71 Bankruptcies In August, Economic 'Cracks Are Widening' Fast | Danielle DiMartino Booth
Summary
Market Outlook: The podcast highlights concerns about the widening economic cracks, drawing parallels to the 2007-2008 financial crisis, with increasing bankruptcies and a weakening labor market.
Federal Reserve Dynamics: Discussion centers on potential changes in Federal Reserve leadership, with speculation about Jerome Powell's position and the influence of the Federal Open Market Committee.
Labor Market Concerns: The labor market is described as weakening, with rising unemployment expectations and significant layoffs anticipated in the coming years, impacting consumer spending and economic stability.
Gold and Investment Strategy: Morgan Stanley's significant allocation to gold is noted, but caution is advised due to potential margin calls; defensive investment strategies focusing on dividend-generating stocks are recommended.
Credit Market Signals: The bond market is seen as a leading indicator of economic stress, with recent bankruptcies in the credit sector signaling potential broader financial instability.
Inflation and Interest Rates: Despite some signs of inflation easing, concerns remain about persistent inflationary pressures, with the Fed's approach to rate cuts being scrutinized.
Housing Market Trends: Home prices are expected to decline, with the current market not reflecting a true correction despite falling mortgage rates, impacting consumer wealth perception.
Tourism and Regional Economies: Nevada's economy, heavily reliant on tourism, is in recession, reflecting broader economic challenges and reduced consumer spending in discretionary sectors.
Transcript
If Morgan Stanley is putting 20% of its clients assets in gold, the contrarian in me says run the run to the other direction. We're starting to see individual stocks fall out of bed and that's never a good sign because it will lead to margin calls. The cracks are widening if you see gold prices come down even a smidge. This happens to be the last day of federal severance payments for about 150,000 federal workers. Uh, so they're going to be joining the ranks of of unemployed. We're going to see home prices decline. Gee, that sounds a lot like 0708 to me. >> I'm pleased to welcome back Danielle T. Martino, Booth, CEO of QI Research, and we'll be giving uh an overview of the macroeconomic landscape given that the Fed has begun its pivot era or has it? We'll talk about that. Danielle, welcome back. >> It is it's great to be here, David. Um, how are you today? I am very well. Thank you. And uh uh I see that you're in a sunnier part of the world than I am, but that's okay. Winter will be upon us all shortly. Uh Donald Trump is uh making posts on Truth Social once more. He's u putting cartoons of uh firing Jay Powell. I'm not sure if you've seen this. So this is uh >> Yeah, this this is what that looks like. You're fired. Okay. Well, I don't know if he's just trolling him at this point. Um we we we know he legally can't fire him now, but uh most likely Powell will get replaced. Do we have any idea or do we have more clarity now as to who uh might replace him next year? >> So um you know the the betting markets still have their money on Christopher Waller. Um, I'm I'm not so sure that that President Trump may have viewed his uh Wallers not dissenting at the September meeting as some sign of of a lack of loyalty on Waller's part that he didn't join Steven Myron in in his descent. We shall see. Um, the other name that's thrown around with the greatest frequency is of course Kevin Hasset. Um, but there's also a, you know, a non a material chance, and I'm must be because I'm in Las Vegas that I'm citing all these betting odds, but about 40% uh foresee uh Jerome Powell staying in his position on the board through January the 31st, 2028. >> Wow. And you know, just just to throw one wrinkle out there that a that's a high probability of him staying in place, but b uh if he was to do so, most people don't really understand the inner workings of the Federal Reserve. It's in his rights. It is in Powell's excuse me, it's it's in the rights of the Federal Open Market Committee, a body of 19 individuals to um to elect the chair of the Federal Open Market Committee. So, there's a distinction here, right? because the president has the authority to to nominate uh the chair of the Federal Reserve, which is a body of seven individuals, but it's the Federal Open Market Committee's purview to to vote for the chair. In other words, David, if you can only imagine, given you just started this segment off by talking about the president trolling Jay Powell, can you imagine how he would feel if the Federal Open Market Committee elected him to remain in his place as chair of the Federal Open Market Committee such that he would be at every single press conference at the podium and not the individual he put in as chair of the Federal Reserve Board from now until January of 2028. again, perfectly legal. >> Yeah, I like to see the headlines of that. I like the cartoons coming out of uh Trump social feeds when that happens. There was a descent, I believe, at the last FOMC meeting. Um the uh Miran wanted uh 50 basis points, correct me if I'm wrong, and um that didn't happen, of course. So, um should we have gotten 50 basis points? Let's talk about the direction of the Fed funds rate going into next year. Well, it's um it it the prepundonderance of data suggests whether you're talking about the University of Michigan, 65% of u of Americans now foresee a rising unemployment rate. Those numbers go up even higher for upper upper income earners. The University of Michigan parses it out by way of top tier, middle tier, lowest lowest tier in terms of income generation capacity. But when that upper income foresees rising unemployment, that is even more indicative of the broader population because they tend to be the individuals in charge of hiring and firing decisions. So um and we've heard from whether it's the CFO survey or the CEO survey that they have every intention going forward of continuing to press forward in 2025 into 2026 with layoffs. So, it's clear that there is a a um a more rapid decline in the health of the US labor market. The two of us are speaking on September the 30th, uh 2025. This happens to be the last day of federal severance payments for about 150,000 federal workers. Uh so, they're going to be joining the ranks of of unemployed as well. FHA the boondoggle there runs out uh in terms of extending and pretending and modifying mortgages at infan item that runs out today. Uh student loan garnishments of wages that begins tomorrow. Um and it looks like we've got a government shutdown on our hands. So yes, uh the the the confluence of factors, if you will, suggests that we certainly should have gone for 50 basis points, but the reason nobody joined Myron in in his descent, David, is because they were all so united in showing voting, if you will, for Fed Independence. And that's really what that was all about. >> All right, I want to touch on Fed Independence toward the end of the interview. Let's talk about uh Jerome Powell's assessment of the labor market and then we'll discuss the labor market in a bit more detail. This was from his last uh conference uh a couple couple weeks ago. Take a listen. >> You see um people who were sort of more at the margins. So kids coming out of college and and younger people, minorities are are uh uh having a hard time finding jobs. The overall job finding rate is very very low. However, the the the layoff rate is also very low. So you've got a low a low firing low hiring environment. And the concern is that if you start to see layoffs, the people who are laid off won't there won't be a lot of hiring going on. So that could very quickly flow into uh into