Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: This week on the podcast, I have a special guest.
Speaker 1: Her name is Danielle Di Martino Booth, and full disclosure,
Speaker 1: we know each other for way too long. We've spent
Speaker 1: way too much time fishing, debating economics, markets, the Fed,
Speaker 1: which Cabernet is better, making fun of some some mutual
Speaker 1: acquaintances who shall go nameless. And I brought her on
Speaker 1: the show this week to talk about her book fed Up,
Speaker 1: as well as to discuss and debate economic policy, the Fed,
Speaker 1: the markets, and honestly, I had way too much fun.
Speaker 1: If it sounds like we're arguing, it's because we just
Speaker 1: know each other too well and it's practically shorthand. So
Speaker 1: if you're at all interested in everything from the Federal
Speaker 1: Reserve to REPO markets to Alan Greenspan, you're gonna find
Speaker 1: this to be an absolutely fascinating conversation. So, with no
Speaker 1: further ado, my discussion with Danielle de Mark, you know both.
Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: My special guest this week is Danielle Di Martino Booth.
Speaker 1: She is the CEO and chief strategist of Quill Intelligence,
Speaker 1: a research and analytics firms, where she authors commentary with
Speaker 1: actually fairly rabid following. Previously, she served nine years at
Speaker 1: the Federal Reserve Bank of Dallas, where she was chief
Speaker 1: advisor and Wall Street liaison to President Richard Fisher. She
Speaker 1: is the author of fed Up, an insider's taken on
Speaker 1: why the Federal Reserve is bad for America. As well
Speaker 1: as somebody I've known for ten years in a decade,
Speaker 1: Danielle di Martino. Welcome to Bloomberg. It's awesome to be here.
Speaker 1: So you and I have known each other for a
Speaker 1: long time, and it's weird asking you questions that I
Speaker 1: asked you a decade ago. But for the sake of
Speaker 1: the audience, I'm gonna pretend we hardly know each other
Speaker 1: and start with so, Danielle, how did you begin your
Speaker 1: career on Woolf Street. Well, it was something of a
Speaker 1: secuitous route. I was born to be a writer. I
Speaker 1: was accepted at the n y U scholars Program. I
Speaker 1: was going to travel, I was going to be an
Speaker 1: esteemed very poor journalist. And my covering what what sort
Speaker 1: of things interested you? In your my forte when I
Speaker 1: was younger with sportswriting real things. People would never guess
Speaker 1: about me. Put that right up there at the top,
Speaker 1: the huge fan of sports and cars. But anyways, my
Speaker 1: parents ended up splitting up around then. My father told
Speaker 1: me that he hadn't paid his taxes for the better
Speaker 1: part of the last decade, and good luck with the
Speaker 1: financial scholarship financial aid that I needed for the other
Speaker 1: half that wasn't covered by this great big scholarship to
Speaker 1: go to n Y You. So I found myself at
Speaker 1: San Antonio College. So I am the product of a
Speaker 1: community college where I started. I went off to the
Speaker 1: local University of Texas, moved my way up after a
Speaker 1: few years, became the collar business scholar. Just study, study, study.
Speaker 1: That was all that I could do to to figure
Speaker 1: out how to get back to where I thought I
Speaker 1: was starting when I was getting out of high school
Speaker 1: and my misremembering, didn't you get an NBA from the
Speaker 1: University of Boston, got very very respected school. I've got
Speaker 1: my NBA and finance there the year that E. D.
Speaker 1: S actually opened up a trading floor. One of my
Speaker 1: great mentors, Dr Keith, He's the person I literally earmark
Speaker 1: money to the finance department, even though he made me.
Speaker 1: He made me pull apart the black shoals and then
Speaker 1: showed me how to put it on my calculator. It
Speaker 1: took me a few years really to forgive him for that.
Speaker 1: But in any event, so so wait, when you say
Speaker 1: e d S, you're talking Russ Perro's electronic data system.
Speaker 1: That there was way back inside the business school. We
Speaker 1: had our own trading floor, and we had our own
Speaker 1: fund and it was fun, and I mean it was
Speaker 1: actual money. Oh god, what's more fun than being a
Speaker 1: trader in the eighties? Come on, well, when you're in
Speaker 1: your early twenties and coming sure, so how do you
Speaker 1: end up going from there to Credit Swiss and d LJ.
Speaker 1: Some guy at Solomon Brothers came to one of these
Speaker 1: informational interview type things on campus, and what do you
Speaker 1: had to say was stand up? Pretty interesting to me,
Speaker 1: said come on up any time you like. I said,
Speaker 1: how's next week worked for you? So that's I looked
Speaker 1: out on the Solomon Brothers trading floor, which was two
Speaker 1: stories tall, started at Sally No. No, that was the
Speaker 1: first time I've ever seen anything on Wall Street anything,
Speaker 1: And I looked out and there were probably like four
Speaker 1: guys and like three girls, and that was it, and
Speaker 1: I went to look at the ratio. That's really interesting
Speaker 1: for two reasons. One is I had a similar experience
Speaker 1: very very early in my career. You wanted to become
Speaker 1: interviewing at the Merrill Lynch trading floor, which was a
Speaker 1: football field, but it was the same ratio. All white dudes. Yeah,
Speaker 1: oh yeah, absolutely. You know what, it's the first and
Speaker 1: last time in my entire life, I've had credit card debt,
Speaker 1: first and last time when you moved to the city,
Speaker 1: banging on doors on wall streets, Lehman Brothers, Goldman, Sachs, Morgan, Stanley,
Speaker 1: bear Sterns, you name it, dodge a few bullets in
Speaker 1: that list. Hey, look, Arthur Anderson wanted to keep me
Speaker 1: after business school and fast tracked me to becoming, you know,
Speaker 1: an auditor and and then become a strategist of some kind.
Speaker 1: And they were working with this big company in Houston
Speaker 1: called I'm like, and my mom's like, you'd be staying
Speaker 1: in Texas, honey, And I'm like, i am so out
Speaker 1: of here. She's like, d l J d l J.
Speaker 1: What is that? Like? A transportation company? I'm like, no, mother,
Speaker 1: it's not DHL, it's d l J. And when that
Speaker 1: was your first gig out of business school, that was
Speaker 1: my first kid got out of business school. It was
Speaker 1: the best place to work. I mean, the entire firm
Speaker 1: at first Christmas year fit in the rainbow room. Crazy
Speaker 1: stuff went on back, so that before all divisions, that
Speaker 1: was pre purchase right, oh way, prepurchase way way way.
Speaker 1: And when did they get bought? Tony James and his
Speaker 1: infinite wisdom saw the peak and sold the firm at
Speaker 1: the very top of the bubble. This was like, oh,
Speaker 1: I mean credit see just finished writing off a few
Speaker 1: billion extra dollars from the deal J purchase recently. Oh yeah,
Speaker 1: you know, No, No, I mean, I mean they wrote
Speaker 1: off billions of dollars for years. So what did you
Speaker 1: do at d l J. I sold all kinds of
Speaker 1: things to all kinds of people, bonds, equities, contact, what
Speaker 1: I did. I did share buy backs. I did a
Speaker 1: lot of debt retirement, working with the former Drexel boys
Speaker 1: who dlj's junk bond desk had absorbed. They were so mischievous,
Speaker 1: that's the nicest word I can come up with. But
Speaker 1: I had mutual fund companies, I had some high net
Speaker 1: worth investors, but it was really the debt retirement, the
Speaker 1: junk bond, the private equity. I mean, like I said,
Speaker 1: Tony James sold the firm and then obviously he went
Speaker 1: on too Blackstone in a great career. But Leon black
Speaker 1: walk the halls. I mean, DLJ had a beautiful merchant
Speaker 1: bank before private equity was a thing. So how do
Speaker 1: you do the transition from the bleeding edge of capitalism
Speaker 1: to I know, I'll go in the house of the
Speaker 1: government and work for the Fed. Well, okay, so the
Speaker 1: Swiss were not near as much fun as d l J.
Speaker 1: By the way, overseas investors always to top tick the
Speaker 1: market or bottom ticket if they're sellers, so not a surprise.
Speaker 1: How long did you stay with Credit Swiss? For eighteen
Speaker 1: whole long months? And so that gets us to around
Speaker 1: And by the way, I was getting my second masters
Speaker 1: at the time, because I you know, I'm Italian, I
Speaker 1: hold a grudge, so I but instead of n y U,
Speaker 1: I went to Columbia, the best journalism school at night
Speaker 1: and got my second degree in journalism. Finally finally got
Speaker 1: my lifetime dream. I never knew that about you, who
Speaker 1: was the dean while you were there. Gosh, now you
Speaker 1: got me because it was only there. He was only
Speaker 1: there for one year and then he left, but it
Speaker 1: was now He's one of the most transformative moments of
Speaker 1: my life. Was I graduated in December of oh one.
Speaker 1: Was not being able to go to work on Wall
Speaker 1: Street after nine eleven, but having to report to campus
Speaker 1: the next day Wednesday. Well it's the other direction. So
Speaker 1: but being in journalism school on nine eleven, and I
Speaker 1: mean I was the oldest, you know, part time student
Speaker 1: they'd ever seen. You were also on an institutional trading
Speaker 1: desk when the dot com moms were imploding. What was
Speaker 1: that experience? Like? Well, so you know it was really
Speaker 1: it was the Enron experience and the dyna gy and
Speaker 1: all of the You could tell that these were shady deals.
Speaker 1: It's like, why do you keep your end on price
Speaker 1: target at forty Stock hadn't done anything in forever. I mean,
Speaker 1: you know, one analyst is raking away. You know, a
Speaker 1: couple of million dollars per debt deals to be done,
Speaker 1: So we're going to keep our price target high. Look
Speaker 1: that's where we are. Oh wait today, So but but
Speaker 1: the Enron and the dynages of the world kind of
Speaker 1: set us up for recognizing the Internet bubble when it
Speaker 1: was staring you in the face. So what led you
Speaker 1: to the move from the bleeding edge of capitalism to
Speaker 1: going in house at the Dallas Federal Reserve? So that
Speaker 1: was eleven. Nine eleven was a big turning point for
Speaker 1: me personally. Uh, shortly thereafter a few weeks after nine eleven,
Speaker 1: I met my current husband and we started long distance
Speaker 1: dating between Dallas, Texas, and New York. And when the
Speaker 1: time came, I said, well, just move on up here
Speaker 1: to Manhattan. And he said, you go out six nights
Speaker 1: a week and think it's normal. So that was that.
Speaker 1: I ended up moving to Dallas. I signed a non
Speaker 1: compete and agreed to leave the industry. I called the
Speaker 1: publisher of the Dallas Morning News and I said, I'll
Speaker 1: work for free. I'm retired. They just credit see wrote
Speaker 1: me a big check to leave, and basically the book
Speaker 1: went to the junk bond test um. So I, you know,
Speaker 1: I tootled away with a you know that's right. You
Speaker 1: were you know, did you have me Bill Diner over there?
Speaker 1: And I did, Yes. I was rarely in the newsroom
Speaker 1: per se because I kind of walked in and wrote
Speaker 1: my own rules because I could. You don't need a salary,
Speaker 1: you don't want to like, I'm working for free. Here
Speaker 1: here's what I'm doing. But within within a few months,
Speaker 1: I actually was the first daily columnist that they've ever
Speaker 1: had in the history of the paper. So I was
Speaker 1: writing a daily about the markets. And I was just
Speaker 1: as happy as happy to impassibly be quite fascinating. So
Speaker 1: you finally have your dream job in journalism, working at
Speaker 1: what's the paper in Dallas? Dallas Morning News, Dallas Morning News?
Speaker 1: And what has you leave? A job you had always
Speaker 1: wanted to go into? This crazy semi government told the FED.
Speaker 1: So I start writing about things that had bothered me
Speaker 1: on Wall Street, like the first c d O, for example,
Speaker 1: that was sold at Credit Sweets. I'm like, would buy
Speaker 1: that equity tronch? But this is a one oh two. Oh,
Speaker 1: that's a good equity tronch. Did you see the vig
Speaker 1: attached to that had some fat commissions? Yeah, exactly. But
Speaker 1: I started wondering about these things. I started writing about
Speaker 1: the national debt, got the attention of Warren Buffett, so
Speaker 1: he invited me out to oh Maha. Actually spent a
Speaker 1: lot more time with Charlie Munger at azing. He basically
Speaker 1: said that the efficient Frontier is going to go the
Speaker 1: way the Dodo bird, the pension advisory industry doesn't change
Speaker 1: its ways, and the Federal Reserve continues to be overly intrusive.
