 This is Mises Weekends with your host, Jeff Deist. Ladies and gentlemen, welcome back once again to Mises Weekends. A lot of you already know our guest, Danielle D Martino Booth. She is the author of FedUp, a book that I recommend all of you to read. She of course worked at the Dallas Bank of the Federal Reserve with Richard Fisher. And she's actually been a speaker at a couple of our events. So, Danielle, it is great to see you. Feels like coming home. Good to see you. I wanna start with this. Whatever differences you and I might have on economic policy, on monetary policy, on economic theory, any of these things. It feels like right now, it's more important that we're just talking to an average lay people about the Fed. And you even say in your book, FedUp, that that's one of your goals, is to demystify the Fed to the public. Yeah, in fact, I'm not gonna toot my horn first thing, but the reason that I started this new daily was because there was this vacuum in the wake of the book. When people are like, okay, what's next? So I launched a product that was dirt cheap on purpose just to keep the dialogue alive. Because if you listen to people at the Fed, even Jay Powell, it's still part of their goal. It seems to hide what the true meaning of really simple stuff is, which really irritates me. But you definitely had some success in getting on the financial shows. I see you a lot on the talking head shows. It seems like we hear from the choir though. We hear from people who have been at the financial system for a long time, investment bankers, analysts, et cetera. We don't hear much independent criticism of the treasury or the Fed. We just assume that they are doing what they ought to be doing. It is not an easy voice to be heard. The beauty is that I came from Wall Street, I came from finance, and then I entered the Federal Reserve with no interior Fed vernacular. So I was able to exit the Fed and continue translating it in plain English to the public, but yet still maintain my independence. And sometimes it's a fine line to walk, especially if you're on a network where they've got their own political agenda. Well, what do you think of Powell? He's only been chair for less than a year. It feels like longer. What do you think of him to date? So I have mixed reviews on Powell as opposed to where I was a few months ago when I had just 100% pure raving, 100% approval ratings on Powell. I'm not there anymore. I wish that he would go back to his roots a little bit and stop trying so hard to fit the mold of a traditional central banker. It's not that he's not plain speaking. I think we all have figured that out. He's not gonna waste anybody's time. He doesn't covet the podium. He's not looking to try and confuse anybody, but by the same token, I think that there's something to be said for nodding to obvious excesses in the financial markets without being criticized as being the leader of the Fed screaming fire in a crowded theater. I think that he can walk that line, but he's chosen not to. He's chosen to insist that the U.S. economy is in perfect form and that there are no financial stability risks that are concerning to him. Well, this is a very different cat than Janet Yellen or Ben Bernanke or Greenspan. This is not a wonk. This guy made 100 million bucks as an investment banker at Carlisle, among other places. He founded the industrials group. He speaks to these CEOs all the time. He understands that wages are out of control. I think that that's part of his admins in terms of wage inflation and wanting to normalize interest rates wanting to get them higher. He doesn't need the Fed's pension by any stretch and people deride him because he's wealthy, but just because he's wealthy actually means that he's not part of the swamp. He doesn't have to be there. He chooses to be there and that differentiates him from an economist who's got an agenda to grind or that they want a legacy that they want to live. That's not Jay Powell. Well, he's also not a PhD economist. Do you think he's a seat of his pants guy? Do you think he doesn't revere mathematical modeling and the mathiness of modern economics the way maybe a Ben Bernanke does? I certainly think he does not revere the model if you go back and read the 2012 transcripts which were released in January much earlier this year. You see that he questions some of the gospel according to Fed's models in his commentary and questions out loud in front of his peers even though he was a rookie at the time. In 2012, he had just come on in the middle of the year. He still had the gumption to question the sanctity of some of these models being so very guiding in what central bankers did or did not do and I hope that he stays there. His actions to date suggest that he's gonna get rid of the word gradual pretty soon. He's not somebody who's into committing to anything based on a model and who he got rid of press conferences after only every other meeting. He's like, why am I wasting the public's time? All of my peers worldwide have to answer to the press and explain their actions after every single time they meet. Why would I waste taxpayer dollars? Why would I do that? So he's done some very practical things that tell you that he really does not care about the orthodoxy inside the