Disinflation: The guest argues market-based inflation measures and new-tenant rent data show rapid disinflation, with shelter pressures easing due to multifamily supply.
Labor Market: Wage growth for job switchers and stayers has normalized, workweeks are historically short, and layoffs are rising, signaling broader labor weakness.
Consumer Spending: Real spending declined with services flat, indicating demand softness that undercuts the sticky-inflation narrative.
Autos: An 84-day supply of new cars, falling recovery rates, and record auto delinquencies highlight Auto Credit Stress and affordability issues.
Lodging: Hotel rates are falling, Vegas is reportedly quiet, and leisure/hospitality jobs are slipping, pointing to a Lodging Slowdown.
Retail: 2025 is seeing multi-billion-dollar bankruptcies and surging retail closures, worsening the adverse feedback loop.
Fed Policy: The guest expects imminent Fed Rate Cuts but warns of a trap as older investors reliant on interest income could sell equities, testing passive flows.
Macro Outlook: The overall stance is defensive, emphasizing that investors should “trade the narrative but own the truth” amid recession risks.
Transcript
2025 so far has been the year of the multi-billion dollar bankruptcy For all of 2024 there were 7,400 retail closures announced Just through the end of February we've had more than 4,000 announced United States alone Volatility is back in the stock market The reasons for this have been showing up in the economic data if you know where to look My guest today Danielle DiMartino Booth of Qi Research has been on this story for months and today she explains what's happening in the economy and what comes next I'm Ed D'Agostino. Welcome to Global Macro Update Danielle it's always a pleasure to see you You wrote a piece for your for your clients at at Qi Research way back in February It was it was one of the best pieces I've read all year and you essentially talked about how the narrative around inflation is disconnected from reality C can you sort of set the stage for us on your thinking and then we'll dive into some details At the basis of any great narrative I think uh is fear And the funny thing about the the FOMC meeting that was at the very tail end the 31st of July is that on that same day Ed there was the release and I don't think the Federal Reserve does anything by coincidence especially not when it's a 5-year release schedule but there was the release of the 2019 FOMC transcripts the day the Fed met on January the 31st Again no coincidences And what it walked through was the experience that policymakers that that they had in the year 2019 A lot of people have a hard time grasping that when the initial Trump tweet was sent out this is April of 2018 basically announcing to the world we're going to launch a trade war We're going to launch a tariff war We're going to we're going after China And in those words right this was a tweet this was not he he wasn't I mean there's there's nothing shy about the president Uh but from that time April 2018 until the end of April 2019 the CPI the consumer price index actually fell And you there'll be there'll be some charts in in in what uh your clients are going to be able to see that are very simple demonstrations of this And instead what the n 2019 FOMC transcripts revealed to us is that policymakers grappled much more with the slowdown in growth We are a world that revolves around trade You know at the time 24% of every US automobile 24% of of the pieces the components the parts came directly from China So slowing down global trade in the year 2019 ended up costing jobs in the United States and the slowdown in growth the slowdown in trade global trade as my mentor Lacy Hunt uh has told me for years any year global trade contracts the US economy cannot and has not avoided recession And that was exactly where the US economy was headed in December November December the fall of 2019 we were heading towards a recession predicated on the slowdown in global trade And $15 trillion of stimulus spending later we've miraculously somehow avoided recession Wee Yay Wonderful But but but but fast forward to where we are today the narrative the inflationistas the soft landing camp the individuals who maintain that it's going to be sticky inflation as far as the eye can see That's not what the data are saying It's not what the data are saying at all Chair Powell has shifted his focus to something called market-based core PCE And I think that that's his and his chief lieutenant Christopher Waller Governor Waller I think that that's that's their recognition of the fact that if you look at marketbased prices they've come down pretty darn fast And if you take one additional step and substitute into this market-based core PCE um a metric that the Cleveland Fed came up with called the new tenant rent index and they've spoken about this They've spoken about new rents are market rent prices New rents should represent shelter So if you substitute out of market-based core C PCE the very broken metric we know to be owner's equivalent rent it's it's an imputation It's it's a theory it's a model but it doesn't represent what we're seeing on the ground But if you substitute that in year-over-year we're south of 1% We're below the Fed's 2% inflation target and significantly below that So um you know in in in data that we've seen subsequent to this we've just learned from the census that in the fourth quarter only 47% of record numbers of new apartments that were coming out of the construction pipelines only 47% within 3 months of coming onto market were rented That left 53% not rented It really is a matter of supply and demand And that is what is bringing the largest input to inflation down at a fairly rapid pace now that the downside momentum is in train And yet if you question the average American they're going to tell you that tariffs make inflation rise And then if you look at the news right you hear about eggs right Like but but nobody's reporting at least I haven't seen it that I mean what was gas the last time you pulled up at the pump It's in Connecticut It's in Connecticut of all places it's below $3 a gallon at some places I'm filling up for two bucks a gallon because I'm a crazy I used to actually clip paper coupons Now I use Now I use my my local grocery store You know for every for every x number of dollars you spend with them you get an extra 10 cents off per gallon And so you I'm getting 90 cents off of what is is listed in Texas which is lower than Connecticut but I'm filling up sometimes for $2 for just under $2 a gallon And I am not alone And yet and yet there is this palpable fear that inflation's going to come roaring back Why is that Why is that So um that's what I explored when you consider the fact that in a post DoddFrank world a lot of fast money hedge funds control the narrative They control where treasuries are are are traded They they take massive positions And you