higher unemployment. In a in a healthier economy, healthier labor market, there would be jobs for those people. But now the hiring rate is very very low. So that's been a growing concern over the last last few months. And it's one of the reasons why we think it's appropriate that we begin to begin to shift our policy focus uh toward a more balanced one. >> Uh low firing, low hiring. Uh doesn't that just sound like an equilibrium state? >> Well, it would sound like an equilibrium state. Uh unless you were a college graduate or unless you were one of the 25% of the individuals who is in that pool of unemployed who's been unemployed for longer than 6 months. We call those the permanently unemployed. Once you cross that 25% of the pool of unemployed that's been out of work for that long that we you you start to cross over this Rubicon into what we call labor market scarring. Um, and to Powell's point, if you continue to have individuals join the labor force, which is natural, and they're not getting hired, and even at the rather low pace of layoffs, you know, just the highest pace since 2010, what he calls the low pace of layoffs, uh, I'm I'm being sarcastic, David. Um, but even at even at that juncture, if you will, we will start to see the unemployment rate tick up. Gold prices have continuously hit all-time highs this year in 2025. 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This is from your own research, QI uh research, the daily feather as of um well, I've got two charts. Um first I'll show the one from yesterday. Uh here nothing good, fear something bad uh lower right quadrant. So good news heard on unemployment. Sorry on employment rather 18 to 34% to respond has been going down while the unemployment rate has been going up. So what what is this orange line exactly? Is that a survey? >> That is University of Michigan and um they query all demographics um every month on the percentage who've heard good news on the job market. Now what you're looking at with that orange line, those are that's Gen Z and millennials together. call it 50% of the population has heard zero zero% good news on employment. We only have one other the pandemic aside we only have one other precedent of that zero David and that was in the depths of the great recession. That is how compared to the more balanced labor market that Jay Powell just described in that clip. That's how 50% of Americans perceive the job market as being the worst since October of 2008. It's the only other precedent that we have to match that 0%. >> Is this a coincidence indicator? Because you and I have been talking about the labor market weakening for quite some time. You've you've called for higher layoffs earlier in the year. Maybe those layoffs already happened in some sectors and then people are just reflecting that sentiment now with this particular survey. So I I don't I don't know if it's forwardlooking, but I'll let you comment on that. um it is a more coincident indicator. Uh the expectation for the unemployment rate to rise, higher unemployment expectations, that's a leading indicator. But once people are in their day-to-day lives and hearing nothing good about the job market, that is very much in the here and now. And you correctly identified as being a coincident indicator. >> The um the notion that people are feeling bad about the labor market. I wonder what that is reflective of. Exactly. So, right now, let let's just take it step by step. You're in Vegas. You said you're in Vegas. I was in Vegas in May. It was a little bit quiet. I was also in Denver a couple weeks ago. Uber driver said it was quieter than usual. What's your assessment right now? Um, how's tourism? >> Um, how are the venues? Uh, I don't know. How how have you I don't know if you have had time to talk to anybody. >> It is. >> Yeah. >> Yep. I I have and and it's my nature to do so. And things are definitely definitely quieter. you you don't even have the same number of attendants. You don't have the same number of sponsors um taking out uh um space at conferences where they normally would be. So uh I mean this is we've had six straight months in Las Vegas of declining um traffic. At Qi Research, we gauge states um based on many facets, but we we we rank states based on the industries that their state economies rely on the most. And Nevada is the absolute highest ranking state in the nation in terms of its reliance on the tourism industry to power its economy. um it's the second most important state in terms of construction being a a large influence on the state's economy and that is also if I could use a a technical term in the toilet here in Nevada. So uh the state of Nevada has one of the highest unemployment rates of any state in the United States and it is definitely in recession. Is this in response to trade policy because tourists aren't coming to the US or do you think this would have happened if Joe Biden were in office today? Well, I certainly think that trade policy uh exacerbated the situation in terms of international travelers. Canadians are not obviously traveling to the United States, but this is also reflective of the fact that we know because of very long lagged revisions to data that net job losses began in the second quarter of 2024. And whether you're talking about Walmart or Target, major US retailers are saying that American consumers, if they're not in that that top 10% are are simply not buying discretionary goods, that's going to include vacationing. So I would say that the trade war has made a bad situation worse. But the chief determinant, David, is a lack of income growth. We've lost just since January nearly 1.5 million full-time jobs in this country. You ain't taking the family on vacation if you've gone from a full-time to a part-time income. >> Ultimately, what does a weakening labor market mean for markets um right now? >> Well, I just >> Yeah, please. >> Just look at credit. >> Just look at credit. Look, um the arguably was uh an idiosyncrasy. Um they were a subprime lender in large part to um illegal immigrants. So when your customers up and leave, yes, we can understand that that company in particular going bankrupt. The fact that three banks, however, were lending against the same collateral. Gee, that sounds a lot like 0708 to me. And then we have First Brands blow up. And the night that it was announced just a few it was announced um on a Sunday night, the headline was somewhat comical if not so tragic that the company had somewhere between 10 and 50 billion in liabilities. And you're like, well, there's a spread. Uh but again, we're learning that with First Brands, nearly a 100 LLC's underneath this one name that there's been a lot of offbalance sheet borrowing. My point to you is when the real economy starts to break, you'll see it quickest in credit. And that is what we're seeing with um with with these blowups in in credit. >> Is the bond market usually leading the stock market? >> The bond market always leads the stock market. The only thing we have not seen follow yet are credit spreads. >> Okay. Many stores have announced, including Home Depot, that they're about to raise prices. So, into the third uh fourth quarter rather, uh we may see actual price hikes from a lot of box stores. I wonder what this would translate to margins. On the one hand, if demand stays strong, margins will stay the same, if not improve. On the other hand, if labor market the labor market weakens, people spend less money. Um this will backfire. What do you think is going to happen? I I I think we're already learning. Um Thor Industries, for example, they're the largest RV um seller in the nation. They announced their earnings and they said that that sales of motordriven um RVs were up appreciably. Those are the airirstreams that they sell to the wealthy, the top 10% that