A global thought leader on monetary policy, economics and finance, Danielle DiMartino Booth founded Quill Intelligence LLC and is their CEO & Chief Strategist. This is a research and analytics firm which publishes The Daily Feather and the Weekly Quill.

To build Quill Intelligence, she brought together a core team of investing veterans to analyze trends and provide critical analysis on what is driving the markets – both in the United States and globally.

DiMartino Booth set out to launch a #ResearchRevolution, redefining how markets intelligence is conceived and delivered with the goal of not only guiding portfolio managers, but promoting financial literacy.

Since its inception, commentary and data from The Daily Feather have appeared in financial media such as Bloomberg, CNBC, Fox Business, Institutional Investor, Yahoo Finance, The Wall Street Journal, MarketWatch, Seeking Alpha, TD Ameritrade, TheStreet.com, and more.

She is the author of FED UP: An Insider’s Take on Why the Federal Reserve is Bad for America (2017), a full-time columnist for Bloomberg View, a business speaker, and a commentator frequently featured on CNBC, Bloomberg, Fox News, Fox Business News, BNN Bloomberg, Yahoo Finance and other major media outlets.

Prior to Quill, DiMartino Booth spent nine years at the Federal Reserve Bank of Dallas where she served as Advisor to President Richard W. Fisher throughout the financial crisis until his retirement in March 2015. Her work at the Fed focused on financial stability and the efficacy of unconventional monetary policy.

DiMartino Booth began her career in New York at Credit Suisse and Donaldson, Lufkin & Jenrette where she worked in the fixed income, public equity, and private equity markets. DiMartino Booth earned her BBA as a College of Business Scholar at the University of Texas at San Antonio. She holds an MBA in Finance and International Business from the University of Texas at Austin and an MS in Journalism from Columbia University.

She will be speaking during SFNet’s Live Online Annual Convention, November 17-19, 2020.

In past interviews, you’ve said we should expect a severe cultural backlash as a result of Covid. Could speak about that a bit for the benefit of our audience?

DIMARTINO BOOTH:  We have to understand that this has been a bifurcated recovery; some economists call it a K-shaped recovery. The easiest way to look at it would be the haves and the have nots. So we’ve seen about half the people who lost their jobs return and we’ve seen millions and millions of Americans get left behind, and especially the small-business sector has not been addressed by fiscal stimulus measures to the extent that surely could have been possible given the trillions and trillions of dollars that are being pumped into the system. But again, you’re talking about a sector that employed 47 percent of Americans prior to the pandemic; you’re seeing astounding numbers come out of the restaurant sector and the hotel sector, showing that there is going to be permanent damage. We have clearly seen an improvement in doctors’ ability to treat the coronavirus, we’ve seen mortality rates falling precipitously, and this is a wonderful thing with more than 200,000 deaths here in the United States but, that being said, when the dust settles on the worst of the health crisis, there is going to be a lot of bitterness. The inequality divide will have been widened further. It was already at the widest it had been since the late 1920s several years ago, so social strife is going to become very problematic in the coming years, which is saying something given what we’ve been seeing play out in our streets, which is more of a reflection of racial relations being extremely tense, the worst since the late 1960s, but it’s also a reflection of income inequality in this country.

What do you think Covid’s most significant impact will be and do you think we’ve already seen it or we have to wait for the dust to settle and see if there’s a surge this winter also?

DIMARTINO BOOTH:  Everything remains to be seen, literally everything.  At the moment we have the youngest of our population being tested the most so we are seeing the fatality statistics skewed downwards, if you will, because we’ve kind of flipped a switch. We’ve gone from only testing the most vulnerable and symptomatic individuals and the oldest cohort, demographically speaking, to testing all of the young people to the extent that we can on college campuses.  We’ve got massive testing rates going up among an asymptomatic population so we have this impression that things are “improving”, but the improvement is a reflection of the fact that we’re testing people who, by and large, are not affected by the coronavirus. So we will have to wait and see what happens as we get into the fall and as we get into the potential for hundreds of schools around America sending their kids home for Thanksgiving break and thereby exposing older family members. That’s going to be at the same time that the weather is getting colder in the country, which will limit the number of restaurants that can offer outdoor seating, and it’s going to be coming into cold and flu season as well.

The health question is a huge unknown and, therefore, the economic question is a huge unknown. What we do know is that permanent unemployment is increasing. We’ve had a recovery in the stock market, fantastic, wonderful; corporate America has been bailed out, great, wonderful, but there are huge swaths of Americans who have not and permanent unemployment is setting in regardless of who wins the election. 

How could the election affect all of this?

DIMARTINO BOOTH:  Without bringing politics into it, the stock market detests uncertainty.  And the reason that we’ve seen an increase in volatility is risky markets. We had one of the largest withdrawals from the largest junk bond-exchange traded fund in history yesterday.  So there is clearly a lot of nervousness among investors, and what you get is volatility. And when you get volatility, people are less apt to spend freely. If they have jobs, they are thinking, “Wow, things are really getting bumpy, and it just looks like it’s going to get bumpier so we’re going to save more,” and these are direct transmission mechanisms into the economy that are going to stall out, and we absolutely have to have spending in an economy that is two-thirds consumption.  The top 40 percent of income earners in America are responsible for more than 60 percent of consumption and that is why the stock market is so directly related to consumer spending because if you’re Joe Q., Jane Q. in the workforce, you look at your 401(k) statement as being your prospects for retiring one day. And if it looks like your balance is going down, you realize you may need to work longer and save more and if it looks like your balance is going through the roof, you’re more likely to splurge and get that BMW on lease instead of getting the Camry.  It has a huge influence on consumers’ behavior and on consumers’ psychology. 

