July 29 2014
Unlike last year at this time, the leveraged credit market is relatively calm as of half-time 2014, having absorbed the first salvo in the Fed's tapering actions. While the Fed is clearly seeking to return the capital markets to a more autonomous state, the timing of a return to normalcy seems one or two years away given an anemic economy and monetary actions that have failed to spur significant near-term GDP growth. As a result, markets continue to be supported by aggressive monetary policies that benefit debt instruments of all types. These policies, however, also create an environment rife with excessive behavior, which can contribute to the growth of asset "bubbles".
There is little in the way of visible events that threaten the calmness the market is enjoying, and while volatility will undoubtedly pick up from the multi-year lows recently observed, the study of past credit cycles indicates that the current period of relative calm could endure for a long period of time. Eventually, the storm will hit, but the timing can never be accurately predicted. The storm often originated far from home and out of sight, but, through contagion, is still able to unleash its fury locally.
We view the remainder of 2014 with cautious optimism and, through our fundamental, bottom-up, credit-intensive investment process, will continue to do what we always do -- take prudent risk for an appropriate expected return. We are confident that our investment process and philosophy will continue to benefit from today's calm market conditions but remain careful not to be lulled into false comfort. When the storm hits, as it inevitably will, we expect to be ready to withstand the blows and take advantage of the disruptions the storm will undoubtedly leave in its wake.