The transcript from this week’s MiB: Danielle DiMartino Booth, is below.
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MALE VOICEOVER: This is Master’s in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: This week on the podcast, I have a special guest. Her name is Danielle DiMartino Booth. And full disclosure, know each other for way too long. We spent way too much time fishing, debating economics, markets, the Fed, which Cabernet is better, making fun of some — some mutual acquaintances who shall go nameless.
And I brought her on the show this week to talk about her book, “Fed Up,” as well as to discuss and debate economic policy, the Fed, the markets. And honestly, I had way too much fun. If it sounds like were arguing, it’s because we just know each other too well and it’s particularly shorthand.
So, if you’re at all interested in everything from the Federal Reserve to repo markets to Alan Greenspan, you’re going to find this to be an absolutely fascinating conversation. So, with no further ado, my discussion with Danielle DiMartino Booth.
MALE VOICEOVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: My special guest this week is is Danielle DiMartino Booth. She is the CEO and Chief strategist of Quill Intelligence, a research and analytics firm, which she authors commentary with actually fairly rabid following. Previously, she served nine years at the Federal Reserve Bank of Dallas where she was a chief advisor and Wall Street liaison to President Richard Fisher.
She is the author of “Fed Up: An Insider’s Take on the Why Federal Reserve is Bad for America” as well as somebody I’ve known for, I don’t know …
DIMARTINO BOOTH: About 10 years now.
RITHOLTZ: A decade?
DIMARTINO BOOTH: Yes.
RITHOLTZ: Danielle DiMartino, welcome to Bloomberg.
DIMARTINO BOOTH: It’s awesome to be here.
RITHOLTZ: So, you and I have known each other for a long time and it’s weird asking you questions that I asked you a decade ago but for the sake of the audience, I’m going to pretend we hardly know each other and start with, so Danielle, how did you begin your career on Wall Street?
DIMARTINO BOOTH: Well, it was something of a circuitous route. I was born to be a writer. I was accepted at the NYU Scholars Program. I was going to travel. I was to be an esteemed, very poor journalist. And my …
RITHOLTZ: Covering what? What sort of things interested you in your …
DIMARTINO BOOTH: My forte when I was younger was sports writing.
DIMARTINO BOOTH: Yes. Things people would never guess about me. Put that right up there at the top. Yes. Huge fan of sports and cars.
But anyways, my parents ended up splitting up around then. My father told me that he hadn’t paid his taxes for the better part of the last decade and good luck with the financial scholarship — financial aid that I needed for the other half that wasn’t covered by this great big scholarship to go to NYU.
So, I found myself at San Antonio College. So, I am the product of a community college where I started. I went off to the local University of Texas. Move my way up. After a few years, became business scholar. Just study, study, study. That was all that I could do to figure out how to get back to where I thought I was starting when I was getting out of high school.
RITHOLTZ: Am I misremembering? Didn’t you get into MBA from the University of Austin? A very, very respected school.
DIMARTINO BOOTH: Yes. I’ve got my MBA in finance there. The year that EDS actually opened up a trading floor. One of my great mentors, Dr. Keith, he’s the person I literally earmarked money to the finance department. Even though he made me — he made me pull apart the Black Scholes and then showed me how to put it on my calculator.
It took me a few years, really, to forgive him for that. But in any event, so I …
RITHOLTZ: So, wait, when you say EDS, you’re talking Ross Perot’s electronic data system that — that was located in Texas?
DIMARTINO BOOTH: Way back when.
DIMARTINO BOOTH: Inside the business school, we had our own trading floor and we had our own fund. And it was fun. I mean, it was actual money.
RITHOLTZ: God. What’s more fun than being a trader in the ’80s? Come on!
DIMARTINO BOOTH: Well, when you’re in your early 20s.
RITHOLTZ: So, how do you end up going from there to Credit Suisse and DLJ?
DIMARTINO BOOTH: Some guy at Salomon Brothers came to one of these informational interview type things on campus and what he had to say sounded pretty interesting to me. He said come on up anytime you like. I said how’s next week work for you?
So, that’s — I’ve looked out on the Salomon Brothers trading floor which was two stories tall.
RITHOLTZ: You started at Solly …
DIMARTINO BOOTH: No, no. That was the first time I’d ever seen anything Wall Street.
DIMARTINO BOOTH: Anything. And I looked out and there were probably like 400 guys and like three girls.
DIMARTINO BOOTH: And that was it and I went — look at the ratio.
RITHOLTZ: That’s really interesting for two reasons. One is, I had a similar experience very, very early in my career.
DIMARTINO BOOTH: You wanted to become a waitress?
RITHOLTZ: Interviewing at the Merrill Lynch trading floor which was a football field but it was the same ratio.
DIMARTINO BOOTH: Yes.
RITHOLTZ: All white dudes.
DIMARTINO BOOTH: Yes. Absolutely. You know what? It’s the first and last time in my entire life I’ve had credit card debt. First and last time.
RITHOLTZ: When you moved to the city?
DIMARTINO BOOTH: Banging on doors on Wall Street.
RITHOLTZ: So, how did you end up …
DIMARTINO BOOTH: Lehman Brothers, Goldman Sachs, Morgan Stanley, Bear Stearns, you name it.
RITHOLTZ: You dodged a few bullets in that list.
DIMARTINO BOOTH: I dodged — hey, look, Arthur Andersen wanted to keep me after business school and fast track me to becoming an auditor and then become a strategist of some kind and they were working with this big company in Houston called Enron.
DIMARTINO BOOTH: So, I’m like — and my mom’s like you’d be staying in Texas, honey. And I’m like, I am so out of here.
She’s like, DLJ, DLJ. What is that? Like a transportation company? I’m like, no, mother. It’s not DHL. It’s DLJ.
DIMARTINO BOOTH: And.
RITHOLTZ: That was your first gig out of business school.
DIMARTINO BOOTH: That was my first gig out of business school. It was the best place to work. I mean the entire firm. That first Christmas year in 1996 fit in the Rainbow Room. Crazy stuff went on back then.
RITHOLTZ: So, that was before the …
DIMARTINO BOOTH: But it wasn’t all divisions.
RITHOLTZ: That was pre-purchase, right?
DIMARTINO BOOTH: Way pre pre-purchase. Way, way, way.
RITHOLTZ: And when did they get bought?
DIMARTINO BOOTH: Tony James and his infinite wisdom saw the peak and sold the firm at the very top of the bubble. This was like ’00. I mean Credit Suisse …
RITHOLTZ: Good timing.
DIMARTINO BOOTH: … just finished writing off a few billion extra dollars from the DLJ purchase.
DIMARTINO BOOTH: Yes, yes, yes, no. No, no. I mean, they wrote off billions of dollars for years.
RITHOLTZ: So, what did you do at DLJ?
DIMARTINO BOOTH: I sold all kinds of things to all kinds of people.
RITHOLTZ: Bonds? Equities? Derivatives?
DIMARTINO BOOTH: Bonds, equities. I did share buybacks. I did a lot of debt retirement working with the former Drexel boys who DLJ’s junk-bond desk had absorbed.
DIMARTINO BOOTH: They were so mischievous. That’s the nicest word I can come up with.
DIMARTINO BOOTH: But I had mutual fund companies. I had some high-net worth investors. But it was really the debt retirement, the junk bond, the private equity. I mean, like I said, Tony James sold the firm and then obviously, he went on to Blackstone and a great career. But Leon Black walked the halls.
I mean, DLJ had a beautiful merchant bank …
DIMARTINO BOOTH: … before private equity was a thing.
RITHOLTZ: Right. So, how do you do the transition from the bleeding edge of capitalism to, I know, I’ll go in-house at the government and work for the Fed? How did hat come about?
DIMARTINO BOOTH: Well, OK, so the Suisse were not near as much fun as DLJ.
RITHOLTZ: By the way, overseas investors always tend to top tick the market or bottom tick it if they’re sellers.
DIMARTINO BOOTH: Bless them.
RITHOLTZ: So, not a surprise.
DIMARTINO BOOTH: No.
RITHOLTZ: How long did you stay with Credit Suisse for?
DIMARTINO BOOTH: Eight whole long months.
RITHOLTZ: And so, that gets us to around ’02.
DIMARTINO BOOTH: And by the way, I was getting my second Masters at the time because I’m — I’m Italian. I hold a grudge. So, I — but instead of NYU, I went to Columbia, the best journalism school at night and got my second degree in journalism, finally.
DIMARTINO BOOTH: Finally got my lifetime dream.
RITHOLTZ: I never knew that about you.
DIMARTINO BOOTH: I did.
RITHOLTZ: Who was the dean while you were there?
DIMARTINO BOOTH: Gosh. Now, you got me because I was only there …
RITHOLTZ: Bill Grueskin?
DIMARTINO BOOTH: No. No. He was only there …
RITHOLTZ: Was he there when you were there?
DIMARTINO BOOTH: No, he was only there for one year.
DIMARTINO BOOTH: And then he left. But it was …
RITHOLTZ: And now he’s back there.
DIMARTINO BOOTH: One of the most transformative moments of my life was — I graduated in December of ’01, was not being able to go to work on Wall Street after 9/11, but having to report to campus the next day, Wednesday.
RITHOLTZ: Well, it’s the other direction. So …
DIMARTINO BOOTH: The 12th.
DIMARTINO BOOTH: But being in journalism school on 9/11, I mean …
DIMARTINO BOOTH: I mean, I was the oldest part-time student they’d ever seen.
RITHOLTZ: You were also on institutional trading desk when the dot-coms were imploding, what was that experience like?
DIMARTINO BOOTH: Well, so it was really — it was the Enron experience and the Dynegy and all of the — you could tell that these were shady deals.
DIMARTINO BOOTH: It’s like why do you keep your Enron price target at 40? Stock hadn’t done anything in forever. I mean, one analyst is raking away a couple million of dollars per debt deal …
RITHOLTZ: Well, the syndicate business to be done, so we’re going to keep our price target high.
DIMARTINO BOOTH: Look, that’s where we are, wait, today. So, but the Enron and the Dynegys of the world kind of set us up for recognizing the Internet bubble when it was staring you in the face.
RITHOLTZ: So, what led you to the move from the bleeding edge of capitalism to going inhouse at the Dallas Federal Reserve?
DIMARTINO BOOTH: So, that was 9/11, 9/11 was a big turning point for me, personally. Shortly thereafter, a few weeks after 9/11, I met my current husband and we started long distance dating between Dallas Texas and New York. And when the time came, I said, well, just move on up here to Manhattan and he said you go out six nights a week and think it’s normal. So, that was that.
I ended up moving to Dallas. I signed a noncompete and agreed to leave the industry.
DIMARTINO BOOTH: I called the publisher of the “Dallas Morning News” and I said I’ll work for free. I’m retired. They just — Credit Suisse wrote me a big check to leave, and basically, the book went to the junk-bond desk.
RITHOLTZ: Got you.
DIMARTINO BOOTH: So, I tootle away with …
RITHOLTZ: That’s right. You were publishing at the “Dallas Morning News” …
DIMARTINO BOOTH: … as a reporter.
RITHOLTZ: … for a while. Did you ever meet Bill Deener over there? I remember …
DIMARTINO BOOTH: I did. Yes, yes, yes.
RITHOLTZ: I remember his …
DIMARTINO BOOTH: Yes. I mean, I was …
RITHOLTZ: He’s a really good writer.
DIMARTINO BOOTH: I was rarely in the newsroom per se because I kind of walked in and wrote my own rules because I could.
RITHOLTZ: You don’t need a salary. You don’t want it.
DIMARTINO BOOTH: I’m, like, I’m working for free here.
RITHOLTZ: Here’s what I’m doing.
DIMARTINO BOOTH: But within a few months, I actually was the first daily columnist that they’d ever had in the history of the paper. So, I was writing up a daily about the markets and I was just as happy as happy could massively be.
RITHOLTZ: I could imagine. Quite fascinating.
So, you finally have your dream job in journalism, working at — what’s the paper in Dallas?
DIMARTINO BOOTH: The “Dallas Morning News.”
RITHOLTZ: “Dallas Morning News” and what has you leave a job you had always wanted to go into this crazy semi-government thing called the Fed?