The election presents a tremendous risk to the U.S. economy because of this uncertainty element that is being introduced and that has only been exacerbated by the death of Ruth Bader Ginsburg, which has dragged down the probability of stimulus legislation being passed prior to the election because now the two different parties have bigger fish to fry, and they’ve got an issue that is even more important in their mind to bringing out the vote one way or another because of the precedent set in 2016 when Barack Obama nominated somebody with 10 months left in his term and you know the rest of the story. The stage has been set for a much bigger battle to occur, which pushes stimulus spending to the back burner, but that’s really, really toxic for the stock market.

Your criticism of the Fed and its low interest-rate policy is well known. What do you think could be the longer-term adverse consequences of the Fed stimulating with so much new debt?

DIMARTINO BOOTH:  In 1951 there was an accord between the Federal Reserve and the Treasury Department.  During World War II the Federal Reserve was recruited like a soldier would have been recruited, and they were needed by the country to keep interest rates at artificially low levels to fund the war efforts. And after the war had concluded, it was apparent that the Federal Reserve Act of 1913 needed to be revisited because the Treasury Department is never supposed to have a say or any influence on the dealings within the Federal Reserve. The Federal Reserve Board was designed to be an independent apolitical federal agency. The 1951 Accord reestablished those lines and drew a darker line in between the Treasury and the Fed. 

That line has been erased in the aftermath of the coronavirus.   The Federal Reserve has effective Enron-type of accounting going on.  The Federal Reserve is not legally able to purchase corporate bond-backed exchange traded funds. They’re not legally able to purchase bonds in the open market, so they have set up an off-balance sheet vehicle, a special- purchase vehicle on the Treasury balance sheet where all of that activity has taken place so that there is an arm’s length distance in between a direct violation of the 1913 Act. And this has all been under the auspices of ensuring adequate and abundant liquidity for the financial markets, which certainly went through a very rocky period up until March 23when the Fed stepped in.  But since then, they’ve regained their all-time high and the Fed is under increased scrutiny, as it should be, for doing things through these Treasury special-purpose off-balance-sheet vehicles for doing things like buying the bonds of Apple Corporation, which, some taxpayers might argue, really isn’t a good way to spend their money, because Apple Corporation at last check is just fine. 

What are your thoughts on the U.S. debt now being at $26.7 trillion and the current budget deficit of $3 trillion?  Could the US be forced to run the debt to $40 trillion or more in the next five years to sustain the price of risk assets and what could this mean specifically for secured lenders?

DIMARTINO BOOTH: There is a great risk building in the market.  There is an assumption that because we’ve doubled and tripled the debt with no consequences in recent years that we can continue to double and triple the debt from current levels. This is a very dangerous assumption and because of the environment, the backdrop that I described earlier, that there seems to be permanent damage done to the economy, it looks like we’re going to need more stimulus spending. Government officials are going to have to be very careful about saying, “what’s the difference between 27 and 34, what’s the difference between 34 and 68, what difference does it all make because there’s no inflation?”

The best way to test that hypothesis is to go there and to try to seriously increase the level of spending because that is when you begin to invite in the specter of inflation.  More than a third of U.S. Treasuries are owned abroad and the best way for investors to step back and say, “You know what? You have no care for your nation’s balance sheet. You have the reserve currency status of the dollar, which makes you behave in ways that would be considered reckless, and we’re going to push back.  And we’re going to demand more money in return for taking on the risk of U.S. debt.” And this whole house of cards comes tumbling in on itself if the zero interest-rate environment that the Fed has promised is rejected by the bond market and the bond market starts to demand higher rates of return to hold U.S. treasuries despite the Federal Reserve’s commitment to hold interest rates at the zero bound.  And again, most Americans can’t even foresee such a development. On the other hand, we’ve never gone down the path of deficit spending to the extent that we have this year.

Do you see the Fed going deeper into supporting riskier credits?

DIMARTINO BOOTH:  The risk is that the Fed could go in two different directions. The Fed can either start buying stocks directly, or the Fed could directly monetize the debt. And right now the construct of quantitative easing, QE, which means that the Treasury issued a bond for the first time, issues the debt of the United States for the first time, and that is purchased by a bank. And the bank has the right to bid at auction for the bonds, and then the bank turns around and sells them to somebody else.  In trillions of cases they sell them to the Fed, and the Fed has never been able to buy the debt of the United States directly at auction because that is true printing money.  And it would require reopening the Federal Reserve Act of 1913 to allow the Feds to buy debt directly from the U.S. government and that is a direction for which no Fed chair in history has ever advocated. I would certainly hope that that would remain the case because we’d become a third-world country overnight.

They can go down that path, but it would require a Congressional act for the Fed to buy stocks directly. I don’t think that they would do that in front of an election because it’s difficult to explain to the layperson that the Fed is buying high-yield bonds; it’s even riskier than buying stocks technically.