Speaker 1: I just condensed the thirty minute conversation that I had
Speaker 1: with him. But he's right, and he's getting right er
Speaker 1: every day, and he might not live to see the change,
Speaker 1: but he is right. I would push back and say,
Speaker 1: so far he's been completely wrong because all the bad
Speaker 1: things that people have predicted about that have yet to
Speaker 1: come true, well, they've definitely yet to come true. But
Speaker 1: what he said was it might not happen in my lifetime.
Speaker 1: So that's not saying exactly he's he's but but I
Speaker 1: don't think that he saw passive coming in the way
Speaker 1: that it's come. When Passive Investing and J Powell walk
Speaker 1: into a bar, it's a beautiful thing. You don't fight him,
Speaker 1: You let them run hand in hand. I don't want
Speaker 1: to get off on something. We'll talk about that more
Speaker 1: because it's a fascinating topic. It is how did you
Speaker 1: end up at the Dallas fit? So I started working
Speaker 1: some with Jonas, and he was working on Goldman's Economist,
Speaker 1: but he was just a rookie back then, and he
Speaker 1: was doing a lot of great work on what Alan
Speaker 1: Greenspan had been working on mortgage actively withdrawal. So I
Speaker 1: started writing intensely about the housing crisis, and at one
Speaker 1: point the publisher was like, do you know what systemic
Speaker 1: risk is? And I'm like, actually I do. He's like,
Speaker 1: you're saying that this is going to be global and
Speaker 1: systemic in nature. This is oh five, and he's like,
Speaker 1: you're nuts. And if you looked in the right place,
Speaker 1: there was an overwhelming amount of data, but if you
Speaker 1: looked in the usual place, everything was absent. Who knew
Speaker 1: what a German lands bank was? I didn't know until
Speaker 1: Lateman blew up. In any event, I did get a
Speaker 1: call one day from Richard Fisher, and he took me
Speaker 1: to lunch and said, look, you're you're you're wasting your talent.
Speaker 1: You should beat the Wall Street Journal, the economists. What
Speaker 1: are you doing here in Dallas, Texas? And I'm like,
Speaker 1: if you couldn't tell him, I do have my shoes on,
Speaker 1: but I'm very pregnant. In any event, within a few
Speaker 1: months he asked me to come join and the FED
Speaker 1: and what was your title? Oh gosh. I started off
Speaker 1: as like, you know, a dishwashers as a writer in
Speaker 1: the research not a research assistant. I came in as
Speaker 1: somebody to help with his speech writing. Okay, so you
Speaker 1: were an aide to the president of the Dallas FED.
Speaker 1: And it evolved into the more he got his sea
Speaker 1: legs and realized that the New York Fed markets intelligence,
Speaker 1: which you're kind of obligated to take if you're running
Speaker 1: a district. The New York Fed Markets Desk conducts intelligence
Speaker 1: with the broker dealer community. It's actually an inc on
Speaker 1: their website. So, as jo Q president, whether it be
Speaker 1: Minneapolis or Cleveland or Dallas, Texas, you're sister, take all
Speaker 1: of your market intelligence from the New York Markets Desk,
Speaker 1: which kind of reads like cell side research, which Richard
Speaker 1: figured out really quickly because economics neither of mine. We're
Speaker 1: both nbas and financial. So let's talk about something you
Speaker 1: sort of snuck in there, which is until he got
Speaker 1: his sea legs, because I was one of several people
Speaker 1: pretty critical of him in the early days, and I
Speaker 1: want to throw some stuff at you and have you
Speaker 1: either defend him or we're not. June two thousand and five,
Speaker 1: Richard Fisher told CNBC, we are clearly in the eighth
Speaker 1: inning of a tightening cycle, and we have the ninth
Speaker 1: inning coming up at the end of June. Lots of
Speaker 1: people began calling him a thanning Fisher. I'll take a
Speaker 1: little uh blame for that as as well. Why did
Speaker 1: he think that we were so far along in the
Speaker 1: tightening cycle when it was clear green Span had a
Speaker 1: different agenda. Green Span did have a different agenda, There
Speaker 1: was nothing macro prudential going on. Green Span at the
Speaker 1: time said that because the FED only technically regulated of
Speaker 1: mortgage lending in America, that's the only thing that the
Speaker 1: FED was responsible for policing. There were a few other
Speaker 1: people inside the institution who were of a different opinion,
Speaker 1: because in the event that there was a falling knife
Speaker 1: and something went wrong with this supreme explosion, the FED
Speaker 1: might be catching the entire falling knife before we even
Speaker 1: get to the subprime issue, which I think you and
Speaker 1: I are very much an agreement of oh five. We
Speaker 1: had already seen gold takeoff, we had seen inflation take off.
Speaker 1: Oil was probably halfway on its way to one fifty milk, beef,
Speaker 1: food stuffs, everything was moving up. It was pretty clear
Speaker 1: that there was a lot of inflation in the system
Speaker 1: even as the dollar got weaker and weaker and weaker.
Speaker 1: So that's the question is was he just a little
Speaker 1: green and naive or did he simply not see what
Speaker 1: I described as rampant inflation everywhere except the statistics. I
Speaker 1: think he saw the inflation, but I think more importantly
Speaker 1: what he saw too early on. And this is a
Speaker 1: lesson I think a lot of people who have been
Speaker 1: inside the FED and lived to tell learn it's that
Speaker 1: easy monetary policy can elongate any cycle, for sure, any cycle.
Speaker 1: And right now we're in the longest elongation. So even
Speaker 1: when the longest elongation and the longest elongation, it's been
Speaker 1: lower for longer than it ever has. That's going to
Speaker 1: be my first tattoo. That's pretty That's pretty interesting. So
Speaker 1: was he just unaware of how they thought that because
Speaker 1: he had Wall Street contacts, and because he was speaking
Speaker 1: to hedge funds, and because he knew that there was
Speaker 1: a d LTV toxic garbage that was trading hands, that
Speaker 1: surely this had to give. Well, it had some more
Speaker 1: gas in the tank, before it a whole lot more.
Speaker 1: So let me give you another question, another quote. We're
Speaker 1: going to fast forward to two thousand and eight, and
Speaker 1: bear in mind we didn't always agree with each other.
Speaker 1: I know that about you generally, but knowing your economic
Speaker 1: world forew and your politics, I could see you respectfully
Speaker 1: disagreeing with them and then getting to say I told
Speaker 1: you so afterwards in a very polite different verbiage. If
Speaker 1: you're listening, I'm still waiting for the opportunity. So two
Speaker 1: thousand and eight, the crisis is expanding. There's an FOMC
Speaker 1: meeting in June and then another one in August. The
Speaker 1: Fed had left rates at two percent. At both meetings
Speaker 1: there was one dissenter one Richard Fish, president of the
Speaker 1: Dallas Fed. The sole dissentier was Richard Fisher, who had
Speaker 1: both meanings quote preferred an increase in the target for
Speaker 1: the federal funds rate unquote. This is in the middle
Speaker 1: of two What was he smoking again? He is much
Speaker 1: more of an inflation boogeyman Wymar Republic, speaks fluent German,
Speaker 1: gives speeches in Germany and German. He's much more of
Speaker 1: that generation than I am. I've learned from Lacey Hunt
Speaker 1: that the more debt you create, as long as that
Speaker 1: debt is going to be absorbed by whatever the system is,
Speaker 1: because you've got reserve currency status. The only thing that
Speaker 1: that incremental dollar of debt is going to potentially create
Speaker 1: a deflation because you're taking away money that you would
Speaker 1: otherwise spend on something else in order to service the debt.
Speaker 1: So there's always going to be a deflationary impetus if
Speaker 1: you're allowed to grow your debt two levels that Richard
Speaker 1: would have thought would have created hyper inflation. That makes sense.
Speaker 1: You have a giant mon terry activity should be somewhat
Speaker 1: deflationary versus a giant fiscal activity which should be more inflationary.
Speaker 1: And I was also of the opinion at the time. Again,
Speaker 1: he and I were not, and you know we're an
Speaker 1: agreement on a two percent floor. I'll say that out right, yes, period,
Speaker 1: forever and ever. I think that we had we stopped
Speaker 1: at two percent, we would have a much different world
Speaker 1: today than we do. I wouldn't disagree with you at all.
Speaker 1: It was it was liquidity. It was the alphabet soup
Speaker 1: of god knows what acronyms that I was involved in
Speaker 1: helped the New York Markets desk set up for the
Speaker 1: asset back securities market, and you name the market. It
Speaker 1: was liquidity that was frozen. The price of credit was
Speaker 1: meaningless at the time to any investment. That nobody was
Speaker 1: extending credit at any price it was. It was a
Speaker 1: function of everything being frozen and unavailable, not expensive. We
Speaker 1: did not have to go to the zero bound. So
Speaker 1: so here's the here's the big question. Right, You've been
Speaker 1: a pretty big FED critic for a long time. I
Speaker 1: think you and I both agree the there's some overlap.
Speaker 1: I think the FEDS ultra low rates and I wrote
Speaker 1: this embail nation is one of many causes of the
Speaker 1: financial crisis. I think you put more weight on that.
Speaker 1: Uh and fed up you really say that is where
Speaker 1: it all begins and ends. Here's what we disagree, and
Speaker 1: this is what I'm fascinated about. As much as I
Speaker 1: give them an F for all their actions leading up
Speaker 1: to the crisis, I give them a B plus following
Speaker 1: the crisis. What sort of ranking would you give them?
Speaker 1: By the way, that's just during an immediately after normalizing
Speaker 1: rates over the past decade. I think they're way behind
Speaker 1: the curve. But we'll come back to that, how would
Speaker 1: you grade the FED for their response immediately to the
Speaker 1: crisis in let's call it oh eight oh nine, and
Speaker 1: even I would probably give them not an F but
Speaker 1: I would probably give them a C minus for adhering
Speaker 1: to the Bernanke doctrine which was agreed upon at Jackson
Speaker 1: Hole in two thousand seven with a very small group
Speaker 1: of f o MC members, by the way, which was
Speaker 1: kind of against the rules um but in that meeting
Speaker 1: it was decided that a precondition to growing the balance sheet,
Speaker 1: if the time came right, this is August of oh seven,
Speaker 1: if the time markets still haven't even made their high,
Speaker 1: which doesn't show up till October seven exactly, so, if
Speaker 1: it came to pass that they needed to start growing
Speaker 1: the balance sheet, quantitative easing, heading to Japan, whatever you
Speaker 1: want to call it, the Bernanke doctrine dictated the interest
Speaker 1: rates must go to the zero bound first. That's that's
Speaker 1: why I given the C minus as opposed to be
Speaker 1: as opposed to stopping at had they stopped at two,
Speaker 1: I would have given them a B plus because of all,
Speaker 1: because of the Pandora's box that was opened by going
Speaker 1: to the zero bound. In later years, So here's where
Speaker 1: I think you and I will find more common ounds post.
Speaker 1: Let's just call it eleven through. I've been waiting for
Speaker 1: them to normalize rates. And I know some people think
Speaker 1: this is the quote greatest economy ever, But why if
Speaker 1: this is such a good economy, haven't rates returned to
Speaker 1: a more normal level instead of what's still incredibly accommodative.
Speaker 1: And I know we could blame where's the thirty year?
Speaker 1: The ten years? Like one five the day before we
Speaker 1: recorded this, So you could blame the bond market, but really,
Speaker 1: shouldn't the Fed have been further along the normalization process
Speaker 1: and off emergency footing? Or am I just crazy? Look?
Speaker 1: Kiri two and Que three were outright mistakes in my opinion.
Speaker 1: Would we have suffered a mild and shallow recession? It's
Speaker 1: impossible to look in any rear view mirror, But we
Speaker 1: knew at the time that we were creating zombies. I
Speaker 1: wrote zombie banks to zombie people. No, No, well we
Speaker 1: and I mean I mean like politicians and others, the
Speaker 1: saving of zombie banks, that's different. I'm talking about giving
Speaker 1: birth to zombie corporations. I did an entire briefing on
Speaker 1: what the potential ramifications would be in the future of
Speaker 1: cutting a default rate cycle in the high yield market
Speaker 1: in half. So I have to stop you here and
Speaker 1: go over each of those zombie banks and zombie corporations
Speaker 1: zombie banks. So let's do first, because I think that's
Speaker 1: the easy one. Zombie banks are banks that and again,
Speaker 1: tell me where we disagree. I think there's a lot
Speaker 1: of daylight between us. Hey, if you're a city bank
Speaker 1: or a Bank of America or whoever, and you have
Speaker 1: all these really good assets and you have all these
Speaker 1: really bad debts, Well there's this lovely building downtown of Manhattan.
