Danielle DiMartino Booth: Warsh Could Slam the Economy Into Recession

[00:00:00] Danielle DiMartine Booth: He keeps saying Americans are looking out their window, bemoaning what they're paying at the gas pump. But if he was inside their house looking out the window, he might appreciate that they can't afford the rent. I don't even know why as an alternative data task force, because he's not looking at any of it himself. He's not taking the onus to look at the alternative data sets himself, or he would not say, you know, the unemployment rate's low, move on. [00:00:25] Speaker 2: Hey, everyone. Welcome to another special in-studio episode of the Julia LaRose Show on FOMC Fed Day, where we are joined by none other than Danielle DiMartine Booth, CEO and Chief Strategist at QI Research. Great to see you, Danielle. [00:00:40] Danielle DiMartine Booth: Happy Fed Day. [00:00:41] Speaker 2: Happy Fed Day. Always a Super Bowl for you. And I got to get your reaction because we had a hold. Tin Tuvo, we had two dissents here. One rather surprising dissent. Would love to get your take. [00:00:55] Danielle DiMartine Booth: What's your reaction for today? So, I mean, so when I heard the announcement, thank God my mic was not hot, because I went, oh my God, that Lisa Cook had dissented. I mean, we're talking about, if you look back at the full body of her academic work, she is as dovish a human being as has ever been created. So for her to have dissented, don't get me wrong, she's been saying the right things, but she certainly hasn't been as outspoken as Beth Hammock or Lori Logan or Neil Kashkari. I mean, that was where the betting odds were, that we were going to see three dissents from three Federal Reserve District presidents. And yet we just saw one from Beth Hammock and then Lisa Cook. And, you know, if she's recently come under attack again on Truth Social by the president, again, saying, I'm not going to let this case go away, even though I think there's a math challenge there because she did pay a higher interest rate for the second home, indicating that if she was trying to rip off the system, she was doing it very poorly. So, but it felt like a very political move on her part. It was just like, it was just like, if you're going to keep going after me, then I'm going to go after you. And you know what, I'm a governor, I can dissent. I'm not. Lori Logan, Neil Kashkari, Beth Hammock, they all roll off of rotation after this December the 9th upcoming meeting for three more years. So their vote doesn't count. Lisa Cook's vote counts every single time. She can stick that needle in him and just keep sticking it as much as she wants. [00:02:38] Speaker 2: I wonder if we'll see more from her then in terms of dissents, like something to watch. It's, it's conceivable. I mean, you probably won't see it at the December meeting [00:02:46] Danielle DiMartine Booth: if they don't, if, if they hike rates had to get that straight. [00:02:54] Speaker 2: Mm-hmm. Okay. So how would you describe today's hold? People are saying, you know, hawkish hold. [00:03:01] Danielle DiMartine Booth: It was a hawkish hold. It was definitely a hawkish hold because, um, because of the, the, the way, again, going into the press conference, we were all kind of holding our breath, which Kevin Warsh is going to be behind the podium today. Um, and it was definitely a hawkish Kevin Warsh. He said he was, unwilling and unable to call financial conditions tight. Um, let's wait and see if Anthropic gets priced and sucks a little bit more liquidity out of the system. And let's wait and see what the bond market does, sucking a little bit more liquidity out of the system into this December meeting. [00:03:40] Speaker 2: Mm-hmm. As you point out, yeah, he was unwilling and unable to call the financial conditions and the credit conditions tight. I guess the question here is, does that language, does that sound like that's someone who's in touch with what's really happening? It sounds like somebody who's in [00:04:02] Danielle DiMartine Booth: touch with his narrative. Explain that. He would have had a harder time had the Philadelphia semiconductor index not taken back off, bumped its 200-day moving average and then bounced back up and the Kospi's up and the Nasdaq's up. And so he would have had a little bit harder time. However, we've not seen credit spreads come in that much on these hyperscalers. So in the sense that the credit market did a lot of tightening for the Fed in the last few weeks, which it has, in that sense, it was a highly disingenuous statement on his part to suggest that financial conditions were not, hadn't tightened, I guess, sufficiently. Mm-hmm. But had he said that, on the other hand, I'll talk out of the other side of my mouth, then that would have signaled to the market, well, maybe there is not going to be a December rate hike. And he certainly didn't want to pigeonhole that. But I don't, Julia, it was a highly unsatisfying press conference. You're left unsatisfied. What did you want to hear? Less thesaurus. I mean, he's intellectually, he's, he's