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The Disciplined Investor is all about you,

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0:47

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0:51

episode of The Disciplined Investor is sponsored

0:53

by Horowitz & Company. If

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you're looking for a portfolio manager, look

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no further. Horowitz & Company,

1:00

from seed through harvest, cultivating

1:03

financial success. Only

1:07

one sector up this month and

1:09

it's going to surprise you. GDP

1:12

is what? Who says

1:14

the economy is slowing? Not Janet

1:16

Yellen who proclaims a soft landing is

1:18

here. Margin and earnings.

1:21

A look inside and our guest today, Danielle

1:24

DiMartino Booth, founder of QI

1:26

Research and author of Fed Up,

1:28

an insider's take on why the Federal Reserve is

1:31

bad for America. All this and

1:33

much more on episode number 840

1:36

of the Disciplined Investor

1:37

podcast.

1:49

Andrew Horowitz here and welcome. Thanks for joining

1:51

me. I'm back from a quick trip to

1:53

Guatemala. Hopefully you saw

1:55

the pics of the huge and I

1:57

mean tremendous, massive giraffe.

1:59

Jurassic Park style fish

2:02

that we caught, tuna, yellowfin tuna, and we caught

2:05

sailfish and Dorado and wow,

2:08

what an incredible, incredible

2:12

time. I mean just an enormous

2:14

amount of opportunity

2:17

to fish. The days, it's

2:19

a fishery that's pretty unbelievable. Casa

2:21

Vieja is the place we stayed, which

2:24

is first class. I mean you

2:26

get there and it smiles on the face of everybody

2:28

serving you, just 36 people total

2:31

maximum can be there and the food and

2:33

the service and the drink and the fishing and wow,

2:36

you could do that for a weekend. I'm telling you it would be

2:38

a trip to remember. But

2:41

if you haven't seen the pictures yet, go over

2:43

to Twitter. There's a few on there. Follow me at

2:45

Andrew Horowitz, one word, and I got some pictures

2:47

up there. Of course over on Instagram,

2:50

a dad bod food blog. There's a few

2:52

different photos as well. I

2:55

guess when we think about this week and

2:57

this month and this last,

3:00

I don't know, three months, you got to say just yuck.

3:03

I mean that's all we can really think about what's going on.

3:06

What we're seeing is that there is a revolt

3:09

against stocks and even

3:11

though we see that some stocks like we saw this

3:13

week was meta, came

3:16

out with some decent numbers and overall, I

3:18

would say respectable results. The

3:20

commentary about things related

3:22

to their advertising revenue really spooked investors

3:25

and you can go on with a list of some of the

3:27

good ones that came out of course like Microsoft this

3:29

week that was really a tremendous

3:31

report and outlook looked really good and then

3:33

you have others, not

3:35

so good, Google being one of them. These are the tech companies

3:38

that are reporting and of course the reason why that's

3:40

so important is because they hold a major

3:42

influence on the markets. So

3:46

it's interesting to note that this month we

3:49

had something that actually worked out

3:51

pretty well as you would expect and that

3:53

would be one

3:55

of two reasons. It was either a flight to safety

3:58

or a reversion to the mean trade. flight to

4:00

safety saying that, hey, let's go for the guys that

4:02

can just power on, and no pun

4:04

intended when I tell you the name, and

4:06

just continue on making money regardless

4:09

of the economy to a degree. Or maybe

4:11

it was a reversion to the mean that these

4:13

companies and these stocks in this sector got hit

4:16

so hard over the last, I

4:18

don't know, eight months, a year. That

4:21

is time to invest. Maybe it's done

4:23

for. Maybe there's a capitulation

4:26

going on. That's utilities. Utilities

4:28

being those very boring names

4:30

that you hardly ever hear about. Next era

4:32

energy is one that comes to mind.

4:35

That's the FPNL down in Florida, plus other states

4:37

around the country. They have

4:40

clean energy. They have, you know, regular utility, but they're

4:42

getting paid month in and month out regardless of

4:45

what's going on. Right? I mean, the fact is that

4:47

they get paid because you

4:50

have to pay them. This is the way it goes

4:52

for your power. And again, it could

4:55

be a reverse to the mean where it's simply, it looks

4:57

like it was so oversold that we're getting in there. Or maybe

5:00

there's this idea that

5:02

the reason that they got hit really was not about the economy,

5:04

but more so about utilities being a proxy

5:07

or an alternative

5:09

to bonds

5:10

and as an alternative to bonds, they

5:13

are not looking so good because their yield, which

5:15

looked good at one time, is no longer so good.

5:18

When interest rates were at zero, 1%,

5:20

you know, a two, three, four, 5% yield on

5:23

a utility was pretty good.