Speaker 1: It's got these beautiful columns, and it's called the Federal
Speaker 1: Bankruptcy Cord. And if you are bankrupt, for lack of
Speaker 1: a better term, you go down there and you do
Speaker 1: a Chapter eleven reorg and you take the good parts
Speaker 1: of the bank and you spin it out, and you
Speaker 1: take the debt. There's no such thing as toxic debt.
Speaker 1: There's just toxic prices. This junk at at a dollar
Speaker 1: or nine eighty is fabulous at fifteen or twenty or dollar.
Speaker 1: John Thane, there you go. So you turn around, and
Speaker 1: now you're ripping the band aid off, and maybe we
Speaker 1: end up at Dow five thousand. But now you have
Speaker 1: a clean, healthy Bank America's my favorite example. Here's Bank
Speaker 1: of him. Here's Mary Lynch spinning out. Here's Bank of
Speaker 1: America's spinning out. Here's who else did they acquire in
Speaker 1: the last couple of years before the year's countryroid mortgage?
Speaker 1: So you end up with all these good So am
Speaker 1: I and I'm talking way too much, but um, I'm
Speaker 1: literally talking my book. But is that how you avoid
Speaker 1: zombie banks? The how you would have avoided zombie banks
Speaker 1: and you wouldn't have institutionalized too big to be failed
Speaker 1: with stupid legislation. I was trying to find a polite word.
Speaker 1: And you wouldn't have let them go downtown to the
Speaker 1: other place downtown, the other fed on Liberty Street, and
Speaker 1: instead just go knock, knock, knock. I need to see somebody.
Speaker 1: I've got a problem. So the second question is zombie corporations.
Speaker 1: What is a zombie corporation? So a zombie corporation is
Speaker 1: a corporation. Our mutual friend Jim Bianco, who started fishing
Speaker 1: the same year we did, He's written a lot of
Speaker 1: great things. I think about fourteen percent of the US
Speaker 1: stock markets are considered to be zombie corporations. They couldn't
Speaker 1: last like one or two if the coronavirus doesn't go away,
Speaker 1: we're going to have a handful of companies that go
Speaker 1: poof into the night because they can't handle one or
Speaker 1: even two quarters of operating themselves because they're so in debt.
Speaker 1: It meaning, so, now, what is the normal zombie corporation
Speaker 1: overly leveraged, too much debt ratio? Typically if it's fourteen percent, Now,
Speaker 1: what was it in the eighties, what wasn't in the nineties?
Speaker 1: It's of of of stocks in America are zombies. So
Speaker 1: four is it? When you say fourteen cent stocks? Is
Speaker 1: it of the companies in America the publicly traded? Okay,
Speaker 1: so so what has that been historically? Well, if you
Speaker 1: look at it over time, it's it's been in the
Speaker 1: single digits. We've always wounded. So it's double what it
Speaker 1: usually is. And and ultra low rates goes to the
Speaker 1: argument allows them to refinance cheaply. And so companies that
Speaker 1: should again, other companies that should find that pretty building
Speaker 1: with the dead rock, take out the yucky capacity, make
Speaker 1: room for new entrance to put in efficient capacity, you
Speaker 1: get innovation, and uh so this is about double what
Speaker 1: it historically has been. If if I'm reading you correctly,
Speaker 1: if I'm if I'm quoting Jim correctly, Yes, all right, Jim,
Speaker 1: we'll get you on the show to follow up and
Speaker 1: do another version and continue this conversation. My special guest
Speaker 1: is Danielle di Martino Booth. She is the author of
Speaker 1: fed Up, an insider's take on why the Federal Reserve
Speaker 1: is Bad for America. So I gotta call you out
Speaker 1: on the title right away, The Federal Reserve is bad
Speaker 1: for America. I mean, they've made some mistakes. Are they
Speaker 1: really all that bad for America? Well, when when J.
Speaker 1: Powell first gave his first congressional testimony when he said
Speaker 1: it's not the Fed's job to backstop the stock market,
Speaker 1: I went, you know what, we might have to go
Speaker 1: back and fix that subtitle because it looks like we
Speaker 1: have an adult in the room right now. A lot
Speaker 1: of this could be described as Alan Greenspan, an acolyte
Speaker 1: of Iron Rand who believed in as little government intervention
Speaker 1: into the economy in the marketplace as possible, was constantly
Speaker 1: changing rates and doing what Wall Street wanted him to do.
Speaker 1: Aren't you really complaining that Greenspan was not a great
Speaker 1: FED chief? It for me at least, and you can
Speaker 1: talk to people about the era in between. Way, McChesney
Speaker 1: Martin my absolute favorite FED chair of all time, and
Speaker 1: the only other one I liked er my second to
Speaker 1: favorite one. They're they're my two favorites because they were
Speaker 1: really the only two who they had to go to
Speaker 1: hell button. They just hit it. Go to hell, go
Speaker 1: to hell, go to hell, and they did what they
Speaker 1: needed to do for the country. In his biography, I mean,
Speaker 1: there was somebody like living with him for two years
Speaker 1: practically to write this big Alan Greenspan biography, the guy
Speaker 1: admits that he enjoyed being popular for the first time
Speaker 1: did He was like, Wow, I'm like really really popular
Speaker 1: with these politicians. They're paying attention to everything I say.
Speaker 1: All they want for the stock market to keep going up.
Speaker 1: Surely I can figure that out. And so he had
Speaker 1: a briefing on his desk every single morning. Some shmow
Speaker 1: had to wake up and write it at five thirty
Speaker 1: in the morning, and he had his stock market briefing
Speaker 1: every single day. I think he is the first FED
Speaker 1: chief with a Bloomberg terminal on his desk would not
Speaker 1: surprise me. It would not surprise me. Look, I always
Speaker 1: tell people they're like, when did your anger starting. I'm like, October,
Speaker 1: So go back to that, because that's kind of fascinating.
Speaker 1: He came in in the summer, and following the crash,
Speaker 1: which was really as much plumbing and other issues. Following
Speaker 1: a huge recovery from AD two to eighty seven, he
Speaker 1: cuts rates and basically my pet theory has been the
Speaker 1: audience applause just washed over him and it felt so good.
Speaker 1: He wanted another hit of that. Absolutely. On October, instead
Speaker 1: of presenting in Dallas, Texas, he got on an airplane
Speaker 1: flew back to Washington. D C released a statement that said,
Speaker 1: the Federal Reserve and my new popular life is now
Speaker 1: going to backstop the banking and financial systems. Okay, the
Speaker 1: middle part I put in there, but the banking and
Speaker 1: financial systems were part of a very short statement that
Speaker 1: the Fed released the day after the stock market crash,
Speaker 1: which is quite shocking. This was the hardest thing to
Speaker 1: get past the lawyers for the books in the days
Speaker 1: and the weeks and the months that followed. He's got
Speaker 1: the guys on the New York Markets desk, calling bond
Speaker 1: desks all across the street and saying, we're about to
Speaker 1: inject liquidity just so you know, wink wink, get out
Speaker 1: of the way. So their front running the Fed. They've
Speaker 1: been taught since the weeks and the months that followed
Speaker 1: that they can front run the fetist. So here's the pushback. Hey,
Speaker 1: isn't it easier if the Fed gets Wall Street traders
Speaker 1: to do their business and now they could be a
Speaker 1: little less interventionists. They don't have to make the injection
Speaker 1: is big because the bond traders are doing their work
Speaker 1: for them. Yeah, good luck with that. People have said
Speaker 1: that many many times. I hear all the best on
Speaker 1: what basis. I mean, look what happened with this repo
Speaker 1: thing recently. Yeah, that's a few huge banks basically throwing
Speaker 1: their weight around the financial system. And by the way,
Speaker 1: when I was researching my book, I was shocked to
Speaker 1: learn that the FED chief had the power to raise
Speaker 1: your lower rates on his own the phone see clipped
Speaker 1: his wings because he was doing it way too much.
Speaker 1: So how much of nothing corrupts like power. That's exactly
Speaker 1: where it's going to go. How much of the current
Speaker 1: criticism of the FED traces back to Alan Greenspan as
Speaker 1: a deeply flawed chairman. Well, it wasn't so much Alan
Speaker 1: Greenspan the deeply flawed chairman, had he not had two
Speaker 1: successors in his wake who adopted identical philosophies. It's just
Speaker 1: each iteration of successor was even more afraid of their
Speaker 1: shadow than the prior. How do you describe what should
Speaker 1: be the proper role of a central bank in a
Speaker 1: country like the United States? I would think that the
Speaker 1: best role for the FED to play is making sure
Speaker 1: that the dollar you pull out of your wallet, Ay,
Speaker 1: you can still pull out of your wallet, Sorry, Ken Rogolf,
Speaker 1: but b is worth the same amount of money tomorrow
Speaker 1: that it is today. The dollar is very strong lately.
Speaker 1: We're the cleanest shirt in the hamper relative to the end,
Speaker 1: the Euro, the pound, sterling. Wherever you look in the world,
Speaker 1: the dollar is. But even the one isn't really doing
Speaker 1: a whole lot of much. So after a decade of
Speaker 1: quei one to three plus twist and all this other stuff,
Speaker 1: you still have a very robust US currency. Doesn't that
Speaker 1: suggest the FED hasn't damaged that purchasing power? Well, there
Speaker 1: is that second mandate that has caused the FED to
Speaker 1: completely go off the rails, and that is minimizing the
Speaker 1: unemployment rate or maximizing employment that was given to them
Speaker 1: in by Congress in the middle of a huge yemment. Yes, yes, yes,
Speaker 1: misery index was through the roof, I get it. But nevertheless,
Speaker 1: that was a crucial error made on the part of Congress.
Speaker 1: And people are like, you know, you'll never be able
Speaker 1: to get Congress to say that the FED can do
Speaker 1: negative interest rates or by corporate bonds or by stocks.
Speaker 1: And I'm like, when push comes to show, have Congress
Speaker 1: a vote for anything, especially in a panic, there are
Speaker 1: no actually in a panic, there are no atheists and foxholes,
Speaker 1: and there are no hard dollar monitus at the FED
Speaker 1: in the middle of a panic. But that second employment
Speaker 1: mandate is what has caused the fed's mission creep and
Speaker 1: the lower for longer. They're trying to pull that one
Speaker 1: last employee in off the sidelines. Really at the expense
Speaker 1: of going, Oh, that financial stability thing, we don't know
Speaker 1: that until it hits us in the head. So so
Speaker 1: let me push back a little bit of it. I
Speaker 1: find it hard to believe that the FED is really
Speaker 1: concerns very concerned about unemployment, with unemployment levels at sixty
Speaker 1: year lows. At the same time, this third mandate of
Speaker 1: back stopping the markets seems to be their biggest priorities.
Speaker 1: Or so some people say, what what are your thoughts
Speaker 1: on that? So, look, I think that there's there's a
Speaker 1: little bit of confusion here. Look when you are when
Speaker 1: you are, when you're facilitating Uncle Sam to quietly blow
Speaker 1: up debt and and debt throughout the Obama administration grew quickly.
Speaker 1: A lot of this was in order to fund fiscal spending.
Speaker 1: But if you're if you're teaching the lesson to your
Speaker 1: to the to the powerful politicians that run the country
Speaker 1: that there are absolutely no ramifications for you can run
Speaker 1: up as much debt as you please because it's going
Speaker 1: to be just about free. Okay, then you're going to
Speaker 1: cause a sclerosis an atrophying in the labor force. So
Speaker 1: it doesn't matter how hard the Fed tries to pull
Speaker 1: somebody off the sidelines, if they're not qualified to fill
Speaker 1: the position, it's not going to be field. So what
Speaker 1: does one thing have to do with the other. Why
Speaker 1: does debt cause Well, you have this massive expansion of
Speaker 1: the social safety net such that in this country or
Speaker 1: you talking about Obamacare. No, I'm talking about in this
Speaker 1: country in a more in a more general sense, there's
Speaker 1: been some good I don't know if I call that massive.
