Danielle DiMartino Booth: Gold's Violent 5% Drop Is a 'Repeat of March 2020'
Summary
Market Outlook: The podcast discusses two contrasting market realities, with industrial giants raising forecasts and stocks near highs, while the private credit market shows signs of stress reminiscent of the 2007 subprime crisis.
Gold Market: Gold experienced a significant 5% drop after reaching a record high, raising concerns about liquidity issues and potential Federal Reserve actions.
Federal Reserve Policy: The Fed is operating in a data vacuum due to delayed government reports, relying on alternative data sources, which may lead to cautious policy decisions and potential rate cuts.
Bond Market Dynamics: The bond market is anticipating Fed rate cuts, with the 10-year Treasury yield reflecting recession fears, impacting gold prices and signaling economic slowdown concerns.
Consumer Debt Concerns: Household debt is at a record high with increasing 401k hardship withdrawals and auto loan delinquencies, indicating financial strain on consumers, particularly those repaying student loans.
Credit Market Risks: The podcast highlights potential contagion risks from private credit market blowups, with concerns over lax underwriting standards and the possibility of systemic issues.
Liquidity and Fed Actions: Liquidity concerns may force the Fed to halt quantitative tightening, with potential implications for gold and broader market stability.
Investment Strategy: The discussion emphasizes the importance of monitoring credit spreads and bond volatility as indicators of market stress and potential shifts in economic conditions.
Transcript
[Music] Hey everyone, welcome back. I'm Jeremy Saffron. There are two distinct realities in the market today. And in the first, industrial giants like General Motors and Coca-Cola are raising their fullear forecasts. And stocks are again wavering near all-time highs. But in the second, the governor of the Bank of England testified just this morning comparing recent blowups in the US private credit market to the 2007 subprime crisis, asking if they are quote the canary in the gold mine. And this comes as gold suffers one of the most violent sell-offs in about 5 years with spot gold down over 5% after hitting a record high just yesterday. And now, of course, there are fears that the Federal Reserve may be forced to abruptly end its balance sheet tightening. And not because inflation fight is won, but because the financial system itself is continuing to show signs of stress. Now, there's two narratives backed by conflicting facts. Of course, let's talk about which one is real. Joining me now is the one person who's been ahead of this story for months, I guess, for years. Danielle, former Federal Reserve insider and CEO of Qi Research, Danielle D. Martino Booth, joining us today. Thank you. It's a critical time to have you >> and and thank you for having me. Lots and lots to talk about, lots to unpack, and I think it's the Bank of Canada right now that's got their eye on the right ball. >> Yeah. Yeah, that's interesting. Okay. Well, we'll come back to the BFC, but uh you know, I I got to ask you, I mean, Wall Street's acting like it's 2019 again. I mean, you've seen it. We got these big record earnings that were being reported with the record evaluations and and a 4% GDP now print. Yet, credit markets seem to be cracking here and gold just had its worst day in years. So, are we witnessing the final, you know, blowoff top of an economy running on borrowed time? >> Well, it it it it certainly does seem to be the case, especially when uh when it's not just me, but when it's outfits like Goldman Sachs that are coming out and saying, you know what, what we're seeing in the labor market is much more indicative of the real economy in the United States compared to what we're seeing in GDP. So, fade the latter and pay more attention to the former. as as I I I continue to get these bizarre, surreal uh missives about Americans cutting coupons and buying generic and scraping by to to pay for their groceries while at the same time stocks remain at all-time highs. >> Yeah. Yeah. You're not kidding. And we get that narrative, too, that Main Street versus Wall Street. We've been talking about it. And of course, a lot of that this year on the narrative has been about government data. Let's talk about the data itself. I mean, the government shutdown means obviously the Fed is flying blind. I mean, the official September jobs report was delayed and according to the BLS, the September CPI report won't be released until this Friday, October 24th. Obviously, a lot of people watching that. I mean, it's someone that's been in these rooms. How dangerous is it when the central bank is making policy in a data vacuum? I mean, we've been talking about it kind of guided primarily by Wall Street's optimism here. Well, um I think to be to be fair before Blackout, uh Governor Christopher Waller um made really a critical speech where he said, "You know what? We get updates from ADP every other week." So, we get to see what's happening in the US job market with greater frequency than um than than private investors and economists get to see. And what we're seeing is continued weakening. And we we even heard from uh Chair Powell himself in his most recent remarks that he's also paying more attention to alternative data sources. This is a great actual uh um turn of events for the Fed because we've learned over the past few years that this official data can really lead us astray once we get all of the revisions back years later. >> Yeah. Yeah. I mean, how many times did you and I unpack the past year, some of these revisions, and they always come to fruition. I mean, could you argue that this lack of data actually forces the Fed to be a little bit more cautious? You know, that without the negative data prints that their default position is to let the market run, which obviously the bulls would say is the right move. >> Well, I think the market that's running right now is actually the bond market. and uh and that is an anticipation of the Fed lowering rates regardless of what the CPI print says this Friday. And the markets have indeed