Unemployment 'Exhaustion': 40% Have 'Literally Nothing' Left | DiMartino Booth
Summary
Fed Policy Shift: The Fed halting QT on Dec 1 provides only marginal Treasury support while repo market strains and hedge fund basis-trade leverage complicate liquidity.
AI: Extensive discussion of an AI boom increasingly financed by debt, chip depreciation risks, and accounting scrutiny suggests fragility despite headline growth.
Nvidia (NVDA): Highlighted for strong results but questioned on sustainability due to rapid chip obsolescence and cash flow quality concerns including receivables factoring.
BlackRock (BLK) & Private Credit: A BlackRock private credit CLO failing a solvency test and fee waivers signal broader private credit contagion risk among smaller managers.
Credit Stress: Oracle CDS used as an AI hedge, calls to monitor junk bond issuance, and margin debt/leveraged ETF risks elevate the probability of a credit-driven accident.
Gold: Framed as the ultimate hedge post-margin-call volatility, with historical snap-backs after forced selling and a supportive long-term case.
Bitcoin: Treated as a high-beta bellwether with tight Nasdaq correlation and a likely first source of liquidity during margin calls, informing risk sentiment.
Transcript
Welcome back. I'm Jeremy Sappern. [music] The morning started as a victory lap, but it's ending in confusion. Now, early in the morning, we saw Nvidia crush earnings, sending the Dow up more than 600 points and [music] fueling that soft landing narrative. The S&P as well, hitting a nice little soft spot. But as the day went on, the rally faded and volatility has returned. And a lot of the question is because while equity traders were chasing the AI hype, the bond market was reading the fine print on a major policy shift, too. I mean, we now have confirmation that the Federal Reserve is halting quantitive tightening effective December 1st, months ahead of schedule. And then the cracks are spreading fast. We have reports that Black Rockck Private Credit CLLO failed a solveny test, forcing the manager to wave fees just to keep the deal compliant. And we have trading in Oracle credit default swaps, essentially insurance against a tech crash, uh, exploding in volume and getting more pricey. And despite a headline, jobs beat today. Continuing jobless claims are still hovering near 2 million. That's the highest level since 2021. And when our next guest was here last month, she warned that the rod in private credit would bleed into the public system. And with Black Rockck failure in the Oracle betting, uh the Fed surrender to QT, it looks like that day has arrived. Joining me now is the CEO of Qi Research, Danielle D. Martino Booth. Thanks for making the time. >> Thanks for having me on this very hectic Thursday. >> Yeah, just a few things to talk about and I obviously we're going to time this differently. I mean, we've seen a sharp reversal today in the markets. Who knows what'll happen as we go to air here, but uh let's start with the Fed because I mean the minutes confirm QT ends on December 1st and liquidity drain stops. And for a equity investor, isn't that the all clear signal? Does that effectively, you know, put a floor under the market and give the green light rally into 2026? >> Well, what the Fed has decided to do is to stop draining liquidity from the system. um there will be some support at the margin for the Treasury market uh to the extent that mortgage rates continue to fall and refinancing continues to occur. Then you will see an increase in the mortgage prepayment rate, the rate at which people are paying their mortgage off earlier than what was expected. That will allow the Fed to uh get from its current about $20 billion a month run rate of mortgage back security rolloff up to that $ 35 billion a month ceiling. And as they continue rolling those mortgage back securities off the Fed will replace them with treasuries. Um so in that sense there will be again but just at the margin some report uh some support for the Treasury markets. >> Well you know we we know that that GC re repo rates have been trading above the Fed's target. But uh if we look at who's borrowing I mean the reports indicate that hedge funds have ballooned their treasury basis trades to 2.4 trillion. I mean these trades rely on cheap overnight cash. So, I mean, be direct. If the if if Fed stops QT to save the repo market, aren't they explicitly bailing out these hedge fund basis trades here? I mean, is the Fed's policy now effectively held hostage by highly leveraged speculators who threaten to blow up if funding costs rise, even one basis point? >> Well, I mean, you actually bring um bring in a very important distinction because it's only banks that can lend, excuse me, it's only banks that can borrow directly from the Fed, from the Fed's standing repo facility. And that was supposed to act as a backs stop as opposed to 2019 when the Fed was forced to launch not QE. Uh but as you said, hedge funds are deep in the repo market. That has has been flagged. It was flagged actually in mid-occtober by the New York Fed. And then the New York Fed saw fit last week to republish that paper along with news that the New York Fed had had an impromptu, we wouldn't want to call it an emergency meeting with the broker dealers to discuss why there is no greater uptake of this standing repo facility even by banks. So um you know we're coming into week into month end. The end of October was ugly. We can only imagine what the end of December is going to be because there are more funding dislocations at the end of a quarter than there are at the end of any given month. >> Yeah, that's an interesting one. Uh, you know, I mean, we could bring up this this shift too. I mean, if leverage goes to die, I mean, you talk about Black Rockck while the S&P hit that new high this morning. We did see that credit CLLLO failing a solveny test, but I want to get the technical on kind of on the fix. I mean, they didn't sell the bad loans. They waved management fees to kind of cure the breach. Is is this fee waver the modern version of extend and pretend? And and more importantly, if if the manager has to subsidize the fund to keep it solvent, doesn't that mean that the true yield on these private credit assets is actually negative right now? >> Well, it certainly would be as it relates to that particular portfolio company. Um I I don't think we're going to be worried anytime soon about Black Rockck solveny. It is too big to fail. Um but more importantly it sends up a signal because a lot a lot a greater number of smaller operators in this space who don't have the same um experience that Black Rockck has had in this space much less liquidity and ability to to to take care of itself from within. That's what we worry about. We worry about um a particular company that was in in in in the financing um that that was that was helping finance First Brands for example, but it was just a company extending credit to First Brands that we're now hearing is actually going to be declaring chapter chapter 11 itself. So Jeremy, at times like these, what we worry about the most is contagion. >> Yeah. Yeah. Yeah. I mean, how many sub10 billion private credit firms have the capital to survive multiple OC test failures? [laughter] >> That's exactly my point. >> So, um, and and and it's not, again, this is not idiosyncratic. We are seeing, as Jamie Diamond predicted, we are seeing these cockroaches continue to crawl out from underneath the woodwork. >> Uh, you've noted that this distress isn't kind of isolated. You posted a chart today on X uh that I found interesting showing delinquencies on 2021 and 222 vintage consumer debt going vertical. I mean, if the if the consumer who pays the bills backing