met for inflation. There has also been clear progress toward maximum employment. At the FOMC’s recent July meeting, I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year. The intervening month has brought more progress in the form of a strong employment report for July, but also the further spread of the Delta variant. We will be carefully assessing incoming data and the evolving risks.”

He also made clear that winding down QE would not imply the raising of the Fed Funds Rate.

“The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test. We have said that we will continue to hold the target range for the federal funds rate at its current level until the economy reaches conditions consistent with maximum employment, and inflation has reached 2 percent and is on track to moderately exceed 2 percent for some time. We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2 percent inflation on a sustainable basis.”

Powell’s words triggered signals to the wait-and-see, cash-rich investors that as long as Jay Powell is at the helm through February 2022, he doesn’t see the current inflationary pressures in the same light that several of his lieutenants voiced leading up to Friday.

To the surprise of Wall Street, Powell stuck to his “transitory” narrative – mentioning that word five times in conjunction with inflation – but when you think about it, why not wait for more data before changing?

July was full of economic data points that were downside surprises – aside from the July labor report that predominantly reflected a pre-Delta variant hiring surge – and it would totally behoove Powell to see if the August data doesn’t corroborate the generally weak July economic data to determine how to shape fiscal policy at the September FOMC meeting. If the consumer is in the process of a spending slowdown, then Powell is probably figuring that prices for goods and services have peaked.

Consider the August 13, final University of Michigan Consumer Sentiment Index for August, checking in at 70.3. The final reading for July was 81.2, so the huge downturn was one of the largest losses since 1978. This is Twilight Zone data, in that the Expectations Index fell nearly 14 points, to 65.1 from July’s reading of 79.0 and the Current Economic Conditions Index came in at 78.5 versus 84.5 for July.

Consumer spending accounts for two thirds of GDP and Americans went on a June-July spending binge, most of it on borrowed money. According to, the expansion in consumer credit in June was the largest since December 2010 with healthy demand for both revolving and nonrevolving credit. Revolving credit saw its biggest increase since January 2006.

Consumer Credit Monthly Change Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

At the lower end of the economic spectrum, unemployment benefits run out on September 6 for millions of Americans and inflation makes getting by a major challenge, but with nearly 10 million jobs still needing to be filled, there isn’t any motivation on Capitol Hill to provide more unemployment checks.

How easy is to get those checks? I was in my local Italian restaurant, and the manager told me that the state of Virginia requires unemployment recipients to provide proof they are applying for jobs on a weekly basis in order to receive unemployment benefits. But Virginia doesn’t require proof if they were offered the job or not, just the application. I believe what is happening is the restaurant is hiring the applicants, but they are ghosting (not showing up) on day one of employment and gaming the system. If this is a wide-ranging practice, it is not helping the cause of extending unemployment benefits to the truly needy.

Back to the economic calendar. The Empire State Manufacturing Index for the New York region in August slumped to 18.3 versus a consensus forecast of 26.0. Retail sales for July fell -1.1% versus -0.2% consensus, ex-auto -0.4% versus 0.2% consensus, and the Philadelphia Fed Index for August dropped to 19.4 versus a consensus of 24.0. The huge increase in the personal savings rate during the pandemic has all but vanished during the summer months. This is a data point that I believe Powell is focused on.

Personal Saving Rate Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

It just makes sense that the Fed Chair kept beating the dovish drum when the most recent numbers show a more cautious trend by consumers, especially those at the margin, where much higher gas, food, services and utility prices are hitting middle class families and those on fixed income the hardest.

Against this backdrop, the market celebrated Powell’s speech and the FOMO rally was on.

The best read from among investment houses is that the Fed Funds Rate won’t be raised above its current 0.00%-0.25% level until 2023. QE will likely start to wind down, but interest rates on the short end will likely remain near zero., which begs the question: If the Fed is not going to regard inflation as a real long-term threat and keeps downward pressure on bond yields via QE purchases, where do investors go for the needed income to absorb higher inflation (and taxes) and still provide a meaningful return yield?

The BDC Sector Provides the Answer

One sector that gets the job done in a recovering economy with low interest rates is the BDC sector. For the uninitiated, Business Development Companies (BDCs) lend money to small to medium-sized private business that need to access capital right away. The loans typically command rates of 8% to 15% and are in the amounts of $3 million to $25 million and sometimes higher.

They are structured like REITs and thus have to pay out at least 90% of all funds from operations in the form of dividends. Most of the loans are variable rate and many come with equity kickers in the event of exits that result in IPOs. Dividend yields on BDCs range from 6% to 14%, so some meaningful due diligence is required before investing in the space, but in my view, the timing is pretty good.

First of all, if annual GDP is growing from a lowered forecast of 5%, that’s still 5% and will be reflected in robust sales and earnings of the private sector. BDCs will be able to borrow money at less than 2% or float stock to make loans that provide for outsized dividend yields at a time when inflation, transitory or not, is real now. With 45 publicly listed BDCs to choose from, there are prime income opportunities. The Cliffwater BDC Index (CWBDC) mirrors the S&P BDC Index and shows how they trade vs. their NAV.

Cliffwater Business Development Companies Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Top holdings for the index account for roughly 75% of total composition (see for information about these and the rest of the BDC universe of listed stocks. I have no positions in these.)

Top Ten Index Holdings Table

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

As long as the Fed is supporting this secular bull market, the risk/reward for BDCs is worth considering. There are few if any other sectors that offer the kind of income stream that so many people need to fight the forces of inflation and remain 100% invested in U.S. companies. If income is a top priority in this stingy world of conventional yield, then take a hard look at BDCs as the economy continues to rebound.

Navellier & Associates does not own ARCC, FSK, ORCC, PSEC, MAIN, GBDC, HTGC, GSBD, TSLX and OCSL. Bryan Perry does not own ARCC, FSK, ORCC, PSEC, MAIN, GBDC, HTGC, GSBD, TSLX and OCSL personally.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
Jerome Powell Is the Frontrunner for Reappointment

Sector Spotlight by Jason Bodner
Market Timing Can Look Wrong and Still be Right

View Full Archive
Read Past Issues Here

About The Author

Bryan Perry

Bryan Perry

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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