trying to create word salad to emulate Alan Greenspan. But he doesn't come across with the same gravitas. He sounds like he's just somebody using big words. And, you know, in my Bloomberg chat this afternoon, they were like, I'm going back to sleep now, good night. Because he, he just dances and dances and dances around without saying anything. So if a reporter asks a question he does not want to answer, why can't he just say, I'm not answering that, and move on? Why does he have to throw like a pundit on TV, a bunch of nonsensical words out there to say nothing, and take up airspace? It's just highly unsatisfactory. [00:06:13] Speaker 2: Okay, so unsatisfactory. The conditions, financial conditions, credit conditions, tighter, but not tight. [00:06:21] Danielle DiMartine Booth: Not tight. We're not seeing investment grade spreads. [00:06:24] Speaker 2: Right. And you've been flagging, you know, rising bankruptcies and the stress in certain credit pockets. And now that we have the Fed acknowledging tighter conditions, um, for some businesses and households, but still not saying it's overall tight. Do you think that the setup for the next few months, is it becoming more dangerous or maybe even less so? [00:06:51] Danielle DiMartine Booth: Well, again, um, it's going to come down to liquidity into year end. And even though the markets tend to historically rally after a midterm election, um, the stock market, uh, there's still this hundred billion dollar IPO coming down the pipeline, which is going to take liquidity out of the system. And, uh, the hyperscalers have to continue taking on debt to continue building new data centers. But what's to say the political winds are gonna blow in their favor after the midterms. And the reason I say the hyperscalers must continue to take on debt, they have no choice. If you look at industrial production that's, that is surrounding the AI production phase, if you will, the construction of these data centers in the month of May, there was not a single hyperscaler that came to market. What did industrial production and computers and peripherals do? It declined month over month. In September, there wasn't a single hyperscaler that came to the bond market and sold a gigantic bond issue. What happened again, that portion of industrial production contracted. So it's, it's a constant wheel. You have to keep turning with fresh capital capital and capital is getting more expensive. They're making hyperscalers pay up every time they come to market and investors are becoming increasingly nervous about the return on investment proposition. So this, we're in a situation where worse could tighten and slam the economy, not slide into recession, slam the economy into a recession, like hit a wall at a time when he is highlighting how low jobless claims are. When, as you've heard me say in the past, only one in four unemployed Americans are collecting jobless benefits. I dare say the PhDs at the Federal Reserve Board, they know that too. And yet he's ignoring that so many Americans are underemployed and not collecting unemployment benefits because they have no choice but to stay in the gig economy to pay the rent. 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In theory, if the financial markets continue to tighten, [00:12:31] Danielle DiMartine Booth: then you remember, you may not remember, but we knew each other then. Halloween 2018. Halloween 2018. Oh yeah. The junk bond market shut down. Not a single bond sold for 40 days into the bloodbath on Christmas Eve in the stock market, which prompted dot dot dot the Powell pivot on January the 4th, just a few days later. Because Fed chairs are not allowed to let credit risk run wild. It's a big no-no. It's really bad on their resumes. So if we want to stop debating the finer points of inflation and whether it's sourced because of Russia, Ukraine, and Iran, and whether it's going to trickle down, Whirlpool would say no. Sherman Williams would say no. They're saying we don't have pricing power. We're going to fire more people as a result because we have to cut costs because our margins are getting squeezed because Americans cannot afford to pay up. We could go from debating inflation to how quickly is the Fed going to lower interest rates and how aggressively, with, by the way, one fewer meeting in 2027 and two fewer meetings in 2028. That conversation could change very fast. Very fast. [00:13:59] Speaker 2: What do you make of the the meeting structure going ahead in the coming years? [00:14:04] Danielle DiMartine Booth: Well, I brought that up because the last thing I mean it would be the the mother of all backfires would be for the Fed to come in intra-meeting during this gulf of time that we're just going to sit around and talk like the academics that we are and have discussions and have to come in in between one of those meetings when especially if it was in between when the one that was that's not going to be a matter of public knowledge, no statement, no nothing, and do an emergency rate cut. [00:14:36] Speaker 2: Very bad optics, Chair Warsh. Bad