DIMARTINO BOOTH: So, I start writing about things that had bothered me Wall Street like the first CDO, for example, that was sold Credit Suisse. I’m like who would buy that equity tranche? This is ’01-’02.
RITHOLTZ: That’s a good equity tranche. Did you see the vig (ph) attached to that?
DIMARTINO BOOTH: Yes.
RITHOLTZ: That’s some fat commissions.
DIMARTINO BOOTH: Yes. Exactly. But I started wondering about these things. I started writing about the national debt, got the attention of Warren Buffett. So, he invited me out to Omaha. I actually spent a lot more time with Charlie Monger at the …
RITHOLTZ: Who I just find so amazing.
DIMARTINO BOOTH: He basically said that the efficient frontier is going to go the way the dodo bird if the pension advisory industry doesn’t change its ways and the Federal Reserve continues to be overly intrusive. I just condensed a 30-minute conversation that I had with him but he’s right and he’s getting righter every day. He might not live to see the change, but he is right.
RITHOLTZ: I would push back and say, so far he’s been completely wrong because all the bad things that people have predicted about that have yet to come true.
DIMARTINO BOOTH: Well, they’ve definitely yet to come true. But what he said was it might not happen in my lifetime.
RITHOLTZ: Well, he’s 96, so that’s not saying a lot.
DIMARTINO BOOTH: Exactly. He’s — he is 96 but I don’t think that he passive coming in the way that it’s come when passive investing. And Jay Powell walked into a bar, it’s a beautiful thing. You don’t fight him. You let them run hand-in-hand.
I don’t want to get off on some …
RITHOLTZ: We’ll, talk about that more because it’s a fascinating topic.
DIMARTINO BOOTH: It is.
RITHOLTZ: How did you end up at the Dallas Fed?
DIMARTINO BOOTH: So, I started working some with Jan Hatzius and he was working …
RITHOLTZ: Goldman’s economist.
DIMARTINO BOOTH: Goldman’s economist. He was just a rookie back then and he was doing a lot of great work on what Alan Greenspan had been working on mortgage equity withdrawal.
So, I started writing intensely about the housing crisis. And at one point, the publisher was like, do you know what systemic risk it is? And I’m like, actually, I do. He’s like you’re saying that this is going to be global and systemic in nature? This is ’05.
DIMARTINO BOOTH: And he’s like you’re nuts.
RITHOLTZ: And if you look in the right place, there was an overwhelming amount of data. But if you looked in the usual place, everything was fine.
DIMARTINO BOOTH: It was absent. Right.
DIMARTINO BOOTH: Who knew what a German Landesbank was? I didn’t know until Lehman blew up.
In any event, I did get a call one day from Richard Fisher and he took me to lunch. And said, look, you’re wasting your talent. You should be at “The Wall Street Journal”, “The Economist.” What are you doing here in Dallas Texas? And I’m like — I couldn’t tell him, I do have my shoes on but I’m very pregnant.
In any event, within a few months, he asked me to come join and — the Fed …
RITHOLTZ: And what and what was your title?
DIMARTINO BOOTH: Gosh, I started off as like a dishwasher.
DIMARTINO BOOTH: As a writer in the research …
RITHOLTZ: Research assistant. Yes.
DIMARTINO BOOTH: Research department. No, not a research assistant. I came in as somebody to help with his speech writing.
DIMARTINO BOOTH: And …
RITHOLTZ: So, you were an aide to the president of the Dallas Fed.
DIMARTINO BOOTH: And it evolved into the more — he got his sea legs and realized that the New York Fed market’s intelligence which you’re kind of obligated to take if you’re running a district, the New York Fed market desk conducts intelligence with the broker-dealer community. It’s actually in ink on their website.
DIMARTINO BOOTH: So, as Joe Q president, whether it’d be Minneapolis or Cleveland or Dallas, Texas, your assistant take all of your market intelligence from the New York Market’s Desk which kind of reads like sell side research which Richard figure out really quickly because he’s not …
RITHOLTZ: So, let’s …
DIMARTINO BOOTH: … Ph.D. in economics, neither am I. We’re both MBAs in finance.
RITHOLTZ: So, let’s talk about something you sort of snuck in there which is until he got his sea legs. Because I was one of several people pretty critical of him in the early days and I want to throw some stuff at you and have you either defend him or not. June 2005, Richard Fisher told CNBC, we are clearly in the eighth inning …
DIMARTINO BOOTH: Inning.
RITHOLTZ: … of the tightening cycle and we of the ninth inning coming up at the end of June. Lots of people began calling him (inaudible) Fisher. I’ll take a little blame for that as well. Why did he think that we were so far along the tightening cycle when it was clear Greenspan had a different agenda?
DIMARTINO BOOTH: Greenspan did have a different agenda. There was nothing macroprudential going on. Greenspan at the time said that because the Fed only technically regulated 25 percent of mortgage lending in America, that’s the only thing that the Fed was responsible for policing. There are were a few other people inside the institution were have a different opinion because in the event that there was a falling knife and something went wrong with the subprime explosion, the Fed might be catching the entire falling knife.
RITHOLTZ: Before we even get to the subprime issue, which I think you and I are very much in agreement of, ’05, we had already seen gold take off. We had seen inflation take off.
Oil was probably half way on its way to 150. Milk, beef, food stuffs, everything was moving up. It was pretty clear that there was a lot of inflation in the system even as the dollar got weaker and weaker and weaker, so that’s the question is — was he just a little green and naïve or did he simply not see what I described as rampant inflation everywhere except the statistics?
DIMARTINO BOOTH: I think he saw the inflation. But I think more importantly, what he saw too early on, and this is a lesson I think a lot of people who’ve been inside the Fed and lived to tell learn, it’s that easy monetary policy can elongate any cycle.
RITHOLTZ: For sure.
DIMARTINO BOOTH: Any cycle. And right now, we’re in the longest elongation. So, even when …
RITHOLTZ: The longest elongation.
DIMARTINO BOOTH: We’re in the longest elongation. It’s been lower for longer than it ever has.
RITHOLTZ: That’s going to be my first tattoo.
DIMARTINO BOOTH: Yes.
RITHOLTZ: That’s pretty -that’s pretty interesting. So, was he just unaware of how that played out?
DIMARTINO BOOTH: I think he thought that because he had Wall Street contacts and because he was speaking to hedge funds and because he knew that there was 125 percent LTV toxic garbage that was trading hands, that surely, this had to give, well, it had some more gas in the tank before it did give.
RITHOLTZ: A whole lot more. So, let me give you another question, another quote. We’re going to fast-forward to 2008.
DIMARTINO BOOTH: And bear in mind, we didn’t always agree with each other.
DIMARTINO BOOTH: I know that about you, generally. But knowing your economic world for you and your politics, I could see you respectfully disagreeing with him. And then getting to say I told you so afterwards in a very polite, different verbiage …
DIMARTINO BOOTH: Richard, if you’re listening, I’m still waiting for the opportunity.
RITHOLTZ: So, 2008, the crisis is expanding. There’s an FOMC meeting in June and then another one in August. The Fed had left rates at two percent at both meetings. There was one dissenter, one Richard Fisher, president of the Dallas Fed, the sole dissenter was Richard Fisher who at both meetings, quote, “preferred an increase in the target for the federal funds rate,” unquote. This is in the middle of 2008, what was he smoking?
DIMARTINO BOOTH: Again, he is much more of an inflation bogeyman, Weimar Republic, speaks fluent German, give speeches in Germany in German.
DIMARTINO BOOTH: He’s much more of that generation than I am. I’ve learned from Lacy Hunt.
DIMARTINO BOOTH: That the more debt you create as long as that debt’s going to be absorbed by whatever the system is because you’ve got reserve currency status, the only thing that that incremental dollar of debt’s going to potentially create is deflation because you’re taking away money that you would otherwise spend on something else in order to service the debt.
DIMARTINO BOOTH: So, there’s always going to be a deflationary impetus if you’re allowed to grow your debt to levels that Richard would’ve thought would have created hyperinflation.
RITHOLTZ: That makes sense. You have a giant monetary activity, should be somewhat deflationary versus a giant physical activity which should be more inflationary.
DIMARTINO BOOTH: And I was also of the opinion at the time — again, he and I were not in — he and I were in agreement on a two percent floor. I’ll say that outright.
RITHOLTZ: In ’08.
DIMARTINO BOOTH: Yes. Period.
DIMARTINO BOOTH: Forever and ever. I think that had we started (ph) at two percent, we would have a much different world today than we do.
RITHOLTZ: I wouldn’t disagree with you at all.
DIMARTINO BOOTH: It was liquidity. It was the alphabet soup of God knows what acronyms that I was involved and helped the New York markets desk setup for the asset-backed securities market and you name the market. It was liquidity that was frozen.
The price of credit was meaningless at the time to any investor — nobody was extending credit at any price.
RITHOLTZ: Right. It was — it was a function of everything being frozen and unavailable, not expensive.
DIMARTINO BOOTH: Right. Right.
DIMARTINO BOOTH: We did not have to go to the zero bound.
RITHOLTZ: So, here’s the — here’s the big question, right? You’ve been a pretty big fed critic for a long time. I think you and I both agree the — there’s some overlap. I think the Fed’s ultra-low rates, and I wrote this in “Bailout Nation” is one of many causes of the financial crisis. I think you put more weight on that in “Fed Up.”
You really say that is where it all begins and ends. Here’s what we disagree and this is one I’m fascinated about. As much as I give them an F for all their actions leading up to the crisis, I give him a B+ following the crisis. What sort of ranking would you give them? By the way, that’s just during and immediately after normalizing rates over the past decade, I think, they’re way behind the curve.
But we’ll come back to that. How would you grade the Fed for their response immediately to the crisis in, let’s call it ’08, ’09 and even 2010?
DIMARTINO BOOTH: I would probably give them not an F but I would probably give them a C- for adhering to the Bernanke doctrine which was an agreed-upon at Jackson Hole in 2007 with a very small group of FOMC members, by the way, which was — is kind of against the rules.
But in that meeting, it was decided that a precondition to growing the balance sheet, if the time came, right, this is August of ’07.
DIMARTINO BOOTH: If the time …
RITHOLTZ: The market still having made their high which doesn’t show up till October ’07.
DIMARTINO BOOTH: Exactly. So, if it came to pass that they needed to start growing the balance sheet, quantitative easing, heading to Japan, whatever you want to call it, the Bernanke doctrine dictated the interest rates must go to the zero bound first. That is — that’s why I give him the C-.
RITHOLTZ: As opposed to a B+?
DIMARTINO BOOTH: As opposed to stopping at — had they stopped at two, I would’ve given them at a B+ because of all of — because the of the Pandora’s box that was opened by going to the zero bound …
RITHOLTZ: So …
DIMARTINO BOOTH: … in the later years.
RITHOLTZ: So, here’s where I think you and I will find more common grounds, post — let’s just call it 2010, ’11 through 2020, I’ve been waiting for them to normalize rates and I know some people think this is the, quote, “greatest economy ever” but why, if this is such a good economy, haven’t rates return to a more normal level instead of what’s still incredibly accommodative?
And I know we could blame where’s the 30 year? The 10 years, it’s like 155, day before we recorded this. So, you could blame the bond market. But really, shouldn’t the Fed have been further along the normalization process and off-emergency footing or am I just crazy?
DIMARTINO BOOTH: Look, QE2 and QED3 were outright mistakes, in my opinion. Would we have suffered a mild and shallow recession? It’s impossible to look in any rearview mirror.
But we knew at the time that we were creating zombies. I wrote …
RITHOLTZ: Zombie banks or zombie people?
DIMARTINO BOOTH: No, no. Well, we …
RITHOLTZ: And I mean …
DIMARTINO BOOTH: We facilitated …
RITHOLTZ: And I mean like politicians and others.
DIMARTINO BOOTH: We facilitated the saving of zombie banks.
DIMARTINO BOOTH: That’s different. I’m talking about giving birth to zombie corporations. I did an entire briefing on what the potential ramifications would be in the future of cutting a default rate cycle in the high-yield market in half.
RITHOLTZ: So, I have to stop you here and go over each of those zombie banks and zombie corporations. Zombie banks, let’s do first, because I think that’s the easy one.