priced in a full uh probability, a 100% probability, 99.9% probability that the Fed's going to lower rates um on October the 30th based on basically what Powell said. He pre-committed, which is very unusual for Powell because he's always data dependent, data dependent. Well, as you say, in a data vacuum, the Fed is clearly being more cautious and leaning on what these alternative data sets are saying. So, for the moment, it's the bond market that that's running wild that I think is is doing the the greatest amount of lifting in terms of supporting stock prices right now. That's interesting. I mean, what we got the 10-year Treasury yield hovering around 4.4% after spiking earlier in the session. And of course, we got these renewed deficit fears, too. the the move index is back above 110 and liquidity is off the run. I mean, what are what are your thoughts here? I mean, given these stresses, is is the bond market kind of sending those early warnings that you're talking about? But if so, I mean, that policy is effectively breaking the plumbing before inflation is even, you know, back at target. >> And and that couldn't be any more correct. And I I I think that what we've seen with the 10-year benchmark Treasury yield breaking below the 4% level and holding that level is a sign right now at least that the market and investors feel that the greater um the greater potential outcome right now is going to be recession in the United States. And that is indeed what long yields always communicate to the market. That's one of the reasons that we're seeing the selloff in gold prices as well. And again, if we're not going to have to worry as much about inflation because we're worrying about slower growth because we're worrying about income declines, then that's that's much more problematic for the Fed. >> Yeah. Yeah. Uh let's drill down on the consumer. Just kind of jump back there again because obviously, you know, the latest New York Fed report showed that household debt is at a record $18.4 trillion. But beyond delinquencies, I mean, we're now seeing reports from firms like Empower and Vanguard showing those 401k hardship withdrawals at a 2-year high with the resumption the resumption of of student loan payments cited as a key driver, which again you talked about, Danielle. So, uh, is this a definite sign that the consumer is finally broken? I I I mean it really depends which consumer you're talking about because Moody's informs us that the top 10% of earners in the United States account for a record 50% of consumption. Now that's obviously very imbalanced and and also to use that word again problematic. It's the rest of the 90% of Americans. It's those who have been hit with repaying their student loans. There was some excitement over the weekend that there was going to be the resumption of some income driven repayment plans for student loan holders. But then you drill down into the details, you see that it's only 2 and a.5 million of the 42 and a.5 million student loan borrowers. So yes, we are definitely seeing signs that the consumer is cracking. We are seeing uh in fact Vantage Score came out uh last week and said that the most rapid increase off of a low base, mind you, but the most rapid increase they're seeing in auto automobile loan delinquencies is with prime borrowers. And again, these are these are the individuals who are affected by having to repay their student loans. Yeah. So, I mean, if the if the consumer is kind of breaking there, and again, it depends on which one we're talking about. But that leads us obviously to the credit markets where some of the world's most senior financial figures are obviously sounding the alarm just before you did. I mean, this morning we saw the Bank of England Governor Andrew Bailey testified before Parliament and he drew a direct parallel between the collapse of US firms like First Brands and Triricolor in the 2007 sub crime crisis. Um, too small to be systemic was, in his words, the wrong call. Is is the governor of the Bank of England now publicly validating that very thesis you've been advancing for months? >> I I think I I think that what the governor is recognizing more than anything else is that even though there might have been idiosyncrasies and you know with withricolor and the out migration and the fact that so many of the borrowers who had bought cars using subprime loans are no longer in the United States. Um, but I think what he's referring to is underwriting standards and the fact that if we're seeing these blowups in the private credit market, which are less visible than anything that we could see in the public credit markets, that they are indicative more so of banks not necessarily having proper due diligence and and and sound enough underwriting standards when the money was throwing flowing freely. And what we're learning is through banks like JP Morgan and um and Fifth um Fifth Third Bank, we're learning that there is a blowback function from the private credit space, from the private equity space back into the conventional banking system because it's the conventional banks that are providing funding to the private non-banking sector. So, in that sense, I I think it's it's prudent right now for all central bankers to be cognizant of the fact that there is a serious potential and risk for contagion here. >> Yeah, that's interesting. I I mean, I have to jump into it because I mean, the Fed senior loan officer survey from the second quarter showed credit standards tightening across every category, commercial real estate, autos, and consumer credit. But again, what's new and you brought that up is that Moody's October report, several banks on the regional banks have eased their underwriting on renewals to avoid that classifying loan as non-performing. Just talk to our audience a little bit more about this because is this the beginning of a quiet loosening cycle, you know, a form of extend and and pretend to mass solveny stress? >> So, look, um, if we're if we're really talking about extend and pretend, it is nothing new. It is something that banks have been leaning on for a a good long time in the post-pandemic era. We've seen a commercial real estate