Danielle DiMartino Booth: Don't Count On The Powell Fed To Rescue The Markets

The new Fed Chair may break from his predecessors
Sunday, February 11, 2018, 4:29 PM

The recent gut-wrenching drop in asset prices began on the first day of the job for new Federal Reserve Chairman Jerome Powell.

How is Mr. Powell likely to react to a suddenly sick-looking market? Will he step in forcefully to reassure investors that there's a "Powell put" in place as a backstop?

To address these questions, former analyst at the Federal Reserve Bank of Dallas, Danielle DiMartino Booth, returns to the podcast this week. In her opinion, having studied Powell's previous statements, she thinks those expecting him to continue the market support his predecessors provided will likely be quite disappointed.

Powell appears to be no large fan of continued quantitative easing, and has long been on the record as concerned about the eventual pain its unwind will cause. He very well may resist riding to the market's rescue at this time, allowing natural market forces to finally have their way:

Look, this is a message that market participants do not want to hear: It is not the Federal Reserves job to put a floor under risky asset prices.

Compare and contrast Jerome Powell's silence in the wake of the flash crash on his first day at work to Alan Greenspan -- who got on an airplane the day after the Black Monday crash of 1987, canceling an appearance he was to have made, and reassuring the markets with a statement on Tuesday morning that the Federal Reserve was standing by and ready and willing and available to satisfy any kind of disruption in the banking and financial systems. That was the day -- October 20, 1987 -- that the Greenspan put was born.

My issue with the mainstream media these past few weeks is that they have been insistent on the fact that there is going to be a Powell put to follow the Greenspan, then Bernanke, and then Yellen put. I've been pushing back against that conventional wisdom, mainly because of A) the release of the 2012 FOMC transcripts when we finally got to hear words coming out of Powell's mouth which showed that he was no pushover and B) the fact that he worked for a $1 salary to educate the Congress on the perils of the Untied States defaulting on its debt.

Powell himself has stated that was concerned that quantitative easing would end up being habit-forming for the markets.

So I read his silence these last few days as prudent and cleaving to the original intention of the Federal Reserve being lender of last resort; not babysitter to the stock market.

Click the play button below to listen to Chris' interview with Danielle DiMartino Booth (40m:10s).


Chris: Welcome, everyone, to this Peak Prosperity podcast. I am your host, Chris Martenson, and it is Thursday, February 9th 2018. Hey, at the time of the recording of this podcast there is legitimate market turmoil after years of smoothly gliding ever higher. The worlds equity markets are again experiencing volatility which is a fancy way of saying sharp declines and inclines in prices. Now, my view is that it was the volatility trade themselves that broke, dragging everybody else along for the ride. Look, every bubble is in search of a pin. It really doesn't matter what the pin was. It could be a wayward finance minister saying the wrong thing at the wrong time, the seemingly unimportant collapse of a midsize company, or a derivatives accident. Was the breakdown of the volatility trade the pin? We don’t know. But a whole lot depends on how the Central Banks, and especially the Federal Reserve are going to respond here. And the Fed has a brand-new leader at the helm with Jerome Powell having taken over just this week.

So we thought we better get a former Fed insider on the show to shed some light on the subject. And exactly one year ago we had Danielle DiMartino Booth on our program, and we're excited to be bringing her back. Last time, we discussed her then new book, the extraordinary and very successful, Fed Up; An Insiders Take on Why the Federal Reserve is Bad for America. Danielle spent nine years as a senior financial analyst at the Federal Reserve of Dallas and served as an advisory on monetary policy to Dallas Federal Reserve President Richard Fisher until his retirement. Fisher called on Danielle to serve at the Fed after becoming a loyal reader of her financial column in The Dallas Morning News. She began her career in New York at Credit Suisse and Donaldson, Lufkin, Jenrette, where she worked in fixed income, public equity and private equity markets. She's got an MBA from the University of Texas at Austin and an MS in Journalism from Columbia University. Danielle is also the President of Money Strong, LLC. Danielle, welcome back to the program.

Danielle: So happy to be here with you today.

Chris: Well, fantastic. Listen, before we get to Jerome Powell and your views on the markets, I'd like you to set the stage for those listening today and explain how the Fed works. How are decisions made? What's the bureaucracy like? What's it like to be a staffer there/

Danielle: Well, all decisions, when I was there, and I think through the end of Yellen's tenure are made by committee. And the committees tend to get along in a very agreeable fashion which is highly problematic. And everything is done in a very deliberate fashion. And you would think for all of the due diligence and all of the data mining, all of the analysis that is done, you would think that you would have a variety of potential outcomes. And the reason that I wrote Fed Up in the fist place and became fed up is that the research that is undertaken at the Fed tends to back into a forgone conclusion by one of its leaders.

