RAOUL PAL: Danielle, good to see you.
I was thinking, the last time you and I chatted was in New York, like years ago. And
both you and I are on the platform all the time. DANIELLE DIMARTINO BOOTH: Yeah, no, no, no.
That was probably right after I'd left the Fed. I mean, a long time ago! I still [INAUDIBLE] PTSD
there. I was fresh out of the Fed. RAOUL PAL: You and I are on the platform all the time, and
we've never actually got together chatting. And I've– DANIELLE DIMARTINO BOOTH: Oh I know.
RAOUL PAL: And there's so much going on that I just wanted to pick your brains. But first,
before we start, give people a bit of background about yourself, what you're doing, that kind
of stuff. DANIELLE DIMARTINO BOOTH: So I have the strangest career path– probably not the
strangest, but one of the most eclectic that I've ever heard of. I came out a business school,
MBA in finance. Went off to Wall Street. Worked at a firm that's no longer with us called DLJ.
James, who recently– he retired from Blackstone, he beautifully sold the firm at the very
height of the internet dot-boom craze. Some of the equity analysts that I worked with
at DLJ made their mothers proud later in life, they went and testified before Congress for
all kinds of lovely shenanigans. We're way back there. We've come absolutely full circle. In
any event, I got my second master's at Columbia at night after the market closed while I worked
full-time because I was spending too much money on Jimmy Choos and champagne. So I said, you know
what? It's time to go back to school. So I sent myself back to school. Writing was going to be
my retirement plan. 9/11 happened. I landed in Texas as a result, after doing this long-distance
dating stuff and retired. Signed a noncompete, sold my book of business back to those
nasty boys we inherited from Drexel, the junk bond desk, and agreed to leave the
Called the publisher of the Dallas Morning News. I said, I'll work for free.
He said, that's perfect with my budget. And two big phone calls changed my life, one from
Warren Buffett and one from Richard Fisher. And eventually ended up serving my country, I don't
know why, at the Fed, as I'm the worst bureaucrat in the world. I didn't do sensitivity training
when I was on Wall Street, for heaven's sake. I certainly wasn't going to do it at the Fed. But
I was there for nine years throughout the crisis. And I came out, and now I have a research firm,
and I do exactly what I used to do for Richard. He saw New York markets desk research as sell-side
in nature. And they've typically got a guy from Goldman running it, so it should read sellside.
And he wanted to be unorthodox. He also did not have a PhD in economics like me, which was rare
for Federal Reserve presidents.
So he set up his own markets desk in Dallas. So prior to every FOMC
meeting, I would head up to New York, talk to the trading desks, economists, strategists, pick
everybody's brains– portfolio managers– and present to him a markets briefing before he went
off to Washington. Initially Timothy Geithner, and then Bill Dudley, I was the biggest thorn in their
side, because I came up with massively different conclusions than what their desk was disseminating
to the entire system. It was a lot of fun. But I do what I do now that I did for Richard, I do it
now for subscribers. And of course, if you're on my Twitter feed, you know that I tweet about 24/7
as well. RAOUL PAL: So what the hell is going on? It is a confusing old world out there. I
want to pick your brain to see what you're seeing. I don't know where you want to start,
but just– DANIELLE DIMARTINO BOOTH: I look at the world, people call it k-shaped.
And I don't
think it's that simple. I think that you have a protected universe and an unprotected
universe. Inside the protected universe, there's no price discovery. Prices just go
up. So whether it's residential real estate in the United States, because the FHA lending is
up and strong, Fannie, Freddie. People don't know about this.
They're doing something called an
automated appraisal waiver. They're even doing it for 12% of purchases right now. We've got $50
billion run rate of cash-out refinancings coming. We don't even talk about that anymore. I mean,
we had that your house is an ATM machine was so passe, we never thought it would happen again.
We're in the middle of it. So when the Fed is buying– PETER COOPER: Sorry for interrupting your
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in the description or go to realvision.com, it costs you just $1. I don't think you
can afford to be without it. DANIELLE DIMARTINO BOOTH: coming. We don't even talk about
that anymore. I mean, we had that your house is an ATM machine was so passe, we never thought
it would happen again. We're in the middle of it. So when the Fed is buying up more than
net mortgage originations, and FHA lending standards are lax, and Fannie and Freddie are
saying, drive-by appraisals are fine.
Just put it in the computer system. We don't actually need
a human being physically in the home. They've got 90% of cash-out refinancing volumes right now.
They've got 80% of plain vanilla refinancings. And all of this is feeding into this exodus to
the exurbs and the suburbs, which is the only fundamental thing backing residential real estate.
But I give you all of these details because this is the protected. Think of it as being an
endangered species. And it's a place that the Fed, the Fed's transmission mechanism worked. The
same thing can be said for the corporate bond market. Anything publicly traded, anything capital
markets, Figaro, I mean, Legaro, a few days ago, a company that will probably be filing, issued debt
for 17 and 1/2%.
I mean, we finally have a high in high yield. But as long as you have access to
the capital markets, you're also in a protected realm. Commercial real estate missed that boat,
and we're seeing price discovery increasingly– obviously, we've seen it in lodging. We've seen
it in retail. Retail was a long time coming. Lodging was something that crashed upon
the commercial real estate industry. 50% of lodging-backed CMBS is a full-service hotel.
How many full-service hotels do you know of that are running at 100% capacity right now? And that's
the point. And that's why delinquencies are 27%, 28% in that subsector. And what's next is office
and multifamily high rises in the middle of urban centers. But again, that is an unprotected realm,
and that is where you can see some movement. The same goes with currencies. The same goes
with volatility. The same goes with commodities. And that's why you're seeing volatility where
people feel like they can have an influence on price discovery. RAOUL PAL: Yeah, fascinating. I
mean, I've been following this story. I call that the insolvency, which is one part of this economy
that looks terrible, right? It's anything with debt attached to it has impaired cash flow.
then, there's this other half, which is as– it's like in la-la land, because the Fed doesn't
allow price discovery in a bunch of stuff. I mean, the credit market is ridiculous.
We've got massive defaults going on, and everyone's got impaired cash flow, yet
junk bonds and everything else are just absolutely fine, whistling past the graveyard.
DANIELLE DIMARTINO BOOTH: Well, right now, we're in a sweet spot in the credit markets.
