WIN 36 - Danielle DiMartino-Booth - The Dangers of the Confidence Bubble in America

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It's my pleasure to welcome back a returning guest and that is Danielle DiMartino Booth. We are very excited to have her as one of our keynote speakers at our upcoming Meet the Masters of Income Property conference. She is the author of Fed Up. An Insider's Take on why the Federal Reserve is Bad for America. As you know, I couldn't agree more and it's a pleasure to have her back. Danielle, welcome back. How are you?

I'm great, thank you. So happy to be here.

Yeah. Good to have you back. So there is a lot going on in the world. Of course, you watch the bond market very closely and the bond market impacts so much of the economy, especially the lending market and the financing market. You will be speaking at our upcoming event. We've got tax reform that is the new law of the land. Just a few days ago, the first time in really three decades we've had major tax reform like that. Maybe I'll start with that. You know, and it may be so soon that you possibly haven't assimilated all your thoughts on this. I don't know that anybody has. What do you think of tax reform and what we have, good, bad or indifferent?

For me, it was a little bit too convoluted. I'm of the opinion that any and all tax reform in this country should have the noble aim of simplification. And in speaking with CPAs, they haven't been this happy in years.

Because they got more work.

Exactly. The tax code just got a whole lot more complicated. I would have liked to have seen even a hint of honesty from our politicians. And that would have required getting rid of the carried interest provision. I didn't see that. And so much of this tax law depends on unicorns existing that I just don't know how much faith we can put in it. It's not that I don't advocate for a lower corporate tax rate, of course I do. Who wouldn't? But it simply is not a durable enough plan. It relies on math. I just don't see as being feasible. The CBO's assumption is that we don't go into recession for the next 10 years, starting now.

Right. Well, yeah, right.

I just, I don't know how realistic that is at this juncture of the third longest economic recovery in U.S. history.

Well, so let me ask you about that. That's a great point that you make. You know, you're really referring to the business cycle. And I kind of wonder, Danielle, if the business cycle, when we had the worst economy in seven decades since the Great Depression, then we had the Great Recession, you know, would it be fair to start at the lowest point or would you sort of put that at the, say the economy has been booming since maybe 2012, or the recovery has been going on since 2012 versus saying it's been going on since 2009, 10, when we're really at a low point. Just curious about your timeline on that.

It really depends on who you are, Jason. If you're an investment banker, life has been good since 2009, right? It's been really good because of the deal flow, because of unnaturally low interest rates that have kept the bond market on a record run for seven consecutive years of issuance. If you're the companies that have been on the receiving end of all of this cheap money and have been able to buy back their shares, even though that trend is critically slowing, too few people have paid attention to the fact that share buybacks have slowed appreciably. But it really depends on who you are. If you're Joe Q. Who works in a restaurant and you've had your hours cut or you've had to take on a second job, or if you're a millennial who's still in your parents basement, you know, we have not seen movement in the mobility figures and it stumps all of the economists, Jason. It depends on who you are, whether or not. Right. It started in 09 or 12 or has yet to start. Right.

Yeah, fair enough, fair enough. It's never evenly distributed as much as the redistributionists like might like to make it that way. It never, it will never happen. So it does depend who you are. No question. And, and you refer to the millennials living in the parents basement type concept. And you know, that represents shadow demand for housing. It is amazing how slowly the millennial impact with 80 million strong are coming into the marketplace. But they've largely an anemic job market. I mean, it's better certainly than it was, but overall, in comparison, wage growth has been, you know, very stagnant. For decades. So, yeah, there's, there's a lot to think about, no question. But tell us about the impact of the share buybacks. I mean, companies have benefited and wealthy people have benefited from cheap money for, like you say, unnaturally low interest rates for many, many, many years are artificially low. And now the buybacks are slowing. What, what impact does that have? And why aren't people paying enough attention to it?

Well, people aren't paying enough attention to it because the market has just come through a record run rate of quantitative easing. People don't appreciate the fact that 2017, this is a seminal report put out by bank of America, Merrill Lynch, Michael Hartnett, who actually is the first words in my book, I quote him. But 2017 has been a record run rate for quantitative easing globally. So the markets have plowed ahead based on that and people do not appreciate. The other thing that too few people are talking about in our world is that by the time we roll around to this time in 2019.

This quantitative easing should be cut in half. If you tally up what Mario Draghi in the European Central bank has committed to, plus what the Federal Reserve has committed to in terms of quantitative easing being reduced, that's a trillion dollars. You're cutting $2 trillion from 2017 in half next year. And you can't tell me that that is not going to negatively impact all of these risky asset markets, that despite the fact that share buybacks have decreased, have continued to run on steroids.

Yeah, very interesting. So how much of that QE cutback? Of course, it's a global economy. We all know that. But how much of that is us? You know, how extreme has 2017 been in terms of the run rate in US? Yeah, right. So it's half in the US as well as the world, is what you're saying.