Chris: Well, so then, if I have this right, it's an institution. It's got a bureaucracy, it's got a culture, it's got a way of doing things. And this way of doing things involves a lot of research that has a preordained conclusion. That is, they sort of back fit it. I'm thinking now specifically of a paper I lampooned at the time in 2007 where some Fed staffers, PhDs, had done this wonderful work saying that there's no such thing as a housing bubble and that we weren't in one at that moment in time. And Bernanke took that and ran with it, and it was just, of course, exactly wrong. I wasn’t sure how they had come to that conclusion because their data didn't support what they proposed. Is that an example of what you're talking about?

Danielle: It's a great example. It's one of the examples that I highlighted in the book, and it's one of the most egregious examples. You know, one of the reasons that Richard Fischer brought me on as his internal markets desk, if you will, is that because both of us had Wall Street backgrounds, and we were able to recognize sell-side research when we saw it. And the research that all Federal Reserve District bank presidents are supposed to use and key off of to give them their financial markets insights comes off of the New York markets desk. However, a lot of their research tends to read as if it came off of the sell-side from a big brokerage firm, and that is a lot of what that housing research definitely read like and why Bernanke should have questioned it back then, but he did not. He took it as gospel, as you say, he ran with it, and that was a problem.

Chris: Now, Danielle, how does something like that happen? Are you suggesting that possibly the people who are doing the research there out of New York are being influenced by the sell-side research? Are they actually taking it and just sort of repurposing it, or how does that actually work? What's going on here?

Danielle: Well, I think part of it is that the ties to the banks that they supervise – and this has been determined – this is not my opinion – it's been determined objectively that the ties to the banks that they regulate are much too close. And there is a sense that if it's coming to you as kind of classified information off of a sell-side firm that what they're telling you is the truth, and it's not that they're necessarily lying – that's a harsh word – I would never use that – but anybody who's in the business knows that sell-side research typically has an agenda, and that is that you make sure all of your clients are always, 100 percent long.

So, you know, the staffers at the New York markets desk would meet with the same exact individuals I would meet with. I might question some of the conclusions they were coming to, dig deeper, and Richard Fisher would end up at a Federal Open Market committee having a completely different take on the state of any given pocket of the financial markets that came from the same source. And it was definitely a source of irritation from the others around the FOMC table that Fisher was constantly questioning, really, what was the conventional wisdom provided by the New York Market's Desk. But again, it was too cozy a relationship and there wasn't enough probing and questioning of the data and materials and anecdotes that they got from their sources and contacts of Wall Street.

Chris: Now I know Richard Fisher has retired, and I don’t want you to put world in his mouth, but how do you – what would his views be of this system as it is where we have this too cozy relationship where the Federal Reserve is making decisions based on preordained conclusions sort of research that basically says, hey, let's just keep monetary conditions loose and pump and pretend that there are no problems? What would his thoughts on that, if not criticisms, be? I was an admirer of his because I thought he spoke truthfully and bluntly and more accurately than most other people at the Fed. In fact, perhaps anybody else at the Fed that I'm aware of.

Danielle: Well, I'll take that as a huge compliment because he got so much of his reconnaissance from me. And to answer your question, I think I actually already have answered your question. And that is that he deemed fit to set up his own market's desk internally at the Dallas Fed. And that is – you know, whenever you were sitting down for a pre-brief before the President would head off the Washington, he would always sit down with the economists around the table and me and ask the question – and he was a very hard-working president – I take my hat off to his integrity. He always read the entire briefing document cover to cover, much to the chagrin of so many of the economists who would want to jump into a full-blown presentation regurgitating what he'd already read. But he would always sit at the table, look down at everybody and say, "Since this document was printed 48 hours ago, what has happened? What can you tell me beyond what I've already read?" And so, he was a very real time thinker and didn't have to seasonally adjust his thinking in order to have a good grasp of the past, the present, but more importantly the future and where we were headed.

Chris: All right. And what did he think of this idea of just printing trillions of dollars and throwing them into the markets?

Danielle: He was very outspoken in voicing his concerns at the time that after QE1 basically saved the system, the system that the Fed had rendered vulnerable in the first place, that after QE1 it was throwing good money after bad, but more importantly, it was potentially putting the Fed on a very slippery slope of one day being called upon to outright monetize the debt. And if you listen to some of the thinkers and some of the thought leaders in the Cassian [PH] world, most of whom run our Central Banks these days, they will tell you that the solution to the next financial crisis would indeed be an outright monetization of the debt.