these CLLOs is is defaulting at 2008 levels, how much longer can managers wave those fees or or do these interesting things before the money runs out? >> So, this is this is where the intersection gets to be very interesting, right? It's when the underlying collateral itself starts to become so compromised. By the way, with an unemployment rate at 4.4%. >> And that we're already seeing this level of distress. God help us when the unemployment rate starts to rise much more rapidly than it is with what we know today from September data in terms of collateral being compromised. And again, the idea of a ripple effect of contagion that starts out with, hey, we made some really bad car loans in 2021 and 2022, >> they're coming back not just to haunt us in the in the sense of consumer distress and an inability to buy things. >> They're coming back to haunt the financial system. >> Yeah. Yeah. And that distress, I mean, it brings us to the labor market. The headline number was a beat, 119,000 jobs. But today's continuing claims data, nearly 2 million, shows that labor market, where people who lose their jobs are struggling to find new ones. Help us reconcile this. I mean, is is this is the strong $119,000 number a stale September mirage, or do we trust the real-time claims data that shows the freezes here? >> I think we definitely uh trust more in the real time continuing claims data because it does reflect something that is occurring in the month of November. Um, and more importantly, there is a 40% exhaustion rate attached to that. And exhaustion rate means I have collected all of the claims as a continuing claimant that I'm allowed to do over the whether it's 24 months for for most states. I think it's 12 or 14 months in North Carolina, Tennessee, and Florida. But that means that people are actually 40% of individuals who had been continuing claimants have now gone through the period at which they can at which they can collect unemployment benefits. That leaves them literally with nothing in in in addition to this nearly 2 million cycle high that we're seeing in continuing claims. And you know, if you want to go back to that 119,000 headline, uh, September payroll number, why don't we go back instead to June because that was originally reported as 160,000. And now we know that that was actually a negative print for that month. So I I think what Fed policy makers are talking about more today than they were yesterday is the fact that the unemployment rate has risen and that is what Chair Powell said that he would be focusing on going forward and it is now 4.44%. 44%. So we're 610 of a percentage point away from the Fed's year end 4.5% target >> as of September. >> Right. Right. And you know there's that public versus private kind of recession debate. I mean wage growth was only 2% for the Fed. That's the holy grail. Hiring without inflation. But if we get you know if we're getting jobs without wage price spiral isn't that the literal definition of kind of that soft landing Powell promise narrative? Well, it it would be it certainly would be if if we didn't have so many people who were unemployed and not able to get jobs. If we didn't have permanent job losers just crossing over the 2 million threshold where it was in December of 2007, the first month of the great recession. There's an overabundance, Jeremy, of data that is in hand. We know that more than 100,000 federal employees on September the 30th no longer were collecting the severance package that they received in order for taking the Doge buyout. >> So that might be why the government doesn't want to report at all the October payrolls. Maybe they just as they've said, we're just going to roll it into November. Um very convenient. But my point is, the Fed knows that these government employees will have already added to that unemployment rate and gone right past its year-end target. And that's why you've seen after yesterday a huge decline in probability for the Fed to cut rates in December. You've seen that rebound to more than 40% today. >> Yeah. And obviously we got those Fed minutes yesterday. Uh just quickly, anything interesting? I mean, we saw some descent. We saw some people um you know openly wanting different rate cuts. We saw QT anything that really stood out for you there? >> No. Uh it was as was expected. There were several members who didn't want to cut rates at all. There were several who were on board with that one last rate cut, but they sorry many on board with that October rate cut, but they didn't they didn't see any reason justification for a subsequent rate cut. And then there were several who felt that it would be appropriate to continue cutting rates in December. So it was on the one hand, on the other hand, and on the third hand. Nothing was unexpected out of those minutes. But again, all of that was negated yesterday at least with news that the that the government would not be releasing November non-farm payrolls until November the 16th, 6 days after the Fed meets. >> Uh I want to ask you about this. I mean, obviously you and I, we would turn on this morning. morning, we look at the markets and I mean, you know, they they started really strong. Now we're sitting here watching this a little bit of a reversal. But if we go to that rich trade, I mean, Nvidia blew out earnings kind of again. Maybe not blowout, that's a strong word, but Michael Bur is raising a massive red flag. He's flagging the useful life of these AI chips, companies that are appreciating them uh five or six years to make their earnings look good, but we know that an H100 chip is obsolete in two years. Now, if we're are we sitting on a massive right down cliff, right? I mean, in 2027, when these chips are doorsteps, but still valued at billions on the balance sheet, does the entire tech sector have to take a massive earnings hit that crashes the S&P? >> Well, that is the job of the markets. It is to look ahead and anticipate what the value of any given firm is on any given day. I I think Michael Bur is um has been as skeptical of the AI narrative, the AI bubble, because we've had a dramatic shift in the last 12 months away from we're going to be able to handle these trillions of dollars of investment to continue growing AI with cash flow and earnings to oh, we got to take debt out instead to finance the growth. And that has been the main shift over the last 12 months. It's and and it is a lot of debt that these companies are taking on. >> Yeah. Yeah. It's interesting to kind of just watch them reinvent or reinvest rather into each other, you know, that that meme. Um but I mean, you know, the c the cash flow is real. I mean, Nvidia and Microsoft are generating tens of billions in actual cash. Um does depreciating accounting even matter when they have enough cash in the bank to buy the next generations of chips? I mean, you know, is is is what are your thoughts here? Could this just be people are saying I mean, I always get in trouble for being a bull, but I mean, we're getting close, but it seems like it's just keeping going here. >> Well, you know, Jeremy, there was a a there there was a tweet that went viral overnight that uh demonstrated that a lot of the cash flow that Nvidia had generated came because they were actually factoring their accounts receivables. >> Yeah. Um there are different ways to generate cash flow. One of them would be to collect the cash earlier than it's actually coming into the company by factoring it and taking a haircut on it. So um again in the aftermath ofricolor in the aftermath of first brands investors are becoming much more skeptical about how earnings are made and how cash flow is generated. >> Yeah. Yeah. And the AI story is incredible. Yeah, I mean if we look at it, we're