Federal Reserve. You think he reads a lot? Do you think he's read Chicago stuff like Milton Friedman monetarism? You think he's read Mises and Hayek? I think that he has probably read more across more schools than many people who have led the Fed to his credit. I think he understands, if you were to say malinvestment, his eyeballs would not roll into the back of his head. He understands what that means inherently and to his credit, he came into the Fed not having had a deep economics background and did his homework, but he did his homework across a full spectrum of schools. Well, I noticed he uses the term, which is a mystifying term to me despite its definition, neutral interest rate. He says we're a long way from a neutral interest rate and he's basically announced that there will be a series of rate hikes over the next couple of years up to about 3.5%, 3.5 basis points on the Fed funds rate. If something happens and he pulls back on that, is that a scary admission of sorts? No, I don't think so at all. I think that above all, he has tried to convince the public that he is genuinely going to be data dependent. And the reason that's such a hard task for him is because his predecessors used the words data dependent, but then when the data didn't go their way, they did what their models told them to do anyways. So the credibility of being data dependent has just been annihilated over the past 30 years starting with Greenspan. I think he's truly going to be data dependent. And if we see further slowing in the economy as 2018 ends, I'm not so sure that we don't see a pause after the December rate hike and for him to be extremely plain spoken and say, look, we're going to have to wait and see what this economy does. It's apparent, he's already said it in a recent speech, that housing has slowed. He lengthened the FOMC statement for the very first time. This is somebody who's decreased the length of the FOMC statement by a hundred words, by a third since coming on. He likes to be plain spoken. The first time he increased it was to nod to the fact that business spending had pretty much crashed from 11 plus percent in the first quarter to 0.8 percent in the third quarter. It's the only addition we've seen out of Jay Powell to the FOMC statement. Again, I think he's going to move with the data. I'm not so sure the market believes it yet. Well, but you point out in your own Twitter feed, it's not just housing, it's autos, it's tech, it's the fang stocks. We did an analysis recently and we looked at the manufacturing, we looked at the top 10 states that are most dependent on the manufacturing sector. We looked at the top 10 states most dependent on leisure and hospitality. Same thing for real estate and construction, same thing for energy. So we're basically talking about the entire country absent financials. And we just got a recent headline that even financials, even the mortgage market has begun to shrunk and impose layoffs. So when you add it all up, there has been a turn in initial jobless claims and initial jobless claims are our most frequent and reliable leading economic indicator on the state of consumption, on the state of the household. And I hope somebody handed him my daily feather from that I actually ran twice because it was so important because again, we've seen across the board slowing in the labor market and that should push Jay Powell to hit the pause button. We say he focuses on data. Maybe he looks at different data than a Yellen looked at. In other words, the average hourly wage of an Amazon warehouse employee might matter to a lot of people more than fang stocks. That's very true. By the same token, I'm hoping that he's also looking at the fact that the minimum wage increasing for the average Amazon worker, what effect that might have on Walmart, another great big employer in this country and what some of the fallout might be. I hope that he's speaking to Mary Bara at General Motors and asking her, gee, that's a fairly large decision that you made offering buyouts to over a third of your North American workforce in the middle of a recovery. Of course, she didn't get the take up that she wanted for those buyouts. So she just implemented layoffs across the board and announced the closure of many factories. I hope he's talking, I hope Powell's talking to her and saying, why are you doing this? What are you seeing? And by the same token, I hope he's also following what Janet Yellen did not follow, which is the credit markets and credit spreads and what happened in general electric bonds recently when they traded down to junk levels. These are things he understands. He speaks this language. He speaks to people in private equity. He has friends in the hedge fund community. Again, he should be looking across a much broader spectrum than his predecessors. We have to hope that's the case. Well, I'm reading that corporate debt has quietly almost doubled since the crash of 2008. There's about 6.3 trillion of non-financial corporate debt out there. How should average people think about this? Why should we care? The corporations have loaded themselves up with debt. Well, I think there's several reasons to care. And actually, if you look, we're actually closer to $9 trillion. You got to tack on leverage loans and