market that is absolutely frozen with deals not getting done, especially in the private space. Uh so if if a credit rating agency is beginning to recognize that there might be issues with banks reclassifying losses, um I I would venture to say that given credit rating agency's track record, shall we say, that they're typically the last to recognize what's been going on and what we've been seeing going on with banks extending and pretending unlike in 2007, 2008, 2009, 2010. Then it was really isolated to commercial real estate and commercial real estate loans on bank balance sheets but we're seeing it across the entire consumer loan spectrum whether it's auto loans, credit cards or personal loans. >> Yeah. So Governor Bailey's comments echoed obviously JP Morgan's Jamie Diamond who recently warned and I'm sure you've heard of the cockroaches comment right in the credit market. I mean your work has relentlessly highlighted fraud. I mean, we saw 71 corporate bankruptcies in August alone. And is the market in its focus on earnings in AI completely missing the real story? I mean, is it is this a normal downturn or or if is this the bill kind of coming due for a a fraudfueled credit bubble? Well, I'm I'm hoping that fraud itself is not endemic, but what we are seeing as having been uh systemic and and and kind of reflected throughout lending across the economy is very loose underwriting standards, not performing enough due diligence, not being able to be secured that cash flows are going to be able to service debts. And that goes back to the bankers and the individuals who have been allowing for this kind of debt spree. if you will, that we've been seeing over the past few years. But you're right, it is now that we see fraud actually begin to come out. This is always what we see at the end of credit cycles along with the strongest players, so to speak, begin to turn to borrowing because they don't have sufficient cash flows. And indeed, that is what we are seeing even in the AI space is some of the largest bond deals in the history of the US uh uh debt markets. I believe Oracle just u just sold 18 billion dollars uh of debt in one of the biggest bond deals of the year. Um and others are getting into this game because again even though the narrative is still intact that AI is the second coming of Jesus Christ himself. Uh if you have to borrow in order to make that play then the economics the pro-forma the assumptions they really aren't there anymore. Right. If you've got to borrow in order to get the deals done. Yeah. Yeah. I mean, the bulls would obviously say that these are isolated incidents. Goldman Sachs CEO David Solomon said today that they're idiosyncratic events that, you know, kind of don't make a trend that Zion stock is already kind of recovering. What are your thoughts on this risk of of contagion here? I mean, are we overstating it? How far are we? >> Well, what we're talking about here is something that sounds arcane, non-depository financial institution lending. And when we see in one week's time the Federal Reserve reclassify $300 billion of loans from being conventional commercial and industrial loans and consumer loans into this non-depository financial institution loan bucket, taking the outstanding there from 1.3 to 1.7 trillion. And then we find out that there's another $900 billion in untapped lines of credit for these borrowers in the non-banking space. you really are starting to talk about a lot of money. And again, while I respect what Solomon is saying about idiosync idiosyncrasies, if the lending standards have been have been across regional banks and across bigger banks laxer than they should have been, then we're going to find, as Jamie Diamond would suggest, more cockroaches these days. Whenever I see a headline come across that says, "Oh, there's another one." I simply tweet out RAID capital R A I D exclamation point and everybody knows exactly what I'm talking about. >> All right, Danielle, I mean, you've laid out the warnings that are coming from the credit markets, but let's pivot to the Federal Reserve. I mean, according to this new report from Reuters that some of the Wall Street analysts are now believing that the Fed will be forced to abruptly end its balance sheet runoff, quantitative tightening, as we've discussed, as soon as this month. I mean they cite mounting friction in the money markets and the very plumbing of the system that you've warned about here. I is this the first clear sign that the Fed has lost control kind of forced to abandon its inflation fight because the system itself is breaking. What are your thoughts? So liquidity is the ultimate cleansing agent and the lack of liquidity is going to and has always forced the Fed whether we're talking about not QE uh prior to the pandemic when the Fed was insisting that it was not conducting quantitative easing but in fact it was trying its best to inject liquidity into the system. We will see if this is forced. I think it's a little bit premature to be having this discussion about shifting gears from quantitative tightening to quantitative easing because we're still debating whether or not there's going to be a subsequent rate cut at the December the 10th Federal Open Market Committee meeting. So a a you know a precursor to jumping to QE which a lot of market players want to see. They want to see trillions of dollars injected into the system so that we can keep this rally going forever. Um, but you have to get to the zero bound first. We can't be debating whether it's going to be a quarter of a percentage point rate cut or a half percentage point rate cut. You actually have to go all the way to zero for that discussion then to proceed about whether the Fed's going to start to blow up its balance sheet again. Will the Fed be forced to pull the plug on quantitative tightening? It certainly looks like the system is running out of um sufficient liquidity and that the Fed is going to be forced to pull over to the sidelines. certainly hope that any central banker right now is listening to me and that you pick up the phone, call Jay Powell, and say, "Whatever you do, Jay, keep rolling those mortgage back securities