Chris: Well, now, a slippery slope. My view is that slope is made out of Teflon at 60 degrees and is covered in oil. The Fed now, by my – siting out here in the cheap seats – it seems to me they're heavily market dependent, market focused. The remit of controlling the monetary policy, setting the price of money through interest rates and maybe having some sort of a mandate around employment seems to have really expanded wildly. That's my perception What's your perception of the Fed at this point?

Danielle: Yeah. I called it mission creep. And it was so interesting that one of Janet Yellin's first public appearances when she was Chair of the Fed, she ended up putting two individuals on the stage with here who had been convicted felons. And she knew it going in, but she was so sure of her position and of her mission to try and get that last marginal worker off the sidelines, come what may in terms of stoking financial instability, that she decided that she was in her rights to actually have people who had not been properly vetted, who the media might scrutinize, up there on stage with her. I found it to be a horrific moment in time.

Chris: Oh, that's fascinating. Now, I want to turn to Jerome Powell. He's the successor to Janet Yellen. Just took over this week. Very interesting week in the markets, almost literally to the minute of his taking over we had a pretty stiff market decline Friday and then Monday. And it's played out – continued here on Tuesday, Wednesday and Thursday. Just very up and down. Now I want to start here – I'm going to paly a clip from a recent Off the Cuff interview I did a number of months ago with Axel Merk. He's head of Merk Funds, and this is before Mr. Powell had really been officially named. And so he had this to say. I'm going to play the clip now.

Axel: Now just on the Fed chair, just a comment here, everybody thinks that, oh, we’ve always had a PhD economist. That’s not the case. That was since Greenspan we’ve had PhD economists. But Volcker, for example, wasn’t. If we get Kevin Warsh, by the way, he’s not a PhD economist either. Powell is not either. And historically there hadn’t always been. There have been business people as well, but there’s never been a lawyer. I don’t say that disrespectfully for the profession - but a lawyer doesn’t seem to care about monetary policy, has no interest in it. And maybe that’s exactly what you need if you want to have somebody that you can bully and coerce to do certain things. But it’s going to be very interesting if, indeed, we do get Powell. I talked to a former Fed president, and he just "what the hell are they thinking if it’s Powell," not that they think that he isn’t any good, but not for setting interest rates.

Chris: Danielle, what Axel seems to be saying there at the end is that he's worried that a Powell Fed won't react as quickly in a time of crisis, and that in such moments speed counts. Danielle, what are your views on that and Mr. Powell?

Danielle: Well, I think we should put Axel on a pulpit, so I can scream Amen and Halleluiah. Look, this is a very – this is a message that market participants do not want to hear. It is not the Federal Reserves job to put a floor under risky asset prices. You know, compare and contrast Jerome Powell's silence in the wake of the very – there was a flash crash on his first day at work. So compare and contrast J. Powell's silence to Alan Greenspan getting on an airplane the day after the Black Monday crash of 1987, and cancelling an appearance he was to have made, and reassuring the markets with a statement on Tuesday morning that the Federal Reserve was standing by and ready and willing and available to satisfy any kind of disruption in the banking and financial systems. That was the day, October 20, 1987, that the Greenspan put was born.

And my issue with the mainstream media these past few weeks is that they have been insistent on the fact that there was going to be a Powell put that followed the Greenspan, then Bernanke, then Yellen put. And I've been pushing back against that conventional wisdom, mainly because of A) the release of the 2012 FO1C transcripts. So we finally got to hear words coming out of Powell's mouth which showed that he was no pushover and B) the fact that he worked for a dollar salary to educate the Congress on the perils of the Untied States defaulting on it's debt. And now I'm going to actually be an economist. I'm going to have a third hand and see the fact that Powell himself – himself – has stated that was concerned that quantitative easing would end up being habit forming for the markets.

So I read his silence these last few days. He's due to speak to Congress on the 28th. It's not as if he's going to remain silent, but I view his silence as prudent and cleaving to the original intention of the Federal Reserve being lender of last resort, not babysitter to the stock market.

Chris: Well, now, this is fascinating because clearly, he has been a little bit more silent then Greenspan would have been, and/or I think Bernanke or even Yellen at that point. So he's got a little bit of difference right out of the gate. Now here's the thing though. Now we're at the big question. This is the centerpiece of what I really wanted to talk to you about. It's this – the Central Banks are publicly committed to shrinking their balance sheets. This includes the European Central Banks and the Federal Reserve for sure, and, of course, Japan's made some noises around that end. The question is this: can they and will they stick to that plan if the markets decline further? Alternatively, if you agree with that, where do you think the line in the sand is though?