Speaker 1: I mean, you've seen you've seen creep. There's been a
Speaker 1: big uptick in people claiming disability on Medicaid and social Security.
Speaker 1: You asked the average one of these people who are
Speaker 1: basically living off the government, how much would you have
Speaker 1: to have an entry position job pay you in order
Speaker 1: for you to come off the sidelines and work. And
Speaker 1: it's a heck of a lot more money than they
Speaker 1: would be getting as a starting salary. Well, it's entry
Speaker 1: because that pays very little. It's but again, so if
Speaker 1: you get thirty thousand dollars without working with thirty thousand
Speaker 1: dollars worth working economic incentives, say why would you work? Exactly?
Speaker 1: But how does as long as you keep government debt
Speaker 1: super super super cheap, then you can keep these programs
Speaker 1: alive and well. As opposed to removing you and making
Speaker 1: it a job of the private sector. I mean, it
Speaker 1: is time to make vocational training great again in this country.
Speaker 1: I don't think anybody's going to disagree with you about that.
Speaker 1: But where they will disagree with you about is that
Speaker 1: the FED has enabled federal debt because you've seen federal
Speaker 1: debt go in one direction for World War two forward.
Speaker 1: You have, but you've also seen the duration of the
Speaker 1: treasury holdings of the United States until this twenty year
Speaker 1: bond issuance that was recently announced. You've seen the duration
Speaker 1: of treasuries come way in while the United Kingdom has
Speaker 1: gone the absolute opposite way. Because if we were to
Speaker 1: be borrowing money at the maturities where we should be borrowing,
Speaker 1: you name it, if we'd been borrowing way out there,
Speaker 1: then our interest expense would be a hell of a
Speaker 1: lot higher um. And nobody wants that anything. I don't
Speaker 1: know if it would be them, of course it would
Speaker 1: be higher. Listen, the thirty year and the ten year
Speaker 1: of spitting distance apart. I think you do the fifty
Speaker 1: year and and and this is this is it. This
Speaker 1: has been a fifteen year trend of reducing the maturity
Speaker 1: profile of treasuries. So this is this changing the shape
Speaker 1: of the duration and borrowing much shorter, shorter to fund. Yes,
Speaker 1: but it's a good way to kind of hide the
Speaker 1: evils of having tri whatever the debt clock says, downtown
Speaker 1: trillion accounting of national debt. All right, so now let
Speaker 1: me push back to you on that. So let's what's
Speaker 1: rounded up to trillion. Okay, we can forgive all student debt.
Speaker 1: Well before we even do that, here's what a lot
Speaker 1: of people, here's what some analysts and economists and strategists
Speaker 1: have brought forth as a counter argument. Hey, we have
Speaker 1: our own printing press, and we have a standing army,
Speaker 1: and we have the reserve currency. We can print all
Speaker 1: the debt we want, and we aren't going to have
Speaker 1: the same problem that Japan had. Oh and ps, Japan's
Speaker 1: credit rating is fine and the their tenure bond is
Speaker 1: you know when it's not negative, it's you know, fraction.
Speaker 1: Why does should we think that our debt isn't going
Speaker 1: to be any different than Japan's debt? Well, we are
Speaker 1: beholden to foreign ownership of our treasuries. Why why do
Speaker 1: we care about that? We care about it because we don't.
Speaker 1: We don't have the same latitude that Japan has because
Speaker 1: Japan's um sovereigns are mostly owned by the Japanese internally
Speaker 1: inside the country. Right, So what Japan did is printed
Speaker 1: up a whole bunch of bonds and put it in
Speaker 1: their right pocket and then have their left pocket by it.
Speaker 1: They completely created money out of thin air. Why can't
Speaker 1: we do that? There's a theory that we can do that,
Speaker 1: but again we all we are. Don't make me say
Speaker 1: them M I prefer modern meritocracy theory. I call it
Speaker 1: Bernie's theory MMT. But the thing about mm T is
Speaker 1: he again go back to the fact that we do
Speaker 1: have reserve currency status, but we can't piss all over
Speaker 1: it because we are have been. We have been, but
Speaker 1: that does not mean that foreign buyers of our debt
Speaker 1: have completely stepped back. Now, now I will say that
Speaker 1: China has methodically and for years been reducing the maturity
Speaker 1: of US treasuries with no negative impact on rates or anything,
Speaker 1: no negative impact. Despite the warnings of a lot of
Speaker 1: crazy it doesn't matter. If China is in a preparation
Speaker 1: mode to do anything they've they're they're doing it actively, right,
Speaker 1: And they play a much longer game than us, and
Speaker 1: they think in terms of decades. They do, and they
Speaker 1: have ten year plans. And I wish we were as
Speaker 1: savvy when it came to industrial power, industrial um policy
Speaker 1: and long term planning is them. We just kind of
Speaker 1: wing it, we do. And trillion you're throwing out there
Speaker 1: has nothing to do with modern monetary theory at all.
Speaker 1: That's what we're going to have, like an eighteen months
Speaker 1: for God's sake, as quickly as the deficit is growing.
Speaker 1: But what they're talking about is something more that's that's upwards,
Speaker 1: up closer to fifty. Is Trump a modern monetary trillion?
Speaker 1: Oh gosh, I think he doesn't seem to care about
Speaker 1: the debt at all. He doesn't, and Mitch McConnell doesn't
Speaker 1: care about it, and Paul Ryan tended to care about it.
Speaker 1: So we're the responsible adults when it comes to managing
Speaker 1: debt outside the belt Way anywhere anywhere there. I I
Speaker 1: still care about the debt. I think there are some
Speaker 1: Americans who still care about the debt. Oh no, there
Speaker 1: are a lot of people do, but none within who
Speaker 1: can actually do something about it within the powers of
Speaker 1: But again, to look out at a crowd, as President
Speaker 1: Trump did recently, and to say to Kevin worsh you know,
Speaker 1: if you were there right now, at least I'd have
Speaker 1: negative interest rates just like Germany, and I'd be getting
Speaker 1: paid for my debt. I mean, these are the things.
Speaker 1: These a billion economic theorist. You've got to give him that. Okay,
Speaker 1: my hair was on fire when he said that. But
Speaker 1: other than that, it was great. I mean that the
Speaker 1: whole rest of the play, it was fine. Negative interest
Speaker 1: rates come, negative interest rates come to America. And aside
Speaker 1: from that, what did you think of the plays? But again,
Speaker 1: if you're talking about universal basic income, if you're talking
Speaker 1: about health care for all, if you're talking about student
Speaker 1: loan forgiveness, forget the pony part. You're still talking about
Speaker 1: doubling the debt quickly. Alright, So so let's be so
Speaker 1: here's because, by the way, social Security and Medicare are
Speaker 1: no longer actuarial theories. Their cash flow issues over the
Speaker 1: next few years. So let's discuss that because I find
Speaker 1: that fascinating. So social Security we could we it's capped
Speaker 1: at about a hundred and ten thousand dollars salaries where
Speaker 1: your FICA tops out. I think if you raise it
Speaker 1: to something like two three four thousand, you buy another
Speaker 1: in your forty years. So I'm not worried about Social Security,
Speaker 1: Medicare and Medicaid. You have runaway prices of prescriptions. You
Speaker 1: have medical tourism because you go to Tiajuana and for
Speaker 1: two thousand dollars get three thousand dollars worth of surgery.
Speaker 1: The United States is quite literally the only industrialized developed
Speaker 1: nation without some form of a universal health care which
Speaker 1: allows a cap on many prescription and procedure costs. And
Speaker 1: if we do that, you'll have this very lovely too
Speaker 1: tier system where here's basic coverage for everybody, here's high
Speaker 1: end coverage for anyone who can afford to buy insurance,
Speaker 1: and the entire cost structure comes way way down, or
Speaker 1: so goes the theory. What's what's wrong with that before?
Speaker 1: And forget forgiving school dad, and forget basic income for now,
Speaker 1: let's just get of the US economy wrestled into submission
Speaker 1: by fixing the healthcare system. I'm not opposed to what
Speaker 1: you just described, and there's certain rationale as long as
Speaker 1: we can keep the quality up. But you did at
Speaker 1: some point asked me why I wrote this book. Yes, well,
Speaker 1: that actually takes us right back to Medicare and Medicaid.
Speaker 1: The Federal Reserve uses the PC as its inflate consumer
Speaker 1: price equivalent for lack of a better yes, it's it's
Speaker 1: a substitute for the for the CPI, for the consumer
Speaker 1: Price Index, and which has it's. Both of them have them.
Speaker 1: Both of them have their problems, but one has a
Speaker 1: lot bigger worth than the other because they both understate housing.
Speaker 1: Both of them, well, the owner's equivalent rent is very
Speaker 1: problematic because when home prices are going up, paradoxically, the
Speaker 1: the residency, the shelter portion of inflation paradoxically goes down.
Speaker 1: It's totally backwards. And right now rents are going at
Speaker 1: such a fast pace and we haven't captured that in
Speaker 1: the CPI, and we could talk about that all day now.
Speaker 1: The pushback to that is, well, that's because we have
Speaker 1: this nimby restriction on building UM denser multi family units
Speaker 1: and apartment buildings and areas that open that up see
Speaker 1: much more competitive prices for renters UM. And as long
Speaker 1: as we have this NIMBYism, places like New York and
Speaker 1: San Francisco are going to be really problematic when it
Speaker 1: comes to renters. Hashtag acinine, But why did I write
Speaker 1: the book? Is that a real hashtag? Can I? Can
Speaker 1: I go to Twitter and function that in UM? So
Speaker 1: why did you write the book. Well, so Stanley Fisher
Speaker 1: was vice chairman of the FED for a while, UM
Speaker 1: Jim Bianco one afternoon we spent an entire afternoon fishing
Speaker 1: trying to debate why on earth the godfather or Central Banking,
Speaker 1: who Ben BERNANKEI had on speed dial in case he
Speaker 1: had an existential crisis, why this legend of central banking
Speaker 1: would come out of retirement to be vice chairman. So
Speaker 1: very first f MC meeting, Fisher says, I only have
Speaker 1: one question, why on earth do you use this convoluted
Speaker 1: PC in my life? At least it's a minimum headline
Speaker 1: CP I. Why don't we have something more realistic and
Speaker 1: reasonable that we're following. So some trepidacious FED staffer in
Speaker 1: the back of the room in the Echoes Building raised
Speaker 1: his hand and said, well, if we don't use it,
Speaker 1: our models are going to break. So you gotta fix
Speaker 1: your models. So at which point Jim Bollard, who knew
Speaker 1: he had a sense of humor, raises his hand and says,
Speaker 1: let me get this straight. This is how we make
Speaker 1: monetary policy in America. Crap in, crap out. That's the
Speaker 1: gist of it. Because the PC uses as an input
Speaker 1: in Medicare and Medicaid reimbursement rates, which is an absolute
Speaker 1: insult to every American who's actually paying for real over
Speaker 1: priced healthcare. So it's it's it's it's the shield that
Speaker 1: the FED hides behind. I'm almost finished. So in two
Speaker 1: thousand nine, internal debate occurs. Everybody inside the FED is like,
Speaker 1: we might not have you know, we might not have
Speaker 1: the right inflation metric. We might have seen this crisis
Speaker 1: coming had we incorporated something like, oh, I don't know,
Speaker 1: real estate and financial asset prices into some inflation metric.
Speaker 1: So it was decided that something had to be done
Speaker 1: because it was broken. And then they did nothing, And
Speaker 1: then I got really piste off and wrote fed up.
Speaker 1: So here's the pushback. I've heard the PC and the
Speaker 1: CPI arguments, and and let let me just disclose my
Speaker 1: bonefit ese um. In the two thousand's, I was screaming
Speaker 1: about inflation. I used to mock what I called inflation
Speaker 1: X inflation. We're going to report inflation, but we're gonna
Speaker 1: take out food and energy. Oh so you're only going
Speaker 1: to report the things that aren't going up in price. Fantastic. However,
Speaker 1: the pushback that I find persuasive is uh M I
Speaker 1: T has this project called the Billion Price Projects where
Speaker 1: they use the Internet to track literally millions and millions
Speaker 1: of product prices. And when you overlay the Billion Price
Speaker 1: Project on top of cp I, they're not perfect, but
Speaker 1: they're pretty close. I mean, when the Billion Price Project
Speaker 1: says inflation is ticking higher, you see it in cp I,
Speaker 1: and when it flattens out, you see it in c
Speaker 1: p I. It's not perfect, but what it says is
Speaker 1: there is modest inflation out there. You have a lot
Speaker 1: of inflation and things like healthcare and education UM, both
Speaker 1: of which one is a free market disaster, the other
Speaker 1: is a government disaster. Uh and you don't have a
Speaker 1: lot of inflation and things like UM technology and software
Speaker 1: and uh and and we're as real estate and rents
Speaker 1: have gone up a lot. A big chunk of that
Speaker 1: is driven by ultralow mortgage rates because you can buy
Speaker 1: that much more. So you could lay that at the
Speaker 1: feet of the Fed. But overall, we've had modest inflation
Speaker 1: for the past ten years, nothing like what we saw
Speaker 1: in the two thousands or the nineteen seventies. I would
Speaker 1: agree with that, but what we've we've had twenty three months.