seeing $1.5 trillion in projected high-grade issuance just to finance this AI structure infrastructure. I mean, are we creating an AI boom that only exists because Wall Street is leveraging it up? I mean, you know, >> well, I I I think that we don't even have to contemplate whether that's what's going on here because on the same day that that Meta missed its earnings and the stock closed down 11% on the day, they were able to sell 25 billion of in bonds in the in the bond market and they had an order book of 120 billion of demand. And that starts to get you to the discussion of are these protected companies? Are they too big to fail? Is that what investors are perceiving or are they possibly able to fail if you look at what it costs to ensure against the failure of Oracle bonds? It's an open question right now. >> Yeah. Yeah. What are your thoughts on that? I mean, if you look at that Oracle CDS explosion, I mean, traders are clearly using Oracle as a hedge for this AI crack. I mean, does that tell you that the market believes that this boom is kind of debt dependent and fragile, not self- financing like the real tech revolutions of the past? Look, Jeremy, we haven't talked about credit default swaps to hedge against the possibility that a company's going to go poof since 2008. So, you know, in that we're even having these discussions is indicative of the need for investors to be either defensively positioned or at least hedged in what they own, especially when you've got margin debt that is even as as a percentage of GDP is at levels that is are so high that on any given day if there's enough disruption in the market that you could be having a whole separate conversation about margin calls. Yeah. Yeah. Yeah. Yeah. It's a whole different conversation. But I mean, you know, if if the market's hinging those AI through those CDS rather than shorting equities, does that mean that this boom is already migrated from equity speculation into this credit risk that we're talking about? >> That certainly would seem to be why we're seeing the cost to ensure against uh against the debt defaulting go up as much as it is. >> That's interesting. I want to talk to you about the safe haven bid because Ray Dalio was just today uh on CNBC, I think it was on Squawkbox, and he said um that we're definitely in a bubble, but the answer isn't to sell, it's to diversify into assets like gold. Uh if the Fed is effectively committing, you know, to a huge balance sheet with with many call a repression, does does that make gold the only asset still mathematically works long term? Well, it it theoretically should after we get past the margin calls. I mean, it is the ultimate hedge when when there's if there's even a whiff of a financial crisis. Gold has always been the the safest of safe harbors. Unfortunately, there appear to still be some tourists uh who hold gold right now who won't necessarily have the stomach for potential volatility in the event that like 2020 there is a margin call and people sell what they can liquidate the most easily at a profit. >> Yeah. Interesting. I mean, we got to go down that just a little bit here because for the audience, they kind of know what a margin call is, but I mean, if they're losing their house and they got to sell gold, are we close here? Are you looking at indications of this happening? I mean, we're seeing the sell off right now in Bitcoin, I guess. [laughter] >> Well, um, Jeremy, we're too close to the end of the month for me to answer that question because >> the the simple mechanistic the way passive investing works is, oh boy, the stock market was down in November. in order to rebalance my target date 401k fund if I'm 30 and I'm supposed to have 70% of my portfolio therefore invested in the stock market is to sell bonds and buy equities. And that's exactly what we saw by the way uh the day that the Fed came roaring to the markets rescue in March of of of 2020. It was the largest rebalancing day in the history of the market. So, we have we don't know whether or not passive investing because of its structure and because it buys prices agnostically if we're going to have a huge rush of money into the market at the end of November or at the end of of December when there's quarter end balancing. >> Yeah, that's interesting. I mean, the irony is is that if if there's if if we're talking about the for sale of gold, I mean, it doesn't reflect the fundamentals at all. It's just the kind of cleanest collateral to raise cash fast, right? Right. I mean, it's it's it's more liquid than the Treasury market, >> right? And that was why when we did see margin calls in 2020, the hit that gold took was short was shortlived. >> Right. Right. Yeah. Yeah. They tend to snap back a little bit. That's interesting. I never actually thought about that. I mean, we're seeing a little bit of this. Uh let me ask you, I mean, we've seen the movie before, right? Margin calls hit leverage tech. Traders kind of dump whatever is most liquid. Um do you think that that long-term direction next year will still be there? I mean, once some of this clears, I mean, I I was talking to somebody yesterday. They said 2026 is going to be the year, but I mean, you know, they said 2025, too. What are your thoughts? >> Well, 2025 certainly was the year for gold. >> Um, [clears throat] but no, again, Jeremy, every single time passive has been tested, passive has won. >> Mhm. So unless you're talking about people changing the allocations of their 401ks, which is not the easiest thing to do, or reducing their contributions to 401ks, or if you have enough people get fired who are contributing to their 401ks to start to turn that in addition to retirees, right? 11,500 Americans retire every single day. They're no no longer contributing to their 401ks. you. It takes a lot to tamper with the structure of the market that buys blindly. Dollar in simply buys the largest capitalization stock. It's why Nvidia got to be a $5 trillion market cap stock because you buy the biggest and it's just a factor of the of the of the structure. >> Yeah, that's interesting. Okay, I got to ask you. I mean, if we're seeing this much strain with QT still technically running and the AI boom still in full mania mode, what does the landscape look like once we roll into 2026 with heavier corporate maturities, you know, more exhaustive consumers and maybe a Fed that's that's already used to most of its policy em. [gasps] >> So, I think one of the greatest risks here is what we call the recognition of recession. M and right now we've got twothirds of Americans who according to the University of Michigan who foresee the unemployment rate continuing to rise. That is a deeply recessionary print that we're talking about. But once there is a a widespread acceptance that we are in recession, people tend to look at their portfolios differently. And I'm talking about everybody presumably the institutional investors already gotten out. Um but if there is a recognition of recession, especially with clear dissension inside the Fed and the Fed making monetary policy for politics sake instead of for the public good, then I think that that caused some disruption. Certainly. >> That's an interesting one. And I I you know I I think a lot of people don't realize that in 2026 is the year that corporate refinancings that wall starts. I mean hundreds of billions of dollars roll over at double or triple the old interest costs. If we're seeing these cracks now what happens when those loans repric next year. I mean where are we in this thing? >> Well again that's where the Fed comes in and whether they're going to be prompted maybe after May. Is May too late? I don't know who the next chair may or may not be to uh you know at some point