know what If you're short treasuries you're you want for those prices to fall you want for those yields to rise And that's exactly what we saw in 2024 is that we saw yields rise based on a construct called the risk premium even though inflation expectations were not going up because the most visible price which you just pointed out at the gas at the gas pump is was coming down individuals know that if they can play hard ball with their with their landlord and threaten to move and if they do so they're going to get either a cut to their rent or they're going to go through with their threat and move and and get a lower rent So on the ground we've seen inflation come down but so many Americans continue to live with the latent shock of the price rises that occurred post 2019 And those are not to be dismissed I'm not trying to imply that But at the rate we're seeing prices right now Jay Powell's got a disinflationary problem on his hand That's a lot harder for central banks to address Last time we spoke you were pretty focused on the the labor market which also is you know that factors into this I mean how much people make and how much they can expect for an increase and how much they can negotiate just like with their landlord negotiating their rent You sit once a year and negotiate your your your pay adjustment What are you seeing there when we were kind of at at peak quiet quitting when we were at maxed out working from home before return to office became its own RTO acronym you know the the the the price increases the wage inflation for individuals who were job switchers according to the Atlanta Fed's wage uh uh tracker and they track this every month they were making north of 8% to jump ship the grass really was greener and job stayers so to speak their wage gains were closer to 5% See this three percentage point differential at the peak This is 2022 2022 also happens to be when full-time employment in the United States peaked We haven't seen a higher number of full-time employed Americans since 2022 And that is when job switcher wage inflation peaked Have a look at what the Atlanta Fed is showing right now You're seeing both job switchers and job stayers commanding about 4 and a.5% wage increases So you've seen a complete reversal in terms of wage gains all the way back to where we were headed into the pandemic And that is it's a reflection of the things that are not a figment of my of our imagination It's a reflection of true job losses and layoffs Do you think that continues Cuz you were you were early on this You were you were pointing out the anecdotes Gosh nine months ago And nine months ago we had a lot fewer Americans working as Uber drivers working as lift drivers choosing logically why am I taking $295 a week in unemployment benefits Why why would I even bother applying for initial jobless claims if I can make $750 a week driving for Uber So they made this logical rational decision And I I've got a a a graph that's going to be included in in in what all of your readers see that show now we're seeing Uber driver pay fall And we're and if it's if it's not falling for Lyft drivers or for Amazon drivers they're working a lot more hours to get that same weekly pay If you look at the latest non-farm payrolls jobs data you've seen two months in a row of a work week of 34.1 You know outside from the initial shock of the pandemic you've got to go back to 2009 2010 before you see such a short work week And guess what Jay Powell It's not average hourly earnings It's average weekly earnings that we take home in our paychecks And for the first two months of 2025 that pay has been falling out right given how short the work week is So incomes are falling inflation is falling The rate of inflation is falling So So prices are not falling outright but the rate of inflation is well within the Fed's 2% below the Fed's 2% target you brought up true inflation in in that great piece that you wrote last month and I I'm a big fan of trueflation's numbers and I just want to uh look back at a couple with you because back in June 17th of 2022 True Inflation said that that the real inflation we were experiencing here in this country was 11.59% Which it makes a lot of sense right Like the official numbers were lower People were saying that's just not what I'm experiencing That's right Well now it's below 1.4% That's right And that is 30 million realtime price points that are being tracked on a day-to-day basis Where are we seeing job losses right now Where are we seeing prices fall right now Where are we seeing delinquencies rise right now Well according to Tre even though the worst of the worst appears to be coming off for the office sector for example of course we've got a lot of people returning to the office but what we're seeing right now is lodging We're seeing hotel rates come down We're seeing anecdotes of people saying "I went to Vegas It was a ghost town." We're seeing people in leisure and hospitality lose their jobs they were one of the biggest job losers in the month of February uh surpassed only by federal workers who had lost their job and this was this was a time stamp of February the 15th So that's when the survey week for non-farm payrolls cut off So we haven't even seen the bulk of the layoffs that have followed since then But we are seeing something that I think really started to get market uh market veterans attention a few weeks ago when we got that that personal income and spending report Everybody looked immediately Oh let's see what core PCE is doing Let's see what PC and they went a minute on an inflationadjusted basis Spending fell 0.5% Declined and service spending is flat as a pancake Wait wait wait wait wait We've been we've been working on the inflation narrative that service spending always goes up What do you mean it it flatlined and good spending cratered That's what we're seeing And that's why we're seeing once the caboose starts to finally come into the station and that is services spending which is flatlined The wheels officially start to come off And what have we seen in the media outside of the media salivating that they can finally declare a recession and blame it on Trump Look people people believe what they read They do But but the disinflationary forces the private sector job cut you know we we had um macro edge is they they've been doing a great job of of tracking layoffs as they're announced And uh I I've been a bit of a critic of challenger gray and Christmas because in 2023 and throughout 2024 as best I could tell they were understating announced layoffs How do you have some major retailer in the United States announce that it's closing all of its locations and only manage to tally like 4,000 retail job losses in a month I'm like it's your job Challenger Grand Christmas to track layoff announcements and you didn't even begin to capture half of the jobs that were lost in retail in one month Lo and behold now that we have the first clean month