If you're talking about the amount of balance sheet reduction to which the Fed has pre committed and verbally said, we are not data dependent. The balance sheet reduction does not depend on the data. Future interest rate increases depend on data. But they have publicly stated that reducing the size of the balance sheet by this time next year at a $450 billion annual run rate is going to be like watching paint dry. I beg to differ with such naivete. But that's what they have committed to. And then Mario Draghi's been to about that same amount in terms of tapering.

So Draghi's going to taper it off. The Fed is going to taper it off. Tell us how that trickles down into the Marketplace. What that means to, you know, your typical American.

I don't know. That's my eye opening answer. We don't know what the unwind of the biggest experiment in monetary policy history is going to look like. We didn't know what the experiment was going to look like coming in and we sure as heck don't know what the exit's going to be. But the odds are increasing that policymakers will run out of the ability to control interest rates that they've really had for years and years now. That is the biggest risk. It is why you see such confusion in the bond market. It is why for all of the predictions that we're going to see some massive steepening following the tax cuts, but we haven't. The yield curve, the differential between the 2 year and the 10 year yield refuses to push past 60 for any sustainable period of time. 60 basis points.

And what does that mean when the yield curve doesn't match like that? What does it mean?

It means that the bond market is dictating that any rise in interest rates that the Fed seems hell bent on continuing with is going to slow an economy that is dependent upon leverage. Look, We've gone from $150 trillion of global credit in 2007 to over $220 trillion in global credit today is a magnet.

The economy is leveraging built on credit. There's no question about it. The whole thing is built on credit.

Never been built on this much credit.

No question.

Right again. That's why I've got so many I don't knows.

Yeah, right.

Because it's impossible to say what could happen to the corporate bond market because it's never been this big.

Very interesting. So it would be interesting to see that chart and the increase in credit supply, money supply, in comparison to the increase in, well, the modest increase in global GDP and as well as national end population. It's just crazy. I mean the house of. Well Jason, what you're talking about is.

Getting less bang for your buck, right? That's what you're talking about, less bang for your buck.

What does that mean? You mean inflation?

The chart that you've just described, it shows that we need more incremental debt to get economic growth right. That every time the Federal Reserve has gone on one of these binges, the inability to control themselves, the longer the interest rates have stayed low, the nastier, the flip side is, the worse the hangover, if you will.

Agreed. It's just what I wonder is how long can the Fed, the US and the world at large defy gravity. They seem to be able to kick this can down the road just indefinitely. It makes no sense, but it makes me think that it's not really all about math and numbers. Thoughts?

Oh, it's not. It's a confidence. The shame of this is that the word bubble has become so meaningless to so many people, it's become almost a cliche. But to therefore make myself into a hypocrite, the biggest bubble out there is the confidence bubble. Confidence in central bankers ability to defy gravity is enormous. Enormous.

Yeah, right.

And so underappreciated.

Yeah, yeah, let's be careful being confident about that, folks. That's a good, good point, Danielle. I mean, as we talk about the. What I'll call the standard, really shouldn't even call it money supply, but currency supply, including credit, it would be remiss not to talk about what's going on in the cryptocurrency world with bitcoin and all the rest. Seems like tulip mania. Beyond that, I don't know, are you a fan or a detractor or just sort of neutral about it, about the cryptocurrency world?

Look, a long time ago in a land far, far away, with all due deference to. I don't personally believe we can go back onto a gold standard. So cryptocurrency in its original form was utterly appealing to libertarians who were of the opinion, rightly, that eventually all this money printing was going to destroy the value of the dollar. So the idea, the genesis of cryptocurrency is as solid as it can be. The idea of blockchain, the technology of blockchain is tremendous. But about 1,000 percentage points ago, any and all logic left the station. The train is taken off and the fact that it is not derailed is insane. Because you are correct. Something that was logical in its inception has now become beyond tulips in terms of the size of the bubble. And you can't tell me that anything is a store of value that can lose 25% in a week. You just can't.

I totally agree with you. And you know what I've said from the beginning, when I first learned about bitcoin, when it was about $80, okay. And I wish I bought a bunch of it. I'm quite jealous that I didn't. But I'm not much of a speculator. I like cash flow investments. So I didn't. But I said right at that time, I thought I would love nothing more than to be wrong about this. I would love to see this succeed. But the idea that you can just create the argument from the gold bugs and the crypto bugs, bitcoin bugs, is that, you know, the dollar does not have limited supply, the euro does not have limited supply and therefore doesn't have intrinsic value. And it's not, you know, backed by anything. We've all heard these arguments incessantly. Right. But the fact that you can just keep creating another ico, an initial coin offering, and a new cryptocurrency tomorrow is like almost the very definition of fiat currency. It's crazy. Yeah. 21 million bitcoins. So what? Just create a new one. It's every day.