Zombie banks are banks that, and again, tell me where we disagree because I think there’s a lot of daylight between us. Hey, if you’re a Citibank or Bank of America or whoever and you have all these really good assets and you’ve all these really bad debts, well, there’s this lovely building downtown in Manhattan that’s got these beautiful columns and it’s called the Federal Bankruptcy Court.
And if you are bankrupt, for lack of a better term, you go down there and you do a Chapter 11 reorg and you take the good parts of the bank and you spin it out and you take the debt. There’s no such thing as toxic debt, there’s just toxic prices. This junket at a dollar 90 or 80 is fabulous at 15 or 20 or 25.
DIMARTINO BOOTH: Twenty-two cents on the dollar, (inaudible).
RITHOLTZ: There you go. So, you turn around. And now, you’re ripping the Band-Aid off and maybe we end up at Dow 5,000. But now you have a clean, healthy — Bank of America is my favorite example. Here’s Bank of — here’s Merrill Lynch spinning out. Here’s Bank of America spinning out.
Here’s — who else did they acquire in the last couple of years before the — here’s Countrywide Mortgage.
DIMARTINO BOOTH: Countrywide. Yes, that’s a good one.
RITHOLTZ: So, you end up with all these — so, am I — and I’m talking way too much. But I’m literally talking my book. But is that how you avoid zombie banks and, the pretty building downtown?
DIMARTINO BOOTH: That would have been how you would have avoided zombie banks and you wouldn’t have institutionalized too big to big to be fail with stupid legislation, I was trying to find a polite word.
DIMARTINO BOOTH: And you wouldn’t have …
RITHOLTZ: You could cuss, we’ll just bleep (ph) it out.
DIMARTINO BOOTH: … let them go downtown to the other place downtown, the other Fed on Liberty Street, and instead, just go knock, knock, knock, I need to see somebody. I’ve got a problem.
RITHOLTZ: Right. So, the second question is zombie corporations. What is a zombie corporation?
DIMARTINO BOOTH: So, a zombie corporation is a corporation — our mutual friend, Jim Bianco, who started fishing the same year we did, he’s written a lot of great things, I think about 14 percent of the U.S. stock market is — are considered be zombie corporations. They couldn’t last like one or two if — if the coronavirus doesn’t go away, we’re going to have a handful of companies that go poof into the night because they can’t handle one or even two quarters of operating themselves because they’re so indebted.
RITHOLTZ: Meaning, so — now, what is the normal zombie corporation overly leveraged, too much debt ratio, typically? If it’s 14 percent now, what was it in the ’80s? What was it in the ’90s? Or is that …
DIMARTINO BOOTH: No, no, no. It’s 14 percent of stocks in America are zombies.
RITHOLTZ: So, is it — when you 14 percent stocks, is it 14 percent of the companies in America?
DIMARTINO BOOTH: Fourteen percent of the publicly traded …
RITHOLTZ: OK. So …
DIMARTINO BOOTH: … companies in America.
RITHOLTZ: So, what has that been historically?
DIMARTINO BOOTH: Well, if you look at it overtime, it’s been in the single digits. We’ve always had walking wounded.
RITHOLTZ: So, it’s double what it usually is.
DIMARTINO BOOTH: Yes. But …
RITHOLTZ: And ultra-low rates goes the argument, allows them to refinance cheaply. And so, companies that should, again …
DIMARTINO BOOTH: Otherwise …
RITHOLTZ: Again, other companies that should find that pretty building with the columns …
DIMARTINO BOOTH: Take out the debt rot — take out the yucky capacity, make room for new entrants to put in efficient capacity, you get innovation.
RITHOLTZ: And so, this is about double what it historically has been, if I’m reading you correctly.
DIMARTINO BOOTH: If I’m quoting Jim correctly, yes.
RITHOLTZ: All right. Jim, we’ll get you on the show to follow up and do another version and continue this conversation.
My special guest is Danielle DiMartino Booth. She is the author of “Fed Up: An Insider’s Take on Why the Federal Reserve is Bad for America.”
So, I got to call you out on the title right away. The Federal Reserve is bad for America? I mean, they’ve made some mistakes. Are they really all that bad for America?
DIMARTINO BOOTH: Well, when Jay Powell first gave his first congressional testimony, when he said it’s not the Fed’s job to backstop the stock market, I went you know what? We might have to go back and fix that subtitle because it looks like we have an adult in the room.
RITHOLTZ: Right. Now, a lot of this could be described as Alan Greenspan, an acolyte of Ayn Rand who believed in as little government intervention into the economy in the marketplace as possible, was constantly changing rates and doing what Wall Street wanted him to do, aren’t you really complaining that Greenspan was not a great Fed chief?
DIMARTINO BOOTH: It — for me, at least, and you can talk to people about the era in between Wayne McChesney Martin, my absolute favorite Fed chair of all time and the …
DIMARTINO BOOTH: … and the only other one I liked …
RITHOLTZ: Not Paul Volcker?
DIMARTINO BOOTH: Paul Volcker, my second favorite one.
RITHOLTZ: There you go. All right.
DIMARTINO BOOTH: They’re my two favorites.
DIMARTINO BOOTH: Because they were really the only two who — they had a go-to-hell button. They just hit it, go to hell. Go to hell. Go to hell.
And they did what they needed to do for the country. In his biography, I mean, there was somebody like living with them for two years practically to write this big Alan Greenspan biography. The guy admits that he enjoyed being popular for the first time.
DIMARTINO BOOTH: that he was like, wow, I’m like really, really popular with these politicians. They’re paying attention to everything I say. All they want is for the stock market to keep going up. Surely, I can figure that out.
DIMARTINO BOOTH: And so, he had a briefing on his desk every single morning. Some schmo had to wake up and write it at 5:30 in the morning and he had his stock market briefing every single day.
RITHOLTZ: I think he is the first Fed chief with a Bloomberg terminal on his desk.
DIMARTINO BOOTH: I — it would not surprise me. It will not surprise me.
RITHOLTZ: Which is shocking (ph).
DIMARTINO BOOTH: Look, I always tell people, they’re like when did your anger start? And I’m like October the 20th 1987.
RITHOLTZ: So, go back to that because that’s kind of fascinating. He came in in the summer of ’87.
DIMARTINO BOOTH: August of ’87.
RITHOLTZ: And following the crash which was really as much plumbing and other issues following a huge recovery from ’82 to ’87, he cuts rates, and basically, my pet theory has been the audience applause just washed over him and it felt so good, he wanted another hit of that.
DIMARTINO BOOTH: Absolutely. On October the 20th, instead of presenting in Dallas, Texas, he got on an airplane, flew back to Washington, D.C., released a statement that said the Federal Reserve in my new popular life is now going to backstop the banking and financial systems. OK, the middle part, I put in there. But the banking and financial systems were part of a very short statement that the Fed released the day after the stock market crash.
RITHOLTZ: Which is quite shocking.
DIMARTINO BOOTH: This was the hardest thing to get past the lawyers for the books. In the days and the weeks and the months that followed, he’s got the guys on the New York markets desk death calling bond desks all across the Street and saying were about to inject liquidity, just so you know, wink, wink.
RITHOLTZ: Get out of the way.
DIMARTINO BOOTH: So, they’re frontrunning that Fed. They’ve been taught since the weeks and months that followed 1987 that they can front run the Fed.
RITHOLTZ: So, here’s the pushback, hey, isn’t it easier if Fed gets Wall Street traders to do their business and now they could be a little less interventionist and then we have to make the injection as big because the bond traders are doing their work for them.
DIMARTINO BOOTH: Yes, good luck with that.
RITHOLTZ: People have said that many, many times. I hear all the best people say that.
DIMARTINO BOOTH: On what basis? I mean, look what happened with this repo thing recently.
DIMARTINO BOOTH: That’s a few huge banks. Basically, throwing their weight around the financial system.
RITHOLTZ: And by the way, when I was researching my book, I was shocked to learn that the Fed chief had the power to raise or lower rates on his own, the FOMC clipped his wings because he was doing it way too much.
So, how much of …
DIMARTINO BOOTH: Nothing corrupts like power.
RITHOLTZ: That’s exactly where I was going to go. How much of the current criticism of the Fed traces back to Alan Greenspan as a deeply flawed chairman?
DIMARTINO BOOTH: Well, it wasn’t so much Alan Greenspan the deeply flawed chairman had he not had two successors in his wake who adopted identical philosophies. It’s just — each iteration of successor was even more afraid of their shadow than the prior.
RITHOLTZ: How do you describe what should be the proper role of the central bank in a country like the United States?
DIMARTINO BOOTH: I would think that the best role for the Fed to play is making sure that the dollar you pull out of your wallet, A, you can still pull out of your wallet. Sorry, Ken Rogoff. But B, it’s worth the same amount of money tomorrow that it is today.
RITHOLTZ: The dollar is very strong lately. We’re the cleanest shirt in the hamper relative to the yen. The euros, the pound sterling, wherever you look in the world, the dollar is — even the won isn’t really doing a whole lot of much.
So, after a decade of QE one, two, three plus twist and all this other stuff, you still have a very robust U.S. currency doesn’t that suggest the Fed hasn’t damaged that purchasing power?
DIMARTINO BOOTH: Well, there is that second mandate that has caused the Fed to completely go off the rails and that is minimizing unemployment rate or maximizing employment. That was given to them in ’77, ’78 by Congress.
RITHOLTZ: Right. In the middle of a huge bout of …
DIMARTINO BOOTH: Yes. Absolutely. No doubt.
RITHOLTZ: … stagflation.
DIMARTINO BOOTH: But again…
RITHOLTZ: High unemployment.
DIMARTINO BOOTH: Yes. All of those things.
RITHOLTZ: And high inflation.
DIMARTINO BOOTH: Yes, yes, yes. Misery index was though the roof. I get it.
But nevertheless, that was a crucial error made on the part of Congress. And people are like, you’ll never be able to get Congress to say that the Fed can do negative interest rates or buy corporate bonds or buy stocks. And I’m like when push comes to shove, Congress will vote for anything.
RITHOLTZ: Specially in a panic. They’re in no …
DIMARTINO BOOTH: Especially in a panic.
RITHOLTZ: There are no atheist in foxholes and there are no …
DIMARTINO BOOTH: That’s right.
RITHOLTZ: … no hard dollar moneyist (ph) at the Fed in the middle of a panic.
DIMARTINO BOOTH: No. But that second employment mandate is what has caused the Fed’s mission creep and the lower for longer. They’re trying to pull that one last employee in off the sidelines and …
DIMARTINO BOOTH: At the expense of going that financial stability thing. We don’t know that until it hits us in the head.
RITHOLTZ: So, let me push back a little bit of it. I find it hard to believe that the Fed is really concerned — very concerned about unemployment with unemployment levels at 60-year lows. At the same time this third mandate of backstopping the markets seems to be their biggest priorities or so some people say. What are your thoughts on that?
DIMARTINO BOOTH: So, look, I think that there’s — there’s a little bit of confusion here. Look when you are — when you are — when you’re facilitating Uncle Sam to quietly blowup debt and debt throughout the Obama administration grew quickly. A lot of this was in order to fund fiscal spending.
But if your — if you’re teaching the lesson to your — to the powerful politicians that run the country that there are absolutely no ramifications for — you can run up as much debt as you please because it’s going to be just about free, OK, then you’re going to cause as sclerosis, an atrophy in the labor force. So, it doesn’t matter how hard the Fed tries to pull somebody off the sidelines if they’re not qualified to fill the position, it’s not can be filled.
RITHOLTZ: So, what does one thing have to do with the other? Why does debt cause …
DIMARTINO BOOTH: Well, you this massive expansion of a social safety net such that …
RITHOLTZ: In this country? Or you’re talking about Obamacare?
DIMARTINO BOOTH: No, I’m talking about — in this country — in a more — in a more general sense. There’d been some good …
RITHOLTZ: I don’t know if I’d call that massive. I mean, you’ve seen …
DIMARTINO BOOTH: Well …
RITHOLTZ: You’ve seen creep — there’s been a big uptick in people claiming disability on Medicaid and Social Security.
DIMARTINO BOOTH: Right. And you ask the average one of these people who are basically living off the government, how much would you have to have an entry position job pay you in order for you to come off the sidelines and work? And it’s a heck of a lot more money than they would be getting as a starting salary.