of Trump in office challenger grand Christmas pops up with 172,000 jobs lost in February The sky is falling They were playing catchup They were playing catch-up to layoff announcements that they know had already occurred But what's more important here is that despite the fact that there were 62,000 layoffs that they attached to federal workers well more than that were private sector And there here's the biggest problem here is the reason that President Trump and Treasury Secretary Scott Bessant they've they've started to mention you know that the economy may pause I think over the weekend Trump said that we may be in a time of transition for the people are using all kinds of lovely synonyms for recession but not actually using the R word itself Why is that And that's because economists recognize a phenomenon known as the adverse feedback loop So the private sector has been in layoff mode for some time has been in cost cutting mode for some time Uh in fact first quarter CEO optimism rose and that was one of the few actual aspects that was like here look here's a positive headline Why did CEO optimism rise Well because they announced that they were going to be imposing more hiring freezes and firing more people which is shareholder friendly You please shareholders you cut costs you get a pop in your stock price But while why they're optimistic that's not necessarily a good thing And the reason I bring up the idea of an adverse feedback loop is the more job losses we have in the public sector going forward And by the way not just direct federal employees When you read a headline that says you know that certain large consulting firms derive 98% of their revenues from federal government contracts There will be trickle down effects there will be ripples into the private sector based on the work that they depend on coming from the federal government So if the private sector is saying "Well wait a minute We're going to have aggregate income continue to fall." Then going into the year maybe I thought I was going to be able to tamp the brakes and stop with the cost cutting But if the aggregate income between public sector and private sector layoffs are going to continue to drag on income in an economy that is 70% spending well I got to cut more I've got to reduce headcount even more to account for less money that people can spend on my good or on my service So one sector feeds off of the other And that's bec that's why you saw that the unemployment rate was 0.00111 shy of rounding up to 4.2% In February we came really close to rounding up to 4.2% from that 4.0% which did not four the 4.0% in January was a very real thing and it it did not it wasn't even close to rounding up to 4.1% But now you can see going forward they're going to adjust the birth death adjustment beginning with March payrolls that's going to look a lot more like the last few years of the United States not some crazy imput imputated level of business births that didn't occur and had to be revised away subsequent to in March we get we get a little bit of reality in the statisticians imputations which is going to hurt because that's going to come right on top of the rest of the job losses that we know have been announced occurred all of these massive multi-billion dollar bankruptcies that we're seeing in 2025 2025 so far has been the year of the multi-billion dollar bankruptcy Mattel a huge Canadian telecom company just they had to file 10 different times in the state of Texas just for their subsidiaries here But multi-billion dollar bankruptcies are common place And on top of that I I I'll throw this figure out there For all of 2024 in the United States Ed there were 7400 retail closures announced stores that closed Just through the end of February we've had more than 4,000 announced United States alone alone So the momentum has continued to build and that's something that someone as rational as Scott Bessant can see and prepare for And you know what I'd rather I'd rather move away from being gaslit to being told the truth So if the people in Washington are going to be sober and honest with the American people and say "Look there might be some short-term pain that that involves you know getting rid of the fiscal lunacy." I think the American people would rather be told the truth than read headlines that don't match at all what they're experiencing on the ground I hope so And I've I I've had this conversation with other people that sort of the time the time to do this the time to to get fiscal sanity back is really right now from the perspective of the of the president or you not just this president any president you have to move quick You have to move within the first year before midterms before the narratives start to get spun And this doesn't matter which you know which party you're from The the time to take bold action is now It is And Ronald Reagan did just that Exactly He did There was a massive buildup in the federal workforce during the Carter administration that he felt was was just too much and he came in and cut Now defense spending rose You know we're talking about making shifts at home We're hearing some things that we'd like to hear Um and and we don't look back to I mean we forget I mean I should forget I was in middle school But we forget that the the 1980 recession lasted all of six months It was it was ugly It was dirty It was manufacturing based It was bluecollar People going into that election were angry as all get out But it only lasted 6 months The economy was coming out of it uh by July of 1980 And boom Reagan got to office And before the great recession of ' 07 to09 the double dip recession that started in 1981 was the worst recession since the Great Depression They called it back then the Great Recession but we don't think about Ronald Reagan in those terms even though he was in the White House during a terrible period for US GDP but we came out of it To your point I think a lot of this is really hard for people to understand the the person that's not the analyst or the economist like you We've been dealing with supply issues ever since co right And and so then we hear about there's going to be tariffs added Automobile manufacturers are going to have to start paying 25% more for things that they import And the narrative to your point is that new cars are going to go from on average costing $50,000 which already is a ton of money to $62,000 And and what people are missing and so that sounds inflationary and and what people aren't being told is it's a demand issue right It's the demand side of the equation Am I getting that right You're getting it so so right And I mean hats off to Mary Barah Maybe she should try Hollywood after she's finished with Detroit because according to Car Gurus in March there was an 84 day supply of cars new cars It's a lot of cars And there are a lot of cars because people cannot afford the cars Uh you know Fitch ratings came out just a few days ago and said that new