represent half of all spending. and they said that if you're pulling an RV, those sales have absolutely collapsed and they're having to discount them. It's it's just the reality. Either people can afford to buy the stuff or they can't. It's when you when you phrase it that companies will be raising prices. I think it should be more accurately stated that companies hope to raise prices and for those price hikes to stick because if they don't, what's going to follow price hikes is a sale. >> Yeah, that that uh that could happen if the economy weakens more. This is another chart I want to show uh people. Home price appreciation index. So, I bring this up because um the value of your home has um has a wealth effect. you feel wealthier and spend more money if your home price goes up even though it's on paper. Anyway, so what's what what is this chart showing? Bottom left corner. Uh we are in 2025 and according to this chart, it's peaked sometime around >> May. >> May yeah May, April and um this projection is that by Zillow or who's making their by um it's by AEI. Okay. So they're a separate um aggregator of home prices. They've been doing this for a very long time. That's dated back to 2013. And as you can see, we have completely fallen off trend with that line and we're veering towards zero. So there is every anticipation um that we're going to see home prices decline. Um if uh we had fresh data out this morning from FH um from from FHFA as well as S&P um even though it's got a new name that I can't remember. But the point is um in the case of S&P now we've had five backto-back months of home price declines. Um in the case of FHA we've had four backto-back months of home price declines corroborating the AEI series that you're looking at on this screen. And you're you're correct. Uh for a lot of Americans, they they feel that their net worth and the majority of Americans that is the case, their net worth is tied to the value of their home. >> The idea that the Fed is about to cut rates even more, uh mortgage rates have already started to come down a little bit. Shouldn't shouldn't the inverse be happening? Shouldn't, you know, logically shouldn't prices go up? >> We would certainly think that that was would be the case if we were in a more balanced housing market, that would be the case. But even in poster child cities like Austin, Texas, which is which has the fastest um and deepest home price declines of any metropolitan area in the nation, home prices remain 20 25% above where they were in 2020. In other words, we haven't had a true correction and many people who were in the marketplace are saying it's not just the mortgage rate, it's the fact that home prices remain skyhigh. Have they not come down enough? Yeah. >> And actually this leads to the broader question as to whether or not the Fed will actually cut rates to the same extent that the markets uh may may believe. This is from CNBC. Um Cleveland Fed chair, sorry, Cleveland Fed president rather. Beth Hammock joins CNBC. Squawkbox. On the inflation side right now, I believe I continue to be worried about where we are from an inflationary perspective. We've been missing our mandate on the inflation side. Our objective of 2% for more than 4 and 1/2 years. and I continue to see that we have pressure in inflation both in headline and the core. She said that the labor market looks reasonably healthy and broadly imbalanced while inflation remains stubbornly above the Fed's target, adding she doesn't expect prices to fall back to 2% until end of 2027 or early 2028. I don't know. Let's just take the other side here. Perhaps she's right. Perhaps the Fed's looking at this all wrong. We should be concerned about inflation, not the labor market. Um, you know, perhaps that that's certainly uh possible. I follow trueflation tru I think you know that I follow trueflation. If you if you have the ability to pull that up um uh that that would be great. Uh we did see some upside in real time uh prices earlier this year uh popped up close to 2.4 2.45% and we have now seen it fall back to 2.01%. 01% as of today on a year-over-year >> basis. Of course, that is going to reflect some of the pressure that we've seen in apartment rentals, in discretionary prices, in people's ability to travel and spend money on services. I think what Bethic is is counting on however is the fact that we are going into the time of the year uh the very tail end last few months of a year going into the first few months of a new year is when seasonal upward pressure on inflation metrics is the highest. to give you a different example of seasonals. Had it not been for the largest seasonal adjustment to retail sales for the month of August, the uh the the upside surprise would have actually printed in the negative. Instead of 0.6 with a plus sign in front of it, it would have been negative0.5%. So seasonals really can swing the data. And of course, this depends on the efficacy of the models that create them by the bureau statistics, by the um Census Bureau, by the Bureau of Economic Analysis. But my point is to Hammock's point, if if Federal Reserve hawks are looking for an excuse going forward to lean towards their inflation mandate, then seasonals are going to be on their side. Will it reflect the real economy? No, it will not. We've seen inflation come back down. But again, my mantra is trade the narrative, own the truth. If Fed officials are going to rely on seasonals to justify slowing the pace of any rate cutting, then that's going to that that's going to be reflected in the market. David, >> well, most forecasts do peg inflation as coming down in the long term. I mean, by long term, I mean the next year or so. I wonder if the 10-year yield and the long end of the curve is going to follow that. Hence, we'll see a bond rally into 2026. >> You know, it's it's perfectly conceivable. Everything's going to depend on so many other factors. We have seen the bond market rally. The the the benchmark tenure tenure yield is around I think 4.13% as as we filmed this uh today. That is a reflection of anxiety. anxiety that there's something brewing in the credit market because we're seeing these enormous uh bankruptcies, anxiety about what a government shutdown will do. Will President Trump follow through on his threat not to just furlow federal workers, but fire them, which is something we've never seen in US history. Probably something else that would land on the docket of the Supreme Court in short order. We don't know, but there is a ton of uncertainty out there. And right now at least it's being reflected in longer maturity bond yields. >> It does appear to me that the markets are relatively insulated from this reality that we're talking about. And um as we're speaking today, new all-time highs week after week for the S&P, NASDAQ, gold almost at $3,900 now, 3868. And and it just market participants are probably not feeling the stress that perhaps we're talking about if you're investing in the markets and your wealth is dependent on assets right now. So, can we just comment on this seemingly big disconnect that's going on right now? >> I really don't think there's a disconnect when you can connect those dots with the fact that Moody's came out last week and announced that that the top 10% of earners who own 87% of the stock market control 50% of spending. So, as long as that stock market hangs in there, and I'm not arguing it's going to if credit continues to crack, that will make a difference. But as long as the stock market hangs in there and you get inflows that outweigh redemptions in the world of passivity, everything's going to be fine. You'll know something is up, though, David. Um, even though we know that gold is a long-term holding, the contrarian in me would say that if Morgan Stanley's put 20% of its putting 20% of