other things that are not captured in that it doesn't matter. It's a great big dollar amount. The fact that it has grown at a much faster pace than the economy is troubling. And what it also tells you is that when you hear things like Janet Yellen say, there will never be another financial crisis in our lifetimes because we've managed to clean up the banks in the United States, you have to wonder if she appreciates that the bulk of the growth, the leverage that has occurred, has gone on in the capital markets. But just because it hasn't transpired in the same exact place, doesn't mean that the leverage has not built up. It doesn't mean that the malinvestment has not been committed. It's just been committed in the capital markets. And the most unfortunate aspect of this is that the credit rating agencies are back to their old habits of maintaining investment-grade ratings on companies, in this case, that would otherwise be junk if you were to put an honest credit rating on them. I'm concerned for mom-and-pop investors. They're local AG broker, just their local Maryland broker. Somebody has reassured them that because these are investment-grade bonds, as they head into their retirement years, that they should sleep well at night. Well, there can be plenty of principle lost, especially as we see baby boomers retire in droves and get this complete unwelcome, rude awakening to see what is happening in the holdings that they were told would be safe. Well, also, the borrowed money hasn't gone into CapEx. It appears that it's mostly gone into M&A transactions, the stock buyback, so sort of financialized transactions as opposed to going out there and doing the kind of things that might yield long-term organic growth for the borrower. That is true, dot, dot, dot, once again. And we saw this the last time we had a repatriation holiday that the politicians squawked on and on about how much capital expenditures this was going to generate, and then lo and behold, we see that the great majority of it indeed has gone into shareholder buybacks. Heck, I'd be happy to see it going to dividends because that's at least a deeper commitment to where you think your capital should go, but that has not been the case. And we've seen in time and again, whether it's IBM or General Electric or AT&T, you've seen these companies even take out debt to buy back their shares just to watch their shares plummet. It should not be a company's role to buy high and sell low on behalf of their shareholders. That is not creating shareholder value. But whatever happened to dividends, that's what it used to mean to own a company, not just this idea that the stock price would go up so you'd have a capital gain down the road, you might call that a pyramid scheme, an ever rising stock price. The idea was that you own something as a shareholder to pull income out of it. What happened to that? Well, I think that dividend growth has been pretty magnificent in recent years, but it's been well overshadowed by share buybacks. And it's as if this great contagious disease spread through C-sweets in America among CEOs and CFOs who decided that, you know what, we don't know how long we're gonna be here, we don't know how long we're gonna be in this job, I might take the headhunter's next phone call. In the meantime, I'm just gonna maximize my earnings per share by reducing the number of shares against which those earnings are measured. It's really simple math and it's also a really sad reflection of the long-term growth prospects of this country given its corporate leaders. But all of this is financial engineering. This is all designed to make the financials look better on paper. Of course it is. And it is all designed with the hope of getting your share price up and or getting your earnings per share up such that that is what your bonus is gauged off of. And it really is as simple as that. Pedro De Costa, who's a great reporter, he's been covering the Federal Reserve for a very long time. He came out with a story that highlighted a recent study that was released that said since the early 1970s, average payer income in this country has risen by, I wanna say 11, it might be 27%, don't quote me on it. But you can quote me on the CEO pay which is risen by over a thousand percent. There's something wrong with that kind of an equation. I think that going a socialist route in this country will be the death knell for the American dream. I'm not an advocate for it at all. But I can understand why we have a disenfranchised generation in many ways who feels as if they have been left behind because opportunities, even if they do get a good degree, are not what they should be because of this inequality divide in this country that has been encouraged by the over-financialization of corporate America. Well, getting back to the Fed, I wanna give this great anecdote you have from a friend of yours, Charles Plosser, who was the former Philadelphia Fed president, you're fishing and he says, I think financial markets should get away from this notion that everything the Fed does is so important. Lots of things go on to determine the path of the economy that has nothing to do with the Fed. And of course, do Austrians, do you, do people like David Stockman, do we focus too much on the Fed? Do