The high boil of bankruptcies has come off. What we're seeing is very quiet demand destruction
in the background. So you're seeing white-collar professionals– and these aren't WARN notices.
This isn't like Disney's firing 28,000 part-time workers. It's KPMG getting rid of 100 people here
and there. It's Deloitte closing down– and then another big consulting firm followed them–
their UK offices. It's a very slow grind into higher-paying professions, which is going to be
much more detrimental to the economy. But for now, because the United States perceives the virus
as being behind it, the credit cycle is taking a pause. And because the market still thinks that
there might be stimulus before the election, there's still hope out there.
I think once we
get past the election, how many days away it is, companies that are on the brink, teetering
on the fence, they're going to say, if there's no money in the hands of small
businesses and 20-some odd million– it was 23 million reported recently. Let's take 3 off for
all the fraud, and the swings, and blah, blah, blah– but let's say 20 million Americans still
collecting unemployment insurance. If you're close to insolvency, and you want to restructure
something, A, you pay yourself a big bonus, and then you file. If you know that Americans and
small businesses aren't going to have anything in hand until Valentine's Day at the earliest,
you stop, you study the calendar, and you say, so here we go.
So I think we're going to see the
second wave of insolvencies and chapter 11 filings come after the election. And it's determined
that really, we're going to hang out a certain– two certain cohorts, the unemployed and small
businesses. We're going to hang them out to dry until Valentine's Day. And if that's the
case, then you'll see a resurgence here, BCYGO function on your Bloomberg. RAOUL PAL:
And also, we talk about the virus. And again, I don't want to get involved in the shit fight
over how people interpret it. But all I do know is cases are rising everywhere around the world.
And the fact is that the baby boomers, who are the wealthiest cohort in the world, are going to take
evasive action, regardless of whether governments create them. So if Biden gets in, they'll have
some more rolling lockdowns than they would if Trump gets back in. Either way, people are
going to take evasive action. So all I can see is a renewed slowdown in growth. We're seeing
it in Europe already. DANIELLE DIMARTINO BOOTH: Right.
RAOUL PAL: Because they've got it bad.
And so I don't know. I just wanted to see what your thoughts are. My hunch is that we go through
this– we've got a four-month window, as you say, where we may have no stimulus, slowing growth,
and a lot of these small companies, particularly, on the precipice. How do you see this next four
months play out? DANIELLE DIMARTINO BOOTH: So at the risk of waking the demons on Twitter, because
you mentioned the "case" word.
You mentioned the C word. Don't mention the case word, because we're
testing more. So the way I see it in terms of curbing consumption is, if you know somebody,
a relative or a friend who's in the hospital, it's pretty simple. Either they're
at home, and COVID is no big deal, and they got over it in a few days, or,
shit, somebody I know is in the hospital. Right now, we've got 41,350 hospitalizations
in the United States. That's what I'd look at, because that is what is going to curtail
somebody's consumption behavior. You've got Republican governors in Nebraska right
now doing partial shutdowns, New Mexico– you don't have to have a change in the
White House for the governors to say, you know what? We're a low density, low capita
state, and yet, our hospital system matches that population. So they're going to do what they have
to do to not overwhelm their individual systems. So you'll see pockets, but right now, if you look
at the R0, if you look at the transmissibility of the virus, we're down to four states– one, two,
three, four– with an R0 of not a less than one. So the vast majority of the country is, call
it, four weeks behind where Europe is.
So you've got the European composite PMI this morning, the
business outlook, and the differential between the business outlook and the US PMI this morning was
one of the widest gaps in the history of the two. But again, if you want to connect the dots, look
at hospitalizations and bring them together. And that's where we're headed; it's just with a
lag. RAOUL PAL: Yeah, and what I always have a problem with– I guess you do the same–
is people put their own biases on this. And our job is just to look at the economy. DANIELLE
DIMARTINO BOOTH: Right. RAOUL PAL: Right? So yeah, is the economy going to pick up or slow down in
probability terms? Well, if the virus comes back, it's likely to slow down. DANIELLE DIMARTINO
BOOTH: Right, I mean, you've got your top two quintiles of earners in America, the top
40% of income earners are responsible for 61% of consumption. You get a similar picture if you
look at people 55-plus, because they simply have more wealth accumulated after living here for
longer. So A, Gallup polling– and I don't quote many polls at all– but if you checked Media Bias
Fact Check– it's a fantastic website.
It shows you exactly where on the spectrum your source is
in terms of left to right. Gallup is smack down the middle since 1935. They have no bias. They
simply take the surveys and report the data. People who have college educations or more believe
in the efficacy of masks, meaning if they're in a state where most people don't, and they're acting
like cowboys, your most educated people are going to be like, here I am.
I've got my Instacart.
I've got my Amazon. I'm fine. By the way, I'm in a bigger house. I've spent more. Furniture
sales have gone through the roof. Home improvement has gone– this is all a reflection of
people saying, my house is my bunker. But if you have people stay away from consuming
who are either in a demographic cohort older, or wealthier and more educated, you are going
to put a governor on growth. It's as simple as that. If you look at offices– excuse me– if you
look at small businesses in high ZIP code areas, Opportunity Insights is just a treasure trove
But if you look at high ZIP code small businesses, there's a higher percentage
of them that are closed in high ZIP codes, because people come out less, because they trust–
they're educated enough to say, why is politics involved with science? So they just step back
from it and say, I'll be out when it's safe. You let me know. RAOUL PAL: Yeah, exactly right. So
why is the bull market not seeing this? It come back up a bit.
I mean, I think– as you are, as
well– I'm bullish bonds, because I think the economy is slower than expected. But the bond
market's been backing up. What's your thoughts about this? DANIELLE DIMARTINO BOOTH: Well, don't
fight the Fed. Look, Jay Powell needed to create a narrative out of thin air. And if you want to
create a narrative out of thin air with really high unemployment, you do two things. You have the
leading sector for an economic recovery, housing, roar back. And you buy the TIPS market. You buy
the hell out of the TIPS market. You buy as much– and then you have Hartnett and the Flow Show
every week. And last night, they were like the seventh biggest week. And retail investors, high
net worth investors, people are smart enough to read, every Thursday, the Feds, what their
purchase is, the composition of the balance sheet. And they're like, I'm following the Fed right into
So the Fed and investors are painting this, "Oh, god inflation is right around the corner"
narrative by force. It's just exactly what they did last year, September the 16th, when they
launched Not QE. Because the inversion of the 2s 10s had passed the 30-day mark, and they're like,
oh my god, history says that we're in recession. Well, no kidding we're in recession. World trade
was contracting for the entire year of 2019. Lacy Hunt will tell you, you have to go back
to the double-dip recession of the 1980s or 2007- 2009, that era, before you had
global contraction in global trade. Of course, we were headed into recession. But it was
very slow. But the Fed had to launch Not QE so that it could come out, and buy the short end
of the curve, and physically un-invert it.