its clients assets in gold, the contrarian in me says run the run to the other direction at least for an inim trade. But you will know that there that the cracks are widening if you see gold prices come down even a smidge because that means margin calls. friend of mine asked me today. Uh, my friend wants to buy silver for her child as a shiny gift and my friend's bought all the silver at Costco. It's being sold out and I'm like, what? I That sounds like a market top signal to me. I don't know. I'll let you comment on that. >> You're a contrarian thinker like I am. Um, and so the there there are always signposts or whether it's Electronic Arts getting bought out for 55 billion and you know the largest LBO and there are always always always signposts >> the Okay, so when we have a slowing economy perhaps actually I didn't get your inflation outlook. Let's let's finish up on there. So true inflation has been coming down. What do you think is going to happen in 2026? So, I do think that we're going to see the vestigages, especially if the Fed is planning to go as plottingly slow as they say they are. You're not going to get enough relief on the on the mortgage rate front to offset the weakness in the housing market. My good friend Ivy Zelman has always said to me, Danielle, there is one thing that trumps falling mortgage rates, and that's a rising unemployment rate. So, if we do continue to see downside in shelter prices, that will filter through. And we're also starting to see downside in car prices as well as these delinquencies continue to rise. And remember, David, the the federal government can garnish an entire tax refund come February if somebody's not paid their student loans. So the the seasonal improvements that we tend to see in the economy around tax refund season, they're not going to be there to the extent that people think that they've gotten away with never paying their student loans back and and garnishments begin by the way October 1 as well. And all of these forbearance and mortgage modification programs through the FHA, that all ends today as well. What are some of the signposts that we'll see in the news that will indicate that the labor market is definitely weakening even more? And that we're seeing signs of not just the labor market weakening, but corporate weakness on their books, perhaps leading to more layoffs because they'll need to, not because they want to, not because people want to leave their jobs because they need to cut costs. Perhaps companies defaulting on debt. Perhaps companies going bankrupt. You know, it probably will happen one step at a time. We probably won't get a Leman collapse overnight. what's your take? >> So, you're right. Um, in this particular cycle, it has it has been a a slow build, but as standard and poor um reported just last month, um there were 71 record uh bankruptcies for the month of August, um that's the highest in the post-pandemic era. They do start to add up, especially when when some of these bankruptcies are between 10 and$50 billion in liabilities. So yes, again, I'm going to go back to what I was saying earlier. We're going to see it in credit. It's where we're going to see, and by the way, to your point about margins and profit growth, if you look inside GDP, profit growth peaked six quarters ago. We've just created that graph. It's coming down for six quarters. It's a long time. And again, that helps explain why when you talk to CEOs and CFOs, they remain hyperfocused on cutting costs. >> I uh real GDP growth is still near 4% though in the last quarter. I know. >> Well, it's interesting. It's interesting you raised this because if you look at a separate measure um and there was a very good article in the Wall Street Journal talking about gross output. If you look at business investing, it has turned tail and very much gone into the negative. And that chart right now is trending everywhere. And it's telling you again that if if not for the top 10% who represent 50% of spending, who could care less about inflation, if it wasn't for them, we would certainly have a much different picture of the US economy. And again, I would I would direct everybody to Google gross output um as opposed to gross domestic product because that is a gauge of business investment. There were three um 1970 2001 and I'm missing another maybe 1991 but there were three um recessions in modern US history when we actually saw consumption rise throughout the recession. In other words, the chief determinant of recession is not the consumer. It is businesses and business investment and that is what we're seeing contracting. >> So business so business investment is contracting. Consumer spending may contract next quarter if the labor market weakens. Uh what other component of the GDP will drive growth then? Government spending, net exports. >> Um presum spending's been going the opposite direction at last check. >> Sure. So there could certainly be, you know, a desperate move to do a Doge dividend. We hear about that every once in a while. I think if the wheels start to fall off the economy, we'll you'll certainly see President Trump attempt to do something of that sort. Um that would bring inflation back. Just just throw the money out of a helicopter just like the car's act. >> Yeah. So let's see what carries the uh GDP into the into the last quarter of the year. So finally get Danielle, how do we put this together into an investable um action here? We have uh rising inflation so far according to headline CPI. We've got uh you know rising unemployment and per your surveys that you've showed uh weakening outlook on the labor market. Uh what does this translate to for your portfolio? Um, I think that right now, unless you are 18 years old and getting into the market for the very first time, that it is appropriate to be very defensively postured. So, we're talking about dividend generating stocks that might be appealing to, oh, I don't know, senior citizens who are looking to bolster their cash income as the Fed Federal Reserve takes saving um saving rates down, money market fund rates down. Um, but anything that you would consider to be defensive and income producing is what I would suggest right now. Despite the fact that I continue to maintain that gold is of course a long-term holding, but but again, we're starting to see individual stocks fall out of bed, and that's never a good sign because it will lead to margin calls even if the broad market continues to hang in there. So, be careful with margin calls and your gold holdings. >> All right. Um, let's follow up in a couple weeks to see what happens with the markets. And, um, I'm curious as to what the trigger may be for when the markets the the broad stock markets I'm talking about will actually start to reflect what's going on with the with the with the economy. Or perhaps bad news is good news. Perhaps the markets are pricing in lower lower interest rates, lower discount rates. Hence why valuations are going up. >> It could look I mean the two of us could be having this discussion in in in 1998 right and valuations just kept going higher and higher. >> Yeah. All right. Thank you. Where can we find um your work and uh and read about what you're writing. >> So um we'd love to to grow the Daily Feather reading community. Please come to dartinoboot.substack.com if you're an institutional investor. Uh we publish eight times a week. We have a very exciting Bloomberg chat room going at all times. Come to qirearchearch.com. And if you don't already follow me on what was once known as Twitter, please do so at dartino. >> Okay, excellent. Thank you very much. We'll talk again soon. Please follow Danielle Dartino Booth and the Daily Feather links down below. We'll speak again next time and thank you for watching. Don't forget to like and subscribe.