the Fed's going to be pressured to take interest rates down to the zero bound and restart quantitative easing. The problem is I don't know anybody right now who the Senate would confirm who would simply do exactly what the administration wants them to do. most of the main contenders right now to to be the successor to Jay Powell, they don't buy into the philosophy that quantitative easing worked. >> Mhm. Um you brought up speaking of quantitative easing, I mean I don't mean to go to Bitcoin, but before going on, you know, we were talking a little bit about seeing this Bitcoin price action. I do want to get your take on it because it's kind of lost correlation >> pulled up right now. It's I mean I'm going to walk around with Bitcoin pulled on my screen because >> well anything with a 99% correlation to the NASDAQ 100 you should watch. >> Yeah. >> It is it is the bellweather. It is the key determinant and has been the key determinant of what is happening in the NASDAQ and the NASDAQ dict the NASDAQ is a reflection of the AI narrative. So they walk hand in hand. So there's no way right now to not follow the highest beta asset class on the planet, which is Bitcoin. >> And are you watching the margin levels here? I mean I mean the the correlations tend to appear at the worst moments, not because Bitcoin is weak, but because it's it's the only 247 asset people can sell when margins get hit. >> Yeah. Yes. Am I watching margin right now? Yes. The reason I'm looking at my phone is because I just posted the chart. >> Yeah. I mean, literally of of margin debt going to the moon. So, I just posted that in my investor in my in my Bloomberg chat room because it's something you have to follow. And it's not just margin debt, Jeremy. The last time margin debt was an issue when they made that movie margin call, there were no triple levered ETFs. >> Yeah, no kidding. >> But there are now. And that's a separate form of leverage that is even more levered because it's three or four or five times one stock's move. It's there is a five times Nvidia exchange traded fund out there. >> And when they go in the opposite direction that means they go in the opposite direction to a factor of five. >> Yeah. Yeah. You I worry about the young people. I mean you know because there's it's that kind of part Wall Street doesn't talk about. I mean they they don't have the buffers. they don't have the credit lines and they're usually the first to lose hours and and and the last to kind of get into this thing here. Any advice for people that are sitting there with margin calls and it's the first time in their life that they've even they didn't even know what a put was. >> So, I would Google the word dividend. >> Yeah, [laughter] >> there are there are many ways. >> Yeah, >> there are many ways to invest in this world and there are always winners and always losers no matter what direction the market goes. >> Yeah. Yeah. >> So, that's something people should appreciate. I'm certainly not suggesting you go out and short the market. Um, that is only something for the most professional investors out there to do, but there are ways to protect yourself. >> Yeah, well said. Uh, and in looking at this, I just curious. I mean, we've been talking about the AI trade. You look at some of the other analysts, they're they're really picking up on this energy trade. I mean, we do have some talks about Ukraine and Russia, and I'm watching oil right now, but is there is there any safe havens outside of the gold market right now? I mean, anything that we're kind of looking at in the macro? >> Well, that's a very good question because right now oil prices are reflecting slowing global demand and an overabundance of supply. So, right now oil is is is very much behaving as the asset class should based on supply and demand. So it's it's until global demand rebounds, you know, we saw the producer price index in in Germany come out overnight and and they fell further into deflation on the producer side. We're not seeing any particular country right now leading the global economy into recovery the way we saw China throw a trillion dollars into the economy in 2009. Mhm. Uh, quickly on the big beautiful bill, some of that stimulus hitting, any of that can offset some of what we're talking about? >> Well, that depends on what companies are willing to invest unless they're protecting their cash because a lot of the benefit is going to come from an expedited depreciation schedule, but that would certainly imply that you make the investment in order to depreciate it at an accelerated pace. Mhm. Uh when you look at everything across that we've been talking about, I mean Fed halting QT early, these repo strains, um Oracle CDS blowing out and and you know, we're not talking about the bigger company Black Rockck, but some of that private equity and I mean, what's the single most important risk investors must understand heading into 2026? I I can't believe I'm saying it, but we're getting close. Uh we are getting close and we should not we should not forget what happened uh at the December 2018 FOMC meeting when Powell decided to play dirty Harry Powell and stood pat and junk bonds stopped being sold. So if you want to follow one thing which you can follow just by googling it, follow junk bond issuance because when junk bonds were not sold for 41 straight days, it culminated in the bloodbath in the stock market in December 2024, Christmas Eve, December 2024, and and Powell pivoting on January the 5th of 2019 and saying, "You know what? We will consider QE after all. But the trigger was illi liquidity in the bond market. So follow that if you are trying to track the odds of a big accident happening in the market. This week alone I believe there have been one or two high yield issuances. So we're not wherever there is we're not there yet. >> Yeah. Yeah. Interesting. as as you say because it's um you know I mean junk bonds is is the is this credit market telling us the recession has already started? I guess that's the question and it brings it up to the point of saying if if they admit it or not. >> Whether they admit it or not that's true because right now we have bankruptcies running at a 15-year high according to S&P. >> Yeah. >> So something is clearly breaking and that's just that's just in the public purview. That's not what's happening in the private credit space. And one one of the more interesting headlines that I saw just a few days ago was that two huge private equity shops were holding the same loan like with a 20 cent differential in terms of what that bond that's 100 cents at par was worth. Those are the things that worry you. What is the actual value of this private credit? >> Yeah, well said. And uh I mean I looked at the tape from last month and you you called this creeping in just as I said Danielle D. Martino Booth, CEO of Qi Research, joining us now. Thank you for this. Of course, encourage the audience to go over to uh your website and subscribe to that newsletter. Some great insights in there. >> Yes, we publish the Daily Feather every day. Martino.substack.com. Come on over. >> Thanks, Danielle. Appreciate your time. Have a great one. Happy Thanksgiving. >> Happy Thanksgiving. Thank you. Well, you're in Canada, but yeah, >> just the same. >> Just the same. >> Have a have a happy Thursday. >> All right. You're right. You're right. We've already had it over here and uh it was delicious. Still a little bit full, but Danielle, thank you again for joining us and I want to thank you for watching. Of course, we're going to stay on it right here at Kitco News. I'm Jeremy Sapp. For all of us, be sure to hit the subscribe button for a take you won't see anywhere else. We'll see you next time. >> [music] >> Heat. Heat.