Fine. So they're like, hey, what do we do to create
inflation so that we can say, we're going to let inflation run hot, when, 11 months since
January 2012, when Bernanke announced the 2%, target they'd hit it– 11, God bless their souls.
But they needed to create the narrative that they were going to let it run hot, so they just– they
made it. They've got the printing press. They just redirected it into the TIPS market. Pretty
powerful stuff. And you get the entire narrative with all of the strategists going, real yields!
Whatever. RAOUL PAL: But what you're saying is, it's all an illusion. There is actually
no inflation pressures right now at all? The Fed are trying to– DANIELLE DIMARTINO
BOOTH: How do you have inflation with– you do have, I just finished a $400 run to the Sam's
I mean, you do have inflation in food. You have inflation where it hurts people the
most. But you don't have inflation in rents, which is one of the stickiest, stickiest parts of
the CPI or PCE, however you want to measure it. And that is going to hurt the Fed more. And
that is what they're fighting against right now. So inflation, where it counts the
most, is through the roof in housing, year-over-year 15% price appreciation, but the
rental market is suffering. And that's also an input. So there's a lot of crosscurrents
going on right now. But in terms of, if you think of inflation through the prism of
pricing power, forget about it. RAOUL PAL: And so the Fed started making noises about doing
something further along the curve, further out the curve, because obviously, they've seen 10s and 30s
backing up a bit.
Not that they've gone very far; it's noise, really. But do you think they're going
to get back in soon? I mean, if there is this window that you and I are talking about, let's say
there is no stimulus agreed before the election. Doesn't feel like anybody wants that to happen.
So in which case, the economy gets sacrificed for three months. Do the Fed step in? DANIELLE
DIMARTINO BOOTH: Well, what the Fed is trying to do right now is, If I could dig deep enough into
what the Fed purchases are, you would probably see that they're buying TIPS way out– tenors,
maturities, way out as far as they can because they want to see a 1% handle on the 10-year. They
want to see a 2% handle on the 30-year, so they can go, I give you a yield curve control. I'm just
going to slap a ceiling on this puppy. And that's what they want. They want for– I mean, Powell
and Mnuchin are on the phone. That's a matter of public record.
Powell and Pelosi have been
on the phone. That's a matter of public record. But I mean, the rebirth of the 20-year Treasury,
it didn't pop out of Mnuchin's head. It popped out of Powell's. So they want to be able to come in
and have product to buy further out on the curve. And so they're probably buying TIPS out as
far as they can. RAOUL PAL: But if yields are generally trending lower over time,
what's the point of yield curve control? Because we saw it in Japan. I mean, Japanese,
yes, for a period of time, in a recovery, sure, they end up buying a ton of bonds. But when
it's not a recovery, they don't buy anything, because the market trades beneath them.
DANIELLE DIMARTINO BOOTH: It's true.
But again, it's hard to understand the psyche of a central
banker. The Hippocratic Oath is nowhere in the Eccles building. They don't understand Do No
Harm. They don't understand Do Nothing. They can't. And the market and market participants,
they need to know that the Fed is doing something, because if they don't, they're just staring at
a pile of insolvent crap. So they have to know that there is something being done on behalf of
them. And the reason that every Fed official has been begging for stimulus spending is they want $3
or $4 trillion of new product out there to buy and continue to aggressively grow the balance sheet.
But they need more Treasury issuance to go there. I mean, god, the Treasury checking
account right now is a trillion dollars. And I think Trump thought that he could deploy
some of that. And I think that the few lawyers who are left in the White House who haven't left said,
I'm sorry, but you really cannot do that. I mean, he employed the FEMA for unemployment benefits.
He employed the CDC to impose the rental eviction moratorium.
If he had more toys to play with,
he would in terms of executive memorandum. If he could spend that 1.8 trillion, he would, that's
sitting in the checking account. RAOUL PAL: So what the hell are they going to do with it?
DANIELLE DIMARTINO BOOTH: Well, eventually, they will– I mean, McConnell, this Mitch
McConnell, Senate Majority Leader, said at the beginning of the week, we're going to be voting
on deploying that extra 100, 150, 60-some odd billion PPP funding that was never tapped. We're
just going to do a piecemeal and release those funds from the TGA. That didn't happen. Everything
was about the Supreme Court justice and rushing back to Kentucky, where he's got a tight race.
So the thing that pisses me off so much, Raoul, is that never in the history of the United States
has Congress so blatantly put their interests in front of small business. RAOUL PAL: Yeah.
DANIELLE DIMARTINO BOOTH: Or people. Yes, people. But 48% of landlords in America are
small business owners. They've been hung out to dry. They've got mortgages to pay on these
So it's the chosen, it's the protected versus the unprotected. I go back to my theme.
I've been writing about it, and it's atrocious. RAOUL PAL: And it still amazes me that it
doesn't get more public discourse. I mean, as you say, I mean, what you're doing
is protecting the old guard. Everybody, it's the 1% versus the 99. This is the
core of the economy, the small shops and– New York's being decimated,
and nobody is there to help them. DANIELLE DIMARTINO BOOTH: Yep.
RAOUL PAL: I
mean, I think there's 170,000 restaurants closed in New York. DANIELLE DIMARTINO BOOTH: Yeah,
and I mean, to add insult to injury, you have idiots like de Blasio going rogue and saying, oh,
we're just going to get rid of bail, and we're just getting– we're going to force the police
to say, you must put the gun down. I'm not going to use force, because I've been told I can't. So
you have this massive wave of early retirements out of the police force. And the White House is
like barking like seals happy. They're like, burn it down, burn it all the way down so we can blame
it on politics. You're sacrificing the financial center of the world right now between what is not
being done for the national restaurant industry and the national lodging industry. God, I mean,
the Roosevelt Hotel just closed, for god's sake– Things that have been around for much
longer than our great grandparents were. But there is so much economically that is being
sacrificed on the funeral pyre of politics. And what people don't realize is when you go
this route, there's all kinds of excitement, because the Census has released data that shows
that applications to start new businesses have never been like this.