71 Bankruptcies In August, Economic 'Cracks Are Widening' Fast | Danielle DiMartino Booth
Summary
Transcript
If Morgan Stanley is putting 20% of its clients assets in gold, the contrarian in me says run the run to the other direction. We're starting to see individual stocks fall out of bed and that's never a good sign because it will lead to margin calls. The cracks are widening if you see gold prices come down even a smidge. This happens to be the last day of federal severance payments for about 150,000 federal workers. Uh, so they're going to be joining the ranks of of unemployed. We're going to see home prices decline. Gee, that sounds a lot like 0708 to me. >> I'm pleased to welcome back Danielle T. Martino, Booth, CEO of QI Research, and we'll be giving uh an overview of the macroeconomic landscape given that the Fed has begun its pivot era or has it? We'll talk about that. Danielle, welcome back. >> It is it's great to be here, David. Um, how are you today? I am very well. Thank you. And uh uh I see that you're in a sunnier part of the world than I am, but that's okay. Winter will be upon us all shortly. Uh Donald Trump is uh making posts on Truth Social once more. He's u putting cartoons of uh firing Jay Powell. I'm not sure if you've seen this. So this is uh >> Yeah, this this is what that looks like. You're fired. Okay. Well, I don't know if he's just trolling him at this point. Um we we we know he legally can't fire him now, but uh most likely Powell will get replaced. Do we have any idea or do we have more clarity now as to who uh might replace him next year? >> So um you know the the betting markets still have their money on Christopher Waller. Um, I'm I'm not so sure that that President Trump may have viewed his uh Wallers not dissenting at the September meeting as some sign of of a lack of loyalty on Waller's part that he didn't join Steven Myron in in his descent. We shall see. Um, the other name that's thrown around with the greatest frequency is of course Kevin Hasset. Um, but there's also a, you know, a non a material chance, and I'm must be because I'm in Las Vegas that I'm citing all these betting odds, but about 40% uh foresee uh Jerome Powell staying in his position on the board through January the 31st, 2028. >> Wow. And you know, just just to throw one wrinkle out there that a that's a high probability of him staying in place, but b uh if he was to do so, most people don't really understand the inner workings of the Federal Reserve. It's in his rights. It is in Powell's excuse me, it's it's in the rights of the Federal Open Market Committee, a body of 19 individuals to um to elect the chair of the Federal Open Market Committee. So, there's a distinction here, right? because the president has the authority to to nominate uh the chair of the Federal Reserve, which is a body of seven individuals, but it's the Federal Open Market Committee's purview to to vote for the chair. In other words, David, if you can only imagine, given you just started this segment off by talking about the president trolling Jay Powell, can you imagine how he would feel if the Federal Open Market Committee elected him to remain in his place as chair of the Federal Open Market Committee such that he would be at every single press conference at the podium and not the individual he put in as chair of the Federal Reserve Board from now until January of 2028. again, perfectly legal. >> Yeah, I like to see the headlines of that. I like the cartoons coming out of uh Trump social feeds when that happens. There was a descent, I believe, at the last FOMC meeting. Um the uh Miran wanted uh 50 basis points, correct me if I'm wrong, and um that didn't happen, of course. So, um should we have gotten 50 basis points? Let's talk about the direction of the Fed funds rate going into next year. Well, it's um it it the prepundonderance of data suggests whether you're talking about the University of Michigan, 65% of u of Americans now foresee a rising unemployment rate. Those numbers go up even higher for upper upper income earners. The University of Michigan parses it out by way of top tier, middle tier, lowest lowest tier in terms of income generation capacity. But when that upper income foresees rising unemployment, that is even more indicative of the broader population because they tend to be the individuals in charge of hiring and firing decisions. So um and we've heard from whether it's the CFO survey or the CEO survey that they have every intention going forward of continuing to press forward in 2025 into 2026 with layoffs. So, it's clear that there is a a um a more rapid decline in the health of the US labor market. The two of us are speaking on September the 30th, uh 2025. This happens to be the last day of federal severance payments for about 150,000 federal workers. Uh so, they're going to be joining the ranks of of unemployed as well. FHA the boondoggle there runs out uh in terms of extending and pretending and modifying mortgages at infan item that runs out today. Uh student loan garnishments of wages that begins tomorrow. Um and it looks like we've got a government shutdown on our hands. So yes, uh the the the confluence of factors, if you will, suggests that we certainly should have gone for 50 basis points, but the reason nobody joined Myron in in his descent, David, is because they were all so united in showing voting, if you will, for Fed Independence. And that's really what that was all about. >> All right, I want to touch on Fed Independence toward the end of the interview. Let's talk about uh Jerome Powell's assessment of the labor market and then we'll discuss the labor market in a bit more detail. This was from his last uh conference uh a couple couple weeks ago. Take a listen. >> You see um people who were sort of more at the margins. So kids coming out of college and and younger people, minorities are are uh uh having a hard time finding jobs. The overall job finding rate is very very low. However, the the the layoff rate is also very low. So you've got a low a low firing low hiring environment. And the concern is that if you start to see layoffs, the people who are laid off won't there won't be a lot of hiring going on. So that could very quickly flow into uh into higher unemployment. In a in a healthier economy, healthier labor market, there would be jobs for those people. But now the hiring rate is very very low. So that's been a growing concern over the last last few months. And it's one of the reasons why we think it's appropriate that we begin to begin to shift our policy focus uh toward a more balanced one. >> Uh low firing, low hiring. Uh doesn't that just sound like an equilibrium state? >> Well, it would sound like an equilibrium state. Uh unless you were a college graduate or unless you were one of the 25% of the individuals who is in that pool of unemployed who's been unemployed for longer than 6 months. We call those the permanently unemployed. Once you cross that 25% of the pool of unemployed that's been out of work for that long that we you you start to cross over this Rubicon into what we call labor market scarring. Um, and to Powell's point, if you continue to have individuals join the labor force, which is natural, and they're not getting hired, and even at the rather low pace of layoffs, you know, just the highest pace since 2010, what he calls the low pace of layoffs, uh, I'm I'm being sarcastic, David. Um, but even at even at that juncture, if you will, we will start to see the unemployment rate tick up. Gold prices have continuously hit all-time highs this year in 2025. 