Unemployment 'Exhaustion': 40% Have 'Literally Nothing' Left | DiMartino Booth
Summary
Transcript
Welcome back. I'm Jeremy Sappern. [music] The morning started as a victory lap, but it's ending in confusion. Now, early in the morning, we saw Nvidia crush earnings, sending the Dow up more than 600 points and [music] fueling that soft landing narrative. The S&P as well, hitting a nice little soft spot. But as the day went on, the rally faded and volatility has returned. And a lot of the question is because while equity traders were chasing the AI hype, the bond market was reading the fine print on a major policy shift, too. I mean, we now have confirmation that the Federal Reserve is halting quantitive tightening effective December 1st, months ahead of schedule. And then the cracks are spreading fast. We have reports that Black Rockck Private Credit CLLO failed a solveny test, forcing the manager to wave fees just to keep the deal compliant. And we have trading in Oracle credit default swaps, essentially insurance against a tech crash, uh, exploding in volume and getting more pricey. And despite a headline, jobs beat today. Continuing jobless claims are still hovering near 2 million. That's the highest level since 2021. And when our next guest was here last month, she warned that the rod in private credit would bleed into the public system. And with Black Rockck failure in the Oracle betting, uh the Fed surrender to QT, it looks like that day has arrived. Joining me now is the CEO of Qi Research, Danielle D. Martino Booth. Thanks for making the time. >> Thanks for having me on this very hectic Thursday. >> Yeah, just a few things to talk about and I obviously we're going to time this differently. I mean, we've seen a sharp reversal today in the markets. Who knows what'll happen as we go to air here, but uh let's start with the Fed because I mean the minutes confirm QT ends on December 1st and liquidity drain stops. And for a equity investor, isn't that the all clear signal? Does that effectively, you know, put a floor under the market and give the green light rally into 2026? >> Well, what the Fed has decided to do is to stop draining liquidity from the system. um there will be some support at the margin for the Treasury market uh to the extent that mortgage rates continue to fall and refinancing continues to occur. Then you will see an increase in the mortgage prepayment rate, the rate at which people are paying their mortgage off earlier than what was expected. That will allow the Fed to uh get from its current about $20 billion a month run rate of mortgage back security rolloff up to that $ 35 billion a month ceiling. And as they continue rolling those mortgage back securities off the Fed will replace them with treasuries. Um so in that sense there will be again but just at the margin some report uh some support for the Treasury markets. >> Well you know we we know that that GC re repo rates have been trading above the Fed's target. But uh if we look at who's borrowing I mean the reports indicate that hedge funds have ballooned their treasury basis trades to 2.4 trillion. I mean these trades rely on cheap overnight cash. So, I mean, be direct. If the if if Fed stops QT to save the repo market, aren't they explicitly bailing out these hedge fund basis trades here? I mean, is the Fed's policy now effectively held hostage by highly leveraged speculators who threaten to blow up if funding costs rise, even one basis point? >> Well, I mean, you actually bring um bring in a very important distinction because it's only banks that can lend, excuse me, it's only banks that can borrow directly from the Fed, from the Fed's standing repo facility. And that was supposed to act as a backs stop as opposed to 2019 when the Fed was forced to launch not QE. Uh but as you said, hedge funds are deep in the repo market. That has has been flagged. It was flagged actually in mid-occtober by the New York Fed. And then the New York Fed saw fit last week to republish that paper along with news that the New York Fed had had an impromptu, we wouldn't want to call it an emergency meeting with the broker dealers to discuss why there is no greater uptake of this standing repo facility even by banks. So um you know we're coming into week into month end. The end of October was ugly. We can only imagine what the end of December is going to be because there are more funding dislocations at the end of a quarter than there are at the end of any given month. >> Yeah, that's an interesting one. Uh, you know, I mean, we could bring up this this shift too. I mean, if leverage goes to die, I mean, you talk about Black Rockck while the S&P hit that new high this morning. We did see that credit CLLLO failing a solveny test, but I want to get the technical on kind of on the fix. I mean, they didn't sell the bad loans. They waved management fees to kind of cure the breach. Is is this fee waver the modern version of extend and pretend? And and more importantly, if if the manager has to subsidize the fund to keep it solvent, doesn't that mean that the true yield on these private credit assets is actually negative right now? >> Well, it certainly would be as it relates to that particular portfolio company. Um I I don't think we're going to be worried anytime soon about Black Rockck solveny. It is too big to fail. Um but more importantly it sends up a signal because a lot a lot a greater number of smaller operators in this space who don't have the same um experience that Black Rockck has had in this space much less liquidity and ability to to to take care of itself from within. That's what we worry about. We worry about um a particular company that was in in in in the financing um that that was that was helping finance First Brands for example, but it was just a company extending credit to First Brands that we're now hearing is actually going to be declaring chapter chapter 11 itself. So Jeremy, at times like these, what we worry about the most is contagion. >> Yeah. Yeah. Yeah. I mean, how many sub10 billion private credit firms have the capital to survive multiple OC test failures? [laughter] >> That's exactly my point. >> So, um, and and and it's not, again, this is not idiosyncratic. We are seeing, as Jamie Diamond predicted, we are seeing these cockroaches continue to crawl out from underneath the woodwork. >> Uh, you've noted that this distress isn't kind of isolated. You posted a chart today on X uh that I found interesting showing delinquencies on 2021 and 222 vintage consumer debt going vertical. I mean, if the if the consumer who pays the bills backing these CLLOs is is defaulting at 2008 levels, how much longer can managers wave those fees or or do these interesting things before the money runs out? >> So, this is this is where the intersection gets to be very interesting, right? It's when the underlying collateral itself starts to become so compromised. By the way, with an unemployment rate at 4.4%. >> And that we're already seeing this level of distress. God help us when the unemployment rate starts to rise much more rapidly than it is with what we know today from September data in terms of collateral being compromised. And again, the idea of a ripple effect of contagion that starts out with, hey, we made some really bad car loans in 2021 and 2022, >> they're coming back not just to haunt us in the in the sense of consumer distress and an inability to buy things. >> They're coming back to haunt the