Well what are people going
to do in a LinkedIn world? They're going to apply for a tax license, whatever they're going to–
say, I'm Joe Q. I cannot get through my LinkedIn. Every day, I get 10 solicitations from
somebody who's CEO of their own company, because they have to put something on their
resume. But they're not hiring people, and they're not generating revenues. So Raoul, I mean, there–
but again, when you look at the stock market, nothing appears to be wrong. RAOUL PAL: No. Here's
another thing I want to talk about, is, I know, since I've been basically shut in on a small
island– DANIELLE DIMARTINO BOOTH: Bless your heart. RAOUL PAL: –I've been spending money doing
my house up, doing things that needs to do, blah, blah, blah. And many of us have done the same,
right? So, oh, god, the deck needs doing, those windows need doing, and all of that stuff, right?
So we've brought forward a ton of consumption to do stuff.
I'm more concerned than others
are about 2021. Everyone thinks it's a shoo-in recovery year, and I'm like, well, I've never seen
a recession that's lasted less than 18 months, ever. So why this case? What do you think?
DANIELLE DIMARTINO BOOTH: So I mean, right now, I think if I'm at the National Bureau of Economic
Research and it's my job to date the recession, but let's say we see a 35% print. That's the
best one out there when we get the GDP report next Thursday. The question is, what's going to
happen in the current quarter? If I'm in the NBER, how do I date this puppy? Well, industrial
production is still on the floor.
Your survey data is really good. But if you look inside the
internals of both the manufacturing and service surveys this morning employment is not
there at all. And temporary hiring has gone through the roof, because companies
aren't willing to make the commitment. And CEO confidence, a few days ago, was reported
from the conference board. It's a quarterly print. It popped above the 50 line for the
first time since 2018, like pretrade war, because 68% are planning to either cut their
headcount or freeze their headcount, and a ton of them are planning to freeze pay. So CEOs right
now are– they're like, this is amazing. I've got this currency called my stock price. I can go buy
whatever I want. In the process, I can fire a ton of people, and I can get all the synergies that
my consultants are telling me and my investment bankers are telling me that I can get.
all well and good, but in terms of productivity, economic output, it's a nothing burger. It's not.
It's financial engineering in a different way. But the victim here is going to be employment. So again, if I'm the NBER, I'm having a really
hard time if there's a 1% or 2% print in 4Q for US GDB, I'm still having a hard time saying
the recession is over. Even if– RAOUL PAL: So if you look at– DANIELLE DIMARTINO BOOTH:
Quarters– RAOUL PAL: –because also, if you look at year-on-year, if you look at– I look at a lot
of the realtime data, and I"m sure you do, too. It's all still down.
It's suggesting the
economy is still down 5% year-on-year, which is the biggest recession you and I have
ever lived through. DANIELLE DIMARTINO BOOTH: Right. RAOUL PAL: And that This. Is the recovery.
This is the reflation trade, negative 5%. And it's not clear, with COVID coming on the rise,
the lack of stimulus, what's going on globally, that you're going to get a pickup to above 0
year-on-year. Obviously, you will do in March, because we had this event, so the numbers get
screwy again. But I– DANIELLE DIMARTINO BOOTH: No, I mean, look, are our people going to be
doing their decks when there's a foot of snow on the ground outside? I mean, furniture sales
could theoretically hold in there. And again, interesting about housing, what's most interesting
about housing is Richard Curtin at the University of Michigan, he has the most granular data for
a total dork like me.
You can dig so deep into this stuff. The people who are most enthusiastic
about their home prices rising in the next 12 months are in the middle. They're right smack in
the middle. So we have this cohort of aspirational consumers right now precisely because the average
cash-out refinancing is $62,500. So you're seeing the Home Depots of the world, and the furniture
makers– and gun manufacturers– but you're seeing certain areas of consumption that
are so strong. But it's predicated on, A, the 55% of Americans who own stocks, they're
happy. I mean, Trump can't– he cannot stop squawking about your 401(k) is so fat and happy.
That's great. But for the 45% of Americans who don't own stocks, big deal. But for the people
who own stocks and own homes, in the middle– and this isn't the haves and the have-nots.
These are the people in the middle. They're taking cash out of their homes, and
their 401(k)s are bigger than they've ever been. And they think that this is a genuine, bona fide,
escape velocity, full-blown recovery.
RAOUL PAL: So when you look at asset allocation
of this very complicated world, what do you think? I mean, how do you navigate
this, right? Because– DANIELLE DIMARTINO BOOTH: I mean, it's exceedingly difficult to
even look at the stock market right now. I mean, people don't realize the power of–
I interviewed Mike Greene a few days ago. Wow, I mean, shut-me-up brilliant. But he made a
fine point. Because so much investing is automated today, if investors have any kind of
a drawdown in their stock holdings, and they're in some kind of
an automated targetdated fund in their 401(k)s, March 23 came to his mind as a
March 23 also is when Jay Powell pulled out his double-barreled bazooka. But on that
same exact day, there was a massive rebalancing, where all of this passive money had to flow out
of bonds and into the stock market. But again, as a fundamental investor, how
do you position yourself when that everything you learned in portfolio
management 101 is out the door? I mean, for god's sake, fine, stock buybacks are
down 66% year-over-year. Apple is still out there, balls-to-the-wall nuts on buybacks. So are a lot
of companies that can. And so between passive investing, and that feeding this beast, I think
it's just very difficult to position yourself in the stock market. I think high-yield bonds are
going to get interesting if spreads gap way out, because the Fed will feel like it has to do
something. And it's got these credit facilities that it's not really using. Now, there's something
to be said, there's a big caveat for any credit investor out there, and that is that there is this
presidential election coming along.
The Treasury Department must agree to extending these Fed
facilities beyond December the 31st. So if Mnuchin is walking out the door, he's not going to agree
to anything. They're going to let it burn down. So I mean, "never" is a big word, but a lot is
predicated on the outcome of this election. Steve Mnuchin, Lael Brainard– wow, I mean, you
couldn't– fine, Elizabeth Warren is a little bit further out on the spectrum, but Lael Brainard,
for God's sake.