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This is from your own research, QI uh research, the daily feather as of um well, I've got two charts. Um first I'll show the one from yesterday. Uh here nothing good, fear something bad uh lower right quadrant. So good news heard on unemployment. Sorry on employment rather 18 to 34% to respond has been going down while the unemployment rate has been going up. So what what is this orange line exactly? Is that a survey? >> That is University of Michigan and um they query all demographics um every month on the percentage who've heard good news on the job market. Now what you're looking at with that orange line, those are that's Gen Z and millennials together. call it 50% of the population has heard zero zero% good news on employment. We only have one other the pandemic aside we only have one other precedent of that zero David and that was in the depths of the great recession. That is how compared to the more balanced labor market that Jay Powell just described in that clip. That's how 50% of Americans perceive the job market as being the worst since October of 2008. It's the only other precedent that we have to match that 0%. >> Is this a coincidence indicator? Because you and I have been talking about the labor market weakening for quite some time. You've you've called for higher layoffs earlier in the year. Maybe those layoffs already happened in some sectors and then people are just reflecting that sentiment now with this particular survey. So I I don't I don't know if it's forwardlooking, but I'll let you comment on that. um it is a more coincident indicator. Uh the expectation for the unemployment rate to rise, higher unemployment expectations, that's a leading indicator. But once people are in their day-to-day lives and hearing nothing good about the job market, that is very much in the here and now. And you correctly identified as being a coincident indicator. >> The um the notion that people are feeling bad about the labor market. I wonder what that is reflective of. Exactly. So, right now, let let's just take it step by step. You're in Vegas. You said you're in Vegas. I was in Vegas in May. It was a little bit quiet. I was also in Denver a couple weeks ago. Uber driver said it was quieter than usual. What's your assessment right now? Um, how's tourism? >> Um, how are the venues? Uh, I don't know. How how have you I don't know if you have had time to talk to anybody. >> It is. >> Yeah. >> Yep. I I have and and it's my nature to do so. And things are definitely definitely quieter. you you don't even have the same number of attendants. You don't have the same number of sponsors um taking out uh um space at conferences where they normally would be. So uh I mean this is we've had six straight months in Las Vegas of declining um traffic. At Qi Research, we gauge states um based on many facets, but we we we rank states based on the industries that their state economies rely on the most. And Nevada is the absolute highest ranking state in the nation in terms of its reliance on the tourism industry to power its economy. um it's the second most important state in terms of construction being a a large influence on the state's economy and that is also if I could use a a technical term in the toilet here in Nevada. So uh the state of Nevada has one of the highest unemployment rates of any state in the United States and it is definitely in recession. Is this in response to trade policy because tourists aren't coming to the US or do you think this would have happened if Joe Biden were in office today? Well, I certainly think that trade policy uh exacerbated the situation in terms of international travelers. Canadians are not obviously traveling to the United States, but this is also reflective of the fact that we know because of very long lagged revisions to data that net job losses began in the second quarter of 2024. And whether you're talking about Walmart or Target, major US retailers are saying that American consumers, if they're not in that that top 10% are are simply not buying discretionary goods, that's going to include vacationing. So I would say that the trade war has made a bad situation worse. But the chief determinant, David, is a lack of income growth. We've lost just since January nearly 1.5 million full-time jobs in this country. You ain't taking the family on vacation if you've gone from a full-time to a part-time income. >> Ultimately, what does a weakening labor market mean for markets um right now? >> Well, I just >> Yeah, please. >> Just look at credit. >> Just look at credit. Look, um the arguably was uh an idiosyncrasy. Um they were a subprime lender in large part to um illegal immigrants. So when your customers up and leave, yes, we can understand that that company in particular going bankrupt. The fact that three banks, however, were lending against the same collateral. Gee, that sounds a lot like 0708 to me. And then we have First Brands blow up. And the night that it was announced just a few it was announced um on a Sunday night, the headline was somewhat comical if not so tragic that the company had somewhere between 10 and 50 billion in liabilities. And you're like, well, there's a spread. Uh but again, we're learning that with First Brands, nearly a 100 LLC's underneath this one name that there's been a lot of offbalance sheet borrowing. My point to you is when the real economy starts to break, you'll see it quickest in credit. And that is what we're seeing with um with with these blowups in in credit. >> Is the bond market usually leading the stock market? >> The bond market always leads the stock market. The only thing we have not seen follow yet are credit spreads. >> Okay. Many stores have announced, including Home Depot, that they're about to raise prices. So, into the third uh fourth quarter rather, uh we may see actual price hikes from a lot of box stores. I wonder what this would translate to margins. On the one hand, if demand stays strong, margins will stay the same, if not improve. On the other hand, if labor market the labor market weakens, people spend less money. Um this will backfire. What do you think is going to happen? I I I think we're already learning. Um Thor Industries, for example, they're the largest RV um seller in the nation. They announced their earnings and they said that that sales of motordriven um RVs were up appreciably. Those are the airirstreams that they sell to the wealthy, the top 10% that represent half of all spending. and they said that if you're pulling an RV, those sales have absolutely collapsed and they're having to discount them. It's it's just the reality. Either people can afford to buy the stuff or they can't. It's when you when you phrase it that companies will be raising prices. I think it should be more accurately stated that companies hope to raise prices and for those price hikes to stick because if they don't, what's going to follow price hikes is a sale. >> Yeah, that that uh that could happen if the economy weakens more. This is another chart I want to show uh people. Home price appreciation index. So, I bring this up because um the value of your home has um has a wealth effect. you feel wealthier and spend more money if your home price goes up even