off of your balance sheet. Even if you're going to replace them with treasuries because the Fed's foray into manipulating the housing market twice now, they've both been abject failures." >> Yeah, that's interesting. And weirdly enough, it kind of brings us to gold because, you know, we just saw its worst slide in 5 years right after hitting a record high. Now, in our last interview in August, I was watching it this morning. You warned that gold can be sold in a liquidity crunch. I mean, we got these record option volumes on the largest gold ETF. Is this violent swing of a of, you know, a sign of a healthy market, or is this tremor warning that the very liquidity event that seems to be forcing the Fed's hand? >> So, when we last spoke, I indeed did say that, you know, look at recent history. We look at the gold selloff in the immediate post-pandemic moment when markets were having a heart attack and that is that people tend to if they get margin calls, if liquidity becomes an issue, they tend to sell their winners and that that was the risk going forward. It wasn't so much that gold was not a um a secure longtime long-term holding in your portfolio, but rather that the price had run up so much that if liquidity became problematic that you were going to get that margin call and that you were going to sell your gold as a result. >> Yeah. And I mean the dollar I'm surprised. I mean we're seeing the dollar index firm up today. Uh what makes you think that this time is different that gold could you know won't be won't be a casual a casualty of of a dash for cash here? >> Oh no. I think it is. I I think it is. I think that's what we're witnessing right now. I think we're witnessing a repeat of what we saw uh in March of 2020. Uh when people need to access cash, sometimes they do whatever they can to access it, even if it's selling off, you know, something that has gained so much in value so quickly. That's not typically the way gold is supposed to behave. Even though proponents of gold will tell you that this is all justified, you never want to see gold behave like a meme stock. >> Yeah. Yeah. And it sure certainly is. is I mean some of this volatility obviously we haven't seen in years and it it is it a purely mechanical deleveraging I wonder you know I wonder if in other words could this wash out actually set a stage for a a more powerful next leg higher especially if the Fed is forced to halt QT or even reexpand its balance sheet >> that certainly is uh among the realm of possibilities and especially when you consider that you're going to be potentially washing out of the system individuals who are not core holders of gold, setting the stage for those who are indeed core holders of gold. So in in any asset class, whether it's GameStop stock or um or um ESPACS, anything where you have a new breed of buyers crowd in that are unfamiliar with the asset class and they're buying it because everybody else is buying it. typically you need in the correction phase to wash them out so that they can go and look for the next speculative >> in instrument. >> What is your anticipation here in the next little bit of an outlook? Uh you know I mean to be intellectually honest what what could prove the bears wrong, right? I mean the bulls point to these strong earnings and they say that the productivity boom from AI will power us through. What's the single strongest argument against your thesis and and what data point would make you reconsider your thought? So, if I was to see private sector companies become very serious about saying, you know what, 2026 is fast approaching and we've had legislation passed in the United States and we are we are going to be gang busters doing more capital investment, investing in the future, expanding our workforces, not just an AI moment, not just saying we're we're we're adopting AI in order to fire people, but saying we are investing in the next leg of the future and we're putting our money where our mouth is instead of saying our capital expenditures are going to decline. We're we're saying our capital expenditures are going to increase and we're going to hire the individuals required to make that happen. That I think would be a gamecher. Yes, we're having a good earning season, but we have to remember that the bar has been lowered and therefore exceeding that bar is a little bit easier uh if it's been lowered to the floor. So, we have to keep these things in mind. a a company like there's a major auto parts uh provider in the United States. They lowered their their guidance going forward, but they beat their lowered estimate at the same time, but they still said going out in the future things are going to get worse, but that's okay. We beat our our our current quarters estimates. >> Yeah. Yeah. I wonder how quick it'll happen. Before I let you go, last question to you because in August again, I was watching that tape and you told us that you're kind of, you know, deserted island indicator was the move index for bond volatility. I mean, you brought it up a little bit here and of course it's it's still elevated. It's come off its recent highs a little bit, but given the chaos of the last 48 hours, I mean, what's that one signal that you're kind of watching most closely now that'll outside of that that'll be the definitive sign for our audience that this whole illusion of control is shattered and and you know, this this reckoning that we talk about has begun. So, the thing that I've got my eye on right now um are credit spreads and we got reassurances last week from Jamie Diamond himself. You know, it just the rot in the system is isolated to the private space. If I start to see CLLO spreads, collateralized loan obligation spreads begin to widen out. We just saw um a lot of outflows from CLLO funds in the last week. If I see this bleed into credit spreads widening, and by the way, you'll also see that validated with a a resumed increase in the move index. I think that that would be highly problematic because that would tell you that that whatever is happening in the private space, that credit event is bleeding into the public space. That would get markets attention. >> Wow. All right. So analysis, Danielle D. Martino Booth, thank you for cutting through the noise as always and giving your uh your direct perspective here. That's Danielle D. Martino Booth, CEO of Qi Research, which you should check out. out. I mean, you've had some some stunningly accurate analysis over the past year. >> Thank you very much. And any we we QA research appreciates anybody who wants to come and join the fold. Thank you. >> Yeah, appreciate it, Danielle. Have a great one. Thank you so much. All right, the battle between Wall Street's optimism and the warnings from the credit markets is reaching a fever pitch here. We'll continue to track every development right here on Kicko News. For all of us here, I'm Jeremy Saffron. Thanks for watching. [Music] Heat. Heat. [Music]