So it's difficult. I mean, when I listen to really Intelligent investors
saying, I've never sat on 40% cash in my career, and by the way, I'm a billionaire and
I've been doing this for 40 years, I mean, you have to listen to that. I know
you're Mr. Crypto on Twitter. I see it. But there's something to be said for people
who do have gold holdings.
And by the way, there are some– RAOUL PAL: I have gold. I mean,
it just makes total sense. It's a great trade. DANIELLE DIMARTINO BOOTH: It does make sense.
And my municipal bond holdings in good states, they're doing fabulously. And guess what? If
Biden wins, they're going to do even better. Because if Biden wins, they're going to do even
better, and people are going to say, OK, there's eight, nine trading weeks left in the year,
maybe seven trading weeks if there's an extended period of uncertainty in terms of who is going
to be president. But if Biden comes in, and you're sitting on all-time high gains in stocks,
what are you going to do? Are you going to say, well, I'll just roll the dice. And maybe
my capital gains tax won't be 43% in 2021. Maybe I'll just gamble on that.
it's not how it works. You're going to take your gains before December the 31st, 2020. So
there are just so many damn unknowns that I don't think that there's anything– look, CMBS
has got some really sweet, sweet spots. There's still denial with office. There's still denial
with multifamily. So there are places you can go. There are pockets you can go. You can dig into
these CMBS indices. But I mean, everybody knows it's kind of there. Even though, again, in office
and in multifamily, people are still in denial.
So there might be money to be had there. But Raoul,
when you think about what the Fed has done, BBB is still 50% of the investment grade
universe after record fallen angels, because we will– by the time the year comes to
an end, corporate America will have tacked on a tidy $2 trillion of extra debt. So what we've done
with this, we came into the year with debt-to-GDP, nonfinancial debt to GDP holistically, including
the corporate bond market and all other forms of loans, at a record 78%. Great Financial Crisis
peak, 74% So in an expansion, we came into 2020 with 78% debt-to-GDP non-financial.
I suspect by
the time we get to the end of the year, it will be closer to 90%. So with this great opportunity
of this crisis to clean up our balance sheets, we've made them uglier. And that's why you
see great interviews with Howard Marks saying, it is nasty in the restructuring pits. And we're
in the mud, and I'm nobody's brother. That's what he said, I'm nobody's brother. The reason
that there is such a shit show in terms of what's happening in restructuring– and there's
tons of them going on– is because when you tatter a balance sheet further, when you
go to extract value, there's nothing there. And that's why we're seeing more liquidations
than we've seen in the past. It's because the capital markets have been open for so, so long
that you don't have a typical restructuring cycle when you declare chapter 11.
There's just less
for the creditors to fight over. RAOUL PAL: The other thing that Mike Greene talked about when I
chatted with him recently was the increase in jump to default risk, because the Fed is supporting the
bond markets, and the bond market is not a signal. I've been using the equity market as a
signal. Because we saw the same in Europe. The European bank bonds hold up, but the equity
doesn't, right? The equity goes to 0. DANIELLE DIMARTINO BOOTH: Yes. RAOUL PAL: And Mike's like,
this is a problem. Yes, equity may fall. We've seen it in, let's say, GE and stuff like this,
these big, indebted old economy names. The equity falls; the bonds hold up. But if anybody defaults,
you've got a real problem, because it goes from BBB to out in one go. DANIELLE DIMARTINO BOOTH:
That's the point, is it's not just that it's over-indebted, it's that it's more over-indebted
than a BBB has ever been.
RAOUL PAL: Yes. DANIELLE DIMARTINO BOOTH: So so you go
from investment grade to gone. RAOUL PAL: Yeah, and that– well, portfolios deal with that. People
haven't figured this out. And the Fed is hiding the price signal. DANIELLE DIMARTINO BOOTH:
Oh, yeah. It's– RAOUL PAL: Everybody's deaf, because normally, the bonds would sell off,
[INAUDIBLE] would sell off, and you'd get out of the trade. But this, your bonds are here, and
then they're worth 0.
DANIELLE DIMARTINO BOOTH: And here we are. RAOUL PAL: So another
question I want to ask you is about, what happens if the election isn't decided? What
happens then with the negotiation? Does that just absolutely, categorically stall everything in
terms of stimulus or anything else? So let's say we don't the votes, or, Christ, it's
split? So the Republicans hold the Senate, and the Democrats hold Congress? I mean, there
seems like there's a lot of banana skins to slip up here. DANIELLE DIMARTINO BOOTH: There are.
And there's a lot more risk right now for the GOP in terms of the Senate.
And they know
that. So that, it's pretty amazing to see that a lot of the GOP has thrown in the towel
on the presidential race because they're so desperate to hold the Senate. RAOUL PAL: Huh. And
so let's assume that they got their way, right? So let's say Biden gets in, the GOP holds the
Senate. Well, then, there goes the stimulus, and all of the big New Green Deal, and all of
that stuff, right? You have to wipe the whole out of markets, because they're never going to
allow it to happen.
DANIELLE DIMARTINO BOOTH: It's going to be gridlock at a very tenuous
juncture. And the furthest that the Republicans wanted to go was $400 a week. Pelosi was saying
$600 a week additional unemployment insurance. Where will the bank lobbies fall? Pelosi's
plan has an another 12 months of forbearance. So right now, you've got 7% of Americans with
mortgages who are not paying their mortgage. And that clock runs out on March the 31st. The
CARES Act provided for 12 months of forbearance. But if I'm the lender, if I'm Wells Fargo–
Wells Fargo is a bad example in terms of lobbying power on the Hill– but if I'm another
big mortgage lender, and the bill says another 12 months, so 24 months, March 2022 is
the first time that I can, A, foreclose, or B, say, send me a mortgage payment–
you're asking a lot of lenders. And the GOP is going to know it if they keep
So little details are going to have big economic implications if you have what you
describe– Biden, the Senate stays with the GOP, the Democrats keep the House. RAOUL PAL: Yeah,
it just feels to me the market's not pricing any different outcomes and they're of assuming
that stimulus comes faster. All of this just feels like a big, scary three-month risk
ahead of us. DANIELLE DIMARTINO BOOTH: You've got a little debt clock running
out on December the 11th. So I mean, something has to be done during a lame duck or
you're going to have the government shut down. So it's– Raoul, yeah, no, a contested election,
I mean, that's why Michael Bloomberg poured $500 million of his own pennies into the state of
Florida, because so few swing states this year are up for grabs.