car recovery rates are 32% They're not getting a lot of money when a car is is is is taken by repossession or is traded in A 32% recovery rate is nothing And on top of that you've got auto delinquencies at the highest level since the early 1990s Forget forget 08 09 10 Forget those years Auto delinquencies with a 4.1 almost drowned up to 4.2% 2% unemployment rate or at the highest on record Imagine what they're going to be when we see a jump to 4.5% and 4.6 and 4.7% in the unemployment rate in short order here What those delinquencies are going to look like because Americans are actually having to they're having to pay their obligations They're having to pay their student loans And there's a lot of rude awakening that's going on right now with US households who were operating under the assumption that they would never have to repay their student loans that they would forever be on ICE And so you're seeing people with the highest some of the highest FICO scores see some of the biggest declines in their FICO scores because they never they they didn't qualify for student loan forgiveness They simply made too much money And now they're being reported to the Experians and the TransUnions of the world and their their payments are large They they like "Why not be a dentist I'll never have to pay this student loan back I'll just take out hundreds of thousand dollars of of student leu student debt and and never worry about it." Well now they're having to worry about it their their credits getting destroyed and at the same time they bought a house that they never realized what the cost would be you know if their furnace went out and what the cost to maintain a home was going to be when you were buying it at the very peak of the post pandemic exodus to the exerbs So there's a lot of rude awakening right now a lot of rude awakening for US households And the last thing that they want to be told when they're irritated is that they're imagining things This all has me pretty concerned right I mean I I've gone from sort of being in the soft landing camp a few months ago to starting to really pay attention to what you were saying first about jobs and then going deeper and and then this article came out u few weeks ago from the Wall Street Journal saying that I think it was 48% of US GDP is attributed to the top 10% of wage earners You factor that in I mean what is your prediction where where are we going with this economy So it's um 49% 49.7% according to Moody's and that was a real eye opening Wall Street Journal article The next decile if you will they're the ones I'm describing getting hit by big students they spend money too And this is what I have to say about the top 10% who account for 49.7% of US spending They're fine as long as the stock market never goes down Got it It's how it works It's called the wealth effect Works both ways And by the way demographics is destiny And when 40% of the stock market is owned by individuals who are 70 years of age or older when 25% of US residential real estate is owned by individuals who are 70 years old or older that puts Jay Powell in a very tight spot because he can need to lower interest rates He can want to lower interest rates he can press forward with lowering interest rates My guess they're not going to lower interest rates at the March 19th meeting and it's going to be a replay of July of 2024 By the time we see March and April payrolls before they meet in miday there's going to be regret It's going to be the why didn't we cut rates in July of 2024 Here we come in September of 2024 with a 50 basis point jumbo rate cut I think we're going to see a replay of that script because once we see March and April payrolls it's going to be pretty apparent that the Fed made a mistake by not lowering interest rates at the March 19th meeting Dot dot dot However the Fed is trapped 70 year olds and older own 40% of the US stock market They're kind of okay You look fine A year ago I was making five and a half percent on my cash Now I'm making four and a quarter I'm okay with that But don't touch it If I'm making much less than 4% on my cash I that doesn't work I'm retired in 2001 I'm 70 today I am the median age of a US baby boomer I am 70 today My mom is 78 She's at the very outer edge of baby boomer She's the oldest baby boomer But I'm pretending right now I'm I'd look really good if I was 70 I'm pretending right now that I'm 70 years of age And here comes Jay Powell And he's cutting into my interest expense Now I as a 70-year-old spend 70 cents of every dollar of interest income I make It It's money It's cash income And I'm happy to spend it If my NASDAQ position portfolio goes up by a dollar I'm only spending two pennies of that I don't liquidate I don't monetize near as much of my paper wealth as I spend of my interest income But Jerome Hayden Powell up in the Eckles building needs to stop lowering my interest income now immediately How's that going to work when we're in recession a recognized recession because in 2001 me the theoretical 70-year-old you know what I was 20 years younger So what I went to go work at Southwest Airlines I went to go work at Walmart as a greeter I went back and got my old job in 2007 There went my retirement savings again But you know what 60 was the new 50 Young spritly fine great wonderful do not have to sell my stocks I'll go back to work again so I don't have to sell my stock today What's that 70-year-old going to do if Jay Powell lowers the amount of income that they're collecting in interest when they own 40% of the stock market This is the catch 22 that has got Jay Powell in a terrible trap With inflation coming down as quickly as it is he won't have any choice but to lower interest rates in 2025 But the risk is the 70 year olds and older start to liquidate their stock holdings I don't even know what that looks like at I couldn't pretend to tell you But I will tell you that that will test something that John Bogle is spinning in his grave concerned about being tested That's passive And that will test passive And John Bogle before he died did an interview and said "God help us if passive is ever more than 50% of inflows to the market." It is but it's never been tested You ended your research note with one of the best lines in in research that that I think I've ever read You you wrote "Trade the narrative but own the truth." So you just spoke a whole lot of truth I think people are going to be really interested to learn more about your work and where they can find you Danielle Where should they go come to dartinobuth.stack.com Um and if you you know if if you run money if you run your family's money if you run a small family office uh we're also going to be offering an institutional entree if you will just for you And I've never done this before Um at qi research.com So uh if that's something that you feel that you have the appetite uh to take on our institutional investors absolutely love the research They love my flagship weekly You're going to get a sample of that You have access to my Bloomberg chat room which is always on fire Um with all kinds of colorful commentary as well as my private Twitter feed Um but regardless read the research because I have no bias I have no reason to have a bias I have no narrative I just give you the data and you make your decisions based on that But at least at least you're owning the truth not trading the narrative Danielle D Martino Booth thank you so much for your time Great to see you Thank you for having me