RITHOLTZ: Well, it’s entry because that pays very little. It’s $20,000, $25,000 or $30,000?
DIMARTINO BOOTH: Of course. But again …
RITHOLTZ: So, if you get $30,000 without working or $30,000 with working, economic incentives say why would you work?
DIMARTINO BOOTH: Exactly.
RITHOLTZ: But how does the — how is the Fed …
DIMARTINO BOOTH: As long as you keep government debt super, super, super cheap, then you can keep these programs alive and well as opposed to removing the …
RITHOLTZ: So, you’re (cradling) the Fed with that?
DIMARTINO BOOTH: … and making it a job of the private sector. I mean, it is time to make vocational training great again in this country.
RITHOLTZ: I don’t think anybody’s going to disagree with you about that. But where they will disagree with you about is that the Fed has enabled federal debt because you’ve seen federal debt go in one direction for World War II forward.
DIMARTINO BOOTH: You have but you’ve also seen the duration of the treasury holdings of the United States until this 20-year bond issuance that was recently announced. You’ve seen the duration of treasuries come way in while the United Kingdom is going the absolute opposite way.
Because if we were to be borrowing money at the maturities where we should be borrowing money …
RITHOLTZ: Fifty years, 100 years?
DIMARTINO BOOTH: Fifty, 100, you name it …
RITHOLTZ: I’m with you on that also.
DIMARTINO BOOTH: … Austria, Argentina, if we’d been borrowing way out there, than our interest expense would be a hell of a lot higher. And nobody wants that interest expense to be higher …
RITHOLTZ: I don’t know if it would be — how much higher would it be?
DIMARTINO BOOTH: It would — of course, it would be higher.
RITHOLTZ: Listen, the 30-year and the 10-year, spitting distance apart. I think you do the 50-year for …
DIMARTINO BOOTH: I get that but you were talking about the …
RITHOLTZ: Two and a half percent? Three percent?
DIMARTINO BOOTH: … long term trend in …
DIMARTINO BOOTH: And this is — this is — this has been a 15-year trend of reducing the maturity profile of treasuries. So, this is …
RITHOLTZ: Changing the shape of the duration and borrowing much shorter to fund longer…
DIMARTINO BOOTH: Borrowing shorter and shorter and shorter to fund — yes. But it’s a good way to kind of hide the evils of having 23 — whatever the debt clock says downtown, 23 trillion and counting of national debt.
RITHOLTZ: All right. So, now let me push back to you on that. So, let — let’s round it up to 25 trillion.
DIMARTINO BOOTH: OK. We can forgive all student debt.
RITHOLTZ: Well, before we even do that, here’s what a lot of people — here’s what some analysts and economists and strategists have brought forth as a counterargument, hey, we have our own printing press and we have a standing army and we have the reserve currency. We can print all the debt we want and we aren’t going to have the same problem that Japan had.
And P.S., Japan’s credit rating is fine and the their 10-year bond is when it’s not negative, it’s you know fraction. Why does — should we think that our debt isn’t going to be any different than Japan’s debt?
DIMARTINO BOOTH: Well, we are beholden to foreign ownership of our treasuries.
RITHOLTZ: Why? What do we care about that?
DIMARTINO BOOTH: We care about it because we don’t — we don’t have the same latitude that Japan has because Japan’s sovereigns are mostly owned by the Japanese internally inside the country.
RITHOLTZ: Right. So, what Japan did is printed up a whole bunch of bonds and put in their right pocket that had their left pocket buy it, they completely created money out of thin air.
DIMARTINO BOOTH: They did.
RITHOLTZ: Why can’t we do that?
DIMARTINO BOOTH: There’s a theory that we can do that. But again …
DIMARTINO BOOTH: We are — don’t make me say them.
DIMARTINO BOOTH: I prefer modern meritocracy theory.
RITHOLTZ: Right. I call it Bernie’s theory.
DIMARTINO BOOTH: MMT. But the thing about MMT is, A, again, go back to the fact that we do have reserve currency status, but we can’t piss all over it because we are …
RITHOLTZ: We have been.
DIMARTINO BOOTH: We have been but that does not mean that foreign buyers of our debt have completely stepped back. Now, I will say that China has methodically and for years been reducing the maturity of U.S. treasuries …
RITHOLTZ: With no negative impact on rates or anything else.
DIMARTINO BOOTH: With no negative impact because …
RITHOLTZ: Despite the warnings of a lot of crazies.
DIMARTINO BOOTH: It doesn’t matter. If China is in a preparation mode to do anything, they — they’re doing it. Actively.
RITHOLTZ: Right. And they play a much longer game than us and they think in terms of decades.
DIMARTINO BOOTH: They do.
RITHOLTZ: And they have 10-year plans and I wish we were as savvy when it came to industrial power — industrial policy and long-term planning as them. We just kind of wing it.
DIMARTINO BOOTH: We do and the 25 trillion you’re throwing out there has nothing to do with modern monetary theory at all. That’s what we’re going to have like in 18 months for God’s sake as quickly as the deficit is growing. But what they’re talking about is something more that’s upwards of closer to 50.
RITHOLTZ: Is Trump a modern monetary theorist?
DIMARTINO BOOTH: That was 50, five-zero, trillion. Gosh, I think …
RITHOLTZ: He doesn’t seem to care about the debt at all.
DIMARTINO BOOTH: He doesn’t.
RITHOLTZ: And Mitch McConnell doesn’t care about it and Paul Ryan pretended to care about it. So, where are responsible adults when it comes to managing debt?
DIMARTINO BOOTH: Outside the beltway?
RITHOLTZ: Anywhere. Anywhere.
DIMARTINO BOOTH: They’re — I still care about the debt. I think there are …
RITHOLTZ: That’s one.
DIMARTINO BOOTH: … some Americans who still care about the debt.
DIMARTINO BOOTH: I really do.
RITHOLTZ: No, there are a lot of people who do. But none within who can actually do something about it within the powers of government?
DIMARTINO BOOTH: Absolutely not. But again, to look at of a crowd as President Trump did recently and to say to Kevin Warsh, if you were there right now, at least I’d have negative interest rates just like Germany and I’d be getting paid for my debt.
I mean, these are the things that …
RITHOLTZ: He’s a brilliant economic theorist. You got to give him that.
DIMARTINO BOOTH: OK. My hair is fire when you said that. But other than that, it was great. I mean, the whole rest of the play, it was fine.
DIMARTINO BOOTH: I am Mrs. Lincoln.
RITHOLTZ: Negative interest rates come to America and aside from that what did you think of the play?
DIMARTINO BOOTH: Please.
RITHOLTZ: That’s very funny.
DIMARTINO BOOTH: But again, if you’re talking about universal basic income, if you’re talking about healthcare for all. If you’re talking about student loan forgiveness, forget the pony part. It — you’re still talking about doubling the debt quickly.
RITHOLTZ: All right. So, let’s be — so here’s …
DIMARTINO BOOTH: Because, by the way, Social Security and Medicare are no longer actuarial theories. Their cash flow issues over the next few years …
RITHOLTZ: So, let’s discuss that because I find that fascinating. So, Social Security, we could — it’s capped at about $110,000 salaries where your FICA tops out. I think if you raise it to something like two, three, four, 500,000, you buy another, I don’t know, 20 or 40 years, so I’m not worried about Social Security.
Medicare and Medicaid, you have runaway prices of prescriptions, you have medical tourism because you go to Tijuana and for $2,000, get $300,000 worth of surgery. United States is quite literally the only industrialized developed nation without some form of a universal health care which allows a cap on many prescription and procedure cost. And if we do that, you’ll have this very lovely two-tier system where here’s basic coverage for everybody, here’s high-end coverage for anyone who can afford to buy insurance, and the entire cost structure comes way, way down or so goes the theory.
What’s wrong with that before — and forget forgiving school debt and forget basic income for now. Let’s just get 25 percent of the U.S. economy wrestled into submission by fixing the healthcare system.
DIMARTINO BOOTH: I’m not opposed to what you just described. And there are certain rationale as long as we can keep the quality up. But you did, at some point, ask me why I wrote this book.
DIMARTINO BOOTH: Well, that actually takes us right back to Medicare and Medicaid. The Federal Reserve uses the PCE as its inflate …
RITHOLTZ: Consumer price equivalent for lack of a better …
DIMARTINO BOOTH: Yes. It’s a substitute for the CPI, for the Consumer Price Index.
DIMARTINO BOOTH: And on …
RITHOLTZ: Which has its — both of them have their own warts …
DIMARTINO BOOTH: Both of them have their problems but one has a lot bigger wart than the other. Because they both understate housing, both of them.
RITHOLTZ: Well, the owner’s equivalent rent is very problematic because when home prices are going up, paradoxically, the residency, the shelter portion of inflation paradoxically goes down.
DIMARTINO BOOTH: Right. It’s …
RITHOLTZ: It’s totally backwards.
DIMARTINO BOOTH: And right now, rents are going up at such a fast pace and we haven’t captured that in the CPI and we could talk about that all-day long.
RITHOLTZ: Now, the push back to that is, well, that’s because we have this NIMBY restriction on building denser, multifamily units and apartment buildings in areas that open that up. See much more competitive prices for renters. And as long as we have this NIMBYs in places like New York and San Francisco, are going to be really problematic when it comes to renters.
DIMARTINO BOOTH: Hashtag asinine. But why did I write the book?
RITHOLTZ: Is that a real hashtag? Can I …
DIMARTINO BOOTH: I don’t know.
RITHOLTZ: Can I go to Twitter and punch that in? So, why did you write the book?
DIMARTINO BOOTH: Well, so, Stanley Fischer was Vice Chairman of the Fed for a while. Jim Bianco, one afternoon, we spend an entire afternoon fishing, trying to debate why on earth the godfather of central banking who then Ben Bernanke had on speed dial in case he had an existential crisis, why this legend of central banking would come out of retirement?
RITHOLTZ: To be vice chairman under Bernanke?
DIMARTINO BOOTH: To be vice chairman of the Federal Reserve.
DIMARTINO BOOTH: So, his very first FOMC meeting, Fischer says I only have one question. Why on earth do you use this convoluted PCE?
DIMARTINO BOOTH: In my life, at least, it’s a minimum headline CPI.
DIMARTINO BOOTH: Why don’t we have something more realistic and reasonable that we’re following?
DIMARTINO BOOTH: So, some trepidatious Fed staffer in the back of the room in the Eccles Building raised his hand and said, well, if we don’t use it, our models are going to break.
RITHOLTZ: You got to fix your models.
DIMARTINO BOOTH: So, at which point, Jim Bullard who knew he had a sense of humor raises his hand and says, let me get this straight, this is how we make monetary policy in America? Crap in, crap out? That’s the gist of it. Because the PCE uses as an input Medicare and Medicare reimbursement rates which is absolute insult to every American who’s actually paying for real overpriced healthcare.
RITHOLTZ: Right. Right. All right, so …
DIMARTINO BOOTH: So, it’s the shield that the Fed hides behind. I’m almost finish.
DIMARTINO BOOTH: So, in 2009 and 2010, internal debate occurs, everybody inside the Fed is like we might not have — we might not have the right inflation metric. We might have seen this crisis coming. Had we incorporated it something like, oh, I don’t know real estate and financial asset prices into some inflation metric? So, it was decided that something had to be done because it was broken.
DIMARTINO BOOTH: And then they did nothing. And then I got really pissed off and wrote “Fed Up.”
RITHOLTZ: So, here’s the pushback. I’ve heard the PCE and the CPI arguments and let me just disclose my bona fides. In the 2000s, I was screaming about an inflation. I used to mock what I called inflation x inflation. We’re going to report an inflation but we’re going to take out food and energy. So, you’re only going to report the things that aren’t going up in price. Fantastic.
However, the pushback that I find persuasive is MIT has this project called the billion price project.
DIMARTINO BOOTH: Yes.
RITHOLTZ: Where they use the Internet to track, literally, millions and millions of product prices.
DIMARTINO BOOTH: Yes, I’m familiar.
RITHOLTZ: And when you overlay the billion-price project on top of CPI, they’re not perfect but they’re pretty close. I mean, when the billion-price project says inflation is ticking higher, you see it in CPI. When it flattens out, you see it in CPI. It’s not perfect but what it says is there is modest inflation out there. You have a lot of inflation and things like healthcare and education, both of which — one is a free market disaster, the other is a government disaster.