Danielle DiMartino Booth: Gold's Violent 5% Drop Is a 'Repeat of March 2020'
Summary
Transcript
[Music] Hey everyone, welcome back. I'm Jeremy Saffron. There are two distinct realities in the market today. And in the first, industrial giants like General Motors and Coca-Cola are raising their fullear forecasts. And stocks are again wavering near all-time highs. But in the second, the governor of the Bank of England testified just this morning comparing recent blowups in the US private credit market to the 2007 subprime crisis, asking if they are quote the canary in the gold mine. And this comes as gold suffers one of the most violent sell-offs in about 5 years with spot gold down over 5% after hitting a record high just yesterday. And now, of course, there are fears that the Federal Reserve may be forced to abruptly end its balance sheet tightening. And not because inflation fight is won, but because the financial system itself is continuing to show signs of stress. Now, there's two narratives backed by conflicting facts. Of course, let's talk about which one is real. Joining me now is the one person who's been ahead of this story for months, I guess, for years. Danielle, former Federal Reserve insider and CEO of Qi Research, Danielle D. Martino Booth, joining us today. Thank you. It's a critical time to have you >> and and thank you for having me. Lots and lots to talk about, lots to unpack, and I think it's the Bank of Canada right now that's got their eye on the right ball. >> Yeah. Yeah, that's interesting. Okay. Well, we'll come back to the BFC, but uh you know, I I got to ask you, I mean, Wall Street's acting like it's 2019 again. I mean, you've seen it. We got these big record earnings that were being reported with the record evaluations and and a 4% GDP now print. Yet, credit markets seem to be cracking here and gold just had its worst day in years. So, are we witnessing the final, you know, blowoff top of an economy running on borrowed time? >> Well, it it it it certainly does seem to be the case, especially when uh when it's not just me, but when it's outfits like Goldman Sachs that are coming out and saying, you know what, what we're seeing in the labor market is much more indicative of the real economy in the United States compared to what we're seeing in GDP. So, fade the latter and pay more attention to the former. as as I I I continue to get these bizarre, surreal uh missives about Americans cutting coupons and buying generic and scraping by to to pay for their groceries while at the same time stocks remain at all-time highs. >> Yeah. Yeah. You're not kidding. And we get that narrative, too, that Main Street versus Wall Street. We've been talking about it. And of course, a lot of that this year on the narrative has been about government data. Let's talk about the data itself. I mean, the government shutdown means obviously the Fed is flying blind. I mean, the official September jobs report was delayed and according to the BLS, the September CPI report won't be released until this Friday, October 24th. Obviously, a lot of people watching that. I mean, it's someone that's been in these rooms. How dangerous is it when the central bank is making policy in a data vacuum? I mean, we've been talking about it kind of guided primarily by Wall Street's optimism here. Well, um I think to be to be fair before Blackout, uh Governor Christopher Waller um made really a critical speech where he said, "You know what? We get updates from ADP every other week." So, we get to see what's happening in the US job market with greater frequency than um than than private investors and economists get to see. And what we're seeing is continued weakening. And we we even heard from uh Chair Powell himself in his most recent remarks that he's also paying more attention to alternative data sources. This is a great actual uh um turn of events for the Fed because we've learned over the past few years that this official data can really lead us astray once we get all of the revisions back years later. >> Yeah. Yeah. I mean, how many times did you and I unpack the past year, some of these revisions, and they always come to fruition. I mean, could you argue that this lack of data actually forces the Fed to be a little bit more cautious? You know, that without the negative data prints that their default position is to let the market run, which obviously the bulls would say is the right move. >> Well, I think the market that's running right now is actually the bond market. and uh and that is an anticipation of the Fed lowering rates regardless of what the CPI print says this Friday. And the markets have indeed priced in a full uh probability, a 100% probability, 99.9% probability that the Fed's going to lower rates um on October the 30th based on basically what Powell said. He pre-committed, which is very unusual for Powell because he's always data dependent, data dependent. Well, as you say, in a data vacuum, the Fed is clearly being more cautious and leaning on what these alternative data sets are saying. So, for the moment, it's the bond market that that's running wild that I think is is doing the the greatest amount of lifting in terms of supporting stock prices right now. That's interesting. I mean, what we got the 10-year Treasury yield hovering around 4.4% after spiking earlier in the session. And of course, we got these renewed deficit fears, too. the the move