Danielle: You know, you ask the ultimate trillion-dollar question, literally. Look, again, I'll take you back to the 2012 transcripts. The number of times that J. Powell brought up the importance of having a strong exit policy before going into QE3, which he voted for, but the number of times in the meetings leading up to that announcement that he said, "We have to be sure that we are credible in saying when and how we're going to exit, when and how we're going to shrink the balance sheet." This was over five years ago that he was saying this.

I can guaranty you that he was advocating for reinvestment as early as 2015. That I got on first hand knowledge. So was he the architect? Was he one of the people on the Federal Open Market committee who put their foot down and insisted that when they announce quantitative tightening that it would be data agnostic? Because if that is the case, Chris, if that is truly the case, then it won't matter what markets do. they will continue to allow the balance sheet run off to continue in the background. If they blink, I'll be surprised and disappointed.

Chris: They may well bling, but they'd have to have some cover, I would assume at this point in time that they don't currently have. But I can't imagine that a three or a five percent decline qualifies. But here's my perception. I think that the Central Bankers are afraid of the markets that they’ve created. And let me turn now to another question that sort of relates to that. And I'll tell you why I think that. So in the last couple of year, particularly throughout 2017, all of major Central Banks – the G5 Central Banks – they kept saying, hey, all is well. You know, it looks like we're getting a nice recovery here. Unemployment is going the right direction – this was in Europe, this was Switzerland, this was the UK, this the United States, Japan. All of them are saying the same thing, but 2017, Danielle, saw the largest expansion of Central Bank balance sheets of the entire crisis. Higher than 2008, higher than 2009. So, Danielle, which should we trust, their words or their actions?

Danielle: We should definitely only trust their actions because during this globalized reflation, coordinated, synchronized, gorgeous expansion you are correct – they were running a two trillion-dollar quantitative easing program in the background as if Lehman and Behar and AIG were failing every other day. IT was a DEF CON one situation in 2017, so there is absolutely no mystery about the fact that markets became so complacent as to be comatose last year because globally QE was running at a record pace.

So here is where things get interesting. By the time Labor Day rolls around, we are going to know who's going to replace the most cautious dove walking planet earth – that would be on Mario Draghi. We will know the identity of the German who's going to replace him by Labor Day of this year. And the German's have continued to be adamant in saying that this process needs to be completed by September of 2018. It will be interesting to me to see what exactly has to happen in the financial markets for that German to back down off of his position. For J. Powell, who's been advocating for an exit to back off of shirking the Fed's balance sheet. If you would, I'm going to read you something that J. Powell said:

"Right now we are buying the market." So he was recognizing when quantitative easing was at a record run rate that they were the market. "And private capital will begin to leave that activity and find something else to do. So when it is time for us to sell or even to stop buying the response could be quite strong."

He foresaw this years ago. He is not surprised by the reaction right now because he was the one who predicted it.

Chris: And Danielle, he said that – those words come from when? 2012?

Danielle: 2012.

Chris: Interesting. You know, there was one other piece that I'm hoping you can decode, and I want to go into that statement. You just added very important information. Thank you for that. As well, I noted he had a piece in there – very cryptic to me where he said, "We would have to unwind our short volatility positions." Was he talking a structural short because they had so many bonds, or was he talking, do you think an active short position? Is the Fed in the business to selling puts of treasuries or even equities? What did that mean, do you think?

Danielle: What that meant was that he had some real good inside baseball information. Because I was taken totally by surprise when that hit zero hedge. And I asked myself the same exact question because I'm out there on the front lines every single day disputing the conspiracy theorists who think that some plunge protection team is constantly at the ready. I think – I hope – that he was referring to the effective short volatility position that was quantitating easing, that was the establishment of this massive bond portfolio that in turn created the ability to short volatility. If he was speaking to a real position, I don’t have any knowledge of it, and it scares me if he was.

Chris: Again, I don’t have answers to that, but certainly my left eyebrow shot up when I read that. And it caught me – it was an interesting development for me to discover that the New York Feds trading desk, in response allegedly to Super Storm Sandy, they said, hey we got to move this to a safer location. Oh, look, how about Aurora, Illinois? Hey, how about right next to the CME trading floor server farms? That felt like an odd moment to me to have the New York Fed collocated with the Chicago Mercantile Exchanges main trading area.