Speaker 1: Of course, cp I north of the two percent target.
Speaker 1: If you were to make one tweak to the PC,
Speaker 1: the FED would have long since started to normalize rates.
Speaker 1: They're literally hiding behind a metric that they know and
Speaker 1: recognize is broken. I'm fine. I'm fine with it because
Speaker 1: we would have been normalizing a long time ago. I
Speaker 1: don't think they would have even if, even if they
Speaker 1: would have shown more inflation. Well, I think they're too
Speaker 1: afraid to. But that's a whole another That is a
Speaker 1: whole another story. And that's what happened with KI two,
Speaker 1: and that's what happened with QUI three, is that it
Speaker 1: was time to begin normalizing and the fear factor kicked in.
Speaker 1: Quite fascinating. I want to throw a quote at you
Speaker 1: and have you discuss it. Quote. The FED is injecting
Speaker 1: billions of dollars into this market and that's why everything
Speaker 1: is going up. Discuss the FED is about a hundred
Speaker 1: billion dollars a month run rate as things stand right now.
Speaker 1: Commercial industrial lending is at the largest banks is negative
Speaker 1: on a year over year basis, which is shocking. Well,
Speaker 1: it is kind of shocking because so is global trade.
Speaker 1: There are several other metrics that have never coexisted without
Speaker 1: being in recession. So something is intervening to make everything
Speaker 1: better right now. If the money that's being pumped into
Speaker 1: the system is not going into any kind of lending
Speaker 1: of any sort, because it's not, then it's it's has
Speaker 1: to find a home. So let me stop there first.
Speaker 1: Say what you will about the economy. It's fairly robust.
Speaker 1: We have lots of economic activity. It's not three or
Speaker 1: four percent, it's two percent. You have unemployments at three
Speaker 1: and change. Well told, this is not a terrible economy.
Speaker 1: We don't see a whole lot of R and D.
Speaker 1: We don't see a whole lot of capex spening to
Speaker 1: We're not seeing that. And industrial is already in a recession.
Speaker 1: Manufacturing is already in recession. But still it's not a
Speaker 1: terrible economy. It's not a terrible economy yet. So given that,
Speaker 1: why aren't we seeing more lending? Because I think banks,
Speaker 1: especially the large banks, can see the writing on the wall.
Speaker 1: So you think this is a conscious decision. We're not
Speaker 1: going to do more loans because we think looker of
Speaker 1: CFOs in America came into saying we're in a cost
Speaker 1: cutting mode. We saw that also late in ten, they
Speaker 1: had were thraveling. We don't expect to increase capex mending,
Speaker 1: and and that was right into a market correction. The
Speaker 1: surprising thing is that CFO survey, I think that's the
Speaker 1: Duke survey, continued straight through twenty nine. There was even
Speaker 1: as the market started moving higher and recovering that loss,
Speaker 1: there was no change in sentiments. So you think these
Speaker 1: CFOs are genuinely concerned about an impending recession, Well, I
Speaker 1: think that you have seen some very strange things happen.
Speaker 1: So we we follow at quill not seasonally adjust it,
Speaker 1: continuing unemployment claims, because just because you apply for unemployment
Speaker 1: insurance doesn't mean you're going to get it right. So
Speaker 1: we follow a not seasonally adjusted number because it's just
Speaker 1: raw data. Are you looking at year over year numbers?
Speaker 1: Is that what you know bother the seasonal adjustments, So
Speaker 1: we're looking at a year over year so beginning in Octo.
Speaker 1: By the way, I love that, and that I found
Speaker 1: that enormously helpful in the financial crisis to look at
Speaker 1: you over year existing home sales and it told the
Speaker 1: whole story. So I love that methodology as opposed to
Speaker 1: all the seasonal adjustments and everything else. But hold that aside.
Speaker 1: We look at that number, we follow it very closely,
Speaker 1: and it is off of the lowest base you can
Speaker 1: imagine because plus percent of people who qualify for unemployment insurance.
Speaker 1: Now some states have made it a lot harder and
Speaker 1: more expensive, and they've up the premiums on these. So
Speaker 1: Moody's has done some good work showing that you don't
Speaker 1: even have the same percentage of Americans on unemployment insurance
Speaker 1: right now, which is why you know they came to
Speaker 1: the lusion that jobless claims are inherently understated because in
Speaker 1: the aftermath of the crisis, a lot of states made
Speaker 1: it harder and or shortened the time that you could
Speaker 1: be on unemployment insurance as part of the I forgot
Speaker 1: the acronym. The modest fiscal response to the crisis was
Speaker 1: really broken into three parts. I think it was about
Speaker 1: seven billion dollars. A third of it went to infrastructure,
Speaker 1: which is really nothing. A third of it went to
Speaker 1: a temporary tax break, and a third of it went
Speaker 1: to temporarily extending unemployment. And that ended a long time ago.
Speaker 1: So your your position is, but some states, like North Carolina,
Speaker 1: they're they're they're a handful of states that permanently shortened
Speaker 1: the length of time that you can collect unemployment insurance.
Speaker 1: Some states made up for the extra expense by raising
Speaker 1: the premiums that employers had to pay for unemployment insurance
Speaker 1: within their states. So so you're saying the looking at
Speaker 1: the unemployment roles today is a little leading, It is
Speaker 1: a little misleading. Set that aside. Set that aside, We've
Speaker 1: still seen starting in October, four consecutive months of year
Speaker 1: over year increases in non seasonally adjusted continuing claims. That is,
Speaker 1: the number of Americans collecting unemployment insurance on a year
Speaker 1: over year clean basis has been increasing since October. What
Speaker 1: does that mean historically if you see that increase in
Speaker 1: the first time that we've seen this since O nine. Alright,
Speaker 1: well O nine, clearly a different situation go previous to that.
Speaker 1: Is this a recession indicator or is this a softening
Speaker 1: of GDP indicators should be a recession indicator. But you're
Speaker 1: saying the Fed is preventing that from spiraling out of control.
Speaker 1: You've never seen global debt right now, We've seen year
Speaker 1: over year. There's a Netherlands global debt monitor. The next
Speaker 1: one for its very lag The next one's coming out
Speaker 1: in December. But you've seen that going down on a
Speaker 1: year over year basis since I believe May of twenty nine,
Speaker 1: meaning less dead or low equality of debt, when world trade,
Speaker 1: world trade, world trade volumes have been declining on a
Speaker 1: year over year basis. And my friend, now, how much
Speaker 1: of that is coronavirus and how much of that is
Speaker 1: all corona? Really this is made through November. We only
Speaker 1: have a small snapshot because it's extremely lag data. Forget coronavirus.
Speaker 1: This thing is going to fall off a cliff. But
Speaker 1: my buddy Lacy Hunt taught me that you had go
Speaker 1: back to your recession starting in eight. If a US
Speaker 1: recession is accompanied by contracting world trade, it's a nasty recession.
Speaker 1: It's a global recession. No contrasts in world trade. Was
Speaker 1: that even a real recession or was that just a
Speaker 1: mild real estate something going on there? And then two
Speaker 1: well you had f y I, we had seven. You
Speaker 1: had the crash, the Fed responded to it, You had
Speaker 1: a temporary blip in housing, and and then it fell
Speaker 1: pretty much off a cliff. If you bought a co
Speaker 1: opera condo in New York following the eighties seven crash
Speaker 1: and a drop in rates. You ended up not getting
Speaker 1: back to break even for like six or eight years,
Speaker 1: which is New York on the East. In New York specifically,
Speaker 1: that was a terrible real estate recession because driven in
Speaker 1: some part by Green Spans panic. So that's a good
Speaker 1: title for a book. There you go. I want to
Speaker 1: bring this back to the market. Two one, No global
Speaker 1: trade contraction, not a bad recession, right, that was too
Speaker 1: O one was a short what was that March to
Speaker 1: November with September eleven right in the middle of it.
Speaker 1: By the time eleven hit, we were much closer to
Speaker 1: the end than the beginning of the two thousand nine
Speaker 1: ugly contraction in world trade, ugly recession. And here we
Speaker 1: are with this phenomena we're staring at so have rising
Speaker 1: continuing jobless claims and contracting world trade and buck kiss
Speaker 1: going on in the economy. So I would argue the
Speaker 1: O nine to ten, or really the oh seven to
Speaker 1: oh nine in recession was driven by the market, not
Speaker 1: the economy itself. Contracting the market caused a disaster and
Speaker 1: then that led into a whole bunch of systematic problems.
Speaker 1: But let's talk about today you've discussed and I'm paraphrasing,
Speaker 1: the FED has gone into the market. They've exchanged short
Speaker 1: dated government bonds for reserves already held at the FED.
Speaker 1: Government bonds are the most liquid asset in the world.
Speaker 1: How does that end up impacting equities? Because I think
Speaker 1: that's where the debate about the FED sort of schisms
Speaker 1: into two camps. So I'll tell a really quick story
Speaker 1: because it's not the stock market you have to be
Speaker 1: directly concerned with. It's keeping the bond market open. That's
Speaker 1: what's most important. And Jardine has done some good work.
Speaker 1: Over half of share by backs are financed with debt,
Speaker 1: even more than that. Okay, so um, I'm going based
Speaker 1: off that. What happened on Halloween two thousand and eighteen
Speaker 1: when Moody's downgrade at General Electrics debt was what was
Speaker 1: the game changer for j Pal. J Pal still doesn't
Speaker 1: give a damn about the stock market, but he cannot
Speaker 1: not care about the bond market, which is whatever. It
Speaker 1: is almost ten trillion dollars GDP non financial debt, all
Speaker 1: time record high in this country. So Halloween g E
Speaker 1: debt gets downgraded. And remember the fourteenth, two thousand eighteen,
Speaker 1: the highyeld bond market shuts down. Goodbye, goodnight, Irene for
Speaker 1: forty one record days. You've got redemptions on high yield
Speaker 1: E t F. You have the I m F, the
Speaker 1: B I S, all these global entities are like J. J. Pale,
Speaker 1: You've got a problem on your hands. The collateral backing
Speaker 1: these fixed income uh E t F s was trading
Speaker 1: by appointment only. Spreads were gapping out, yields were going
Speaker 1: through the roof. And you have this quiet at first,
Speaker 1: and it got really loud chorus of CFOs on Wall
Speaker 1: Street saying we're gonna behave and stop buying back our
Speaker 1: stock because we're gonna have to pay attention to our
Speaker 1: balance sheets. They were lying, they were lying, but they
Speaker 1: didn't have to lie for long because the meltdown in
Speaker 1: the market, catalyzed by the shutdown in the credit markets,
Speaker 1: shut down shared by backs, people got afraid enough. In
Speaker 1: Q four of Scared J. Powell, J. Powell knows one thing,
Speaker 1: October two thou twelve, f O m C transcript, q
Speaker 1: E is blowing a fixed income duration bubble across the
Speaker 1: entire credit spectrum. That's a quote, so so here's the
Speaker 1: pushback I've read and heard, and some of which resonates,
Speaker 1: some of which doesn't. It goes something like this, First,
Speaker 1: junk bonds are supposed to default. That's what junk bonds
Speaker 1: do not in America, they're called junk for a reason.