Powell's Dangerous Trap: Why Rate Cuts Could Crash Markets | Danielle DiMartino Booth
Summary
Transcript
2025 so far has been the year of the multi-billion dollar bankruptcy For all of 2024 there were 7,400 retail closures announced Just through the end of February we've had more than 4,000 announced United States alone Volatility is back in the stock market The reasons for this have been showing up in the economic data if you know where to look My guest today Danielle DiMartino Booth of Qi Research has been on this story for months and today she explains what's happening in the economy and what comes next I'm Ed D'Agostino. Welcome to Global Macro Update Danielle it's always a pleasure to see you You wrote a piece for your for your clients at at Qi Research way back in February It was it was one of the best pieces I've read all year and you essentially talked about how the narrative around inflation is disconnected from reality C can you sort of set the stage for us on your thinking and then we'll dive into some details At the basis of any great narrative I think uh is fear And the funny thing about the the FOMC meeting that was at the very tail end the 31st of July is that on that same day Ed there was the release and I don't think the Federal Reserve does anything by coincidence especially not when it's a 5-year release schedule but there was the release of the 2019 FOMC transcripts the day the Fed met on January the 31st Again no coincidences And what it walked through was the experience that policymakers that that they had in the year 2019 A lot of people have a hard time grasping that when the initial Trump tweet was sent out this is April of 2018 basically announcing to the world we're going to launch a trade war We're going to launch a tariff war We're going to we're going after China And in those words right this was a tweet this was not he he wasn't I mean there's there's nothing shy about the president Uh but from that time April 2018 until the end of April 2019 the CPI the consumer price index actually fell And you there'll be there'll be some charts in in in what uh your clients are going to be able to see that are very simple demonstrations of this And instead what the n 2019 FOMC transcripts revealed to us is that policymakers grappled much more with the slowdown in growth We are a world that revolves around trade You know at the time 24% of every US automobile 24% of of the pieces the components the parts came directly from China So slowing down global trade in the year 2019 ended up costing jobs in the United States and the slowdown in growth the slowdown in trade global trade as my mentor Lacy Hunt uh has told me for years any year global trade contracts the US economy cannot and has not avoided recession And that was exactly where the US economy was headed in December November December the fall of 2019 we were heading towards a recession predicated on the slowdown in global trade And $15 trillion of stimulus spending later we've miraculously somehow avoided recession Wee Yay Wonderful But but but but fast forward to where we are today the narrative the inflationistas the soft landing camp the individuals who maintain that it's going to be sticky inflation as far as the eye can see That's not what the data are saying It's not what the data are saying at all Chair Powell has shifted his focus to something called market-based core PCE And I think that that's his and his chief lieutenant Christopher Waller Governor Waller I think that that's that's their recognition of the fact that if you look at marketbased prices they've come down pretty darn fast And if you take one additional step and substitute into this market-based core PCE um a metric that the Cleveland Fed came up with called the new tenant rent index and they've spoken about this They've spoken about new rents are market rent prices New rents should represent shelter So if you substitute out of market-based core C PCE the very broken metric we know to be owner's equivalent rent it's it's an imputation It's it's a theory it's a model but it doesn't represent what we're seeing on the ground But if you substitute that in year-over-year we're south of 1% We're below the Fed's 2% inflation target and significantly below that So um you know in in in data that we've seen subsequent to this we've just learned from the census that in the fourth quarter only 47% of record numbers of new apartments that were coming out of the construction pipelines only 47% within 3 months of coming onto market were rented That left 53% not rented It really is a matter of supply and demand And that is what is bringing the largest input to inflation down at a fairly rapid pace now that the downside momentum is in train And yet if you question the average American they're going to tell you that tariffs make inflation rise And then if you look at the news right you hear about eggs right Like but but nobody's reporting at least I haven't seen it that I mean what was gas the last time you pulled up at the pump It's in Connecticut It's in Connecticut of all places it's below $3 a gallon at some places I'm filling up for two bucks a gallon because I'm a crazy I used to actually clip paper coupons Now I use Now I use my my local grocery store You know for every for every x number of dollars you spend with them you get an extra 10 cents off per gallon And so you I'm getting 90 cents off of what is is listed in Texas which is lower than Connecticut but I'm filling up sometimes for $2 for just under $2 a gallon And I am not alone And yet and yet there is this palpable fear that inflation's going to come roaring back Why is that Why is that So um that's what I explored when you consider the fact that in a post DoddFrank world a lot of fast money hedge funds control the narrative They control where treasuries are are are traded They they take massive positions And you know what If you're short treasuries you're you want for those prices to fall you want for those yields to rise And that's exactly what we saw in 2024 is that we saw yields rise based on a construct called the risk premium even though inflation expectations were not going up because the most visible price which you just pointed out at the gas at the gas pump is was coming down individuals know that if they can play hard ball with their with their landlord and threaten to move and if they do so they're going to get either a cut to their