And you don’t have a lot of inflation and things like technology and software and …
DIMARTINO BOOTH: Sure.
RITHOLTZ: And we are as real estate and rents have gone up a lot, a big chunk of that is driven by ultra-low mortgage rates because you can buy that much more so you can lay that at the feet of the Fed. But overall, we’ve had modest inflation for the past 10 years, nothing like what we saw in the 2000s or the 1970s.
DIMARTINO BOOTH: I would agree with that, but what would — we’ve had 23 months of core CPI, north of the two percen ttarget. If you were to make one tweak to the PCE, the Fed would have long since started to normalize rates.
DIMARTINO BOOTH: They’re literally hiding behind the metric that they know and recognize as broken. I’m fine with the …
RITHOLTZ: Bad PCE, bad models.
DIMARTINO BOOTH: I’m fine with the CPI.
DIMARTINO BOOTH: I’m fine with the — because we’d have been normalizing a long time ago.
RITHOLTZ: I don’t think they would have even if — even if they would have shown more inflation.
DIMARTINO BOOTH: Well …
RITHOLTZ: I think they’re too afraid to but that’s a whole another part of it.
DIMARTINO BOOTH: That is a whole another story and that’s what happened with QE2 and that’s what happened with QE3 is that it was time to begin normalizing and the fear factor kicked in.
RITHOLTZ: Quite fascinating. I want to throw a quote at you and have you discuss it. Quote, “The Fed is injecting billions of dollars into this market and that’s why everything is going up. Discuss.
DIMARTINO BOOTH: The Fed is about $100 billion a month run rate as things stand right now.
DIMARTINO BOOTH: Commercial and industrial lending is — the a largest banks is negative on a year-over-year basis.
RITHOLTZ: Which is shocking.
DIMARTINO BOOTH: Well, it is kind of shocking because so is global trade, so are several other metrics that have never coexisted without being in recession.
DIMARTINO BOOTH: So, something is intervening to make everything better right now. If the money that’s being pumped into the system is not going into any kind of lending of any sort because it’s not, then it’s — it has to find a home.
RITHOLTZ: So, let me stop there. First, say what you will about the economy. It’s fairly robust. We have lots of economic activity. It’s not three or four percent, it’s two percent. You’ve unemployment at three in change. All told, this is not a terrible economy. We don’t see a whole lot of R&D. We don’t see a whole lot of CapEx spending.
DIMARTINO BOOTH: You’re not going to.
RITHOLTZ: We’re not seeing that and industrial is already in a recession — manufacturing is already in recession.
DIMARTINO BOOTH: Yes.
RITHOLTZ: But still, it’s not a terrible economy.
DIMARTINO BOOTH: It’s not a terrible economy yet.
RITHOLTZ: So, given that, why are we seeing more lending?
DIMARTINO BOOTH: Because I think banks, especially the large banks can see the writing on the wall. I think …
RITHOLTZ: So, you think this is a conscious decision. We’re not going to do more loans because we think …
DIMARTINO BOOTH: Look, 58 percent of CFOs in America came in to 2020 saying we’re in a cost-cutting mode.
RITHOLTZ: We saw that also late in 2018. They have — well, you don’t expect to increase CapEx spending and that was right into a 20 percent market correction. The surprising thing is that CFO survey, I think that’s the Duke survey.
DIMARTINO BOOTH: The Duke.
RITHOLTZ: Continued straight through 2019. There was — even as the market started moving higher in recovering that lost, there was no change in sentiments. So, you think these CFOs are genuinely concerned about an impending recession.
DIMARTINO BOOTH: Well, I think that you have seen some very strange things happen. So, we follow at Quill not seasonally adjusted, continuing unemployment claims. Because just because you apply for unemployment insurance, it doesn’t mean you’re going to get it.
RITHOLTZ: Right. Right.
DIMARTINO BOOTH: So, we follow a not seasonally adjusted number because it’s just raw data.
RITHOLTZ: Are you looking at year-over-year numbers? Is that why you don’t bother with the seasonal adjustment?
DIMARTINO BOOTH: Yes. So, we’re looking at a year-over-year — so …
RITHOLTZ: Got it.
DIMARTINO BOOTH: … beginning in October …
RITHOLTZ: By the way, I love that and that — I found that enormously helpful in the financial crisis to look at year-over-year existing home sales and it told the whole story.
DIMARTINO BOOTH: Right.
RITHOLTZ: So, I love that methodology as oppose to all the seasonal adjustments and everything else. But hold that aside.
DIMARTINO BOOTH: We’d look at that number. We follow it very closely and it is off of the lowest base you can imagine because 98 plus percent of people who qualify for unemployment and insurance.
Now, some states have made it a lot harder and more expensive and they’ve upped the premiums on this. So, Moody’s has done some good work showing that you don’t even have the same percentage of Americans on unemployment insurance right now which is why they came to the conclusion that jobless claims are inherently understated because in the aftermath of the crisis, a lot of states made it harder and/or shorten the time that you could be on unemployment insurance.
RITHOLTZ: As part of the — I forgot the acronym, the modest fiscal response to the crisis was really broken into three parts., I think it was about $790 billion, a third of it went infrastructure which is really nothing, a third of it went to a temporary tax break, and a third of it went to temporarily extending unemployment.
DIMARTINO BOOTH: Right.
RITHOLTZ: And that ended a long time ago.
DIMARTINO BOOTH: A long time ago.
RITHOLTZ: So, your position is that …
DIMARTINO BOOTH: But some states like North Carolina, there are a handful of states that permanently shorten the length of time …
DIMARTINO BOOTH: … that you can collect unemployment insurance. Some states made up for the extra expense by raising the premiums that employers had to pay for unemployment insurance.
RITHOLTZ: Within their state.
DIMARTINO BOOTH: So, all these being …
RITHOLTZ: So, you’re saying the — looking at the unemployment and roles today or is it a little misleading?
DIMARTINO BOOTH: It is a little misleading. Set that aside. Set that aside.
We’ve still seen starting in October, four consecutive months of year-over-year increases in not seasonally adjusted continuing claims. That is the number of Americans collecting employment insurance on a year-over-year clean basis has been increasing since October.
RITHOLTZ: What does that mean historically if you see that increase in four months?
DIMARTINO BOOTH: The first time that we’ve seen this since ’09.
RITHOLTZ: All right. Well, ’09 clearly, a different situation. Go previous to that. Is this a recession indicator or is this a softening of GDP indicator?
DIMARTINO BOOTH: It should be a recession indicator.
RITHOLTZ: But you’re saying the fed is preventing that from spiraling out of control?
DIMARTINO BOOTH: Look, you’ve never seen global debt. Right now, we’ve seen year-over-year — there’s a Netherlands global debt monitor and the next one for — it’s very lagged. The next one’s coming out in December. But you’ve seen that going down on a year-over-year basis since, I believe, May of 2019.
RITHOLTZ: Meaning? Less debt or lower quality of debt? What is it that you want to go down?
DIMARTINO BOOTH: No, no, no. This is world trade. World trade.
RITHOLTZ: OK. Got you.
DIMARTINO BOOTH: World trade volumes have been declining on a year-over-year basis.
DIMARTINO BOOTH: And my friend …
RITHOLTZ: No, how much of that is coronavirus and how much of that is …
DIMARTINO BOOTH: This is all pre-coronavirus. No, no, no, no, no.
DIMARTINO BOOTH: This is May through November. We only have a small snapshot because it’s extremely lagged data.
DIMARTINO BOOTH: Forget coronavirus. This thing’s going to fall off a cliff. But my buddy Lacy Hunt taught me that you had — go back to your recession starting in ’80. If a U.S. recession is accompanied by contracting world trade, it’s a nasty recession.
RITHOLTZ: It’s a global recession.
DIMARTINO BOOTH: Nineteen-ninety? No contraction …
RITHOLTZ: Pretty mild.
DIMARTINO BOOTH: … in world trade.
RITHOLTZ: And 1990, was that even a real recession or is that a — just a mild temporary …
DIMARTINO BOOTH: There was a real estate something going on there.
DIMARTINO BOOTH: And then 2000, 2001 …
RITHOLTZ: Well, you had — FYI, we had ’87, you had the crash, the Fed responded to it, you had a temporary blip in housing, and then it fell pretty much off a cliff. If you bought a co-op a condo in New York following the ’87 crash and a drop in rates, you ended up not getting back to breakeven for like six or eight years which is unheard of in New York.
DIMARTINO BOOTH: Yes, it was — yes. On the east — in New York, specifically, that was a terrible real estate recession.
RITHOLTZ: Right. Caused (ph) — driven in some part by Greenspan’s panic. That’s a good title for a book.
DIMARTINO BOOTH: There you go.
RITHOLTZ: I want to bring this back to the market.
DIMARTINO BOOTH: In 2000, 2001, no global trade contraction. Not a bad recession.
RITHOLTZ: Right. That was — 2001 was a short — what was that? March to November with September 11 right in the middle of it.
DIMARTINO BOOTH: With September 11.
RITHOLTZ: Byt the time 9/11 hit, we were much closer to the end than the beginning of the recession.
DIMARTINO BOOTH: In 2009, ugly contraction in world trade. Ugly recession.
DIMARTINO BOOTH: And here we are with this phenomenon we’re staring at. We have rising — continuing jobless claims and contracting world trade and (inaudible) going on in the economy.
RITHOLTZ: So, I would argue the ’09 to ’10 or really the ’07 to ’09 recession was driven by the market, not the economy itself contracting the market caused the disaster and then led into a whole bunch of systemic problems.
But let’s talk about today. You’ve discussed, and I’m paraphrasing, the Fed has gone into the market. They’ve exchanged short dated government bonds for reserves, already held at the Fed, government bonds are the most liquid asset in the world. How does that end up impacting equities? Because I think that’s where the debate about the Fed sort of schisms into two camps.
DIMARTINO BOOTH: So, I’ll tell a really quick story because it’s not the stock market you have to be directly concerned with, it’s keeping the bond market open.
DIMARTINO BOOTH: That’s what’s most important and Giardini’s done some good work.
DIMARTINO BOOTH: Over half of share buybacks are financed with debt.
RITHOLTZ: Sixty-seven — even more than that.
DIMARTINO BOOTH: OK. So, I’m going based off that. What happened on Halloween 2018 when Moody’s downgraded General Electric’s debt, was what was the game changer for Jay Powell. Jay Powell still doesn’t give a damn about the stock market. But he cannot not care about the bond market which is — whatever it is, almost $10 trillion, 74 percent of GDP, non-financial debt, all-time record high in this country.
So, Halloween, GE debt gets downgraded. In November 14, 2018, the high-yield bond market shuts down. Goodbye — goodnight, Irene, for 41 record days.
DIMARTINO BOOTH: You’ve got redemptions on high-yield ETFs you have the I’m, the BIS, all these global entities are like, Jay Powell, you got a problem on your hands. The collateral backing these fixed income ETFs was trading by appointment only. Spreads were gapping out. Yields were going to the roof.
And you have this quiet at first then it got really loud chorus of CFOs on Wall Street saying we’re going to behave and stop buying back our stock because we’re going to have to pay attention to our balance sheets.
RITHOLTZ: They were lying.
DIMARTINO BOOTH: They were lying. But they didn’t have to lie for long because the meltdown in the market catalyzed by by the shutdown in the credit markets shutdown share buybacks, people got of afraid enough in Q4 of 2018, scared Jay Powell. Jay Powell knows one thing. October 2012, FOMC transcript, “QE is blowing a fixed income duration bubble across the entire credit spectrum,” that’s a quote. Take out 2012.
RITHOLTZ: So, here’s the pushback. I read and heard and some of which resonates, some of which doesn’t, it goes something like this. First, junk bonds are supposed to default. That’s what junk bonds do. They …
DIMARTINO BOOTH: Not in America.
RITHOLTZ: They’re called junk for a reason. And when the spread between quality corporates and junk gets too small, that’s how you know you’re in a frothy at best, bubble of worst situation.