Speaker 1: And when the spread between quality corporates and junk gets
Speaker 1: too small, that's how you know you're in a frothy
Speaker 1: at best, bubble at worst situation. Seconds. Yeah, there's been
Speaker 1: some problems in the repo market, and there's been some
Speaker 1: problems in the credit market, but it's mostly plumbing, just
Speaker 1: like seven was a plumbing problem, and the equity market
Speaker 1: hadn't caught up technologically, they was still doing paper. Hey,
Speaker 1: these are relatively young markets, these repo markets, and they're
Speaker 1: certainly not you know, like Japanese rice markets and around
Speaker 1: for centuries, and so this is just a plumbing problem
Speaker 1: and we'll figure it out. What's your what's your response
Speaker 1: to that pushback? I would like to see the markets
Speaker 1: figure it out without having the pacifier than being being
Speaker 1: the federal We only had a two percent portfolio insurance
Speaker 1: position against the stock market capitalization. That was just two
Speaker 1: The risk parity trades only about ten percent. So let's
Speaker 1: just let's just throw it up against the wall. Let's
Speaker 1: see what happens. Let's let credit credit volatility come unhinged
Speaker 1: and see what happens. So I'm one of these crazy
Speaker 1: free market people who think if something goes belly up
Speaker 1: like long term capital um, well maybe that's a bad
Speaker 1: example because the FED actually greenspan road to the rescue. No,
Speaker 1: because that's the one where gold Green Smid didn't wass
Speaker 1: bang a bunch of heads together and said, hey, you
Speaker 1: private banks, you go work this out yourself without the
Speaker 1: FED being very involved, because if we get involved where
Speaker 1: you're not gonna be happy. So so the question one
Speaker 1: gentleman from bear Stearns told him where to fly. So
Speaker 1: here's the that's right. Who was who was? By the way,
Speaker 1: one of the biggest counterparties to LTCM. But hold that
Speaker 1: and by the way, the whole rescue was a dry
Speaker 1: run for a decade later for what we ended up doing.
Speaker 1: But hold that aside. What would happen if the FED
Speaker 1: wasn't intervening in the repo market or wasn't providing liquidity
Speaker 1: when there were frictions and and some freezes in some
Speaker 1: of these smaller backwater credit markets with short from interest
Speaker 1: rates pushing double digits? What would have happened? No, No,
Speaker 1: what would happen today? If the FED says, all right,
Speaker 1: you know, we're done intervening here. You guys figure it out.
Speaker 1: The free market can work this out. What's the net
Speaker 1: result of that? I don't think we know, Verry. I
Speaker 1: think that we would see rates be a lot higher
Speaker 1: than they are. It's a little problematic when you're running
Speaker 1: trillion dollar deficits. So when you say a lot higher
Speaker 1: four or five, six or n I don't I do.
Speaker 1: I don't know that the market would end up at
Speaker 1: nine or ten percent, But I know that if the
Speaker 1: market was to end up at four or five percent,
Speaker 1: given that the FED wants to put a new replacement
Speaker 1: for libor out there, it would be the worst possible development. Alright, So,
Speaker 1: given all that, and the fed's about to cut rates
Speaker 1: again because of the coronavirus, that was my next question.
Speaker 1: You you beat me to the question. Given that, what
Speaker 1: do you think the FED is going to do over
Speaker 1: the next four meetings? Real? And by the way, does
Speaker 1: the castors don't fight the FED? But there's one cohort
Speaker 1: out there that doesn't fight the FED harder than the
Speaker 1: who don't fight the FED. And that's the FED itself.
Speaker 1: The FED never fights itself. It never fights the market,
Speaker 1: It never fights w I R P. New type it
Speaker 1: into your Bloomberg. It never fights expectations of rate cuts,
Speaker 1: and it never even fights expectations of FED moves. When
Speaker 1: it came to Ben Bernanky was completely guided in terms
Speaker 1: of the size of the tapering of quantitative easing way
Speaker 1: back when by what the survey from the New York
Speaker 1: Fed was saying. The FED is guided by the financial markets,
Speaker 1: and it will do what they tell it to do.
Speaker 1: Can you stick around a bit? I got a bunch
Speaker 1: more questions for you. Of course, we have been speaking
Speaker 1: with Danielle di Martino Booth. She is the founder and
Speaker 1: chief strategist of Quill Intelligence and author of fed Up,
Speaker 1: an insider's take on why the Federal Reserve is bad
Speaker 1: for America. If you enjoy this conversation, well, be sure
Speaker 1: and check out the podcast extras, where we keep the
Speaker 1: tape rolling and continue discussing all things FED related. You
Speaker 1: can find that at iTunes, Spotify, Google podcast, overcast, stitchers,
Speaker 1: wherever your final podcasts are sold. We love your comments,
Speaker 1: feedback in suggestions right to us at m IB podcast
Speaker 1: at bloomberg dot net. Check out my weekly column on
Speaker 1: Bloomberg dot com. Follow me on Twitter at rit Halts.
Speaker 1: I'm Barry Ri Halts. You're listening to Masters in Business
Speaker 1: on Bloomberg Radio. Welcome to the podcast, Danielle. Thank you
Speaker 1: so much for doing this. I'm afraid that people are
Speaker 1: gonna hear us on the radio and not here this
Speaker 1: part of the discussion, and the gonna say, hey, man,
Speaker 1: what are you giving her such a hard time for
Speaker 1: I'm like, no, no, you understand. We kind of know
Speaker 1: each other. For we've been doing this for a decade, right,
Speaker 1: is it that long? It is? The day I'm at
Speaker 1: you is the day I met Jim Bianco, walked into
Speaker 1: the fishing lodge. There you were. This is up in Maine,
Speaker 1: up in Maine. Always the first person there at the
Speaker 1: lodge so you can suck up all the band with
Speaker 1: and turn your Bloomberg on. That's early in the morning.
Speaker 1: I do my morning reads and I found well, now
Speaker 1: you actually right, actually now there is some bandwidth in
Speaker 1: each of the room, each of the cabins, but the
Speaker 1: best band with is in the dining hall and I
Speaker 1: get listen, I'm an early riser. Uh, the early bird
Speaker 1: gets the worm and the early blogger gets the band
Speaker 1: with that's the that's the thesis up there. Um, and
Speaker 1: we've we've had a number of fascinating debates and discussions
Speaker 1: and experiences and Maine is really a blast. Camp Ko
Speaker 1: talk is always delightful. I can't wait. It wasn't last year,
Speaker 1: it was the previous year. Someone said how long you've
Speaker 1: been coming here? And I've been saying, I know, five
Speaker 1: six years for a few years. And someone said, well,
Speaker 1: when was your first year? And I had to figure
Speaker 1: it out and I'm like, oh, it's been a decade.
Speaker 1: Oh my god, it's crazy. I think this. I don't
Speaker 1: know if this year is eleven or twelve years ten
Speaker 1: for me. So you skipped a year. I've have a sreek.
Speaker 1: I haven't missed one. I skipped here. I was in
Speaker 1: the middle of writing a book. But yes, um, yeah,
Speaker 1: but it's a weekend. Come on, you could you could
Speaker 1: take a weekend off from book. It's okay. It's Dallas,
Speaker 1: Texas to to nowhere in Maine versus New York to
Speaker 1: nowhere in Maine. It's a little bit different calculus. So
Speaker 1: it's like an hour flight up to Bangor and then
Speaker 1: you drive about two and a half hours. Like the
Speaker 1: from the time I leave my house till the time
Speaker 1: I get in the car, and Bangor is more time
Speaker 1: than the time I leave Bangor and get to get
Speaker 1: Lean's Lodge, unless I stopped for a lobster roll at
Speaker 1: the Eagles Nest. I must stack on a four hour
Speaker 1: flight in from Dallas usually am and change changing terminals
Speaker 1: and getting to that damn bang Or flight, but I
Speaker 1: get there. There are lots of places I would consider
Speaker 1: living outside of New York. Dallas happens to be pretty nice.
Speaker 1: And Austin is just such a party town when you
Speaker 1: went to school there. When you're to grad school like today,
Speaker 1: Austin is a full blown hipster. Someone described it as
Speaker 1: the blueberry in the middle of the raspberry pie that
Speaker 1: is Texas, which I find hilarious. But what was Austin
Speaker 1: like when you went to school? There was it a
Speaker 1: big party town? It was. It's always been a big
Speaker 1: party town. It's always been huge for live music, I
Speaker 1: mean institutional level of music. Uh, you know, Sixth Street
Speaker 1: was around then. But the age, the aging of of Austin.
Speaker 1: And now you have Fifth Street, which is where people
Speaker 1: my age go because they don't want to go on
Speaker 1: Sixth Street because germs are no longer for sharing at
Speaker 1: our age. So you know, there are more roof bars
Speaker 1: in Austin today than I think any city I've ever
Speaker 1: been in. And they've they've really just opened some very
Speaker 1: nice hotels. There's plenty of room for the tourists. But
Speaker 1: go downtown. Stay downtown for heaven's sake. Don't get stuck
Speaker 1: in that traffic, to say the least. So there's a
Speaker 1: ton of questions I didn't get to that. I want
Speaker 1: to circle back, and I don't have you here all day.
Speaker 1: But we've been talking long enough. Um, So here's here's
Speaker 1: the the really interesting discussion, which all this comes right
Speaker 1: from your book. What do you mean by the FED
Speaker 1: is bad for America? That seems like a pretty harsh
Speaker 1: statement there. They've made mistakes, they're certainly an important entity.
Speaker 1: I don't think either of us are in the ron
Speaker 1: pole in the FED. No, you know, like that's like
Speaker 1: unilateral nuclear disarmament. But plus, I mean, look at what
Speaker 1: the Chinese have done for everybody who always says, God,
Speaker 1: you've got to end the FED. Just get rid of
Speaker 1: I'm like, look at what the Chinese can do with
Speaker 1: our intellectual property, right, okay, now put it on steroids
Speaker 1: and see what they can do to our financial system.
Speaker 1: Just leave the thing, please, it's it's it's ridiculous. Pole
Speaker 1: was out of his mind with that nonsense. It is
Speaker 1: and some of that's hyperbolic just for him to make
Speaker 1: a point, But I think he truly believe that, and
Speaker 1: his son believes it also. Look, it's just it's not practical,
Speaker 1: not in the world we live in. It. We can
Speaker 1: deglobalize all we want, but we're never going to un globalize.
Speaker 1: There's there's a difference between the two. So so that
Speaker 1: raises the question, how should the FED set interest rates?
Speaker 1: The FED should set interest rates more a the FED
Speaker 1: needs to let these markets somehow, some way normalize. If
Speaker 1: you talk to people who say that the FED is
Speaker 1: going to blow up the balance sheet to ten trillion dollars,
Speaker 1: it's going to ease into the next recession, ease even
Speaker 1: more through the next re session, and eventually we'll have
Speaker 1: a debt jubilee and sing Kumbaya and walk off into
Speaker 1: the side. I have a lot of cars I want
Speaker 1: to buy that are beyond my budget, I'll just borrow
Speaker 1: against it. And if we do student loan forgiveness, maybe
Speaker 1: we could do Biblical times before you had a banking
Speaker 1: system to just say, oh, it's gonna be really easy.
Speaker 1: Let's just debt jubilee. Somebody say private debt markets, Oh god,
Speaker 1: what are we going to do with those? It's more
Speaker 1: complicated than than what it's made out to be. And
Speaker 1: I think somebody at the Fed, somebody has got to
Speaker 1: deal with having the beginning and the end of a recession. Right.
Speaker 1: So in other words, if we want to stick with
Speaker 1: the biblical theme, seven fat years, seven lean years, things
Speaker 1: are cyclical. Not just you mentioned this is ten year expansion,
Speaker 1: the elongated expansion um Australia went what twenty seven years
Speaker 1: and they still haven't had a recession twenty seven years?
Speaker 1: And how far can this has been twenty years incounting,
Speaker 1: but we have not had a benefactor named China. I
Speaker 1: had a speech in Australia. I was there for twelve days.
Speaker 1: Just about everything is not made in China but owned
Speaker 1: by China were exported to China, to China or imported
Speaker 1: from China. I would argue we have had a benefactor
Speaker 1: named China because they make all our crap cheap and
Speaker 1: there where we make every manufacture everything. But they don't
Speaker 1: own our biggest port. They don't have a tick a
Speaker 1: year lease on our biggest port in Melbourne. They don't
Speaker 1: own an island. I went on on the own the
Speaker 1: island on the Great Barrier Reef. They haven't put up
Speaker 1: all of these skyscrapers that, by the way, are wrapped
Speaker 1: with something that is extremely flammable. Um so it's oh
Speaker 1: something something that is literally extremely flammable. So now there's
Speaker 1: certain high rise buildings in Melbourne and in Sydney that
Speaker 1: you kind of know not to buy at some guy
Speaker 1: dropped a cigarette and the whole three floors going up
Speaker 1: before Anyways, anyways, all I'm saying is that that that
Speaker 1: Australia is an aberration, but in a good sense of
Speaker 1: the word. They never went to the zero bound, and
Speaker 1: that was our fatal flaw. The Bernankee doctrine was the
Speaker 1: fatal flaw, the idea that we absolutely had to go
Speaker 1: to the zero bound. I think that J. Powell is
Speaker 1: so correct in pushing back against negative interest rates. I
Speaker 1: even hope he stops at one. So now let me
Speaker 1: throw out an alternative um scenario, a counter factual, but
Speaker 1: it's really based on reality. It's not a counter factual.