financial system. >> Yeah. Yeah. And that distress, I mean, it brings us to the labor market. The headline number was a beat, 119,000 jobs. But today's continuing claims data, nearly 2 million, shows that labor market, where people who lose their jobs are struggling to find new ones. Help us reconcile this. I mean, is is this is the strong $119,000 number a stale September mirage, or do we trust the real-time claims data that shows the freezes here? >> I think we definitely uh trust more in the real time continuing claims data because it does reflect something that is occurring in the month of November. Um, and more importantly, there is a 40% exhaustion rate attached to that. And exhaustion rate means I have collected all of the claims as a continuing claimant that I'm allowed to do over the whether it's 24 months for for most states. I think it's 12 or 14 months in North Carolina, Tennessee, and Florida. But that means that people are actually 40% of individuals who had been continuing claimants have now gone through the period at which they can at which they can collect unemployment benefits. That leaves them literally with nothing in in in addition to this nearly 2 million cycle high that we're seeing in continuing claims. And you know, if you want to go back to that 119,000 headline, uh, September payroll number, why don't we go back instead to June because that was originally reported as 160,000. And now we know that that was actually a negative print for that month. So I I think what Fed policy makers are talking about more today than they were yesterday is the fact that the unemployment rate has risen and that is what Chair Powell said that he would be focusing on going forward and it is now 4.44%. 44%. So we're 610 of a percentage point away from the Fed's year end 4.5% target >> as of September. >> Right. Right. And you know there's that public versus private kind of recession debate. I mean wage growth was only 2% for the Fed. That's the holy grail. Hiring without inflation. But if we get you know if we're getting jobs without wage price spiral isn't that the literal definition of kind of that soft landing Powell promise narrative? Well, it it would be it certainly would be if if we didn't have so many people who were unemployed and not able to get jobs. If we didn't have permanent job losers just crossing over the 2 million threshold where it was in December of 2007, the first month of the great recession. There's an overabundance, Jeremy, of data that is in hand. We know that more than 100,000 federal employees on September the 30th no longer were collecting the severance package that they received in order for taking the Doge buyout. >> So that might be why the government doesn't want to report at all the October payrolls. Maybe they just as they've said, we're just going to roll it into November. Um very convenient. But my point is, the Fed knows that these government employees will have already added to that unemployment rate and gone right past its year-end target. And that's why you've seen after yesterday a huge decline in probability for the Fed to cut rates in December. You've seen that rebound to more than 40% today. >> Yeah. And obviously we got those Fed minutes yesterday. Uh just quickly, anything interesting? I mean, we saw some descent. We saw some people um you know openly wanting different rate cuts. We saw QT anything that really stood out for you there? >> No. Uh it was as was expected. There were several members who didn't want to cut rates at all. There were several who were on board with that one last rate cut, but they sorry many on board with that October rate cut, but they didn't they didn't see any reason justification for a subsequent rate cut. And then there were several who felt that it would be appropriate to continue cutting rates in December. So it was on the one hand, on the other hand, and on the third hand. Nothing was unexpected out of those minutes. But again, all of that was negated yesterday at least with news that the that the government would not be releasing November non-farm payrolls until November the 16th, 6 days after the Fed meets. >> Uh I want to ask you about this. I mean, obviously you and I, we would turn on this morning. morning, we look at the markets and I mean, you know, they they started really strong. Now we're sitting here watching this a little bit of a reversal. But if we go to that rich trade, I mean, Nvidia blew out earnings kind of again. Maybe not blowout, that's a strong word, but Michael Bur is raising a massive red flag. He's flagging the useful life of these AI chips, companies that are appreciating them uh five or six years to make their earnings look good, but we know that an H100 chip is obsolete in two years. Now, if we're are we sitting on a massive right down cliff, right? I mean, in 2027, when these chips are doorsteps, but still valued at billions on the balance sheet, does the entire tech sector have to take a massive earnings hit that crashes the S&P? >> Well, that is the job of the markets. It is to look ahead and anticipate what the value of any given firm is on any given day. I I think Michael Bur is um has been as skeptical of the AI narrative, the AI bubble, because we've had a dramatic shift in the last 12 months away from we're going to be able to handle these trillions of dollars of investment to continue growing AI with cash flow and earnings to oh, we got to take debt out instead to finance the growth. And that has been the main shift over the last 12 months. It's and and it is a lot of debt that these companies are taking on. >> Yeah. Yeah. It's interesting to kind of just watch them reinvent or reinvest rather into each other, you know, that that meme. Um but I mean, you know, the c the cash flow is real. I mean, Nvidia and Microsoft are generating tens of billions in actual cash. Um does depreciating accounting even matter when they have enough cash in the bank to buy the next generations of chips? I mean, you know, is is is what are your thoughts here? Could this just be people are saying I mean, I always get in trouble for being a bull, but I mean, we're getting close, but it seems like it's just keeping going here. >> Well, you know, Jeremy, there was a a there there was a tweet that went viral overnight that uh demonstrated that a lot of the cash flow that Nvidia had generated came because they were actually factoring their accounts receivables. >> Yeah. Um there are different ways to generate cash flow. One of them would be to collect the cash earlier than it's actually coming into the company by factoring it and taking a haircut on it. So um again in the aftermath ofricolor in the aftermath of first brands investors are becoming much more skeptical about how earnings are made and how cash flow is generated. >> Yeah. Yeah. And the AI story is incredible. Yeah, I mean if we look at it, we're seeing $1.5 trillion in projected high-grade issuance just to finance this AI structure infrastructure. I mean, are we creating an AI boom that only exists because Wall Street is leveraging it up? I mean, you know, >> well, I I I think that we don't even have to contemplate whether that's what's going on here because on the same day that that Meta missed its earnings and the stock closed down 11% on the day, they were able to sell 25 billion of in bonds in the in the bond market and they had an order book of 120 billion of demand. And that starts to get you to the discussion