Second, yes, there’s been some problems in the repo market and there’s been some problems the credit market, but it’s mostly plumbing, just like ’87 was a plumbing problem and the equity market hadn’t caught up technologically, they were still doing paper. Hey, these are relatively young market, these repo markets, and there’s certainly not like Japanese rice markets had been around for centuries.
And so, this is just a plumbing problem and we’ll figure it out. What’s your response to that pushback?
DIMARTINO BOOTH: I would like to see the markets figure it out out without having the pacifier. Please, and thank you. I mean, look at …
RITHOLTZ: Being the pacifier being the Federal Reserve?
DIMARTINO BOOTH: We only had a two percent portfolio insurance physical against the stock market capitalization 1987, what — that was just two percent. The risk parity trades only got 10 percent, so let’s just throw it up against the wall. Let’s see what happens. Let’s — let credit volatility come unhinged and see what happens.
RITHOLTZ: So, I’m one of these crazy free-market people who think if something goes belly up, like long-term capital, maybe that’s a bad example because the Fed actually …
DIMARTINO BOOTH: Does Alan Greenspan rode to the rescue?
RITHOLTZ: No, because that’s the one where all Greenspan did was bang a bunch of heads together and say, hey you private banks, you go work this out yourself without the Fed being very involved because if we get involved, you’re not going to be happy.
DIMARTINO BOOTH: Yes.
RITHOLTZ: So, the question is …
DIMARTINO BOOTH: And one gentleman from Bear Stearns told them where to fly.
RITHOLTZ: So, here’s the — that’s right who was, by the way, one of the biggest counterparties to LTCM. But hold that — and by the way, the whole rescue was a dry run for a decade later for what we ended up doing.
But hold that aside, what would happen if the Fed wasn’t intervening repo market or wasn’t providing liquidity when there were frictions and some freezes in some of these smaller backwater credit markets?
DIMARTINO BOOTH: With short-term interest rates pushing double digits, what would have happened?
RITHOLTZ: No. No. What would happen today if the Fed says, all right, we’re done intervening here, you guys figure it out, the free market can work this out, what’s the net result of that?
DIMARTINO BOOTH: I don’t think we know, Barry. I think that we would see rates be a lot higher than they are. It’s a little problematic when you’re running trillion-dollar deficits.
RITHOLTZ: So, when you say a lot higher, four, five, 6 percent or nine, 10, 11 percent?
DIMARTINO BOOTH: I don’t — I don’t — I don’t know that that the market would end up at nine or 10 percent but I know that if the market was to end up at four or five percent, given that the Fed wants to put a new replacement for LIBOR out there, it would be the worst possible development.
RITHOLTZ: All right. So, given all that …
DIMARTINO BOOTH: And the Fed is about to cut rates again because of the coronavirus. I mean, this is …
RITHOLTZ: That’s was my next question. You beat me to the question. Given that, what do you think the Fed is going to do over the next four meetings really? And by the way, just the …
DIMARTINO BOOTH: Investors don’t fight the Fed but there is one cohort out there that doesn’t fight the Fed harder than the people who don’t fight the Fed and that’s the Fed itself. The Fed never fights itself.
DIMARTINO BOOTH: It never fights the market. It never fights WIRP new — type it into your Bloomberg, it never fights expectations of rate cuts and it never even fights expectations of Fed moves when it came to — then Bernanke was completely guided in terms of the size of the tapering of quantitative easing way back when by what the survey from New York Fed was saying. The Fed is guided by that financial market and it will do what they tell it to do.
RITHOLTZ: Can you stick around a bit? I got a bunch more questions for you.
DIMARTINO BOOTH: Of course.
RITHOLTZ: We have been speaking with Danielle DeMartino Booth. She is the Founder and Chief Strategist of Quill Intelligence and author of “Fed Up: An Insider’s Take on Why the Federal Reserve is Bad for America.”
If you enjoy this conversation, well, be sure and check out the podcast extras where we keep the tape rolling and continue discussing all things Fed related. You can find that at iTunes, Spotify, Google Podcast, Overcast, Stitcher, wherever you find our podcasts are sold.
We love your comments, feedback and suggestions. Write to us at email@example.com. Check out my weekly column on bloomberg.com. Follow me on Twitter @ritholtz. I’m Barry Ritholtz, you’re listening to Masters in Business on Bloomberg Radio.
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RITHOLTZ: Welcome to the podcast. Danielle, thank you so much for doing this. I’m afraid that people are going to hear us on the radio and not hear this part of the discussion and they’re going to say, hey, man, why are you giving her such as a hard time for? I’m like, no, no, you don’t understand, we kind of know each other for …
DIMARTINO BOOTH: We’ve been doing this for a decade.
RITHOLTZ: Right. Is it that long?
DIMARTINO BOOTH: It is. The day I met you is the day I met Jim Bianco walked into the fishing lodge, there you were.
RITHOLTZ: This is up in Maine.
DIMARTINO BOOTH: Up in Maine, always the first person there at the lodge that you can suck up all the bandwidth and turn your Bloomberg on.
RITHOLTZ: That’s early in the morning. I do my morning reads and I found — well, now, you actually …
DIMARTINO BOOTH: Game theory (ph) in Maine, Barry plays hard.
RITHOLTZ: Right. Right. Actually, now, there is some bandwidth in each of the room — each of the cabins but the best bandwidth is in the dining hall.
DIMARTINO BOOTH: Yes.
RITHOLTZ: And I get — listen, I’m an early riser. The early bird gets the worm.
DIMARTINO BOOTH: Gets the worm. I know. You’ve mentioned that every single year.
RITHOLTZ: The early blogger gets the bandwidth. That’s the thesis up there. And we’ve had a number of fascinating debates and discussions and experiences and Maine is really a blast. Camp Kotok is always delightful.
DIMARTINO BOOTH: I can’t wait to head over there this August.
RITHOLTZ: It wasn’t last year, it was the previous year, someone said, how long have you been coming here and I’ve been saying, I don’t know, five or six years or few years. And someone said, well, when was your first year, and I had to figure it out and I’m like, it’s been a decade. My God, it crazy.
DIMARTINO BOOTH: Yes.
RITHOLTZ: I think this — I don’t know if this year is 11 or 12.
DIMARTINO BOOTH: This year is 10 for me.
RITHOLTZ: So, you skipped a year. I have a streak. I haven’t missed one.
DIMARTINO BOOTH: I skipped a year. I was in the middle of writing a book but yes.
RITHOLTZ: Right. Yes. But it’s a weekend. Come one. You could take a weekend off from the book.
DIMARTINO BOOTH: OK. It’s Dallas, Texas to nowhere in Maine versus New York to nowhere in Maine. It’s a little bit different calculus.
RITHOLTZ: So, it’s like an hour flight up to Bangor and then you drive about two and a half hours. Like the — from the time I leave my house until the time I get in a car in Bangor is more time than the time I leave Bangor and get to Leen’s Lodge unless I stop for a lobster roll at the Eagles Nest along the way.
DIMARTINO BOOTH: Which is a must.
DIMARTINO BOOTH: Tucked on a four-hour flight in from Dallas, usually the 5:45 a.m. and changing …
RITHOLTZ: Who told you to live in Dallas?
DIMARTINO BOOTH: Changing terminals and getting to that damn Bangor flight. But I get there.
RITHOLTZ: There are lots of places I would consider living outside of New York. Dallas happens to be pretty nice and Austin is just such a party town.
DIMARTINO BOOTH: Austin is wonderful.
RITHOLTZ: When you went to school there, when you went to grad school, like today, Austin is a full-blown hipster. Someone described it as the blueberry in the middle of the raspberry pie that is Texas, which I find hilarious.
But what was Austin like when you went to school there? Was it a big party town?
DIMARTINO BOOTH: It was — it’s always been a big party town.
DIMARTINO BOOTH: It’s always been huge for live music. I mean …
RITHOLTZ: Huge. Huge.
DIMARTINO BOOTH: … it’s institutional level of music. Sixth Street was around then but the aging …
RITHOLTZ: Not like today.
DIMARTINO BOOTH: The aging of Austin and now you have Fifth Street which is where people my age go because they don’t want to go on Sixth Street because germs are no longer for sharing at our age.
DIMARTINO BOOTH: So, but …
RITHOLTZ: There are more roof bars in Austin today than I think any city I’ve ever been on.
DIMARTINO BOOTH: Amen. And they’ve really just opened some very nice hotels. There’s plenty of room for the tourists. Go downtown, stay downtown. For heaven’s sake, don’t get stuck in that traffic.
RITHOLTZ: To say the least. So, there’s a ton of questions I didn’t get to that I want to circle back and I don’t have you here all day but we’ve been talking long enough. So, here’s the really interesting discussion which all of this comes right from your book. What do you mean by the Fed is bad for America? That seems like a pretty harsh statement.
They’ve made mistakes. They’re certainly an important entity. I don’t think either of us are in the Ron Paul, in Fed camp …
DIMARTINO BOOTH: No. No. No. No. No. No. No.
RITHOLTZ: Like that’s like unilateral nuclear disarmament.
DIMARTINO BOOTH: No. No.
RITHOLTZ: But it …
DIMARTINO BOOTH: Plus, I mean, look at what the Chinese have done for everybody who always says, God, you’ve got to end the Fed, just get rid of them, I’m like, look at what the Chinese can do with our intellectual property.
DIMARTINO BOOTH: OK. Now, put it on steroids and see what they can do to our financial system.
DIMARTINO BOOTH: Just leave the thing unpoliced.
RITHOLTZ: You can’t disarm. Right.
DIMARTINO BOOTH: Please. It’s ridiculous notion …
RITHOLTZ: See, I thought Ron Paul was out of his mind with that nonsense.
DIMARTINO BOOTH: It is.
RITHOLTZ: And I — some of that is hyperbolic just for him to make a point. But I think he truly believed that and his son believes it also.
DIMARTINO BOOTH: Like it’s just — it’s not practical, not in the world we live in today. We can deglobalize all we want but we’re never going to unglobalize. There’s a difference between the two.
RITHOLTZ: So, that raises the question, how should the Fed set interest rates?
DIMARTINO BOOTH: The Fed should set interest rates more — A, the Fed needs to let these markets somehow, someway normalized. If you talk to people who said that the Fed is going to blow up the balance sheet to $10 trillion, it’s going to ease into the next recession, ease even more through the next recession and eventually will have a debt jubilee and sing Kumbaya and walk off into the sunset …
RITHOLTZ: I’m excited. I have a lot of cars I want to buy that are beyond my budget. I’ll just borrow against it and if we do student loan forgiveness, maybe we could do …
DIMARTINO BOOTH: Well, look, I mean, you got to go back …
RITHOLTZ: … sports car forgiveness.
DIMARTINO BOOTH: … to biblical times before you had a banking system to just say, it’s going to be really easy. Let’s just do this debt jubilee. Did somebody say private debt markets? God, what are we going to do with those?
It’s more complicated than what it’s made out to be and I think somebody at the Fed, somebody has got to deal with having the beginning and the end of a recession.
RITHOLTZ: Right. So, in other words, if we want to stick with the biblical theme, seven-fat years, seven-lean years, things are cyclical not just — you mentioned this is a 100year expansion, elongated expansion, Australia went what, 27 years, and they still haven’t had a recession, 27 years and counting. How far can this …
DIMARTINO BOOTH: Australia has been 28 years and counting but we have not had a benefactor named China.
DIMARTINO BOOTH: I had a speech in Australia, I was there for 12 days, just about everything is not made in China but owned by China.
RITHOLTZ: Or exported to China, all their natural resources.
DIMARTINO BOOTH: Or exported to China or imported from China.
RITHOLTZ: I would argue we have had a benefactor named China because they make all our crap cheap and there where we make every — manufacturer everything.
DIMARTINO BOOTH: But they don’t own our biggest port. They don’t have a 50-year lease on our biggest port in Melbourne. They don’t own an island I went on the — own the island on the Great Barrier Reef. They haven’t put up all of these skyscrapers that, by the way, are wrapped with something that is extremely flammable. So, it’s …
RITHOLTZ: What are they wrap with?
DIMARTINO BOOTH: Something that is literally extremely flammable. So, now, there are certain high-rise buildings in Melbourne and in Sidney that you kind of know not to buy at.
DIMARTINO BOOTH: When some guy drops a cigarette then the whole three floors are going up before …
RITHOLTZ: That’s insane.