5:26

But now that same yield doesn't look so good

5:28

when you can go into a guaranteed instrument on

5:30

the other side. So it's kind of interesting

5:32

that you saw that that's going on.

5:35

The other thing that's interesting through the month of October,

5:38

that was, I think unusual

5:41

to a degree, not entirely October

5:43

is not known to be a good month. Right?

5:45

We've had crashes. We've had problems, but

5:48

October was also the start of the seasonality

5:50

into the end of the year, that Santa

5:53

Claus rally, that, that time of

5:55

year, when people are trying to pick up the pieces,

5:57

get their portfolios, right. Do some tax

5:59

flows. harvesting rotation back

6:02

in and out of and around. And

6:04

oftentimes it is usually into

6:07

a presidential

6:09

election year. It's somewhat of a

6:12

good time. When I say good time,

6:14

it's usually a good year to consider.

6:17

But it didn't really happen in October

6:19

and that's what makes me think that there

6:21

still is a chance and opportunity. I'm not looking at

6:23

this as trying to be too hopeful.

6:26

That's not it at all because we know hope is not

6:28

a strategy. We know that being disciplined

6:30

investors, right? But the

6:32

fear has been the Fed, which is in my

6:35

opinion clearly a delayed reaction.

6:38

I mean if I ever saw

6:40

a delayed reaction, that was it.

6:42

I mean why now?

6:43

Think about it for a second. Why all of a

6:46

sudden now is everybody so concerned

6:49

that the Fed is going to stay higher

6:51

for longer when in fact that's what they told you they were going

6:53

to do for a very long period of time. It

6:55

tells me

6:57

something and I think and as I

7:00

was going through this in preparation for this week's

7:02

discussion that the

7:04

crowd has got it wrong. The

7:07

Fed doesn't have it wrong necessarily. They

7:10

may have it right and the Fed has it right because they hold the purse

7:12

strings. But it

7:15

looks like a capitulation once again to the fact

7:17

that nobody thought the Fed was serious about

7:19

what they were doing. Now they think they're too serious and

7:21

I think they're going over to a degree

7:26

of concern

7:28

that may be highly

7:31

misplace, misguided and

7:34

there's this fear that's going on. And when

7:36

you look at what's going on from an economic

7:38

standpoint with a great GDP print this week

7:41

for the employment numbers being what they are, Janet

7:43

Yellen saying hey we're gonna have a soft landing or no

7:45

we stuck it. I think something like we have the soft landing.

7:48

You still have to consider where we are

7:51

in terms of earnings because it really earnings

7:53

as you would know and you have

7:55

to know this is really the most

7:58

important part of the overall

8:01

calculus when it comes to valuing stocks.

8:04

So earnings right now is very interesting because what we have in the earnings situation,

8:07

and I went to facts at the C where you are, one of

8:09

the things that I've been very concerned about is margins. I've

8:12

talked about that a hundred times here, right? The idea

8:14

that margins are something that we really

8:17

need to consider in

8:19

terms of the

8:22

idea that if margins

8:24

are going to compress because prices are higher

8:26

and then we get into a slowing economic situation,

8:29

it's like a stagnation of earnings because

8:32

the margin pressure will be really problematic

8:34

when it comes to that. So here's a couple things when

8:37

I found out from some

8:39

of the data that facts had shared. And

8:42

they showed that the blended net profit margin

8:44

for the S&P 500 for the quarter

8:46

three of 2023, 11.6%, which is below the year-ago net profit

8:53

margin of 11.9. So we're dropping

8:55

a little bit, but it's equal to the previous quarter's

8:58

net profit margin and more importantly

9:01

still above the five-year average. And I

9:03

thought that was really interesting to note that

9:05

where we are today, profit margins haven't

9:07

fell below a five-year

9:10

average and that's inclusive of some pretty

9:12

good and bad times. So if

9:14

in fact we stay with 11.6% as

9:17

the actual net profit margin for the

9:20

quarter, it's going to mark the seventh straight

9:22

quarter where net profit

9:24

margin has declined year over

9:27

year. So that's something we need to

9:29

think about and that is the impact

9:31

of inflation and slowing

9:34

of an economy or slowing of

9:36

buying that degree. So

9:40

at a sector level, when we look at the six sectors that are reporting

9:42

year over year increases, we

9:45

see that there

9:47

is six sectors I should say. It's kind

9:49

of interesting to notice that

9:52

the communication services, 12.2% versus 9.8%,

9:55

and that's your Facebooks and a few other

9:58

of those names in there. So

10:00

that's pretty good. Now five

10:02

sectors are reporting year over year decreases. Energy.

10:06

Energy, which is interesting because

10:10

we would expect energy to show this probably

10:12

then start picking up and that's why energy may

10:14

be picking up in the face of higher oil

10:16

price and the opportunity to actually

10:19

have higher earnings.