of are these protected companies? Are they too big to fail? Is that what investors are perceiving or are they possibly able to fail if you look at what it costs to ensure against the failure of Oracle bonds? It's an open question right now. >> Yeah. Yeah. What are your thoughts on that? I mean, if you look at that Oracle CDS explosion, I mean, traders are clearly using Oracle as a hedge for this AI crack. I mean, does that tell you that the market believes that this boom is kind of debt dependent and fragile, not self- financing like the real tech revolutions of the past? Look, Jeremy, we haven't talked about credit default swaps to hedge against the possibility that a company's going to go poof since 2008. So, you know, in that we're even having these discussions is indicative of the need for investors to be either defensively positioned or at least hedged in what they own, especially when you've got margin debt that is even as as a percentage of GDP is at levels that is are so high that on any given day if there's enough disruption in the market that you could be having a whole separate conversation about margin calls. Yeah. Yeah. Yeah. Yeah. It's a whole different conversation. But I mean, you know, if if the market's hinging those AI through those CDS rather than shorting equities, does that mean that this boom is already migrated from equity speculation into this credit risk that we're talking about? >> That certainly would seem to be why we're seeing the cost to ensure against uh against the debt defaulting go up as much as it is. >> That's interesting. I want to talk to you about the safe haven bid because Ray Dalio was just today uh on CNBC, I think it was on Squawkbox, and he said um that we're definitely in a bubble, but the answer isn't to sell, it's to diversify into assets like gold. Uh if the Fed is effectively committing, you know, to a huge balance sheet with with many call a repression, does does that make gold the only asset still mathematically works long term? Well, it it theoretically should after we get past the margin calls. I mean, it is the ultimate hedge when when there's if there's even a whiff of a financial crisis. Gold has always been the the safest of safe harbors. Unfortunately, there appear to still be some tourists uh who hold gold right now who won't necessarily have the stomach for potential volatility in the event that like 2020 there is a margin call and people sell what they can liquidate the most easily at a profit. >> Yeah. Interesting. I mean, we got to go down that just a little bit here because for the audience, they kind of know what a margin call is, but I mean, if they're losing their house and they got to sell gold, are we close here? Are you looking at indications of this happening? I mean, we're seeing the sell off right now in Bitcoin, I guess. [laughter] >> Well, um, Jeremy, we're too close to the end of the month for me to answer that question because >> the the simple mechanistic the way passive investing works is, oh boy, the stock market was down in November. in order to rebalance my target date 401k fund if I'm 30 and I'm supposed to have 70% of my portfolio therefore invested in the stock market is to sell bonds and buy equities. And that's exactly what we saw by the way uh the day that the Fed came roaring to the markets rescue in March of of of 2020. It was the largest rebalancing day in the history of the market. So, we have we don't know whether or not passive investing because of its structure and because it buys prices agnostically if we're going to have a huge rush of money into the market at the end of November or at the end of of December when there's quarter end balancing. >> Yeah, that's interesting. I mean, the irony is is that if if there's if if we're talking about the for sale of gold, I mean, it doesn't reflect the fundamentals at all. It's just the kind of cleanest collateral to raise cash fast, right? Right. I mean, it's it's it's more liquid than the Treasury market, >> right? And that was why when we did see margin calls in 2020, the hit that gold took was short was shortlived. >> Right. Right. Yeah. Yeah. They tend to snap back a little bit. That's interesting. I never actually thought about that. I mean, we're seeing a little bit of this. Uh let me ask you, I mean, we've seen the movie before, right? Margin calls hit leverage tech. Traders kind of dump whatever is most liquid. Um do you think that that long-term direction next year will still be there? I mean, once some of this clears, I mean, I I was talking to somebody yesterday. They said 2026 is going to be the year, but I mean, you know, they said 2025, too. What are your thoughts? >> Well, 2025 certainly was the year for gold. >> Um, [clears throat] but no, again, Jeremy, every single time passive has been tested, passive has won. >> Mhm. So unless you're talking about people changing the allocations of their 401ks, which is not the easiest thing to do, or reducing their contributions to 401ks, or if you have enough people get fired who are contributing to their 401ks to start to turn that in addition to retirees, right? 11,500 Americans retire every single day. They're no no longer contributing to their 401ks. you. It takes a lot to tamper with the structure of the market that buys blindly. Dollar in simply buys the largest capitalization stock. It's why Nvidia got to be a $5 trillion market cap stock because you buy the biggest and it's just a factor of the of the of the structure. >> Yeah, that's interesting. Okay, I got to ask you. I mean, if we're seeing this much strain with QT still technically running and the AI boom still in full mania mode, what does the landscape look like once we roll into 2026 with heavier corporate maturities, you know, more exhaustive consumers and maybe a Fed that's that's already used to most of its policy em. [gasps] >> So, I think one of the greatest risks here is what we call the recognition of recession. M and right now we've got twothirds of Americans who according to the University of Michigan who foresee the unemployment rate continuing to rise. That is a deeply recessionary print that we're talking about. But once there is a a widespread acceptance that we are in recession, people tend to look at their portfolios differently. And I'm talking about everybody presumably the institutional investors already gotten out. Um but if there is a recognition of recession, especially with clear dissension inside the Fed and the Fed making monetary policy for politics sake instead of for the public good, then I think that that caused some disruption. Certainly. >> That's an interesting one. And I I you know I I think a lot of people don't realize that in 2026 is the year that corporate refinancings that wall starts. I mean hundreds of billions of dollars roll over at double or triple the old interest costs. If we're seeing these cracks now what happens when those loans repric next year. I mean where are we in this thing? >> Well again that's where the Fed comes in and whether they're going to be prompted maybe after May. Is May too late? I don't know who the next chair may or may not be to uh you know at some point the Fed's going to be pressured to take interest rates down to the zero bound and restart quantitative easing. The problem is I don't know anybody right now who the Senate would confirm who would simply do exactly what the administration wants them to do. most of the main contenders right