That is a brilliant way of looking at it. And people ask me all the time. Unfortunately, they ask me all the time, which means that I'm getting really old because I can do comparisons. It's not good.

Yeah, but that's. That's also called wisdom. It's wisdom.

True. It just requires I get my gray roots covered more frequently. But that's fine. We all have to support the economy in our own.

There you go. Me, too.

But people ask me all the time, Jason, is this 87, is this 99? Is this 2007? What's your best parallel? And you know what my best parallel is? When you draw the parallel between initial coin offerings and initial public offerings. Well, then you're like, okay, we're in 1999. But then go back to what I talked about. The $70 trillion of leverage that's been tacked on. Well, wait, no, that's more like 2007. Or we're in both now.

Wow. What does that mean? Nobody knows what that means.

Doesn't that twist your brain into a pretzel?

Yeah, it sure does. It sure does. Well, I meant to ask you a few minutes ago when you were talking about the Fed and the bond market and so forth. If you think. I mean, look, it feels like the Tax Reform act is going to have the effect of repatriating some foreign money in back into the U.S. maybe a lot of it. Danielle. Now that seems like good news.

Would you agree it wasn't good news last time? For the economy. For the economy. If companies are truly at the point that they are ready to expand their workforces, I'd like for you to tell me why. So, not that I want to push a question back on you, but at this stage of the business cycle, if you're Joe Q. CEO, does it make sense to plan on expanding your business? I just. I don't know. Unless the business cycle has been permanently killed off by the Federal Reserve, and we can kind of keep this economy chugging along for two more years or three more years in. And that will make it the longest recovery in the history of the country. If that's where we are and you're the CEO or the CFO and you're in charge of making these decisions, fine, then expand your business. It's just justifying it, historically speaking, is very difficult.

Well, I guess you'd have to say, though, that money actually sleeps. And I would kind of throw out the old saying that money never sleeps. Right. Granted, even if the money's offshore, it still has an impact. It somehow trickles through the economy. Right. But if it's on a lot of.

There's been a lot of investing overseas.

Right.

There's been a lot of significant capital expenditures that have occurred overseas. And that was one of the impetuses, rightly so, for tax reform.

Right.

But last time around, companies bought back their shares with what they repatriated. Now, stock market wasn't nearly as overvalued as it is today. It made more sense to buy back your shares. But just because I'm enjoying twisting your brain.

Yeah, sure.

What if companies bring the cash back onshore and pay down some of the debt they've built up?

Okay, so they pay down debt, they buy back shares, maybe they buy back less of them. There's always a counterparty. If they pay back debt, a lender gets paid off, and then they look for a new loan to make. If they buy back stock, that person who sold the stock back or entity that sold the stock back has that money now, and that money goes somewhere, it goes to another investment. I mean, it doesn't evaporate, right?

No, it doesn't evaporate. But does it build anything that is lasting? I wish that economists would quit scratching their heads over the productivity conundrum. I'm like, there's no productivity conundrum. Ask a dermen where vocational training has never been stigmatized. They've continued to innovate, build, grow capital expenditures. They've continued down that path. There's no productivity conundrum here. Out of all the developed countries in the world, the United States is the only one that's had a shrinking labor force for two decades running. That's what happens when you don't invest. You're right. There are proceeds for every transaction. But at some point, those proceeds have to be put to a productive end. If you think about the housing boom, this was not a productive boom that we saw. We saw a lot of single Family homes being built, but there was no lasting productivity gain from that. And what have we done this cycle?

You talking about back in 2004 type housing boom or which? Housing boom? Yeah, right. Housing boom and bust.

Yes. And this cycle we have built a lot of restaurants.

Right.

Retailers.

Yeah, right.

You know, but it's not productive.

So what is productive then? I mean, this is the age old question that every economist throughout history has wrestled with and every person in government or central bank, you know how we both love central banks. What is the productive use then? Give us that. And I know we got to wrap it up, but can't let you go without that.

I have said, and you personally have agreed, that the greatest sin of central banking is that the education system in this country has been sacrificed. It's got to start there. It absolutely must start with educating our children such that we can be competitive on a global stage, because the Chinese and the Germans have no intention of slowing down in terms of their economies being dominant. We must educate our children. We must bring back vocational training and if we have to get the unions out of vocational training and apprenticeship programs to do it, so be it. Bye bye. Unions.

I couldn't agree more.

It's difficult, though. These are difficult things to do. But it requires politicians with spines, not politicians who build pork into a bill and then call it tax reform.

Right, right. You know, everything gets lost in lobbying. You know, Trump made the statement that, you know, you could do your taxes on a postcard and, you know, everything got lobbied around and, you know, that's just never going to happen in this country. It's just the way that the bill.