rent or they're going to go through with their threat and move and and get a lower rent So on the ground we've seen inflation come down but so many Americans continue to live with the latent shock of the price rises that occurred post 2019 And those are not to be dismissed I'm not trying to imply that But at the rate we're seeing prices right now Jay Powell's got a disinflationary problem on his hand That's a lot harder for central banks to address Last time we spoke you were pretty focused on the the labor market which also is you know that factors into this I mean how much people make and how much they can expect for an increase and how much they can negotiate just like with their landlord negotiating their rent You sit once a year and negotiate your your your pay adjustment What are you seeing there when we were kind of at at peak quiet quitting when we were at maxed out working from home before return to office became its own RTO acronym you know the the the the price increases the wage inflation for individuals who were job switchers according to the Atlanta Fed's wage uh uh tracker and they track this every month they were making north of 8% to jump ship the grass really was greener and job stayers so to speak their wage gains were closer to 5% See this three percentage point differential at the peak This is 2022 2022 also happens to be when full-time employment in the United States peaked We haven't seen a higher number of full-time employed Americans since 2022 And that is when job switcher wage inflation peaked Have a look at what the Atlanta Fed is showing right now You're seeing both job switchers and job stayers commanding about 4 and a.5% wage increases So you've seen a complete reversal in terms of wage gains all the way back to where we were headed into the pandemic And that is it's a reflection of the things that are not a figment of my of our imagination It's a reflection of true job losses and layoffs Do you think that continues Cuz you were you were early on this You were you were pointing out the anecdotes Gosh nine months ago And nine months ago we had a lot fewer Americans working as Uber drivers working as lift drivers choosing logically why am I taking $295 a week in unemployment benefits Why why would I even bother applying for initial jobless claims if I can make $750 a week driving for Uber So they made this logical rational decision And I I've got a a a graph that's going to be included in in in what all of your readers see that show now we're seeing Uber driver pay fall And we're and if it's if it's not falling for Lyft drivers or for Amazon drivers they're working a lot more hours to get that same weekly pay If you look at the latest non-farm payrolls jobs data you've seen two months in a row of a work week of 34.1 You know outside from the initial shock of the pandemic you've got to go back to 2009 2010 before you see such a short work week And guess what Jay Powell It's not average hourly earnings It's average weekly earnings that we take home in our paychecks And for the first two months of 2025 that pay has been falling out right given how short the work week is So incomes are falling inflation is falling The rate of inflation is falling So So prices are not falling outright but the rate of inflation is well within the Fed's 2% below the Fed's 2% target you brought up true inflation in in that great piece that you wrote last month and I I'm a big fan of trueflation's numbers and I just want to uh look back at a couple with you because back in June 17th of 2022 True Inflation said that that the real inflation we were experiencing here in this country was 11.59% Which it makes a lot of sense right Like the official numbers were lower People were saying that's just not what I'm experiencing That's right Well now it's below 1.4% That's right And that is 30 million realtime price points that are being tracked on a day-to-day basis Where are we seeing job losses right now Where are we seeing prices fall right now Where are we seeing delinquencies rise right now Well according to Tre even though the worst of the worst appears to be coming off for the office sector for example of course we've got a lot of people returning to the office but what we're seeing right now is lodging We're seeing hotel rates come down We're seeing anecdotes of people saying "I went to Vegas It was a ghost town." We're seeing people in leisure and hospitality lose their jobs they were one of the biggest job losers in the month of February uh surpassed only by federal workers who had lost their job and this was this was a time stamp of February the 15th So that's when the survey week for non-farm payrolls cut off So we haven't even seen the bulk of the layoffs that have followed since then But we are seeing something that I think really started to get market uh market veterans attention a few weeks ago when we got that that personal income and spending report Everybody looked immediately Oh let's see what core PCE is doing Let's see what PC and they went a minute on an inflationadjusted basis Spending fell 0.5% Declined and service spending is flat as a pancake Wait wait wait wait wait We've been we've been working on the inflation narrative that service spending always goes up What do you mean it it flatlined and good spending cratered That's what we're seeing And that's why we're seeing once the caboose starts to finally come into the station and that is services spending which is flatlined The wheels officially start to come off And what have we seen in the media outside of the media salivating that they can finally declare a recession and blame it on Trump Look people people believe what they read They do But but the disinflationary forces the private sector job cut you know we we had um macro edge is they they've been doing a great job of of tracking layoffs as they're announced And uh I I've been a bit of a critic of challenger gray and Christmas because in 2023 and throughout 2024 as best I could tell they were understating announced layoffs How do you have some major retailer in the United States announce that it's closing all of its locations and only manage to tally like 4,000 retail job losses in a month I'm like it's your job Challenger Grand Christmas to track layoff announcements and you didn't even begin to capture half of the jobs that were lost in retail in one month Lo and behold now that we have the first clean month of Trump in office challenger grand Christmas pops up with 172,000 jobs lost in February The sky is falling They were playing catchup They were playing catch-up to layoff announcements that they know had already occurred But what's more important here is that despite the fact that there were 62,000 layoffs that they attached to federal workers well more than that were private sector And there here's the biggest problem here is the reason that President Trump and Treasury Secretary Scott Bessant they've they've started to mention you know