These steps are all part of the Fed's attempt to stave off disinflationary pressures and stimulate the economy by flooding it with liquidity. While its efforts went a long way toward preventing a repeat of the Great Depression, we believe the Fed's suppression of short-term yields (i.e. money market funds and short-term treasury bonds) has induced yield-seeking investors to pile into the highest-yielding, dividend-paying stocks, paying little regard for the financial strength of these companies or their ability to maintain or grow dividends long-term. This is creating what we consider to be an unsustainable 'high-yield equity bubble.'

Most bubbles are created when an expanding number of participants come to view a "logical justification" as the primary reason to own an asset, with little regard for its price. In today's investment world of negative real (after inflation) yields and volatile economic conditions, the justification for owning stable, dividend-paying stocks is simple: 1) long-term bonds no longer provide a return above long-term inflation expectations, and 2) stable, dividend-paying companies typically do not cut their dividend in a recessionary environment.