Made it more complicated, like I said. Yeah.

Oh, the CPAs are loving it.

That's who's happy.

Yeah, no question, no question. I wonder if they'll stay happy though, you know, like if that complexity last or it's just a transitional thing. That's a question.

Well, that's the thing. Part of this tax bill expires in a few years. Things don't go according to the map. I mean, it really is convoluted and confusing and I want it. I was at the front row, I was eating my popcorn, I was like, let's do this, let's do this tax reform. Bring it.

Very interesting. Well, we shall see how it all works out. Danielle, give out your website and then I just want you to share like a couple of maybe bullet points or talking points for your upcoming keynote address at Meet the Masters of Income Property at our conference.

Sure, be happy to. My website address and My Twitter handle are the same DeMartino booth. That's my entire last name. No spaces or martinobooth. Hop on my money Strong website. I gladly have you do a free trial membership for my weekly newsletter. It is never boring, it is always entertaining. And I will be talking about the Federal Reserve, what caused me to write fedup. And then I'll look ahead at the new leader at the first non PhD in economics in over 30 years since Paul Volcker ran the Federal Reserve. Will a pragmatist who does not have a purely economics academic background be able to turn the ship, be able to start a new era? Because it's time. It's overtime. It is time to move past what started on August 11th, 1987 when Alan Greenspan took office. It's time.

Greenspan was the ultimate Keynesian. He sort of betrayed his roots with Ayn Rand, I think. But you know, it's interesting. Danielle, I. I can't wait to see your talk. The last conference I was at where you spoke, you got a standing ovation. You were the only speaker that got a standing ovation. But I gotta ask you before you go, so you mentioned Volcker. Now Paul Volcker is known as the Federal Reserve chair that, you know, sort of made the country take the hard medicine, who broke the back of inflation. Are you a Volcker fan?

I've always been a Volcker fan.

Yeah. Okay. I thought so. Yeah. I just wanted.

I mean, the first book I ever read on Wall street was Liars Poker and I love the man the minute. And I was on Wall street and I can say what I want. I'm a Wall street veteran.

Right.

But he was no friend of Wall street and that should be job qualification number one.

I love it. I'm giving you a standing ovation now. I love it. I love, I love it. I love it. Good stuff, Danielle.

I'm taking a bow now.

Take a bow. You deserve it. Hey, we look forward to seeing you in a couple of weeks. It's just going to be great, folks. If you have not purchased your tickets for Meet the Masters of Income Property yet, go to Jason hartman.com masters Jason hartman.com masters and do that right away. And if you have and you didn't buy a VIP ticket, then you can upgrade and you can get a photo op with some of our speakers and stuff like that. So it'll be a lot of fun. Danielle, thank you so much.

Thank you. I appreciate your time today.

Thank you so much for listening to the Women Investing Network. Be sure to subscribe rate and review the show on itunes or the platform of your choice. You can find the show notes and resources for today's episode@womeninvestingnetwork.com remember that guest opinions are their own and information is of general nature, so be sure to consult a appropriate tax, legal or other professionals for specific advice.

Welcome to Meet the Masters of Income Property Investing. I'm your host Jason Hartman.

Join us in Beautiful La Jolla, California on January 12th 15th. This is your chance to meet the masters of Income Property Investing. Learn from an amazing collection of experts all in one room. You'll meet a table ton of local market specialists, mortgage lenders, tax professionals and investment specialists such as Jeff Myers of Myers Research and John Burns, real estate consultant. Learn from Robert Kiyosaki's rich dad advisors, Ken McElroy, his real estate investment expert and Garrett Sutton, his attorney who specializes in asset protection. Find out what leading economists are predicting for 2018, including Danielle DiMartino Booth, founder of Money Strong LLC and Andrew Zapman from Moneyball Economics. Hear from leading entrepreneurs how to maximize your income streams. You'll learn unique financial strategies from Patrick Donahoe of Paradigm Life and how to give birth to a brand from Brian Smith, founder of Ugg Australia Brand this year also features a very special guest, Dr. Ron Paul, former Congressman, presidential candidate and staunch advocate of liberty. Right now you can upgrade your ticket to include VIP access and a dinner with Dr. Paul. Enjoy a fine dining experience and fascinating conversation. Seats are limited so upgrade your ticket today. Ask questions and learn why real estate is the most historically proven asset class class. Armed with new information, you'll have the confidence to take massive action. As the saying goes, don't wait to buy real estate. Buy real estate and wait. Surround yourself with like minded people and build friendships that will last a lifetime. Share strategies and tips with other investors and hear about their successes and struggles. Make 2018 the year you decide to achieve your dreams. Real estate is a proven way to create true wealth within your lifetime and achieve long term financial independence. Don't wait. Join us in La Jolla.

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