optics. You wrote the book Fed Up. [00:14:42] Danielle DiMartine Booth: Yeah. Are you getting fed up again? I'm having a fed up day right now. I really, really am. Yeah. Because he keeps saying Americans are looking out their window, you know, and he's bemoaning what they're paying at the gas pump. But if he was inside their house looking out the window, he might appreciate that they can't afford the rent and that they're underemployed and that he's not looking at the full body of data and that he's not seeing long term unemployed labor market scarring where it is typically when you're in a recession. He's refusing to acknowledge. I don't even know why as an alternative data task force, because he's not looking at any of it himself. He's not taking the onus to look at the alternative data sets himself or he would not say, you know, the unemployment rate's low, move on. [00:15:35] Speaker 2: So the widest gap then for you would be the labor market description from the Fed right now. [00:15:43] Danielle DiMartine Booth: And also my good friend Anna Wong at Bloomberg. Mm-hmm. We love Anna Wong. We love Anna Wong. She does very good work on BREATH. B-R-E-A-D-T-H. So at Jackson Hole, Kevin Warsh said, I pay attention to the percentage of inputs to inflation that are rising by 3% or more in any given month. If you're north of the 50% line, no bueno. That means that inflation is spreading. If the breadth of inputs to inflation, however, begins to fall, and Anna estimates that that'll be 38% on a six-month moving average basis and under 50% on a year-over-year basis, so whatever barometer you want to use. But she estimates that that's coming down. Mm-hmm. That's what Warsh told us to follow. But he didn't make any mention of that now, did he? So no, it's not just the labor market. [00:16:45] Speaker 2: Yeah. [00:16:45] Danielle DiMartine Booth: It's that there are fewer sources of rising prices than there were when he was at Jackson Hole. [00:16:52] Speaker 2: So he needs to be paying attention to the breadth. [00:16:54] Danielle DiMartine Booth: He does. Well, that's what he told us to do at Jackson Hole. Mm-hmm. [00:16:57] Speaker 2: Mm-hmm. [00:16:58] Danielle DiMartine Booth: So maybe he needs to look back at his notes. [00:17:01] Speaker 2: Yeah. [00:17:01] Danielle DiMartine Booth: From that speech. [00:17:02] Speaker 2: You know, even the FOMC statement today when it comes to the economy, it did change that growth language to strong. Mm-hmm. That's true. Brazilian spending. Yep. Brazilian business spending, for sure. Does that match the economy that you're watching, the language? [00:17:20] Danielle DiMartine Booth: More than 100% of gross domestic product growth is coming from AI, with the defense spending kicker. That means the rest of the economy is contracting. More than 100% of the growth is AI right now. And he's mentioned second derivatives before. The growth rate of AI spending has peaked and turned. In fact, Anna has done work on the AI inputs to inflation. Their growth rates have peaked and turned. Again, maybe you just need to refer back to his notes. Because these are the instructions that he has given us. That he's following the second derivative. He's following how fast something is growing. [00:18:09] Speaker 2: So do you think that we're almost putting too much weight on AI? Kind of helping us get out of this. [00:18:16] Danielle DiMartine Booth: I mean, look, we're deep in the political season, right? I mean, as we're taping this, we're T minus six days away from the election. Politicians tend to back off of all of their threats. So maybe if it's a blue wave, they won't be harder on AI. Maybe they won't follow through with all of their AI threats. But what if they do? What if there's more political pushback to AI if there's a blue wave, which Cauchy tells us there's going to be? What happens then to AI? [00:18:53] Speaker 2: There's no guarantees. Final question for you, Danielle. Because I know we're doing a shorter episode today. But what do you think is the one thing that the Fed is underestimating right now? [00:19:07] Danielle DiMartine Booth: The Fed is underestimating the credit market. How so? Or what's the big risk or the worry there for you? The worry is not just a domestic one. The worry is that as foreigners have been dumping their treasury holdings, which they've been doing for years, they've been loading up on U.S. corporate bonds and U.S. stocks. The IMF came out with a report warning that should anything happen to the AI trade in the United States, it would have contagion effects globally. Because everybody's piled in hand over fist to the AI trade. And what we've learned in the last few weeks is the AI trade gets very shaky if the credit markets start to become angry. [00:19:55] Speaker 2: Danielle D. Martina Booth, founder of QI Research, author of the book Fed Up. Really appreciate you taking the time. It's always great to spend time with you on Fed Day. And happy Halloween. Happy Halloween. And we'll see each other in December. [00:20:08] Danielle DiMartine Booth: Yes, we will. Yeah.