And the reason that's odd is, you know as well as I, on the CME you only trade futures and options. These are highly levered products that you can't find them on any Central Banks balance sheet, but the CMA runs a Central Bank incentive buying program because they're such heavy buyers that they have a special pricing program for them. So somebody's in there buying futures and puts and whatnot. I just don’t know who or what or when. But we do know that the Bank of Japan preferentially buys their markets on down days and that they are now the largest owner of Japanese ETF.

So there's enough smoke here for me to say, okay, if this is how the market works it could not just be a put in word but also a put in deed in some interesting way. And it looks like Mr. Powell has sort of peeked at that and said, "I don’t like this. I'm uncomfortable with this stance that the Fed has taken here. This could go wrong." What is he worried about? Danielle, the question is people come and ask me all the time, they say, "Why can't the Fed just keep doing this forever? So what if they expand their balance sheet to 40 trillion? Big deal." Powell seems to think that would be a big deal. Would you agree or not?

Danielle: I think that what Powell is referring to, and bear in mind, the last analyst that I had before leaving the Fed, he was interested in staying in the system. I advocated hard for him to become part of the New York Markets Desk because I felt that under my tutelage that he had become absolutely brilliant – okay, I'm laughing outload at myself – but I was kind of blown away when he got the position that we were hoping that he would get, and he and his family were thus moved to Chicago where he remains to this day. And now he's recently been promoted to part of the mortgage backed securities online team.

So no, I hear where you're coming from. Smoke. Fire. I think J. Powell was right in being concerned that the Federal Reserves position could end up being disruptive in and of itself because it had intruded so deeply into the markets by virtue of the concentrated positions it was holding in the fixed income markets.

Chris: They had become the markets, and I want to turn now to those income markets, knowing that you have a background in fixed income, or what other people might think of as a treasury or a bond market position. So let's look at this now. Interest rates kind of intriguing. They're actually – they're climbing at this point, some saying that a 30-year bull run in US Treasuries is over. What are your thoughts here? Certainly my view is these rising interest rates are not entirely welcome, but I certainly expect it at some point in the story. And not welcome because of the extraordinary run up in debt across corporations, sovereign entities, you name it, it's stuffed everywhere. What do you make of these rising interest rates right now?

Danielle: Well, they're certainly doing a lot of work for anybody at the Fed who's a hawk because they're doing a lot of heavy lifting for the Fed right now. And they're also giving policy makers a good birds eye view into just how interest rate sensitive these markets have become. And I think at this point it would be safe to say they're acutely sensitive to even the smallest moves in interest rates. So we have yet to see 2.9 percent on the 10-year treasury. I can only imagine what that would trigger because every single time the ten-year benchmark treasury yield hits a new intraday high there's almost a mirrored reflected reaction in the stock market throwing up. So it is clearly a lock step situation.

I've literally been giggling out loud at people being outraged that right now the treasury is not being pursued as a safe haven in order to escape all of this carnage in the stock market. And my stock answers is, "They went up on concert for over 30 years. They both appreciated in value. Why on earth would you think that that relationship would become unhinged when they both start to go down in concert?" So there's a deep hypocrisy right now, and again, I think that the entire key to the risk parody trade, to the short val [PH] trade, all of this keys off of interest rates and where they're headed. You saw Monday – you saw on the flash crash Monday, for example, in that one trading period you saw the markets back off of a 100 percent probability that the Fed would hike interest rates at it's March meeting back down to a two thirds probability. Just one trading session.

Chris: Yeah. That was astonishing. And we saw, as you mentioned, both stocks selling off and bonds selling off. We saw a slight reversal of that on Tuesday, but today, we're seeing that again here on Thursday. We're seeing the same thing on my trading screen I'm looking at interest rates going up and stocks going down. But hey, things are volatile. That could all change by the time this interview is over. And looking here now at this bond universe, it's just insane to me that junk debt in Europe is trading with a lower handle than ten-year treasuries trading with about a two percent last I checked – they could have changed some. But significantly lower yields there that Greek two-year debt was below US two-year debt on a yield basis.

These sorts of deformations – they seem very, very difficult to unwind. I don’t know how you get out of that without a lot of pain. And so, if you could explain to people really what it means if junk debt, say, went from two percent to five percent yield, which is still ridiculously low, what kind of capital loses are sort of involved in that and is there any way for the European Central Bank in this instance to reverse engineer that without somebody taking some loses here?