index is back above 110 and liquidity is off the run. I mean, what are what are your thoughts here? I mean, given these stresses, is is the bond market kind of sending those early warnings that you're talking about? But if so, I mean, that policy is effectively breaking the plumbing before inflation is even, you know, back at target. >> And and that couldn't be any more correct. And I I I think that what we've seen with the 10-year benchmark Treasury yield breaking below the 4% level and holding that level is a sign right now at least that the market and investors feel that the greater um the greater potential outcome right now is going to be recession in the United States. And that is indeed what long yields always communicate to the market. That's one of the reasons that we're seeing the selloff in gold prices as well. And again, if we're not going to have to worry as much about inflation because we're worrying about slower growth because we're worrying about income declines, then that's that's much more problematic for the Fed. >> Yeah. Yeah. Uh let's drill down on the consumer. Just kind of jump back there again because obviously, you know, the latest New York Fed report showed that household debt is at a record $18.4 trillion. But beyond delinquencies, I mean, we're now seeing reports from firms like Empower and Vanguard showing those 401k hardship withdrawals at a 2-year high with the resumption the resumption of of student loan payments cited as a key driver, which again you talked about, Danielle. So, uh, is this a definite sign that the consumer is finally broken? I I I mean it really depends which consumer you're talking about because Moody's informs us that the top 10% of earners in the United States account for a record 50% of consumption. Now that's obviously very imbalanced and and also to use that word again problematic. It's the rest of the 90% of Americans. It's those who have been hit with repaying their student loans. There was some excitement over the weekend that there was going to be the resumption of some income driven repayment plans for student loan holders. But then you drill down into the details, you see that it's only 2 and a.5 million of the 42 and a.5 million student loan borrowers. So yes, we are definitely seeing signs that the consumer is cracking. We are seeing uh in fact Vantage Score came out uh last week and said that the most rapid increase off of a low base, mind you, but the most rapid increase they're seeing in auto automobile loan delinquencies is with prime borrowers. And again, these are these are the individuals who are affected by having to repay their student loans. Yeah. So, I mean, if the if the consumer is kind of breaking there, and again, it depends on which one we're talking about. But that leads us obviously to the credit markets where some of the world's most senior financial figures are obviously sounding the alarm just before you did. I mean, this morning we saw the Bank of England Governor Andrew Bailey testified before Parliament and he drew a direct parallel between the collapse of US firms like First Brands and Triricolor in the 2007 sub crime crisis. Um, too small to be systemic was, in his words, the wrong call. Is is the governor of the Bank of England now publicly validating that very thesis you've been advancing for months? >> I I think I I think that what the governor is recognizing more than anything else is that even though there might have been idiosyncrasies and you know with withricolor and the out migration and the fact that so many of the borrowers who had bought cars using subprime loans are no longer in the United States. Um, but I think what he's referring to is underwriting standards and the fact that if we're seeing these blowups in the private credit market, which are less visible than anything that we could see in the public credit markets, that they are indicative more so of banks not necessarily having proper due diligence and and and sound enough underwriting standards when the money was throwing flowing freely. And what we're learning is through banks like JP Morgan and um and Fifth um Fifth Third Bank, we're learning that there is a blowback function from the private credit space, from the private equity space back into the conventional banking system because it's the conventional banks that are providing funding to the private non-banking sector. So, in that sense, I I think it's it's prudent right now for all central bankers to be cognizant of the fact that there is a serious potential and risk for contagion here. >> Yeah, that's interesting. I I mean, I have to jump into it because I mean, the Fed senior loan officer survey from the second quarter showed credit standards tightening across every category, commercial real estate, autos, and consumer credit. But again, what's new and you brought that up is that Moody's October report, several banks on the regional banks have eased their underwriting on renewals to avoid that classifying loan as non-performing. Just talk to our audience a little bit more about this because is this the beginning of a quiet loosening cycle, you know, a form of extend and and pretend to mass solveny stress? >> So, look, um, if we're if we're really talking about extend and pretend, it is nothing new. It is something that banks have been leaning on for a a good long time in the post-pandemic era. We've seen a commercial real estate market that is absolutely frozen with deals not getting done, especially in the private space. Uh so if if a credit rating agency is beginning to recognize that there might be issues with banks reclassifying losses, um I I would venture to say that given credit rating agency's track record, shall we say, that they're typically the last to recognize what's been going on and what we've been seeing going on with banks extending and pretending unlike in 2007, 2008, 2009, 2010. Then it was really isolated to commercial real estate and commercial real estate loans on bank balance sheets but we're seeing it across the entire consumer loan spectrum whether it's auto loans, credit cards or personal loans. >> Yeah. So Governor Bailey's comments echoed obviously JP