that the economy may pause I think over the weekend Trump said that we may be in a time of transition for the people are using all kinds of lovely synonyms for recession but not actually using the R word itself Why is that And that's because economists recognize a phenomenon known as the adverse feedback loop So the private sector has been in layoff mode for some time has been in cost cutting mode for some time Uh in fact first quarter CEO optimism rose and that was one of the few actual aspects that was like here look here's a positive headline Why did CEO optimism rise Well because they announced that they were going to be imposing more hiring freezes and firing more people which is shareholder friendly You please shareholders you cut costs you get a pop in your stock price But while why they're optimistic that's not necessarily a good thing And the reason I bring up the idea of an adverse feedback loop is the more job losses we have in the public sector going forward And by the way not just direct federal employees When you read a headline that says you know that certain large consulting firms derive 98% of their revenues from federal government contracts There will be trickle down effects there will be ripples into the private sector based on the work that they depend on coming from the federal government So if the private sector is saying "Well wait a minute We're going to have aggregate income continue to fall." Then going into the year maybe I thought I was going to be able to tamp the brakes and stop with the cost cutting But if the aggregate income between public sector and private sector layoffs are going to continue to drag on income in an economy that is 70% spending well I got to cut more I've got to reduce headcount even more to account for less money that people can spend on my good or on my service So one sector feeds off of the other And that's bec that's why you saw that the unemployment rate was 0.00111 shy of rounding up to 4.2% In February we came really close to rounding up to 4.2% from that 4.0% which did not four the 4.0% in January was a very real thing and it it did not it wasn't even close to rounding up to 4.1% But now you can see going forward they're going to adjust the birth death adjustment beginning with March payrolls that's going to look a lot more like the last few years of the United States not some crazy imput imputated level of business births that didn't occur and had to be revised away subsequent to in March we get we get a little bit of reality in the statisticians imputations which is going to hurt because that's going to come right on top of the rest of the job losses that we know have been announced occurred all of these massive multi-billion dollar bankruptcies that we're seeing in 2025 2025 so far has been the year of the multi-billion dollar bankruptcy Mattel a huge Canadian telecom company just they had to file 10 different times in the state of Texas just for their subsidiaries here But multi-billion dollar bankruptcies are common place And on top of that I I I'll throw this figure out there For all of 2024 in the United States Ed there were 7400 retail closures announced stores that closed Just through the end of February we've had more than 4,000 announced United States alone alone So the momentum has continued to build and that's something that someone as rational as Scott Bessant can see and prepare for And you know what I'd rather I'd rather move away from being gaslit to being told the truth So if the people in Washington are going to be sober and honest with the American people and say "Look there might be some short-term pain that that involves you know getting rid of the fiscal lunacy." I think the American people would rather be told the truth than read headlines that don't match at all what they're experiencing on the ground I hope so And I've I I've had this conversation with other people that sort of the time the time to do this the time to to get fiscal sanity back is really right now from the perspective of the of the president or you not just this president any president you have to move quick You have to move within the first year before midterms before the narratives start to get spun And this doesn't matter which you know which party you're from The the time to take bold action is now It is And Ronald Reagan did just that Exactly He did There was a massive buildup in the federal workforce during the Carter administration that he felt was was just too much and he came in and cut Now defense spending rose You know we're talking about making shifts at home We're hearing some things that we'd like to hear Um and and we don't look back to I mean we forget I mean I should forget I was in middle school But we forget that the the 1980 recession lasted all of six months It was it was ugly It was dirty It was manufacturing based It was bluecollar People going into that election were angry as all get out But it only lasted 6 months The economy was coming out of it uh by July of 1980 And boom Reagan got to office And before the great recession of ' 07 to09 the double dip recession that started in 1981 was the worst recession since the Great Depression They called it back then the Great Recession but we don't think about Ronald Reagan in those terms even though he was in the White House during a terrible period for US GDP but we came out of it To your point I think a lot of this is really hard for people to understand the the person that's not the analyst or the economist like you We've been dealing with supply issues ever since co right And and so then we hear about there's going to be tariffs added Automobile manufacturers are going to have to start paying 25% more for things that they import And the narrative to your point is that new cars are going to go from on average costing $50,000 which already is a ton of money to $62,000 And and what people are missing and so that sounds inflationary and and what people aren't being told is it's a demand issue right It's the demand side of the equation Am I getting that right You're getting it so so right And I mean hats off to Mary Barah Maybe she should try Hollywood after she's finished with Detroit because according to Car Gurus in March there was an 84 day supply of cars new cars It's a lot of cars And there are a lot of cars because people cannot afford the cars Uh you know Fitch ratings came out just a few days ago and said that new car recovery rates are 32% They're not getting a lot of money when a car is is is is taken by repossession or is traded in A 32% recovery rate is nothing And on top of that you've got auto delinquencies at the highest level since the early 1990s Forget forget 08 09 10 Forget those years Auto delinquencies with a 4.1 almost drowned up to 4.2% 2% unemployment rate or at the highest on record Imagine what they're going to be when we see a jump to 4.5% and 4.6 and 4.7% in the unemployment rate in short order here What those delinquencies are