now to to be the successor to Jay Powell, they don't buy into the philosophy that quantitative easing worked. >> Mhm. Um you brought up speaking of quantitative easing, I mean I don't mean to go to Bitcoin, but before going on, you know, we were talking a little bit about seeing this Bitcoin price action. I do want to get your take on it because it's kind of lost correlation >> pulled up right now. It's I mean I'm going to walk around with Bitcoin pulled on my screen because >> well anything with a 99% correlation to the NASDAQ 100 you should watch. >> Yeah. >> It is it is the bellweather. It is the key determinant and has been the key determinant of what is happening in the NASDAQ and the NASDAQ dict the NASDAQ is a reflection of the AI narrative. So they walk hand in hand. So there's no way right now to not follow the highest beta asset class on the planet, which is Bitcoin. >> And are you watching the margin levels here? I mean I mean the the correlations tend to appear at the worst moments, not because Bitcoin is weak, but because it's it's the only 247 asset people can sell when margins get hit. >> Yeah. Yes. Am I watching margin right now? Yes. The reason I'm looking at my phone is because I just posted the chart. >> Yeah. I mean, literally of of margin debt going to the moon. So, I just posted that in my investor in my in my Bloomberg chat room because it's something you have to follow. And it's not just margin debt, Jeremy. The last time margin debt was an issue when they made that movie margin call, there were no triple levered ETFs. >> Yeah, no kidding. >> But there are now. And that's a separate form of leverage that is even more levered because it's three or four or five times one stock's move. It's there is a five times Nvidia exchange traded fund out there. >> And when they go in the opposite direction that means they go in the opposite direction to a factor of five. >> Yeah. Yeah. You I worry about the young people. I mean you know because there's it's that kind of part Wall Street doesn't talk about. I mean they they don't have the buffers. they don't have the credit lines and they're usually the first to lose hours and and and the last to kind of get into this thing here. Any advice for people that are sitting there with margin calls and it's the first time in their life that they've even they didn't even know what a put was. >> So, I would Google the word dividend. >> Yeah, [laughter] >> there are there are many ways. >> Yeah, >> there are many ways to invest in this world and there are always winners and always losers no matter what direction the market goes. >> Yeah. Yeah. >> So, that's something people should appreciate. I'm certainly not suggesting you go out and short the market. Um, that is only something for the most professional investors out there to do, but there are ways to protect yourself. >> Yeah, well said. Uh, and in looking at this, I just curious. I mean, we've been talking about the AI trade. You look at some of the other analysts, they're they're really picking up on this energy trade. I mean, we do have some talks about Ukraine and Russia, and I'm watching oil right now, but is there is there any safe havens outside of the gold market right now? I mean, anything that we're kind of looking at in the macro? >> Well, that's a very good question because right now oil prices are reflecting slowing global demand and an overabundance of supply. So, right now oil is is is very much behaving as the asset class should based on supply and demand. So it's it's until global demand rebounds, you know, we saw the producer price index in in Germany come out overnight and and they fell further into deflation on the producer side. We're not seeing any particular country right now leading the global economy into recovery the way we saw China throw a trillion dollars into the economy in 2009. Mhm. Uh, quickly on the big beautiful bill, some of that stimulus hitting, any of that can offset some of what we're talking about? >> Well, that depends on what companies are willing to invest unless they're protecting their cash because a lot of the benefit is going to come from an expedited depreciation schedule, but that would certainly imply that you make the investment in order to depreciate it at an accelerated pace. Mhm. Uh when you look at everything across that we've been talking about, I mean Fed halting QT early, these repo strains, um Oracle CDS blowing out and and you know, we're not talking about the bigger company Black Rockck, but some of that private equity and I mean, what's the single most important risk investors must understand heading into 2026? I I can't believe I'm saying it, but we're getting close. Uh we are getting close and we should not we should not forget what happened uh at the December 2018 FOMC meeting when Powell decided to play dirty Harry Powell and stood pat and junk bonds stopped being sold. So if you want to follow one thing which you can follow just by googling it, follow junk bond issuance because when junk bonds were not sold for 41 straight days, it culminated in the bloodbath in the stock market in December 2024, Christmas Eve, December 2024, and and Powell pivoting on January the 5th of 2019 and saying, "You know what? We will consider QE after all. But the trigger was illi liquidity in the bond market. So follow that if you are trying to track the odds of a big accident happening in the market. This week alone I believe there have been one or two high yield issuances. So we're not wherever there is we're not there yet. >> Yeah. Yeah. Interesting. as as you say because it's um you know I mean junk bonds is is the is this credit market telling us the recession has already started? I guess that's the question and it brings it up to the point of saying if if they admit it or not. >> Whether they admit it or not that's true because right now we have bankruptcies running at a 15-year high according to S&P. >> Yeah. >> So something is clearly breaking and that's just that's just in the public purview. That's not what's happening in the private credit space. And one one of the more interesting headlines that I saw just a few days ago was that two huge private equity shops were holding the same loan like with a 20 cent differential in terms of what that bond that's 100 cents at par was worth. Those are the things that worry you. What is the actual value of this private credit? >> Yeah, well said. And uh I mean I looked at the tape from last month and you you called this creeping in just as I said Danielle D. Martino Booth, CEO of Qi Research, joining us now. Thank you for this. Of course, encourage the audience to go over to uh your website and subscribe to that newsletter. Some great insights in there. >> Yes, we publish the Daily Feather every day. Martino.substack.com. Come on over. >> Thanks, Danielle. Appreciate your time. Have a great one. Happy Thanksgiving. >> Happy Thanksgiving. Thank you. Well, you're in Canada, but yeah, >> just the same. >> Just the same. >> Have a have a happy Thursday. >> All right. You're right. You're right. We've already had it over here and uh it was delicious. Still a little bit full, but Danielle, thank you again for joining us and I want to thank you for watching. Of course, we're going to stay on it right here at Kitco News. I'm Jeremy Sapp. For all of us, be sure to hit the subscribe button for a take you won't see anywhere else. We'll see you next time. >> [music] >> Heat. Heat.