though it's on paper. Anyway, so what's what what is this chart showing? Bottom left corner. Uh we are in 2025 and according to this chart, it's peaked sometime around >> May. >> May yeah May, April and um this projection is that by Zillow or who's making their by um it's by AEI. Okay. So they're a separate um aggregator of home prices. They've been doing this for a very long time. That's dated back to 2013. And as you can see, we have completely fallen off trend with that line and we're veering towards zero. So there is every anticipation um that we're going to see home prices decline. Um if uh we had fresh data out this morning from FH um from from FHFA as well as S&P um even though it's got a new name that I can't remember. But the point is um in the case of S&P now we've had five backto-back months of home price declines. Um in the case of FHA we've had four backto-back months of home price declines corroborating the AEI series that you're looking at on this screen. And you're you're correct. Uh for a lot of Americans, they they feel that their net worth and the majority of Americans that is the case, their net worth is tied to the value of their home. >> The idea that the Fed is about to cut rates even more, uh mortgage rates have already started to come down a little bit. Shouldn't shouldn't the inverse be happening? Shouldn't, you know, logically shouldn't prices go up? >> We would certainly think that that was would be the case if we were in a more balanced housing market, that would be the case. But even in poster child cities like Austin, Texas, which is which has the fastest um and deepest home price declines of any metropolitan area in the nation, home prices remain 20 25% above where they were in 2020. In other words, we haven't had a true correction and many people who were in the marketplace are saying it's not just the mortgage rate, it's the fact that home prices remain skyhigh. Have they not come down enough? Yeah. >> And actually this leads to the broader question as to whether or not the Fed will actually cut rates to the same extent that the markets uh may may believe. This is from CNBC. Um Cleveland Fed chair, sorry, Cleveland Fed president rather. Beth Hammock joins CNBC. Squawkbox. On the inflation side right now, I believe I continue to be worried about where we are from an inflationary perspective. We've been missing our mandate on the inflation side. Our objective of 2% for more than 4 and 1/2 years. and I continue to see that we have pressure in inflation both in headline and the core. She said that the labor market looks reasonably healthy and broadly imbalanced while inflation remains stubbornly above the Fed's target, adding she doesn't expect prices to fall back to 2% until end of 2027 or early 2028. I don't know. Let's just take the other side here. Perhaps she's right. Perhaps the Fed's looking at this all wrong. We should be concerned about inflation, not the labor market. Um, you know, perhaps that that's certainly uh possible. I follow trueflation tru I think you know that I follow trueflation. If you if you have the ability to pull that up um uh that that would be great. Uh we did see some upside in real time uh prices earlier this year uh popped up close to 2.4 2.45% and we have now seen it fall back to 2.01%. 01% as of today on a year-over-year >> basis. Of course, that is going to reflect some of the pressure that we've seen in apartment rentals, in discretionary prices, in people's ability to travel and spend money on services. I think what Bethic is is counting on however is the fact that we are going into the time of the year uh the very tail end last few months of a year going into the first few months of a new year is when seasonal upward pressure on inflation metrics is the highest. to give you a different example of seasonals. Had it not been for the largest seasonal adjustment to retail sales for the month of August, the uh the the upside surprise would have actually printed in the negative. Instead of 0.6 with a plus sign in front of it, it would have been negative0.5%. So seasonals really can swing the data. And of course, this depends on the efficacy of the models that create them by the bureau statistics, by the um Census Bureau, by the Bureau of Economic Analysis. But my point is to Hammock's point, if if Federal Reserve hawks are looking for an excuse going forward to lean towards their inflation mandate, then seasonals are going to be on their side. Will it reflect the real economy? No, it will not. We've seen inflation come back down. But again, my mantra is trade the narrative, own the truth. If Fed officials are going to rely on seasonals to justify slowing the pace of any rate cutting, then that's going to that that's going to be reflected in the market. David, >> well, most forecasts do peg inflation as coming down in the long term. I mean, by long term, I mean the next year or so. I wonder if the 10-year yield and the long end of the curve is going to follow that. Hence, we'll see a bond rally into 2026. >> You know, it's it's perfectly conceivable. Everything's going to depend on so many other factors. We have seen the bond market rally. The the the benchmark tenure tenure yield is around I think 4.13% as as we filmed this uh today. That is a reflection of anxiety. anxiety that there's something brewing in the credit market because we're seeing these enormous uh bankruptcies, anxiety about what a government shutdown will do. Will President Trump follow through on his threat not to just furlow federal workers, but fire them, which is something we've never seen in US history. Probably something else that would land on the docket of the Supreme Court in short order. We don't know, but there is a ton of uncertainty out there. And right now at least it's being reflected in longer maturity bond yields. >> It does appear to me that the markets are relatively insulated from this reality that we're talking about. And um as we're speaking today, new all-time highs week after week for the S&P, NASDAQ, gold almost at $3,900 now, 3868. And and it just market participants are probably not feeling the stress that perhaps we're talking about if you're investing in the markets and your wealth is dependent on assets right now. So, can we just comment on this seemingly big disconnect that's going on right now? >> I really don't think there's a disconnect when you can connect those dots with the fact that Moody's came out last week and announced that that the top 10% of earners who own 87% of the stock market control 50% of spending. So, as long as that stock market hangs in there, and I'm not arguing it's going to if credit continues to crack, that will make a difference. But as long as the stock market hangs in there and you get inflows that outweigh redemptions in the world of passivity, everything's going to be fine. You'll know something is up, though, David. Um, even though we know that gold is a long-term holding, the contrarian in me would say that if Morgan Stanley's put 20% of its putting 20% of its clients assets in gold, the contrarian in me says run the run to the other direction at least for an inim trade. But you will know that there that the cracks are widening if you see gold prices come down even a smidge because that means margin calls. friend of mine asked me today. Uh, my friend wants to buy silver for her child as a shiny gift and my friend's bought all the silver at