Morgan's Jamie Diamond who recently warned and I'm sure you've heard of the cockroaches comment right in the credit market. I mean your work has relentlessly highlighted fraud. I mean, we saw 71 corporate bankruptcies in August alone. And is the market in its focus on earnings in AI completely missing the real story? I mean, is it is this a normal downturn or or if is this the bill kind of coming due for a a fraudfueled credit bubble? Well, I'm I'm hoping that fraud itself is not endemic, but what we are seeing as having been uh systemic and and and kind of reflected throughout lending across the economy is very loose underwriting standards, not performing enough due diligence, not being able to be secured that cash flows are going to be able to service debts. And that goes back to the bankers and the individuals who have been allowing for this kind of debt spree. if you will, that we've been seeing over the past few years. But you're right, it is now that we see fraud actually begin to come out. This is always what we see at the end of credit cycles along with the strongest players, so to speak, begin to turn to borrowing because they don't have sufficient cash flows. And indeed, that is what we are seeing even in the AI space is some of the largest bond deals in the history of the US uh uh debt markets. I believe Oracle just u just sold 18 billion dollars uh of debt in one of the biggest bond deals of the year. Um and others are getting into this game because again even though the narrative is still intact that AI is the second coming of Jesus Christ himself. Uh if you have to borrow in order to make that play then the economics the pro-forma the assumptions they really aren't there anymore. Right. If you've got to borrow in order to get the deals done. Yeah. Yeah. I mean, the bulls would obviously say that these are isolated incidents. Goldman Sachs CEO David Solomon said today that they're idiosyncratic events that, you know, kind of don't make a trend that Zion stock is already kind of recovering. What are your thoughts on this risk of of contagion here? I mean, are we overstating it? How far are we? >> Well, what we're talking about here is something that sounds arcane, non-depository financial institution lending. And when we see in one week's time the Federal Reserve reclassify $300 billion of loans from being conventional commercial and industrial loans and consumer loans into this non-depository financial institution loan bucket, taking the outstanding there from 1.3 to 1.7 trillion. And then we find out that there's another $900 billion in untapped lines of credit for these borrowers in the non-banking space. you really are starting to talk about a lot of money. And again, while I respect what Solomon is saying about idiosync idiosyncrasies, if the lending standards have been have been across regional banks and across bigger banks laxer than they should have been, then we're going to find, as Jamie Diamond would suggest, more cockroaches these days. Whenever I see a headline come across that says, "Oh, there's another one." I simply tweet out RAID capital R A I D exclamation point and everybody knows exactly what I'm talking about. >> All right, Danielle, I mean, you've laid out the warnings that are coming from the credit markets, but let's pivot to the Federal Reserve. I mean, according to this new report from Reuters that some of the Wall Street analysts are now believing that the Fed will be forced to abruptly end its balance sheet runoff, quantitative tightening, as we've discussed, as soon as this month. I mean they cite mounting friction in the money markets and the very plumbing of the system that you've warned about here. I is this the first clear sign that the Fed has lost control kind of forced to abandon its inflation fight because the system itself is breaking. What are your thoughts? So liquidity is the ultimate cleansing agent and the lack of liquidity is going to and has always forced the Fed whether we're talking about not QE uh prior to the pandemic when the Fed was insisting that it was not conducting quantitative easing but in fact it was trying its best to inject liquidity into the system. We will see if this is forced. I think it's a little bit premature to be having this discussion about shifting gears from quantitative tightening to quantitative easing because we're still debating whether or not there's going to be a subsequent rate cut at the December the 10th Federal Open Market Committee meeting. So a a you know a precursor to jumping to QE which a lot of market players want to see. They want to see trillions of dollars injected into the system so that we can keep this rally going forever. Um, but you have to get to the zero bound first. We can't be debating whether it's going to be a quarter of a percentage point rate cut or a half percentage point rate cut. You actually have to go all the way to zero for that discussion then to proceed about whether the Fed's going to start to blow up its balance sheet again. Will the Fed be forced to pull the plug on quantitative tightening? It certainly looks like the system is running out of um sufficient liquidity and that the Fed is going to be forced to pull over to the sidelines. certainly hope that any central banker right now is listening to me and that you pick up the phone, call Jay Powell, and say, "Whatever you do, Jay, keep rolling those mortgage back securities off of your balance sheet. Even if you're going to replace them with treasuries because the Fed's foray into manipulating the housing market twice now, they've both been abject failures." >> Yeah, that's interesting. And weirdly enough, it kind of brings us to gold because, you know, we just saw its worst slide in 5 years right after hitting a record high. Now, in our last interview in August, I was watching it this morning. You warned that gold can be sold in a liquidity crunch. I mean, we got these record option volumes on the largest gold ETF. Is this violent swing of a of, you know, a sign of a healthy market, or is this tremor warning that the very liquidity event that seems to be forcing the Fed's hand? >> So, when we last spoke, I indeed did say that, you