Speaker 1: Normally we have a regular playbook, and whenever there is
Speaker 1: a financial crisis. You learn this from long Keen Lord
Speaker 1: Kanes way long ago. What you end up doing is
Speaker 1: you cut taxes, you increase fiscal spending. You temporarily replace
Speaker 1: the collapse and demands from businesses and households with government.
Speaker 1: Then the economy begins to recover. You start to take
Speaker 1: that back and you normalize things. And if there's a
Speaker 1: little bit of monetary policy assistance, great, But in twenty
Speaker 1: eight and two thousand eight and two thousand nine, there
Speaker 1: was almost no real I mean, I mean it seems
Speaker 1: weird to say, yes, seven eight five billion dollars is nothing,
Speaker 1: but given the size of the financial crisis, that should
Speaker 1: have been a three four five trillion dollar multi year stimulus.
Speaker 1: Bernanke looked out at Congress and he had of meetings
Speaker 1: and he said, you guys have to do fiscal stimulus
Speaker 1: or we're going to hell. And they said, look, we'll
Speaker 1: give you carte blanche to do whatever you want, but sorry,
Speaker 1: it's not coming from us, right. What should the FED
Speaker 1: have done in response to that? Should Their response should
Speaker 1: have been, Hey, you guys are on your own. I'm
Speaker 1: gonna let the whole thing go to hell. You'll all
Speaker 1: get voted out of office because you will have screwed up,
Speaker 1: and then when the next crop comes in, I'll work
Speaker 1: with them, but this is on you, guys. M Jesse
Speaker 1: Martin or Paul Vulker would have told them to do
Speaker 1: just that jump jump in act. That would have been that, right,
Speaker 1: either you save the economy or it's the world's greatest
Speaker 1: recession and every one of you is unemployed and living
Speaker 1: in For me, first, first, I've written a weekly every
Speaker 1: single week since I left the FED in June of
Speaker 1: two thou fifteen. The very first thing that I wrote
Speaker 1: was how Congress abdicated to its authority to the Federal reserve,
Speaker 1: time for fiscal authorities to do their damn job. So
Speaker 1: what should the now Here we are in the elongated
Speaker 1: pansion and nine ten years following the eight or nine debacle,
Speaker 1: we get a giant tax cut, we get a giant
Speaker 1: fiscal stimulus. Is that just pro cyclical instead of countercyclical?
Speaker 1: Should that is that what we trillion dollars, what we
Speaker 1: should have done in oh nine or oh ten. Well,
Speaker 1: it was a little after the fact. What so what
Speaker 1: should be taking place on a basis that was that
Speaker 1: was blatantly political, and of course, of course it was
Speaker 1: as is the one that was just right just floated. Um,
Speaker 1: I have no idea what the hell that was? As
Speaker 1: is the one that was just floated for the summer. Oh,
Speaker 1: let's find a way to get more money into the
Speaker 1: stock market, and let's do a middle class tax cut.
Speaker 1: Obviously August July of a of an election year, that's political,
Speaker 1: and obviously politics is that's never gonna get. I don't
Speaker 1: even know hows get on the island because there are
Speaker 1: some potholes here in New York that are big enough
Speaker 1: that they could swallow a small car. I mean, you
Speaker 1: want to spend money infrastruction, sake, spend it on infrastructure. Everybody,
Speaker 1: everybody agrees. Why can't we do that? And by the way,
Speaker 1: it puts a lot of blue collar workers to our
Speaker 1: years stastic for years at a time. This is great.
Speaker 1: This is what we've been seeing. What we saw in
Speaker 1: the automobile sector worldwide as China urbanized, which was just
Speaker 1: a huge boom to the current recovery. That's what we
Speaker 1: saw with fracking, is it put blue collar people to work.
Speaker 1: Let me push back at you on that, well, at
Speaker 1: least in the state of Texas. I mean, you're making
Speaker 1: a hundred thousand dollars a year and fast. Read Saudi
Speaker 1: America by Bethany McClain, who basically says the entire low
Speaker 1: rate regime of the Federal Reserve is the only thing
Speaker 1: that's made fracking competitive with everything else because it's so
Speaker 1: capital intensive and it's all borrowed money. Oh gosh, it's
Speaker 1: all borrowed money. No, no, no no. I just wrote
Speaker 1: a recent paper on this, the the the growth of
Speaker 1: the Fed's balance. She literally moves in blockstep in block
Speaker 1: step with the growth of the energy industry. I didn't
Speaker 1: say it was free to build. I said it employed.
Speaker 1: It employed people who don't have college degrees. So it infrastructure,
Speaker 1: so does automobile. So here's a debate that I know
Speaker 1: you love to engage in on Twitter, and I just
Speaker 1: kinda watch from Afar. I engage in much dumber debates
Speaker 1: on Twitter. The repo market is what's driving the FED
Speaker 1: activity to inject more liquidly and that's spilling over to
Speaker 1: the equity markets, and that's why stocks are going higher.
Speaker 1: We look, we've discussed this again. You can try and
Speaker 1: see what happens if rates rise, if you step back,
Speaker 1: don't go to ten percent on overnight, go to four
Speaker 1: or five and see what happens. See how I don't
Speaker 1: even think that that would fly given the sensitivity, given
Speaker 1: the wall. Look, every time there's been a wall of refinancing,
Speaker 1: you would blow up what's left of the shale patch
Speaker 1: right now because there's so much paper that has to
Speaker 1: be refinanced this year and God help us next year.
Speaker 1: For the next five years, it's like seventy one billion
Speaker 1: sixties or four percent of shail debt has to be
Speaker 1: refinanced in the next five years. I was gonna say,
Speaker 1: isn't there like a wildly disproportionate amount of corporate debts
Speaker 1: associated with fracking? Like just so far it was invaded
Speaker 1: by you know, living in Texas, I'm like, what is
Speaker 1: this Greenwich private equity firm doing down here? Well, they
Speaker 1: got in the rain, had some money. I mean, they
Speaker 1: were going to build the tallest skyscraper in Midland, O
Speaker 1: Desk that was gonna be the tallest thing between Dallas
Speaker 1: and Los Angeles. But I mean thank that that funding
Speaker 1: was pulled. We would have ended up just about as
Speaker 1: good as the late nineteen eighties Rolls Royce Dealership in
Speaker 1: Midland O Desk. Do you remember in the eighties the
Speaker 1: sea through buildings in Dallas? They put up all these
Speaker 1: in Houston, they put up all these office buildings and
Speaker 1: they were unoccupied. You literally could see straight through from
Speaker 1: one of them. Today, every time I here a central
Speaker 1: banker talk about how much that the sanctity of the
Speaker 1: financial system and how much stronger our banks are, I'm like,
Speaker 1: you might want to reference your own data Federal Reserve
Speaker 1: on commercial real estate loans, on bank balance sheets, see
Speaker 1: and see that they've gone through the roof because of
Speaker 1: regulatory costs that we were associated with. Dodd Frank. Small
Speaker 1: and mid sized banks in this country are not in
Speaker 1: good shape. Small and mid sized banks are not in
Speaker 1: good shape. And why is there are there still small
Speaker 1: and midsized banks? Biball not know. Well, there's been a
Speaker 1: hell of a lot of consolidation. Asking the question, non bank,
Speaker 1: if you look at the holdings of both assets and
Speaker 1: loans of the top let's call it ten banks. It's
Speaker 1: like one and two and a half times what it
Speaker 1: was twenty years ago. It's it's really become wildly top heavy.
Speaker 1: So now we've had is impossibly big defense. So so
Speaker 1: now that we've had all this consolidation, what does that
Speaker 1: mean for the small and midsize It means it's not good.
Speaker 1: It means that. And this was something that was again
Speaker 1: internally debated at the FED. If you want to impose
Speaker 1: these capital requirements, if you want to impose these compliance requirements,
Speaker 1: do it for the big banks. But for god's sake,
Speaker 1: don't do it for small and midsized lenders. If you do,
Speaker 1: they're gonna go away out on the risk spectrum and
Speaker 1: make the crazy commercial real estate loans that they've got
Speaker 1: that they've got right now. And to be fair, they
Speaker 1: have set up different tiers of requirements for but this,
Speaker 1: I mean this, this happened long after the loans were made.
Speaker 1: All right, am I left? Before I get to my
Speaker 1: favorite questions, I have one question I have to ask you,
Speaker 1: what would it take to make you bullish on stocks?
Speaker 1: I'm not embarrished on stocks, alright, So your clients are
Speaker 1: very often investors and not just corporate entities and others.
Speaker 1: I say, as long as the as long as the
Speaker 1: FED is printing, they cannot be fought. So that's my
Speaker 1: biggest mistake in my entire career was that I knew
Speaker 1: when I left the FED with PTSD in a bad way.
Speaker 1: I knew in my guts that as long as they
Speaker 1: printed enough that they were going to hold up risky
Speaker 1: asset prices, it didn't matter what valuations were. That hasn't changed.
Speaker 1: I had to learn it the hard way. So as
Speaker 1: long as the FED is accommodative, and as long as
Speaker 1: they are not either reversing quee doing, unless there's a
Speaker 1: glaive tightening, unless there's a global calamity that is big
Speaker 1: enough to put the world in recession, I'm not. I'm not.
Speaker 1: I'm not somebody who thinks that we can completely decouple
Speaker 1: the entire Canadian yield curve is inverted, all of it,
Speaker 1: all the way at to thirty years. Mexico, where I'm
Speaker 1: presenting at the Bank of Mexico Bonxico next week. They're
Speaker 1: in recession. They're not getting out of recession anytime soon.
Speaker 1: We've never not been in recession. If Canada goes Germany
Speaker 1: for sure is in recession, has been for a good year,
Speaker 1: and they have flat whatever. Germany's in recession, and you
Speaker 1: just saw some really ugly employment data post pre coronavirus
Speaker 1: come out of Germany, so that industrial slowdowns and China
Speaker 1: is for sure whatever on a paper basis, at the
Speaker 1: very least, that's showing a giant drop in GDP, right,
Speaker 1: even if it's temporary, and even if they make up
Speaker 1: some of it. I mean, it's like all of a
Speaker 1: sudden and yelling because the favorite buzzword on Wall Street
Speaker 1: now is transitory. It's all transitory. It's all transitory. Hey,
Speaker 1: everything on this planet is transitory, including the planet. Well,
Speaker 1: and I get asked by people all the time, well,
Speaker 1: even if we go into recession, the FED can just
Speaker 1: keep printing. And even if we're going to recession, the
Speaker 1: stock market's going to stay up. And that's happened on
Speaker 1: rare occasions in the past. I'm not of the opinion,
Speaker 1: given where we are in the cycle, that that happens.
Speaker 1: I wouldn't disagree with you, So I'm curious if when
Speaker 1: people listen to this, how much they think you and
Speaker 1: I actually agree on and how much they think you
Speaker 1: and I disagree on because I'm asking questions very often
Speaker 1: playing a role and not necessarily. My job isn't to
Speaker 1: debate you. My job is to bring some of the
Speaker 1: questions other people have raised about some of the subjects
Speaker 1: you've talked about all people on planet Earth. You know,
Speaker 1: the person who wrote the expose A I had to
Speaker 1: learn after the fact, don't fight the Fed. Don't fight
Speaker 1: the Fed. So you're pretty constructive, and uh, what do
Speaker 1: you like leveraged on a long long how you're invested?