Florida is one of them, and they're
still running neck-and-neck. I mean, history's not supposed to repeat itself, so god help us if we
have Bush-Gore, and hanging chads, or whatever the modern day virtual equivalent of a hanging chad
is. But that's why so much money is being poured into Florida right now. RAOUL PAL: And Texas?
DANIELLE DIMARTINO BOOTH: It's interesting, because more people in the state of Texas, where
I am, have voted in total than who voted for Trump in the entire state in advance. RAOUL PAL:
Wow. DANIELLE DIMARTINO BOOTH: So I mean, A, I'll have to move. I mean, because I mean,
if they impose a state income tax in the state of Texas, well, I think a good chunk of
us would leave. We'd come to your island. But if Texas swings blue, good god.
mean, that is a landslide for Biden. Not a win. RAOUL PAL: But it's swung blue in
the past. It's not always been a red state, right? DANIELLE DIMARTINO BOOTH: '76.
RAOUL PAL: I thought it was blue more recently. DANIELLE DIMARTINO BOOTH: Mm-hmm. No,
mm-mm. I know my state. RAOUL PAL: So I mean, look, it's going to be a super interesting time.
Right, I've got a bunch of questions for you, if you don't mind. DANIELLE DIMARTINO BOOTH: Sure.
RAOUL PAL: OK, from Dwayne. What is your view of the claim that the Fed has no real mechanism
for creating inflation and that QE is nothing more than a signaling mechanism? Do you believe
that the Fed is actually monetizing debt? This argument's been going around, you've seen,
There's a big shit fight. DANIELLE DIMARTINO BOOTH: OK, So Dwayne, you've not read
Fed Up, because if you had read Fed Up, you would remember the scene when Stanley Fischer was at his
first FOMC meeting, and he stood up, and he said, why don't you use the headline PCE? Here on
Planet Earth, it's the closest thing you've got. This is before the New York Fed quietly
created an inflation metric that included asset price inflation that they then put in the
basement. But Stanley Fischer said, why don't you use headline CPI? And some intrepid staffer in
the back of the room raised his hand, and he said, well, if we didn't use the core
PCE, our models would fall apart. And so Bullard– who, I'm not a big fan of
Bullard– but Bullard, so let me understand this. Monetary policy, this is how it's made– crap in,
crap out? And that's basically the case. The core PCE uses Medicare and Medicaid reimbursement
rates to impute health care.
It understates housing by a mile. And that is– again, I don't
say that after Ben Bernanke got his inflation target in January 2012, I don't say willy-nilly
that the Fed's only hit that target in 11 months. They've not hit that target by the design
of the inflation metric that they use, because it works with their models. It's the only
thing that can give them cover to hide behind so that they can keep up the QE ruse. And
QE is– the reason that Fed officials are begging for stimulus spending is because
they know that they're a one-trick pony. They know what the correlation is between the
S&P 500 and the growth of the Fed's balance sheet.
That's all they know. And a monkey could
figure that out. But they do like to provide the illusion that there are other things. But
yes– and this is where Lacy Hunt and I depart. Even if they don't reopen the Federal Reserve
Act of 1913 to allow the Fed to buy Treasuries at auction, which would require the law to change,
what difference does it make if– and you see, you see the ticks flow. You see foreign
investors stepping back from our Treasury market, meaning the Fed had to step in. So if the Fed
is effectively absorbing Treasury issuance, why wouldn't you call it monetization by any other
name, if it's de facto? I mean, people are like, well, we're going to reopen the Federal Reserve
Congress doesn't have to do that. And by the way, in the BlackRock fine print, in the
BlackRock– RAOUL PAL: People say– the argument goes, and I'm not wildly interested because it's
too wonky- – but everyone says, well, the Fed can only add to reserve assets of the banks.
So if the banks don't lend, because we've got N2 is through the floor, so therefore, you can
come up with as much money– DANIELLE DIMARTINO BOOTH: You're asking if it actually works. No, no,
you're not forcing the banks to lend.
No, no, no, in the sense of how they envision it? I mean,
it's their senior loan officer data. It's a Federal Reserve survey, for God's sake. They know
that lending standards are going through the roof. They know that things are tightening up. They
know that banks are not extending credit because banks can't do price discovery on their own credit
books with the Fed where it is.
So no, you're not creating, you're not generating economic growth.
But did we– I mean, we had an entire cycle of non-productive gains by building a bunch of homes
when 4 out of every 10 Americans were indirectly or directly employed in the housing market.
And then we just flipped a switch and said, you know what? OK, what's the next non-productive
endeavor that we can embark upon for 11 years? Oh, I know– finance. We'll just do financialization
of the US economy– which is not productive. So had companies been growing organically
we wouldn't be in the mess we're in today. But instead, they were like– I mean, Ed Yardeni
himself– who's been a bull for as long as I've been alive, — Ed Yardeni himself, his data showed
56% of debt issuance– excuse me, 56% of share buybacks were financed by debt. So again, it's
not productive. But as far as QE actually working, it's the signaling mechanism. RAOUL PAL: Yeah.
DANIELLE DIMARTINO BOOTH: It's the faith.
It's the confidence bubble that my buddy Peter [INAUDIBLE]
talks about. That's what this is. This is all a confidence game. But is it a confidence game if
there's a blue sweep and we take $27 trillion of debt and make it 40? That's when you go from
disinflationary pressures to stagflationary pressures. And that's a different ballgame. RAOUL
PAL: So another question that relates to that then is, it's kind of like the question that I
asked. The Treasury curve has been steepening. Do you expect that to continue? Or do you think
it's gone too far now because of the reasons said, and maybe steepens later for the other reasons you
said? I mean, how do you see the bond market right now? DANIELLE DIMARTINO BOOTH: So a buddy of mine
tweeted out this morning a graph of the 30 year, because everybody's out there on the long bond
And it is still– I mean, a few days ago, it bumped out of its 200-day moving average.
But you can look back 52 weeks and see 2.24. We're not talking about a dramatic move here. And
again, it has to do with the fact that even though the Fed has tried to dictate through policy the
fundamentals don't matter, the last market you're going to convince of that fact is the bond market.