DIMARTINO BOOTH: Anyways, all I’m saying is that Australia is an aberration but in a good sense of the word they never went to the zero bound. And that was our fatal flaw. The Bernanke doctrine was the fatal flaw, the idea that we absolutely had to go to the zero bound.
I think that J. Powell is so correct in pushing back against negative interest rates. I even hope he stops at one.
RITHOLTZ: So, now, let me throw out an alternative scenario, a counterfactual but it’s really based on reality. It’s not a counterfactual. Normally, we have a regular playbook and whenever there is a financial crisis, we learn this from (inaudible) long ago, what you end up doing is you cut taxes, you increase fiscal spending, you temporarily replace the collapsing demands from businesses and households with government then the economy begins to recover.
You start to take that back and you normalize things and if there’s a little bit of monetary policy assistance, great. But in 2008 and 2009, there was almost no real — I mean, it seems we are to say, yes, $785 billion is nothing.
But given this size of the financial crisis, that should have been a $3 trillion, $4 trillion, $5 trillion multiyear …
DIMARTINO BOOTH: Right.
RITHOLTZ: … stimulus. Bernanke looked out at Congress and he had some meetings and he said, you guys have to do fiscal stimulus or we’re going to hell, and they said, look, we’ll give you carte blanche, do whatever you want, but sorry, it’s not coming from us.
DIMARTINO BOOTH: Right.
RITHOLTZ: What should the Fed have done in response to that? Should their response should have been, hey, you guys run your own, I’m going to let the whole thing go to hell, you’ll all get voted out of office because you will screw up, and then when the next crop comes, I’ll work with them. But this is on you, guys.
DIMARTINO BOOTH: So, William McChesney Martin or Paul Volcker would have told them to do just that …
DIMARTINO BOOTH: … and that would have been that.
RITHOLTZ: Go jump and elect.
DIMARTINO BOOTH: That would have been that.
RITHOLTZ: Right. Either you save the economy or it’s world’s greatest recession and everyone in the U.S. unemployed and live in infamy forever.
DIMARTINO BOOTH: The very first — I’ve written a weekly — every single week since I left the Fed in June of 2015, the very first thing that I wrote was how Congress abdicated its authority to the Federal Reserve.
RITHOLTZ: A 100 percent.
DIMARTINO BOOTH: It’s time to fiscal authorities to do their damn job.
RITHOLTZ: So, what should the — now, here we are in the elongated expansion and nine, 10 years following the ’08, ’09 debacle, we get a giant tax cut, we get a giant fiscal stimulus, is that just procyclical instead a countercyclical? Should that — is that what we — trillion dollars what we should have done in ’09 or ’10?
DIMARTINO BOOTH: It was a little after the fact.
RITHOLTZ: What? 2017? So, what should be taking place on the fiscal days …
DIMARTINO BOOTH: I mean, to me, at least that was blatantly political in nature.
RITHOLTZ: Of course, of course it was. As is the one that was just …
DIMARTINO BOOTH: Right.
RITHOLTZ: … just floated — I have no idea what the hell that was. As is the one that was just floated for the summer, let’s find a way to get more money into the stock market and let’s do a middle-class tax-cut. Obviously, August or July of an election year, that’s political and, obviously, politics is that’s never going to get through commerce (ph).
DIMARTINO BOOTH: Well, I don’t even know how fiats get on the island because there are some potholes here in New York that are big enough that they could swallow a small car.
DIMARTINO BOOTH: I mean, you want to spend money, for God’ sake …
DIMARTINO BOOTH: … spend it on infrastructure and by the way …
RITHOLTZ: Everybody agrees, why can’t we do that?
DIMARTINO BOOTH: And by the way, it puts a lot of blue-collar workers to work.
RITHOLTZ: Sure. For years.
DIMARTINO BOOTH: This is fantastic. For years at a time.
DIMARTINO BOOTH: This is great. This is what we’ve been seeing, what we saw in the automobile sector …
DIMARTINO BOOTH: … worldwide as China urbanized, which was just a huge boom to the current recovery. That’s what we saw with fracking is it put blue-collar people to work.
RITHOLTZ: Let me push back at you on that.
DIMARTINO BOOTH: Well, at least in the State of Texas. I mean, you’re making $100,000 a year and fast in the royal patch (ph).
RITHOLTZ: So, read “Saudi America” by Bethany McLean who basically says the entire low rate regime of the Federal Reserve is the only thing that’s made fracking competitive with everything else because it’s so capital intensive and it’s all borrowed money.
DIMARTINO BOOTH: Gosh, it’s all borrowed money. No. No. No. No. No. I just wrote a recent paper in this. The growth of the Fed’s balance sheet literally moves in lockstep, in lockstep with the growth of the energy industry.
I didn’t say it was free to build. I said it employed people who don’t have college degrees. So, would infrastructure, so does automobile.
RITHOLTZ: So, here’s a debate that I know you love to engage in on Twitter and I just kind of watch from afar. I engaged in much dumber debates on Twitter. The repo market is what’s driving the Fed’s activity to inject more liquidly and that’s spilling over to the equity markets and that’s why stocks are going higher.
DIMARTINO BOOTH: Look, we’ve discussed this. Again, you can try and see what happens if rates rise if you step back. Don’t go to 10 percent on overnight. Go to four or five percent and see what happens, see how …
RITHOLTZ: How about two or three percent?
DIMARTINO BOOTH: I don’t even think that that would fly given the sensitivity, given the wallet — look, every time there’s been a wall of refinancing, you would blow up what’s left of the shale patch right now …
DIMARTINO BOOTH: … because there’s so much paper that has to be refinanced this year and, God help us, next year. For the next five years, it’s like 71 billion, 64 percent of the shale debt has to be refinanced in the next five years.
RITHOLTZ: I was going to say, isn’t there like a wildly disproportionate amount of corporate debts associated with fracking like just so far at a proportion?
DIMARTINO BOOTH: Well, it’s invaded by — living in Texas, I’m like, what is this greenwich private equity firm doing down here? They got …
RITHOLTZ: Making it rain. That’s what they do.
DIMARTINO BOOTH: They had some money. I mean, they were going to build the tallest skyscraper in Midland-Odessa that was going to be the tallest thing between Dallas and Los Angeles. But, I mean, if that funding was pulled, it would have ended up just about as good as the late 1980s Rolls-Royce dealership in Midland-Odessa.
RITHOLTZ: Do you remember in the ’80s the see-through buildings in Dallas? They put up all the — and Houston. They put up all these office buildings …
DIMARTINO BOOTH: Yes.
RITHOLTZ: … and they were unoccupied. You literally could see straight through from one end to the other.
DIMARTINO BOOTH: Yes. So, every time I hear a central banker talk about how much the sanctity of the financial system and how much stronger our banks are, I’m like, you might want to reference your own data, Federal Reserve, on commercial real estate loans on bank balance sheets and see that they’ve gone through the roof because of regulatory costs that were associated with Dodd-Frank. Small and mid-sized banks in this country are not in good shape.
RITHOLTZ: Small and mid-sized banks are not in good shape and why is that?
DIMARTINO BOOTH: They’re …
RITHOLTZ: Are there still small and mid-sized banks left?
DIMARTINO BOOTH: They’re — not, no. There’s been a hell of a lot of consolidation.
RITHOLTZ: Right. So, it’s the first question.
DIMARTINO BOOTH: You’re asking (ph) an American who’s non-bank.
RITHOLTZ: If you look at the holdings of both assets and loans of the top let’s call 10 banks, it’s like one — two and a half times what it was 20 years ago. It’s really become wildly top-heavy.
DIMARTINO BOOTH: Yes. So, to fail is …
RITHOLTZ: So, now, we have all this …
DIMARTINO BOOTH: It’s impossibly big to fail.
RITHOLTZ: So, now that we’ve had all this consolidation, what is that mean for the small and mid-sized banks?
DIMARTINO BOOTH: It means it’s not good. It means that — and this was something that was, again, internally debated at the Fed. If you want to impose these capital requirements, if you want to impose these compliance requirements, do it for the big banks but, for God’s sake, don’t do it for small and mid-sized lenders. If you do, they’re going to go where on the risk spectrum and make the crazy commercial real estate loans that they’ve got right now.
RITHOLTZ: And to be fair, they have set up different theories of requirements for China banks …
DIMARTINO BOOTH: This was a daylight a dollar. Sure.
RITHOLTZ: All right.
DIMARTINO BOOTH: I mean, this is — this happened long after the loans are made.
RITHOLTZ: All right. And my — before I get to my favorite questions, I have one question I have to ask you, what would it take to make you bullish on stocks?
DIMARTINO BOOTH: I’m not bearish on stocks.
RITHOLTZ: All right. So, your clients are very often investors and not just corporate entities and others.
DIMARTINO BOOTH: I say as long as the Fed is printing, they cannot be fought.
RITHOLTZ: So, you …
DIMARTINO BOOTH: That’s my biggest mistake in my entire career was that I knew when I left the Fed with PTSD in a bad way, I knew in my guts that as long as they printed enough that they were going to hold up risky asset prices. It didn’t matter what valuations were. That hasn’t changed. I had to learn it the hard way.
RITHOLTZ: So, as long as the Fed is accommodative and as long as they are not either reversing QE, doing QE …
DIMARTINO BOOTH: Unless there’s a global …
RITHOLTZ: Quantitative tightening.
DIMARTINO BOOTH: Unless there’s a global calamity that is big enough to put the world in recession, I’m not somebody who thinks that we can come lately decouple. The entire Canadian yield curve is inverted, all of it, all the way to 30 years.
DIMARTINO BOOTH: Mexico where I’m presenting at the Bank of Mexico, Banxico, next week, they’re in recession. They’re not getting out of recession anytime soon. We’ve never not been in recession if Canada goes. Germany, for sure, is in recession as we speak.
RITHOLTZ: Yes. It has been for a good year and unchanged.
DIMARTINO BOOTH: Well, they have flat whatever. Germany is in recession and you just saw some really ugly employment data post — pre-coronavirus come out of Germany.
DIMARTINO BOOTH: So, that industrial slowdown. And China is, for sure, in whatever …
RITHOLTZ: Right. On a paper basis at the very least that’s showing a giant drop in GDP.
DIMARTINO BOOTH: Right.
RITHOLTZ: Right. Even if it’s temporary and even if they make up some of it …
DIMARTINO BOOTH: I mean, it’s like all of a sudden, everybody …
RITHOLTZ: And the U.K. also.
DIMARTINO BOOTH: … is Janey Yellen because the favorite buzzword on Wall Street now is transitory. It’s all transitory. It’s all transitory.
RITHOLTZ: Right. Everything on this planet is transitory, including the planet.
DIMARTINO BOOTH: Well, and I get asked by people all the time, even if we go into recession, the Fed can just keep printing and even if we go into recession, the stock market is going to stay up and I’m like …
RITHOLTZ: That’s happened on rare occasions in the past.
DIMARTINO BOOTH: I’m not of the opinion given where we are in the cycle that that happens.
RITHOLTZ: I won’t disagree with you. So, I’m curious if when people listen to this, how much they think you and I actually agree on and how much they think you and I disagree on because I’m asking questions very often playing a role and not necessarily …
DIMARTINO BOOTH: Right.
RITHOLTZ: My job isn’t to debate you. My job is to bring some of the questions other people have raised about some of the subjects you’ve talked about.
DIMARTINO BOOTH: I mean, of all people on planet Earth, the person who wrote the expose, I had to learn after the fact, don’t fight the Fed.
RITHOLTZ: Don’t fight the Fed. So, you’re pretty constructive and what do you like, 300 percent leveraged long-time stocks, is that how you’re invested?
DIMARTINO BOOTH: I own a ton of municipal bonds. I own a ton of gold and I’m not unhappy.
RITHOLTZ: Well, gold is approaching 1,600.
DIMARTINO BOOTH: Yes. I’m not …
RITHOLTZ: I did well with gold in 2000s and once it peaked and reversed, I tapped down and said I’m not there.
DIMARTINO BOOTH: I think you have to be bold, bold, bold in your asset allocations. I really, really do when there’s as much global uncertainty as there is and when …
RITHOLTZ: I like muni bonds.