know, look at recent history. We look at the gold selloff in the immediate post-pandemic moment when markets were having a heart attack and that is that people tend to if they get margin calls, if liquidity becomes an issue, they tend to sell their winners and that that was the risk going forward. It wasn't so much that gold was not a um a secure longtime long-term holding in your portfolio, but rather that the price had run up so much that if liquidity became problematic that you were going to get that margin call and that you were going to sell your gold as a result. >> Yeah. And I mean the dollar I'm surprised. I mean we're seeing the dollar index firm up today. Uh what makes you think that this time is different that gold could you know won't be won't be a casual a casualty of of a dash for cash here? >> Oh no. I think it is. I I think it is. I think that's what we're witnessing right now. I think we're witnessing a repeat of what we saw uh in March of 2020. Uh when people need to access cash, sometimes they do whatever they can to access it, even if it's selling off, you know, something that has gained so much in value so quickly. That's not typically the way gold is supposed to behave. Even though proponents of gold will tell you that this is all justified, you never want to see gold behave like a meme stock. >> Yeah. Yeah. And it sure certainly is. is I mean some of this volatility obviously we haven't seen in years and it it is it a purely mechanical deleveraging I wonder you know I wonder if in other words could this wash out actually set a stage for a a more powerful next leg higher especially if the Fed is forced to halt QT or even reexpand its balance sheet >> that certainly is uh among the realm of possibilities and especially when you consider that you're going to be potentially washing out of the system individuals who are not core holders of gold, setting the stage for those who are indeed core holders of gold. So in in any asset class, whether it's GameStop stock or um or um ESPACS, anything where you have a new breed of buyers crowd in that are unfamiliar with the asset class and they're buying it because everybody else is buying it. typically you need in the correction phase to wash them out so that they can go and look for the next speculative >> in instrument. >> What is your anticipation here in the next little bit of an outlook? Uh you know I mean to be intellectually honest what what could prove the bears wrong, right? I mean the bulls point to these strong earnings and they say that the productivity boom from AI will power us through. What's the single strongest argument against your thesis and and what data point would make you reconsider your thought? So, if I was to see private sector companies become very serious about saying, you know what, 2026 is fast approaching and we've had legislation passed in the United States and we are we are going to be gang busters doing more capital investment, investing in the future, expanding our workforces, not just an AI moment, not just saying we're we're we're adopting AI in order to fire people, but saying we are investing in the next leg of the future and we're putting our money where our mouth is instead of saying our capital expenditures are going to decline. We're we're saying our capital expenditures are going to increase and we're going to hire the individuals required to make that happen. That I think would be a gamecher. Yes, we're having a good earning season, but we have to remember that the bar has been lowered and therefore exceeding that bar is a little bit easier uh if it's been lowered to the floor. So, we have to keep these things in mind. a a company like there's a major auto parts uh provider in the United States. They lowered their their guidance going forward, but they beat their lowered estimate at the same time, but they still said going out in the future things are going to get worse, but that's okay. We beat our our our current quarters estimates. >> Yeah. Yeah. I wonder how quick it'll happen. Before I let you go, last question to you because in August again, I was watching that tape and you told us that you're kind of, you know, deserted island indicator was the move index for bond volatility. I mean, you brought it up a little bit here and of course it's it's still elevated. It's come off its recent highs a little bit, but given the chaos of the last 48 hours, I mean, what's that one signal that you're kind of watching most closely now that'll outside of that that'll be the definitive sign for our audience that this whole illusion of control is shattered and and you know, this this reckoning that we talk about has begun. So, the thing that I've got my eye on right now um are credit spreads and we got reassurances last week from Jamie Diamond himself. You know, it just the rot in the system is isolated to the private space. If I start to see CLLO spreads, collateralized loan obligation spreads begin to widen out. We just saw um a lot of outflows from CLLO funds in the last week. If I see this bleed into credit spreads widening, and by the way, you'll also see that validated with a a resumed increase in the move index. I think that that would be highly problematic because that would tell you that that whatever is happening in the private space, that credit event is bleeding into the public space. That would get markets attention. >> Wow. All right. So analysis, Danielle D. Martino Booth, thank you for cutting through the noise as always and giving your uh your direct perspective here. That's Danielle D. Martino Booth, CEO of Qi Research, which you should check out. out. I mean, you've had some some stunningly accurate analysis over the past year. >> Thank you very much. And any we we QA research appreciates anybody who wants to come and join the fold. Thank you. >> Yeah, appreciate it, Danielle. Have a great one. Thank you so much. All right, the battle between Wall Street's optimism and the warnings from the credit markets is reaching a fever pitch here. We'll continue to track every development right here on Kicko News. For all of us here, I'm Jeremy Saffron. Thanks for watching. [Music] Heat. Heat. [Music]