Because the stocks, the stocks will buy the Fed's narrative all day long and on Sunday. RAOUL PAL:
Yeah. DANIELLE DIMARTINO BOOTH: But the bond market is always going to be more skeptical.
So I mean, I'm personally in the long bond– own it.
RAOUL PAL: Yeah, [INAUDIBLE]. DANIELLE
DIMARTINO BOOTH: But I'm not even talking my book, saying could we see it? I mean, the trade is
so crowded right now. RAOUL PAL: And the short Treasury trade, I mean, that's– I checked it.
It's four standard deviations short. I mean, it's the biggest short I've ever seen. DANIELLE
DIMARTINO BOOTH: And the same exact investors are all short the dollar. RAOUL PAL: Yes. DANIELLE
DIMARTINO BOOTH: But did I mention that Europe is four weeks ahead of us in terms of their
service industry beginning to contract again and their hospitals filling up
again? Again. There's only so much latitude that I think– I mean, unless the bond
market has lost its mind, there's only so much latitude that the bond market gives you when
the fundamentals are staring you in the face. And that's why we haven't seen gaps.
haven't seen 2% on the long bond. As long as this steepening trade has been going on, it has
been painful to watch, basis point by basis point. RAOUL PAL: So do you think– question here about
stimulus. So let's assume we've got this blue wave, and there's a bunch of new spending coming.
Does the Treasury market choke up on it? And when does it happen? Because I mean, it never really
happened in Japan. It's; never really happened in Europe. Does it happen in the US? DANIELLE
DIMARTINO BOOTH: But remember, Raoul, it's not– you're talking about it didn't happen in Japan
when China was coming of age, and the global economy was this massive support system, and the
Japanese bond market is held inside the country. So it occurred in a vacuum against a backdrop
of a global expansion, and a big one, led by China being the marginal driver of growth.
I mean, I do have sympathy and we are guiding our clients right now to focus on beneficiaries of the
But I'm good friends with Leland Miller, and I know a lot of it is narrative,
and a lot of it is infrastructure spending. But there's going to be some direct Asian, emerging
market Asian countries that are going to be beneficiaries, but also because they're not going
to be hit by a second wave at the same time. So you're going to have two things working for
them. But again, my point is when the Japanese experience occurred, Japan got out of QE.
They did quantitative tightening in full and extricated themselves from the policy. They
went back in, but right now, we're all doing it. Every single country is crazy QE. RAOUL PAL: Hence
[INAUDIBLE] DANIELLE DIMARTINO BOOTH: Lagarde just said two days ago, she said, well,
the virus is back earlier than we expected, so we're going to have to go do something.
that's what central bankers do– they have to do something. So Lagarde is going to go do something.
But your question is, if the whole world is blowing up stimulus spending– and we know they
are; we know Merkel's going to give however long to keep people technically employed. You know that
these furlough programs in the UK and everywhere, you know they're going to be extended. So
we're all spending money like drunken sailors. But in the United States, we're going to take
it to a different level if there's a blue wave– a whole different level.
And you could envision
easily $2 trillion of infrastructure– which, by the way, we need. So that actually is
productive. Why we've managed to come through the sharpest slowdown from the Great Depression
and not put Americans to work, when we don't need to build the Hoover Dam, We need to repair
the bridges, I don't know. That shows you how dysfunctional Washington, DC is. But there will
be some productive stimulus spending if there's a blue wave, because Republicans don't want
infrastructure spending because they don't want to give the Democrats a win, and Democrats don't want
infrastructure spending because they don't want to give the Republicans a win. That's how policy
is made. But if one party can take credit for all of it, FDR-style, they'll do it.
So that will
be a couple of trillion. And then we know that the HEROES Act was 3 and change. And then, he's going
to start his Green Deal immediately, because it's going to create jobs. He didn't explain in
the debate how it was going to create jobs, but he promises that this Green Deal is going
to create jobs. So you could easily get to $5, $7 trillion immediately of stimulus spending.
Then you start to worry about stagflation, because China has its eye on the eventuality.
I'm not one of these people- – trust me, at 3:00 AM on my Twitter feed, they're like, we're
losing our reserve currency status at 5:00 PM tomorrow.
I'm like, dude, go get some sleep. RAOUL
PAL: [LAUGHS] DANIELLE DIMARTINO BOOTH: Seriously! But China does have its eye on that. And
China does have 1/3– Huawei itself has 1/3 of all the telecommunications equipment in the
world, and they are the next generation of AI, And if they see this as an opening– right?
They came out a few weeks ago and said, we're going to strategically take our
Treasury holdings down to $800 billion, and we're going to keep them there unless
there's a military conflict. I'm like, somebody just said that out loud in China, and
nobody paid attention to it. So they're actively, proactively– because they know the Fed's going
to buy everything– so they're stepping back from our Treasury markets like the tree
in the forest that nobody hears falling. If there is an opportunity in the future for–
if we don't get enough out of our stimulus spending, if we throw money at people, if
we launch universal basic income, if we slide into a socialist-lite state, that will
open up the door for the country that has been acting like a capitalist system, China– except
with an iron fist, and guns, and full control the financial system.
Sorry, Kyle Bass, but
sorry, they've got control of it, I'm sorry. But if they see our stimulus spending be
nonproductive and just tack on, tack on, tack on to the balance sheet, then you start to see
an opening for a switch in the reserve currency. RAOUL PAL: Somebody's asking about– and
this is everybody's worst nightmare– do you think this debt boom
can keep going beyond 2021? I mean, is this not the pin that pricks the debt
bubble? And if not, what the hell does that mean? [LAUGHS] DANIELLE DIMARTINO BOOTH: I
mean, look, the stimulus spending I just described is going to be Hoovered up by the
Fed. So– RAOUL PAL: How does this finish then, Danielle? Where does it finish? DANIELLE
DIMARTINO BOOTH: Well, it finishes if and when, again, there is a perception– no, no, it
finishes, Raoul, based on fundamentals. RAOUL PAL: But what fundamentals? Debt growth
keeps going, governments keep spending, the Fed monetize it, it goes on that balance
sheet. They peg the yield curve. So inflation's at 3%. They don't care, because the bond yield, they
just keep buying every bond like the Japanese did. When does it stop? DANIELLE DIMARTINO BOOTH: Well,
that's when yield curve control truly comes in, because then the Fed would be fighting a war.