DIMARTINO BOOTH: … central banks are the only game in town, hell, I did well in Puerto Rico, but you have to bold and you always — gold should be 10 percent. No. No. No. No. No. No.
RITHOLTZ: Also, how much gold do you own relative to your portfolio?
DIMARTINO BOOTH: No. You should have 20, 25 percent in precious metals at a time like this.
RITHOLTZ: Really? Wow. Again, at a time like this. I tiptoed in about nine months ago.
RITHOLTZ: Wow. That’s is a bold call, 25 percent precious metals.
DIMARTINO BOOTH: And my muni bonds have never — I mean, throughout ups, downs, in between, right now, they’re fat and they stay on huge …
RITHOLTZ: Well, we’ve been in a 40 — have we been in a 40-year bond bull markets? So, whatever you own that’s not junk has done pretty well.
DIMARTINO BOOTH: I wouldn’t own a lot of corporate bonds in America today.
RITHOLTZ: That’s interesting. See, I break (ph) corporates into the B, B plus and up and then everything under that even not the junk, even like the near junk. Like I don’t want to own anything below B minus.
DIMARTINO BOOTH: I don’t want to — no. A buddy of mine who used to work in one of the big three credit-rating agencies, the stories that I’ve heard right out of her mouth, the management is twisting arms to maintain investment grade ratings, I’m like, no, thank you, not in my portfolios.
RITHOLTZ: Does anyone still really pay attention to the credit ratings after the debacle of AIG and Lehman and Enron and …
DIMARTINO BOOTH: Yes, I do. I think …
RITHOLTZ: And the whole financial crisis was — the one lesson — there are many lessons but the one lesson is, hey, credit agencies, they are like stock analysts whose job is to generate more syndicate business. They’re not here for you, the bond buyer. They’re there for the bond’s underwriter.
DIMARTINO BOOTH: OK. We know that but …
RITHOLTZ: Shouldn’t bond buyers know that?
DIMARTINO BOOTH: (inaudible) has some insane numbers that he can trail out about the 46,000 firms and the 413,000 different registered investment advisers and the millions of accounts that exist and they’re all basically look like the same damn pie.
DIMARTINO BOOTH: One of the slices of that pie is an investment grade bond ETF that makes …
RITHOLTZ: Investment grade.
DIMARTINO BOOTH: That’s makes mom and dad sleep at night …
DIMARTINO BOOTH: … because they know it’s money good. Well, guess what, I wouldn’t (ph) have known half of whatever is in there.
RITHOLTZ: All right. So, now, I only have you here for another 10 minutes. I have to get to my favorite questions …
DIMARTINO BOOTH: OK.
RITHOLTZ: … because I know they’re some of your favorite questions. So, let’s — on that happy note, let’s jump right into these, what some people call our speed round, and I’m going to add a question, I’m going to mix it up a bit because I have to ask what was your first car.
DIMARTINO BOOTH: My first car was an Acura. It was a hatchback but I can’t remember the name of it.
RITHOLTZ: What year?
DIMARTINO BOOTH: Was it Integra?
RITHOLTZ: Yes. They had the little Integra …
DIMARTINO BOOTH: Little Integra.
RITHOLTZ: It’s that cute little car …
DIMARTINO BOOTH: I had …
RITHOLTZ: … that you can get that with a five speed and toss it around. It was really based on a sort of …
DIMARTINO BOOTH: Yes. You would want to know what I would do …
RITHOLTZ: … pump-up version of an Accord.
DIMARTINO BOOTH: … with the transmission and the five speed.
DIMARTINO BOOTH: It’s been tried a few times.
DIMARTINO BOOTH: Yes. Don’t get me wrong. Like I said, recently …
RITHOLTZ: You’re bit of a car guy, right?
DIMARTINO BOOTH: I went to my first F1 race and didn’t want to leave, I’m like, no, no, you can — surely, you can go a few more laps. I’ve been to the Daytona, 24 hours of Daytona. I left for two hours and came back …
RITHOLTZ: Just go to Le Mans. There’s — you’ll see more of that. What are streaming, listening to, downloading these days?
DIMARTINO BOOTH: So, I’m not a big podcasted but …
RITHOLTZ: What about video? Amazon Prime, Netflix, what are you watching?
DIMARTINO BOOTH: So, I did just watch, “The Kominsky Method” which I found to be …
RITHOLTZ: So good.
DIMARTINO BOOTH: Hilarious and …
RITHOLTZ: So good.
DIMARTINO BOOTH: … perfectly — it’s like a 21, 22-minute slice.
RITHOLTZ: Right. It’s great.
DIMARTINO BOOTH: It’s amazingly quick. Luxurious radio for me I’m dating myself …
RITHOLTZ: So good. Yes.
DIMARTINO BOOTH: … it’s just so awesome. If I’m on a particular mood, hell, I can turn on …
RITHOLTZ: Are you 8 on ’80s or 7 on ’70s or what do you listen to?
DIMARTINO BOOTH: Sometimes I’m listening to Bruce for hours.
RITHOLTZ: The E Street channel?
DIMARTINO BOOTH: Yes. Yes.
DIMARTINO BOOTH: Occasionally, I’ll even turn on Elvis but I’m an alternative rock kind of a person. I’m Channel 33.
RITHOLTZ: So, do you listen to Deep Cuts, is that with that is or Vinyl Rewind? I don’t know …
DIMARTINO BOOTH: Sometimes I do Vinyl Rewind …
RITHOLTZ: I don’t know the numbers off the top of my head.
DIMARTINO BOOTH: … sometimes I do Classic Rewind.
RITHOLTZ: And you ever listened to (inaudible)?
DIMARTINO BOOTH: No. That I don’t.
RITHOLTZ: Like ’96 to ’97. Check that out. It’s actually — I mean, it’s …
DIMARTINO BOOTH: But I could — but laughter is good for the soul and I don’t laugh …
RITHOLTZ: It is.
DIMARTINO BOOTH: … very much being this huge Fed critic. So, I’m going to find it.
RITHOLTZ: You should find a way to laugh at the Fed. Who are some of your early mentors? Who guided your career?
DIMARTINO BOOTH: So, I would say that the most important mentor was Charlie — excuse me, was Harvey Rosenblum and Harvey took me under his wing. He was the Director of Research at the Dallas Fed. He was the right-hand man …
RITHOLTZ: Yes. Super nice guy.
DIMARTINO BOOTH: … to Richard Fisher and he taught me how to be more accepting of the school of economics …
DIMARTINO BOOTH: … and be less resentful even though my father, may he rest in peace, he taught economics and finance and I said, never will I ever go there. But he …
RITHOLTZ: And here you are.
DIMARTINO BOOTH: Here I am. He gave me a great respect for the school of economics and I gave him a great respect for the financial markets and it’s been one of the loveliest collaborations of my career.
RITHOLTZ: Tell us about some of your favorite books. What are you reading? What sort of books do you like to read?
DIMARTINO BOOTH: So, I like to read books that are almost off in their brilliance. The book that’s had the greatest impact on my career is the “Lords of Finance.” Hands down.
RITHOLTZ: Liaquat Ahamed and I believe that won the Pulitzer Prize.
DIMARTINO BOOTH: Did it?
RITHOLTZ: I’m pretty sure it did. Yes. It’s wonderful, wonderful book.
DIMARTINO BOOTH: It’s an …
RITHOLTZ: About the four Fed chiefs from the U.S., U.K. …
DIMARTINO BOOTH: Yes. Yes. Yes. Yes. Yes.
RITHOLTZ: … Germany and France.
DIMARTINO BOOTH: And parallels between pre-crisis and pre-World War I are just — they’re stunning.
DIMARTINO BOOTH: And it’s well written.
RITHOLTZ: Really well written. Really, really — and I had no idea who he was until that book came out and it was great.
DIMARTINO BOOTH: But if it’s for pleasure, the last year’s quirky book that had history off of the Greek island called “The Destroyers” that was fun.
RITHOLTZ: “The Destroyers.” Who wrote that?
DIMARTINO BOOTH: Gosh, I have no idea.
RITHOLTZ: “The Destroyers.” That’s really interesting.
DIMARTINO BOOTH: And then “Goldfinch” Thank, God, I didn’t watch the movie. That’s all I have to say.
DIMARTINO BOOTH: “Goldfinch” is probably one of the best written books out there, period, end.
DIMARTINO BOOTH: So, if you’ve not read either of those …
RITHOLTZ: Who wrote “Goldfinch”?
DIMARTINO BOOTH: I have no idea. I don’t do authors.
RITHOLTZ: “The Destroyers” a novel by Christopher Bollen.
DIMARTINO BOOTH: Yes. That’s it.
RITHOLTZ: Wow. And then let’s see what “Goldfinch” has, who wrote that.
DIMARTINO BOOTH: I think it’s “Goldfinch” that won the Pulitzer actually.
RITHOLTZ: “The Goldfinch” by …
DIMARTINO BOOTH: Yes.
RITHOLTZ: … Donna Tartt and David — Donna Tartt.
DIMARTINO BOOTH: Yes.
RITHOLTZ: Wow. All right. So, that’s three books. That’s great. “Lords of Finance” “Goldfinch” and “The Destroyers.” Tell us about a time you failed and what you learned from the experience.
DIMARTINO BOOTH: Well, I learned not to fight the Fed even though I did it internally for nine years. But after I left the Fed, I have learned how important liquidity is to the financial markets. I’m going to quote current Dallas Fed President Robert Kaplan and say, let’s see what happens if you take the liquidity away. So, I’ve learned to not fight the Fed.
RITHOLTZ: Quite interesting. What do you do for fun? What do you do when you’re not in the office writing?
DIMARTINO BOOTH: I travel. I travel …
RITHOLTZ: For fun or for work?
DIMARTINO BOOTH: I travel for fun almost as much as I travel for work and I’d always try when I’m traveling for work to have a little bit of fun in there whether it’s one of my favorite restaurants in New York or if I’m in London seeing something that I would never see, when I have this big speech in Australia, wow, it was life changing to see that beautiful country unfortunately before the big wildfires.
RITHOLTZ: All right. So, I don’t know (inaudible) about Fed or general. I’ll give you the option. What are you most optimistic about today and what are you most pessimistic about?
DIMARTINO BOOTH: So, I’m clearly most pessimistic about the printing press running 24/7 making us even more reliant on the largess of the Fed. Optimistic, I am optimistic because I’m close enough to my children and watching them get an education and learning about charter schools to begin thinking that there’s some kind of grassroots desire to begin education reform, which I think is so much more important than anything else in this country is reforming education.
RITHOLTZ: Interesting. Speaking of education, a recent college grad came to you and said, I’m interested in a career in either, fill in the blank, journalism, economics, Wall Street, what sort of advice would you give them?
DIMARTINO BOOTH: So, I am going to switch it to being a recent high school graduate.
RITHOLTZ: Either or.
DIMARTINO BOOTH: I would tell them to …
RITHOLTZ: Go to college.
DIMARTINO BOOTH: … bite the bullet and get an engineering degree …
DIMARTINO BOOTH: … and after the engineering degree, they can get at higher advanced degree in whatever they want. But to get an engineering degree, there’s many different forms of engineering in this world, many different stripes, but get that as your base.
When I was in business school, when I got my MBA in finance, it was always those damn engineers who threw the curve. But they were — they’re raging successes later on in life.
RITHOLTZ: That’s quite …
DIMARTINO BOOTH: I don’t care if it’s law school or to become a doctor after. Start with an engineering degree.
RITHOLTZ: I got to say I think that’s pretty good advice. And our final question, what do you know about the world of monetary policy, Federal Reserve, crisis management today that you wish you knew 20 years ago?
DIMARTINO BOOTH: I wish I would have known about the group of 30 prior to joining the Fed and …
RITHOLTZ: Meaning the nation group of 30?
DIMARTINO BOOTH: It is group of 30 of the world’s most powerful central bankers and financiers. I wish I would have known that that existed because it took me too long to figure out that all central bankers appear to be cut from the same stripe and the reason that it is so difficult to extricate ourselves it’s because everybody around the world is using the same guidebook. It’s the same playbook.
RITHOLTZ: Quite fascinating. We have been speaking to Danielle DiMartino Booth. She’s the author of “Fed Up: An Insider’s Take on Why the Federal Reserve is Bad for America.”
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