we make too much of it? I wish that I could say that we could, that we had the latitude, that we had the ability to make too much of the Fed. We don't have that luxury. When you think about the fact that 45% of equity funds in this country are in some form of a passive strategy, that means that the average Joe is more dependent upon not fighting the Fed than they've ever been. A buddy of mine, Stephen Blitz, an economist, did a recent look back at the stock market at net worth, two times in the history of the United States, 1968 and 1999. Those are the only two times in US history that household net worth had a greater proportion dedicated to equity gains than it did to equity, excuse me, that it did to gains in residential real estate. In other words, the economy right now, the economy that is driven off of consumption is more dependent than it's been outside of 1968 and 1999, two times that preceded great disruptions in the equity markets on the stock market hanging in there. And this is purely a reflection of don't fight the Fed and just pour your money into a passive strategy because why bother paying a larger fee for somebody to actively manage your money when fundamental analysis doesn't matter. All that matters is who's buying back the most shares and who's got the biggest market capitalization. But when interest rates are really low, average people have to go out and chase yields, especially if you're older and retired and you have fixed income and you're counting on your savings to get you to the end of your life. Of course. And that makes it that much more difficult that even if you don't wanna put your money in equities, what are you gonna go do? Chase junk bonds, chase leverage loans, plunk your money into emerging markets when you're 70 years old and it's time for you to retire. It doesn't work. I mean, it's so wonderful to be able to just scream from the mountain tops. You can get 3% on 90 day money, hallelujah. You can actually keep up with inflation. Woo, I mean, how long has it been since we've even been able to say that? But it also artificially channels a lot of money into equity markets that might just be sitting in safe interest yielding money markets or CDs if we had six or seven or 8% interest rates. Of course, absolutely. And the longer fed policy has made us literally a nation of addicts to low interest rates, the less feasible that we're seeing that it is to get back to six or 7% without causing a global financial meltdown. Look at what three and a quarter percent on the 10 year yield did. I mean, we were like waking up every morning and seeing which country we lost. And of course, we forget that historically the fed funds rate has oftentimes been between five and 10%. This would cause a meltout not only for corporate debt but for Congress and the budget too. I don't think that we've ever gone into a recession and I think that we may be precariously close to veering into recession, but I don't think that the Fed has ever gone into recession without having four and a half or five percentage points to in turn reduce rates by to combat a recession. And poor Jay Powell can't even get to 3% without causing the housing market to begin to implode under its own weight because households have become literally needing of a 3% 30 fixed mortgage rate in order to get into an overpriced home as opposed to the 5% rate that has increased the average monthly mortgage payment in 2018 alone by 20%. Well, final loaded question for you. Uh-oh. Given the low interest rate environment, take the growth we've had since the crash of 2008 in GDP, in housing, especially in stocks. Would you go so far as to say it has been largely artificial engineered by monetary policy rather than real growth? I think that if you look at long-term capital expenditures and the trend in this country that you can see that there has been a dearth of innovation, a dearth of investment in the long-term growth of this country. And if you look at the growth of the finance industry and if you look at the growth of the real estate industry, you see how much money has poured into non-productive ends and how much artificiality and financialization that these last 10 years have floated on. This is a sea of liquidity that has raised all boats. But is it real? I have to say not a lot of it. And what we have seen in terms of true economic growth has increasingly come from a very small number, a very small, handful of dominant companies in this country, which is also, by the way, not the American way. Well, it's scary to think about that for sure. Ladies and gentlemen, Daniel DeMartino Booth. Her book is fed up. Absolutely recommend it. She is also the proprietor of Quill Intelligence. She has a newsletter called The Daily Feather. Daniel, what's probably the best way for people to follow you? Hop on quillintelligence.com or follow me on Twitter at DeMartino Booth. Take your pick, but I'm easy enough to find. I put myself out there. Some say I never shut up. Well, Daniel, thanks so much for your time today and thanks for being an independent voice when it comes to the Fed and monetary policy. And ladies and gentlemen, have a great weekend. Subscribe to Mises Weekends via iTunes U, Stitcher, and SoundCloud, or listen on Mises.org and YouTube.