Speaker 1: I own a ton of municipal bonds on I own
Speaker 1: a ton of gold, and I'm not unhappy. Well, gold
Speaker 1: is approaching s I did well with gold in the
Speaker 1: two thousand's and once it, you know, peaked and reversed,
Speaker 1: I tapped out and said, I think you have to
Speaker 1: be bold, bold, bold in your asset allocations. I really
Speaker 1: really do. When there's as much global uncertainty as there is,
Speaker 1: central banks are the only game in town. Hell. I
Speaker 1: did well in Puerto Rico, but you have to be
Speaker 1: bold in your alleys. Gold should be no no no, no,
Speaker 1: no no no. Also, how much gold do you own
Speaker 1: relative to your portfolio? You should have, you should have
Speaker 1: in precious metals at a real time like this. Again,
Speaker 1: at a time like this, I tiptoed in about nine
Speaker 1: months ago. Wow, that is a bold And my Muni
Speaker 1: bonds have never I mean, throughout ups downs in betweens.
Speaker 1: Right now they're they're fat and there we've been, haven't
Speaker 1: we been in a forty year bond bull market. So
Speaker 1: whatever you own that's not junk has done pretty well.
Speaker 1: I wouldn't own a lot of corporate bonds in America
Speaker 1: to day. Huh, that's interesting. See, I break corporates into
Speaker 1: the you know, the B B plus and up, and
Speaker 1: then everything under that, even not the junk, even like
Speaker 1: the near junk, like I want. I don't want to
Speaker 1: own anything below B minus. I don't want to know.
Speaker 1: And a buddy of mine who used to work one
Speaker 1: of the big three credit rating agencies, the stories that
Speaker 1: I've heard right out of her mouth, the management is
Speaker 1: twisting arms to maintain investment grade ratings. I'm like, no, no,
Speaker 1: thank you, not in my portfolio. Does does anyone still
Speaker 1: really pay attention to the credit ratings after the debacle
Speaker 1: of A I G. And Lehman and I think, I think,
Speaker 1: and the whole financial crisis was the one lesson. There
Speaker 1: are many lessons, but the one lesson is, hey, credit agencies.
Speaker 1: They are like stock analysts whose job is to generate
Speaker 1: more syndicate business. They're not here for you, the bond buyer.
Speaker 1: There there for the bonds underwriter. We know that, but
Speaker 1: but shouldn't bond buyers know that Ianco has some insane
Speaker 1: numbers that he can trail out about the thousand firms
Speaker 1: and the fo thousand different registered investment advisors, and then
Speaker 1: millions of accounts that exist. They're all basically look like
Speaker 1: the same damn pie. One of the slices of that
Speaker 1: pie is an investment grade bondy TF that investment grade
Speaker 1: that makes mom and Dad sleep at night because they
Speaker 1: know it's money. Good. Well, guess what I would known
Speaker 1: half of whatever is in there? All right? So now
Speaker 1: I only have you here for another ten minutes. I
Speaker 1: have to get to my favorite questions because I know, um,
Speaker 1: there's some of your favorite questions. So let's uh on
Speaker 1: that happy note, let's jump right into these what what
Speaker 1: some people call our speed round. Um, and I'm gonna
Speaker 1: add a question. I'm gonna mix it up a little
Speaker 1: bit because I have to ask what was your first car.
Speaker 1: My first car was an Accura. It was a hatchback,
Speaker 1: but I can't remember the name of it. What year
Speaker 1: was it? Integra. Yeah, they had the little Integral car
Speaker 1: that you could get that with a five speed and
Speaker 1: toss it around. It was really based on a with
Speaker 1: with a transmission and tips. You just it's been tried
Speaker 1: a few times. Yeah, yeah, I mean, And don't get
Speaker 1: me wrong, like like I said recently, a bit of
Speaker 1: a car guy. Right to my first F one race,
Speaker 1: didn't want to leave. I'm like, no, no, you surely
Speaker 1: you can go a few more laps. I've been to
Speaker 1: the Daytona twenty four hours of Daytona. I left for
Speaker 1: two hours, came back. That's a tough race, you know what.
Speaker 1: But watching Italians cry in the rain when their engine
Speaker 1: blocks crack, there's something magical about That's if you you'll
Speaker 1: see more of that. Um what are you streaming? Listening to? Downloading?
Speaker 1: These days? So I'm not a big podcaster that? Um
Speaker 1: what about video? Amazon? Prime? Netflix? What are you watching? Um? So,
Speaker 1: I did just watch The Kaminsky Method, which I found
Speaker 1: so good, larious and perfectly It's like a two minute slice, right,
Speaker 1: It's great it's amazingly quick. Look serious radio. For me,
Speaker 1: I'm dating myself. It's just so awesome. If I'm in
Speaker 1: a particular mood, Hell, I can tell you eight on
Speaker 1: eighties or seventy on seventies or what are you listening?
Speaker 1: Sometimes I'm listening to Bruce for hours the Street Channel. Yeah,
Speaker 1: occasionally I'll even turn on Elvis. But I'm an alternative
Speaker 1: rock kind of a person. I'm I'm Channel thirty three.
Speaker 1: Uh So do you listen to Deep Cuts? Is that
Speaker 1: what that is? Or Vinyl Rewind? I don't know. Sometimes
Speaker 1: I do Vinyl Dot Classic rewind? And do you ever
Speaker 1: listened to comedy grades? No that I don't like nine
Speaker 1: and ninety seven? Check the note it's actually but I could,
Speaker 1: you know, but laughter is good for the soul, and
Speaker 1: I laugh very much being this huge FED critics. So
Speaker 1: I'm I'm going to find who are some of your
Speaker 1: early mentors who guided your career? So I would say that, um,
Speaker 1: the most important mentor was was Charlie excuse me, was
Speaker 1: Harvey Rosenblum. And Harvey took me under his wing. He
Speaker 1: was the director of research at the Dallas Fed. He
Speaker 1: was the right hand to Richard Fisher and um. He
Speaker 1: taught me how to be more accepting of of the
Speaker 1: school of economics and be less resentful. Even though my
Speaker 1: father may rest in peace. He taught economics and finance,
Speaker 1: and I said, never will I ever go there, But
Speaker 1: he here I am. He gave me a great respect
Speaker 1: for the school of economics, and I gave him a
Speaker 1: great respect for the financial markets. And it's been one
Speaker 1: of the loveliest collab collaborations of my career. Tell us
Speaker 1: about some of your favorite books. What are you reading?
Speaker 1: What sort of books do you like to read? So
Speaker 1: I like to read books that are almost off in
Speaker 1: their brilliance. The book that's had the greatest impact on
Speaker 1: my career is The Lords of Finance, hands down, lie
Speaker 1: Quad and I believe that one the Politzer Prize. I'm
Speaker 1: pretty sure it did. Yeah, it's wonderful, wonderful books about
Speaker 1: the four fed chiefs from the US, Germany, and France,
Speaker 1: and the parallels between pre crisis and pre World War
Speaker 1: One are just They're stunning, and it's well written, really
Speaker 1: well written, really really and I had no idea who
Speaker 1: he was until that book came out. You know, if
Speaker 1: it's for pleasure, you know, the last year's a quirky
Speaker 1: book that had history and it off of a Greek
Speaker 1: island called The Destroyers. That was fun. The Destroyers who
Speaker 1: wrote that, Oh gosh, I have no idea, The Destroyers,
Speaker 1: that's really interesting. And then and then Goldfinch. Thank god
Speaker 1: I didn't watch the movie. That's all I have to say, Goldfinch.
Speaker 1: Goldfinch is probably one of the best written books out
Speaker 1: there period endow. So if you've not read either of
Speaker 1: those who wrote Goldfinch, and I have no idea, I
Speaker 1: don't do authors. The Destroyers a novel by Christopher Boland, yep,
Speaker 1: that's it. Wow. And then let's see what Goldfinch has.
Speaker 1: Who wrote that? I think it's Goldfinch that when the
Speaker 1: pullets are actually uh The Goldfinch by Donna Tart and
Speaker 1: David Donna Tart. Wow. Alright, so that's three books. That's great.
Speaker 1: Lords of Finance, Gold Finch, and The Destroyers tell us
Speaker 1: about a time you failed and what you learned from
Speaker 1: the experience. Well, I learned not to fight the FED,
Speaker 1: even though I did it internally for nine years. But
Speaker 1: after I left the FED, I have learned how important
Speaker 1: liquidity is to the financial markets. I'm going to quote
Speaker 1: current Dallas uh FED president Robert Kaplan and say, let's
Speaker 1: see what happens if you take the liquidity away. So
Speaker 1: I've learned to not fight the FED. Quite interesting. What
Speaker 1: do you do for fun? What do you do when
Speaker 1: you're not UH in the office writing? I travel? I travel.
Speaker 1: I travel. I travel for fun almost as much as
Speaker 1: I travel for UM for work. And I'd always try
Speaker 1: when I'm traveling for work to have a little bit
Speaker 1: of fun in there, whether it's one of my favorite
Speaker 1: restaurants in New York or if I'm in London seeing
Speaker 1: something that I would never see when I when I
Speaker 1: had this big speech in Australia, Wow, it was life
Speaker 1: changing to see that beautiful country. Unfortunately, you know, before
Speaker 1: the big wildfires and um. Alright, so I don't know
Speaker 1: whether SS about the FED or general. I'll give you
Speaker 1: the option, what are you most optimistic about today and
Speaker 1: what are you most pessimistic about? So I'm clearly most
Speaker 1: pessimistic about the printing press running twin four seven, making
Speaker 1: us even more reliant on the largesse of the FED. Optimistic.
Speaker 1: I am optimistic because I'm close enough to my children
Speaker 1: and watching them get an education and learning about charter
Speaker 1: schools to begin thinking that there's some kind of grassroots
Speaker 1: desire to begin education reform, which I think is so
Speaker 1: much more important than anything else in this country. Is
Speaker 1: reforming education interesting? Uh? Speaking of education, a recent college
Speaker 1: grad came to you and said, I'm interested in a
Speaker 1: career in either filling the blank, journalism, economics, Wall Street.
Speaker 1: What sort of advice would you give them? So I'm
Speaker 1: going to switch it to being a recent high school graduate.
Speaker 1: I would tell them to go to college, fight the
Speaker 1: bullet and get an engineering degree. And after the engineering
Speaker 1: degree they can get a higher advanced degree in whatever
Speaker 1: they want. But to get an engine engineering to agree,
Speaker 1: there's many different forms of engineering in this world, many
Speaker 1: different stripes, but get that as your base. When I
Speaker 1: was in business school, when I got my NBA and finance,
Speaker 1: it was always those damn engineers who threw the curve,
Speaker 1: but they were there their raging successes later on in life. Huh.
Speaker 1: I don't care if it's law school or to become
Speaker 1: a doctor. After start with an engineering degree. I gotta say, Uh,
Speaker 1: I think that's pretty good advice. And our final question,
Speaker 1: what do you know about the world of monetary policy,
Speaker 1: Federal Reserve crisis management today that you wish you knew
Speaker 1: twenty years ago. I wish I would have known about
Speaker 1: the Group of thirty prior to joining the FED, meaning
Speaker 1: the nation Group of thirty. It is a group of
Speaker 1: thirty of the world's most powerful central bankers and financiers.
Speaker 1: I wish I would have known that that that existed,
Speaker 1: because it took me too long to figure out that
Speaker 1: all central bankers appear to be cut from the same stripe.
Speaker 1: And the reason that it is so difficult to extricate ourselves,
Speaker 1: it's because everybody around the world is using the same
Speaker 1: guide book. It's the same playbook. Quite fascinating. We have
Speaker 1: been speaking to Danielle de Martino Booth. She is the
Speaker 1: author of fed Up, an insider's take on why the
Speaker 1: Federal Reserve is bad for America. If you enjoy this conversation,
Speaker 1: be sure and look up an Inch or down an
Speaker 1: Inch on Apple iTunes and you could see any of
Speaker 1: the previous three or so such conversations we've had over
Speaker 1: the past five years. We love your comments, feedback in
Speaker 1: suggestions right to us at m IB podcast at Bloomberg
Speaker 1: dot net. Go to Apple iTunes and please give us
Speaker 1: a review. Be sure and check out my weekly column
Speaker 1: on Bloomberg dot com. Follow me on Twitter at rit Holtz.
Speaker 1: Sign up for the Daily Reads at rid Holtz dot com.
Speaker 1: I would be remiss if I did not thank the
Speaker 1: Crack staff helps me put this little conversation together each week.
Speaker 1: Mark Siniscalchi is my audio engineer. Sam Chivraj is my producer.
Speaker 1: Michael Batnick is my head of research. I'm Barry Ritolts.
Speaker 1: You've been listening to Master's in Business on Bloomberg Radio