Danielle: So I'm going to walk you through a little bit of poetry that we've seen these last few days to finally answer your question. So on Janet Yellen's last day in office she decides that she has epiphany number one, that's that Wells Fargo is misbehaving. So that's the first time she clues in, and she walks out the door by saying, "Shame on you. I'm going to sanction you." So epiphany number two, bearing in mind that at her final appearance she made the statement that stocks were, indeed, at the top of their historic valuation range, but other too much to worry about at this point. Then she hits the Sunday morning new circuit and says that commercial real estate and the stock market are both overvalued. Epiphany number two. Epiphany number three comes from Mario Draghi on Monday morning with the news flash that the European Central Bank is going to by more corporate bonds.

The world has become a crazy, crazy place. The ECB is going to be buying more corporate debt when an investment grade bond that it purchased was downgraded to junk and had to be written off the balance sheet. In answer to that they're going to buy more? I mean, this is a crazy situation with QE when Central Bankers are running out of assets to buy, and the minute they leave office declaring that they're over valued on to of that. I know I'm mixing apples and oranges, but when you asked the question, the news headline that was sent to me by several individuals – isn't this dandy, Danielle that the ECBs going to buy more corporate debt? I cannot phantom the level of losses, and Chris, believe it or not, I used to work in the junk bond market quite a bit. I don’t worry as much about corporate debt, junk debt. I worry about investment grade debt because there's so much of is, and it has – the issuance in this market went gang busters at a record level for seven years as "investment grade companies" levered up to their eyeballs all based on – can I get a drumroll – all based on credit rating agencies. Triple A, double A, investment grade stamp of approval.

Chris: Where have I heard this before?

Danielle: Doesn't that sound familiar? Ask yourself, I mean, what are these Central Bankers drinking? I hope they're drinking because if they're drinking then they're not thinking straight. If they're sober, then they're just stupid.

Chris: Yeah. Which is worse, drunk or stupid in this story? And that's a hard one to try and parse out. And so let's talk about this real quick on the longer term. Look, since the crisis, the Fed, all the G5 Central Banks, they’ve enabled perhaps the largest accumulation of debt in both aggregate and percentage terms in all of history. Have they made a mistake here?

Danielle: Well, I think that remains to be seen. We don’t know where systemic risk lies. And it's not that I'm not an advocate of healthy corrections in the market though I will point out this one little thing. Chris, we've heard about healthy corrections these last few days, but did anybody ever say, unhealthy melt up? No, I don’t thing those words were ever used. Nobody ever said this is an unhealthy melt up that will be followed by a healthy correction. No, no, no. It was all we're going to the moon, and it's all good. It's simply a reflection of how strong the economy is and how robust the earnings story is.

This is not going to end well and is much as all of the world is going to end doom and gloomers who are so excited to see Lehman Bros occur in real time, I have had to seriously push back these past few days and say, "This is not Lehman Brothers that we're witnessing at all." It started out with losses at HSBC, and it spread to two hedge funds at Bear Stearns. And then it went on to infect Landesbanks in Germany. We do not know, Chris, at this point, and I cannot say with a straight face that I know where the systemic risk lives. We will find out, and it will be the fault of Central Banks, and to answer your question, finally, the over intrusiveness and the magnitude of this financial engineering experiment.

Chris: You know, you’ve put your finger right on exactly why, Danielle, I happen to think that the Central Banks are afraid because where you can I don’t know where the risk is, I don’t think anybody can tell at this point because it's been smoke and mirror hidden. We have derivative markets that are untested. We don’t know what' really going to happen when those bets have to be settled. And I don’t think anybody wants to really see what happens if we test these inflated markets popping because if you thought 2008 was bad, my perception is these are worse.

And just because it's systemic, it's global, there's really nowhere to hide. It's not just concentrated in housing – it's in a corporate market, it's in a sovereign market, it's in equity markets, it's in commercial real estate. Where is it not? This is the first bubble – and I've been through three I'm embarrassed to say – an average person should have one in a generation. But I've been through three, and this is the first time I can't find anyplace that's really truly undervalued at this point in time, with the exception, possibly, of tiny, tiny crevasses of the commodities markets. But otherwise everything is kind of inflated at this point in time. And so, if it starts to really crack, I think the lesson from that little mine flash crash we had on Monday is it's probably going to be pretty quick. Nasty, shortish, and brutal.

Danielle: Look, I mean, Chris, remind me because it's been so long. It's been at least ten days since some talking head on TV was telling you that if you needed a place to hide in 2018, and to get that relative value play, you really did need to be in the emerging markets. Well, let me think, did they throw up light along side the stock market this week? Yes, they did. To your point, there is no place to hide. And that's a problem and, again, I understood – I was on Wall Street when I was at a firm where our internet analyst eventually testified before Congress – we knew if was a dot.com bubble. It was very visible. You could point your finger at it. We knew it was a subprime mortgage problem. You could isolate it, and you could identify it. But this is bubble wrap, and I'm not all about hyperbole. I'm not the zero-head spokesperson. I'm not. But the fact that I cannot put my finger on where the risk truly lives is the most disconcerting thing that I have experienced in my career.