RAOUL PAL: Yeah, I mean, they'd have to buy every bond.
DANIELLE DIMARTINO BOOTH: The Fed would
have to buy every single bond, because what you're describing is a good portion of the US workforce,
as companies automate, as layoffs continue in the background, I see the initial claims data. I
get it. But they're still automating at the fastest rate they have So there's going to be
a massive drag on the labor force for years. So if you pay them to not work long-term, and if US
productivity is– not in theory, but in practice– crumbling, and if we continue to– and that's
the thing. That's, again, where you get to a Biden win versus a Trump win, a blue wave versus
not a blue wave.
You might have more anti-trust with the blue wave. RAOUL PAL: Yeah,
agree. DANIELLE DIMARTINO BOOTH: But I read a really good report a few days
ago that said that retail is going to be– that what we used to term as big box is
going to be the survivalists next time, and they're going to be badass. And they're going
to have rock solid balance sheets, cash flow, because they're going to put all the
small businesses out of business. Because retail is not coming
back as we know it.
So I mean, it's very difficult for me to conceive,
a year from now, having this same conversation. But if there is a blue wave, and
Jay Powell gets enough product, and the world starts to lose faith in the
direction that the United States is going, and if we just decide to say capitalism is not
theoretically dead– that the Fed's been killing it for a generation– capitalism is dead, and
we're just going to support a bunch of monopolies through Fed policy and then pay everybody
else universal basic income to not work, then you will see the Fed actually have the
ability to execute on yield curve control, because nobody else will want the paper. RAOUL
PAL: And at that point, that might be the thing that turns the dollar lower. I mean, I still
think it goes higher first, but I don't know what your thought is on the dollar as a final
DANIELLE DIMARTINO BOOTH: I mean, that would send the dollar lower finally. Again,
but what people are talking about, people don't understand that we're coming up on the 40th
anniversary, right? 1981 was the last time we saw appreciably rising bond yields in the United
States. I don't think that cycles can go– this cycle, A, it's gone on for longer than most, going
way back in history. But if we decide to recognize socialism in the United States– and I hate to
use such a political term- – but if we decide to recognize it by allowing the oligopolies to take
over, and be the haves in the credit markets, and stay alive by virtue of the credit
markets, then I think that we do have to see rising bond yields.
I think the bond vigilantes
will wake up from their long, long slumber. RAOUL PAL: But I've always wondered
this, is there's a lot of talk about, we're getting socialist, right? Some
social policies, different stuff. OK, fine. So if that were the case, then why hasn't Germany
got 7% inflation? It's not inflationary. It's a red herring. DANIELLE DIMARTINO BOOTH: OK,
2005, Germany launches a skills program to re-skill their workforce. They have the
lowest youth unemployment rate in Europe. Vocational training is not a bad word.
doesn't need a four-year liberal arts degree. And so should they've been able to stay above
the fray, plus they have control of the currency by trashing every other country in Europe with
it. They use it as a weapon. Where Germany is vulnerable– what I'm trying to say, Raoul, is
that Germany got a return on its investment for the money that it put into its economy. RAOUL PAL:
But others didn't, right? So even southern Europe can't generate inflation. DANIELLE DIMARTINO
BOOTH: Oh, gosh, no. RAOUL PAL: Sweden doesn't. So I'm just not sure the social policy– DANIELLE
DIMARTINO BOOTH: Southern Europe has god youth unemployment rates that are 15%, 19%. RAOUL PAL:
And that's the question. I'm still not sure, I understand it's inflationary as it
happens, right? It's a fiscal stimulus. And I think, like you, $7, $10 trillion, whatever
ridiculous number, that's what happens. Yes, that's inflationary temporarily, but I'm not
sure it changes the structure of inflation because of demographics, and because of
technology, and because of all of these things.
DANIELLE DIMARTINO BOOTH: That's why
I say "stagflationary." I'm not saying that– I'm seeing rising bond yields and stagnant growth.
RAOUL PAL: Yeah. DANIELLE DIMARTINO BOOTH: I mean, there's no– look, when we were
coming into the financial crisis, Joe Q Baby Boomer was like, fine, 70 is
the new 60. I'll stay in the workforce. That ain't happening. That's not happening 12
years later. They're not. They're leaving the workforce. And they will rotate out of their
stock holdings and their risky asset holdings. It will happen. RAOUL PAL: Yeah. DANIELLE
DIMARTINO BOOTH: They will sell their homes. Not as many will sell their homes, because
they're going to– we're becoming Italy in the United States. We're going to have multi
generations under the same roof. That's going to be a saving grace for the baby boomers. The kids
are going to– RAOUL PAL: Saving grace for the millennials. It helps the millennials. It helps
the baby boomers. DANIELLE DIMARTINO BOOTH: It does. RAOUL PAL: It's a no-brainer, really.
DANIELLE DIMARTINO BOOTH: They're just going to switch places .
Their kids are going to come
up to the top floor so that they can procreate, and they're going to throw their
parents in the basement. RAOUL PAL: [LAUGHS] DANIELLE DIMARTINO BOOTH: And it's going
to be a demographic win-win. But it's not going to generate the same as if the kids had gone
off and established their own house and home. It's not the same. There's not the same kind
of economic dynamism as you would normally see with one massive generation
handing off to another. RAOUL PAL: True. Danielle, listen, amazing. Lots, lots
to think about. I'm sure people have loved it. Lots to go over, and let's see how the next, A,
two weeks plays out– DANIELLE DIMARTINO BOOTH: Yes. RAOUL PAL: –and then, the next three
months after that. Because I think it's– you and I have– DANIELLE DIMARTINO BOOTH: Just
one thing to keep in mind right now– if nothing can be done, then we're looking at money in hand
on Valentine's Day.
Just think Valentine's Day. And that's where you should have your short-term
view in terms of where the economy is headed. Again, and follow hospitalizations. Go to the
covidtrackingproject.com. Forget the cases, just follow hospitalizations, because that's what's
real to people. RAOUL PAL: Absolutely. Danielle, as ever, fantastic to see you. DANIELLE
DIMARTINO BOOTH: Absolutely. RAOUL PAL: Thank you, DANIELLE DIMARTINO BOOTH: Thank you.
Take care. NICK CORREA: Thank you for watching this interview. This is just a taste of what we
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