Costco. It's being sold out and I'm like, what? I That sounds like a market top signal to me. I don't know. I'll let you comment on that. >> You're a contrarian thinker like I am. Um, and so the there there are always signposts or whether it's Electronic Arts getting bought out for 55 billion and you know the largest LBO and there are always always always signposts >> the Okay, so when we have a slowing economy perhaps actually I didn't get your inflation outlook. Let's let's finish up on there. So true inflation has been coming down. What do you think is going to happen in 2026? So, I do think that we're going to see the vestigages, especially if the Fed is planning to go as plottingly slow as they say they are. You're not going to get enough relief on the on the mortgage rate front to offset the weakness in the housing market. My good friend Ivy Zelman has always said to me, Danielle, there is one thing that trumps falling mortgage rates, and that's a rising unemployment rate. So, if we do continue to see downside in shelter prices, that will filter through. And we're also starting to see downside in car prices as well as these delinquencies continue to rise. And remember, David, the the federal government can garnish an entire tax refund come February if somebody's not paid their student loans. So the the seasonal improvements that we tend to see in the economy around tax refund season, they're not going to be there to the extent that people think that they've gotten away with never paying their student loans back and and garnishments begin by the way October 1 as well. And all of these forbearance and mortgage modification programs through the FHA, that all ends today as well. What are some of the signposts that we'll see in the news that will indicate that the labor market is definitely weakening even more? And that we're seeing signs of not just the labor market weakening, but corporate weakness on their books, perhaps leading to more layoffs because they'll need to, not because they want to, not because people want to leave their jobs because they need to cut costs. Perhaps companies defaulting on debt. Perhaps companies going bankrupt. You know, it probably will happen one step at a time. We probably won't get a Leman collapse overnight. what's your take? >> So, you're right. Um, in this particular cycle, it has it has been a a slow build, but as standard and poor um reported just last month, um there were 71 record uh bankruptcies for the month of August, um that's the highest in the post-pandemic era. They do start to add up, especially when when some of these bankruptcies are between 10 and$50 billion in liabilities. So yes, again, I'm going to go back to what I was saying earlier. We're going to see it in credit. It's where we're going to see, and by the way, to your point about margins and profit growth, if you look inside GDP, profit growth peaked six quarters ago. We've just created that graph. It's coming down for six quarters. It's a long time. And again, that helps explain why when you talk to CEOs and CFOs, they remain hyperfocused on cutting costs. >> I uh real GDP growth is still near 4% though in the last quarter. I know. >> Well, it's interesting. It's interesting you raised this because if you look at a separate measure um and there was a very good article in the Wall Street Journal talking about gross output. If you look at business investing, it has turned tail and very much gone into the negative. And that chart right now is trending everywhere. And it's telling you again that if if not for the top 10% who represent 50% of spending, who could care less about inflation, if it wasn't for them, we would certainly have a much different picture of the US economy. And again, I would I would direct everybody to Google gross output um as opposed to gross domestic product because that is a gauge of business investment. There were three um 1970 2001 and I'm missing another maybe 1991 but there were three um recessions in modern US history when we actually saw consumption rise throughout the recession. In other words, the chief determinant of recession is not the consumer. It is businesses and business investment and that is what we're seeing contracting. >> So business so business investment is contracting. Consumer spending may contract next quarter if the labor market weakens. Uh what other component of the GDP will drive growth then? Government spending, net exports. >> Um presum spending's been going the opposite direction at last check. >> Sure. So there could certainly be, you know, a desperate move to do a Doge dividend. We hear about that every once in a while. I think if the wheels start to fall off the economy, we'll you'll certainly see President Trump attempt to do something of that sort. Um that would bring inflation back. Just just throw the money out of a helicopter just like the car's act. >> Yeah. So let's see what carries the uh GDP into the into the last quarter of the year. So finally get Danielle, how do we put this together into an investable um action here? We have uh rising inflation so far according to headline CPI. We've got uh you know rising unemployment and per your surveys that you've showed uh weakening outlook on the labor market. Uh what does this translate to for your portfolio? Um, I think that right now, unless you are 18 years old and getting into the market for the very first time, that it is appropriate to be very defensively postured. So, we're talking about dividend generating stocks that might be appealing to, oh, I don't know, senior citizens who are looking to bolster their cash income as the Fed Federal Reserve takes saving um saving rates down, money market fund rates down. Um, but anything that you would consider to be defensive and income producing is what I would suggest right now. Despite the fact that I continue to maintain that gold is of course a long-term holding, but but again, we're starting to see individual stocks fall out of bed, and that's never a good sign because it will lead to margin calls even if the broad market continues to hang in there. So, be careful with margin calls and your gold holdings. >> All right. Um, let's follow up in a couple weeks to see what happens with the markets. And, um, I'm curious as to what the trigger may be for when the markets the the broad stock markets I'm talking about will actually start to reflect what's going on with the with the with the economy. Or perhaps bad news is good news. Perhaps the markets are pricing in lower lower interest rates, lower discount rates. Hence why valuations are going up. >> It could look I mean the two of us could be having this discussion in in in 1998 right and valuations just kept going higher and higher. >> Yeah. All right. Thank you. Where can we find um your work and uh and read about what you're writing. >> So um we'd love to to grow the Daily Feather reading community. Please come to dartinoboot.substack.com if you're an institutional investor. Uh we publish eight times a week. We have a very exciting Bloomberg chat room going at all times. Come to qirearchearch.com. And if you don't already follow me on what was once known as Twitter, please do so at dartino. >> Okay, excellent. Thank you very much. We'll talk again soon. Please follow Danielle Dartino Booth and the Daily Feather links down below. We'll speak again next time and thank you for watching. Don't forget to like and subscribe.