Chris: I absolutely understand that, and that's very well said. So as a final question, if you, Danielle, were in Powell's shoes, what actually could be done to begin to unwind these excesses and deformations? What would you do, and can anything really be done to avoid let's just say painful losses?

Danielle: So maybe Powell's memoir can be titled The Courage to Not Act.

Chris: That'd be a great title.

Danielle: Because I can't answer your question, Chris. I don’t know what J. Powell should do. Feds staff papers say that QE was not efficacious, to use one of their gobbledygook words. That's staff papers. We know that the zero balance sucks, that it also doesn't not work. I mean, if we could get to two percent on the Fed funds, I would advocate for staying at two percent and not lowering interest rates from that floor being that we happen to have this little thing in our economy called the banking system that needs to operate effectively. And the fact that we don’t need to continue throwing good money after bad – which is what zero interest rates encourages. I'm putting on my Levid [PH] Vanenese [PH] investment hat.

So, if I'm J. Powell, I honestly do not know what to do at the Federal Reserve because the tools that they have tried to use haven't worked. It's time for the fiscal authorities to do something. And the reason that we're in the soup that we're in is because Ben Bernanke tried so hard to offset what Congress refused to do for so many years. But now, the Central Bank has boxed itself into a corner where it doesn't have tools to react to what's happening and to come to the rescue of the economy when that time comes. Look, I empathize with J. Powell. I don’t envy him his position, but there's not much that the Fed can do, and it's going to take a strong leader to not try and figure out what the spaghetti should be that you're going to throw up against a wall in order to save the world is going to be. Sometimes inefficient players simply have to go out of business in order to clear the playing field for the next generation of innovation to come alive. But nobody wants to hear that.

Chris: The Courage to Not Act. I love the idea, because it will take a lot of courage. I remember really an interview that stuck with me was listening to Paul Volcker. He was asked a question where the person said, "Hey, if you'd known coming into that job position as Chairman, that you were going to have to run short term interest rates up to 21 percent, what would you have done?" You know, and that big, tall, 6'5" tough as nails Texas, cigar chomping guy said, "I would have curled up under my desk, and I would have sucked my thumb and cried." Just an amazing moment, you know. It takes an enormous amount of courage to really get at the root issues. It's so easy to be a serial bubble blower. That's the easy path. No courage in that. So it remains to be seen. Thank you so much for your time today, and for your insights on Powell. I can't wait to see all this plays out. Danielle, please, tell our listeners how they can follow you more closely, and also let people know how important it is that they read Fed Up.

Danielle: Look, Fed Up is what I call a financial literacy primer. It might not have been back in Volcker's time, but the Fed has become Volcker to anybody's understanding of what is going on in the economy and in the financial markets. And Fed Up was written in plain English. It was translated. All the gobbledygook, all the jargon was thrown out the window, and I wrote the book for college students, for high school economic students, for everyday investors so that they had a financial literacy primer. Read the book. I don't care if you go get it at the library. Just read it. And if you're an investor, for heaven's sake, subscribe to Money Strong. Go to my website dimartinobooth.com one of those perineal pieces that I'd written in recent weeks is Powell on Powell. And my subscribers were so delighted that I was able to provide that to them. Read me week in and week out. Jump on a free trial subscription. And if you're bored and you have a really bad case on insomnia, then follow me on Twitter at dimartinobooth It's never boring.

Chris: Fantastic. Well, Danielle, thank you for all of that, and your time today. I really appreciate it.

Danielle: Thank you, Chris. Appreciate it.

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Lemonyellowschwin's picture
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OMG that was so good

What a brilliant woman.

I am definitely re-upping my subscription to Peak Prosperity. Times like these, insight like this . . . . 

Goodsalt's picture
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Gotta second Lemonyellowschwin's sentiments.

JohnH123's picture
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Who is the Decision maker?

What I wonder is even if Powell does not want to back stop the markets, is he the ultimate decision maker here, or does that decision really fall to other more powerful people?

AKGrannyWGrit's picture
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Not So Much

I agree that Ms. Booth is smart and articulate.