going to look like because Americans are actually having to they're having to pay their obligations They're having to pay their student loans And there's a lot of rude awakening that's going on right now with US households who were operating under the assumption that they would never have to repay their student loans that they would forever be on ICE And so you're seeing people with the highest some of the highest FICO scores see some of the biggest declines in their FICO scores because they never they they didn't qualify for student loan forgiveness They simply made too much money And now they're being reported to the Experians and the TransUnions of the world and their their payments are large They they like "Why not be a dentist I'll never have to pay this student loan back I'll just take out hundreds of thousand dollars of of student leu student debt and and never worry about it." Well now they're having to worry about it their their credits getting destroyed and at the same time they bought a house that they never realized what the cost would be you know if their furnace went out and what the cost to maintain a home was going to be when you were buying it at the very peak of the post pandemic exodus to the exerbs So there's a lot of rude awakening right now a lot of rude awakening for US households And the last thing that they want to be told when they're irritated is that they're imagining things This all has me pretty concerned right I mean I I've gone from sort of being in the soft landing camp a few months ago to starting to really pay attention to what you were saying first about jobs and then going deeper and and then this article came out u few weeks ago from the Wall Street Journal saying that I think it was 48% of US GDP is attributed to the top 10% of wage earners You factor that in I mean what is your prediction where where are we going with this economy So it's um 49% 49.7% according to Moody's and that was a real eye opening Wall Street Journal article The next decile if you will they're the ones I'm describing getting hit by big students they spend money too And this is what I have to say about the top 10% who account for 49.7% of US spending They're fine as long as the stock market never goes down Got it It's how it works It's called the wealth effect Works both ways And by the way demographics is destiny And when 40% of the stock market is owned by individuals who are 70 years of age or older when 25% of US residential real estate is owned by individuals who are 70 years old or older that puts Jay Powell in a very tight spot because he can need to lower interest rates He can want to lower interest rates he can press forward with lowering interest rates My guess they're not going to lower interest rates at the March 19th meeting and it's going to be a replay of July of 2024 By the time we see March and April payrolls before they meet in miday there's going to be regret It's going to be the why didn't we cut rates in July of 2024 Here we come in September of 2024 with a 50 basis point jumbo rate cut I think we're going to see a replay of that script because once we see March and April payrolls it's going to be pretty apparent that the Fed made a mistake by not lowering interest rates at the March 19th meeting Dot dot dot However the Fed is trapped 70 year olds and older own 40% of the US stock market They're kind of okay You look fine A year ago I was making five and a half percent on my cash Now I'm making four and a quarter I'm okay with that But don't touch it If I'm making much less than 4% on my cash I that doesn't work I'm retired in 2001 I'm 70 today I am the median age of a US baby boomer I am 70 today My mom is 78 She's at the very outer edge of baby boomer She's the oldest baby boomer But I'm pretending right now I'm I'd look really good if I was 70 I'm pretending right now that I'm 70 years of age And here comes Jay Powell And he's cutting into my interest expense Now I as a 70-year-old spend 70 cents of every dollar of interest income I make It It's money It's cash income And I'm happy to spend it If my NASDAQ position portfolio goes up by a dollar I'm only spending two pennies of that I don't liquidate I don't monetize near as much of my paper wealth as I spend of my interest income But Jerome Hayden Powell up in the Eckles building needs to stop lowering my interest income now immediately How's that going to work when we're in recession a recognized recession because in 2001 me the theoretical 70-year-old you know what I was 20 years younger So what I went to go work at Southwest Airlines I went to go work at Walmart as a greeter I went back and got my old job in 2007 There went my retirement savings again But you know what 60 was the new 50 Young spritly fine great wonderful do not have to sell my stocks I'll go back to work again so I don't have to sell my stock today What's that 70-year-old going to do if Jay Powell lowers the amount of income that they're collecting in interest when they own 40% of the stock market This is the catch 22 that has got Jay Powell in a terrible trap With inflation coming down as quickly as it is he won't have any choice but to lower interest rates in 2025 But the risk is the 70 year olds and older start to liquidate their stock holdings I don't even know what that looks like at I couldn't pretend to tell you But I will tell you that that will test something that John Bogle is spinning in his grave concerned about being tested That's passive And that will test passive And John Bogle before he died did an interview and said "God help us if passive is ever more than 50% of inflows to the market." It is but it's never been tested You ended your research note with one of the best lines in in research that that I think I've ever read You you wrote "Trade the narrative but own the truth." So you just spoke a whole lot of truth I think people are going to be really interested to learn more about your work and where they can find you Danielle Where should they go come to dartinobuth.stack.com Um and if you you know if if you run money if you run your family's money if you run a small family office uh we're also going to be offering an institutional entree if you will just for you And I've never done this before Um at qi research.com So uh if that's something that you feel that you have the appetite uh to take on our institutional investors absolutely love the research They love my flagship weekly You're going to get a sample of that You have access to my Bloomberg chat room which is always on fire Um with all kinds of colorful commentary as well as my private Twitter feed Um but regardless read the research because I have no bias I have no reason to have a bias I have no narrative I just give you the data and you make your decisions based on that But at least at least you're owning the truth not trading the narrative Danielle D Martino Booth thank you so much for your time Great to see you Thank you for having me