Unfortunately, the take-away from the podcast is that the Fed is not as smart or as effective as we've been led to believe.  The shit is going to hit the fan and we, Middle Class America, are screwed.  The motto, of course being it sucks to be you.  While the podcast was very interesting, it was yet more analysis of how screwed up things are.  It felt to me like selling "FUD" Fear, Uncertainty and Doubt.  Ugh, I can't relate as no doubt Ms. Booth probably never shops at Goodwill, worries about how to survive with no job and put food on the table.  Yes, I know Analysis is needed and a good thing, it just doesn't help keep the lights on or belly full.  I think TPTB goal of demoralizing our country is working.

Anything uplifting on the agenda?


Mark_BC's picture
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JohnH123 wrote: What I
JohnH123 wrote:

What I wonder is even if Powell does not want to back stop the markets, is he the ultimate decision maker here, or does that decision really fall to other more powerful people?

We had Uncle Ben and Grandma Yellen as nfriedly faced spokespeople. What now, Brother Powell?

davefairtex's picture
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from the Tao

The line "the courage not to act" was awesome.  It reminded me of a quote from the Tao:

"The master does nothing, yet he leaves nothing undone.  The ordinary man is always doing things, yet many more are left to be done."

Knowing when not to act may well be the most important skill to have.

And if you think about it, the current Fed interventionist philosophy really does go against the Tao - which (to me) is the philosophy of listening to the inner nature of all things, and then aligning any actions you take with the flow of that inner nature as best you can.

Practically speaking, this suggests that - instead of trying hard to paddle upstream "against the current of the business cycle" by slamming rates to 0% and buying 4 trillion in treasury bonds, perhaps the best action is to float downstream and focus on avoiding the big boulders along the way - by being the lender of last resort to non-bankrupt businesses that have good collateral, and letting the vast majority of participants deal with the cycle the best they can.

Snydeman's picture
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Posts: 711

Everything's UP today, so I guess its all good!



mememonkey's picture
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Posts: 263
AKGrannyWGrit wrote:

Anything uplifting on the agenda?


Not as far as TBTB are concerned, I think the saying:

" The beatings will continue until morale improves"  about covers it.

robie robinson's picture
robie robinson
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maybe getting the mare settled wasn't necessary. Not yet.

SagerXX's picture
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Posts: 2268
Occurs to me...

...that the Fed is shrinking its balance sheet (yes, I know, it's mostly chicanery, but still...) while the USGov is firing up the spending, so on balance maybe there will be an equivalent amount of credit growth/money creation?  Saw on the Hedge that the USGov debt will be juuuust under 30 trillion in a decade or so.  Seems like enough added debt to keep these markets levitating.  

But the Fed will still need to sell the debt to give to the USGov to fund that spending.  They might need some new method of prestidigitation to keep people from (FINALLY) catching on that it's a faked-up ponzi catastrophe in the making.  

But if they pull it off, this thing might last another decade.  

Carpe the effing diem, gang.  

VIVA -- Sager

AKGrannyWGrit's picture
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Posts: 516

Not as far as TBTB are concerned, I think the saying:

" The beatings will continue until morale improves"  about covers it.

The term "the-rule-of-thumb" was a law (Middle Ages I think) that stated that land owners couldn't beat their wives, children, slaves and animals with any stick that was bigger than their thumb.  Apparently limiting the size of a beating stick reduced damage to ones property thus reducing the loss of productive out-put by the unfortunate victim. After all reducing profits might interfere with paying ones taxes and that's a bad thing.

Gheez The more things change the more they stay the same.  Today's beatings are phychological, emotional and sociological rather than physical.  Absolutely the abuse is blatant and ubiquitous.  IMHO, of course.  Guess the feeling I get these days isn't fear it's contempt.

Thanks meme monkey, it helps to vent occasionally.  Off to shovel snow.


AKGrannyWGrit's picture
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Posts: 516
Fed Coin?


thc0655's picture
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Posts: 1798
Fund managers busy

The fund manager for my wife's 401k sent out an email to all the stakeholders in light of the recent market action.  Allow me to summarize: "Don't worry. Be happy. And whatever you do, don't withdraw your funds or decrease your regular contributions."  It must've worked: """markets"'" were up today. 

Of course this is exactly what they do right before a recession or depression. Something about "permanently high plateau."

KugsCheese's picture
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Posts: 1474
Yellen on Stage with Two Felons?

Who are these felons referred to in the podcast near the start?

Snydeman's picture
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Posts: 711
KugsCheese wrote: Who are
KugsCheese wrote:

Who are these felons referred to in the podcast near the start?


Politicians, bankers, and economists, of course.

Snydeman's picture
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Posts: 711

Treasuries up. Inflation higher than expected. Eurozone growth highest in 10 years.


Stawks up, hard.



CrLaan's picture
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Posts: 57

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