10:22

Better earnings, but in

10:25

energy went from 14.4% a year ago to 11% healthcare

10:27

went from 10.5 to 8%.

10:33

So.

10:36

Eight of the sectors that we're looking at reported

10:39

net profit margins above

10:41

their five year averages. Energy is one of them.

10:43

Of course, we know what happened with energy over that period

10:45

of time. Still, healthcare

10:48

is still below. I still think there's a really good

10:50

opportunity coming up in healthcare. So

10:53

there's some sectors still having quarter over

10:55

quarter utilities. Interestingly

10:59

enough, just reported a 14.2% overall quarter

11:01

over quarter increase

11:03

versus 12.2. So that's pretty good.

11:10

Profit margins decreasing in real estate. 35 versus 37

11:14

and materials 9.7% versus 11.

11:17

So it's kind of interesting that we're looking at net profit. The

11:19

margins are still believed to be higher

11:21

for the first quarter. We'll see what happens when

11:23

we get closer. But I just thought something interesting that I

11:25

gleaned and just want to get to that

11:27

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11:30

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with that, let's get to our guest this week. Let me

12:35

do a quick intro. And

12:37

as promised, our guest is Danielle DiMartino

12:39

Booth. And she is CEO and

12:42

Chief Strategist for QI

12:44

Research. She founded that research and analytics

12:46

firm. And prior to that, she was

12:49

spending some time over at the Fed, Fed

12:52

Bank of Dallas. And she served as an

12:54

advisor to President Richard Fischer throughout

12:56

the financial crisis until his retirement in March

12:59

of 2015. And

13:01

worked on all sorts of things within the Fed. Also,

13:03

of course, wrote the terrific book,

13:06

Fed Up, an insider's take on

13:08

why the Federal Reserve is bad for America.

13:11

Hi, how are you?

13:13

I'm great. Thank you. How are you? I'm good. Thanks.

13:15

I know you've been very busy. You are

13:18

someone who is... you

13:20

tell it as it is. And I think that's really appreciated

13:22

by a lot of people. And you

13:24

are just busy on the media, aren't you?

13:28

Some days are busier than others, but yes, yes,

13:30

indeed. That's good. That's good for your... You've got to spread the

13:32

word. Yeah, you do. Hallelujah. Amen. Let's

13:36

talk about some of the things that you've been talking about recently.

13:39

You were on our good friend

13:41

Keith McCullough. He is the hedge-eye.

13:45

Educational, I guess, news media

13:47

platform. And you

13:50

were talking about something I thought was really interesting that

13:52

I had to ask you about. And

13:55

about the consumer and

13:58

maybe not being as... strong as we think.

14:01

So, so what, what can you explain that?

14:05

Well, I mean, the, the

14:07

strongest area of sales,

14:09

uh, year over year was in a lottery

14:12

ticket in the GDP

14:14

report that just came out. Yeah.

14:16

I set smacks of a desperation to me.

14:19

Look, look, Americans are running out of money

14:22

and, um, and cashflow

14:24

is really important. So the same way

14:26

that we're seeing, uh, the

14:28

same way that we're seeing companies go belly up and declare

14:30

bankruptcy and file file for chapter 11, we're seeing

14:34

households, uh, make those same

14:36

dramatic moves. Uh,

14:39

when you add up how expensive

14:41

housing is, how much more expensive

14:43

housing is than when they bought,

14:45

if they bought

14:46

in 2021 or 2022, and they've got property tax,

14:50

property tax is going up and that feeds into their

14:52

escrow and all of a sudden, even though they've got

14:55

a 3% mortgage, no, their, their, their mortgage payment

14:57

just took a great big giant leap. The

14:59

homeowners insurance upkeep of

15:01

the house, their first car payment, car

15:04

insurance is sometimes higher

15:06

than the car payment. So, and

15:09

this is all before whole

15:11

of this is before student loan payments, uh,

15:14

were resumed in the month of October.

15:16

And we have to bear in mind, I think it's upwards of 300,000 Americans also, uh, have

15:21

not had to make a mortgage payment since

15:23

March of 2020. They've taken

15:25

many extensions that the government

15:27

has offered quietly, um,

15:29

through, through FHA. So November's

15:32

the

15:32

first month. A lot of Americans have to

15:34

start making their mortgage

15:35

payment for the first time since

15:37

March of 2020.

15:38

So if it's all about cashflow, uh, then

15:41

you can understand why lottery ticket

15:44

sales have gone through the roof. Cause people

15:46

are looking, people are looking to hit the lottery because

15:48

they cannot afford. It's the

15:51

hail marriage is the hail Mary move

15:53

moment, right?

15:54

Completely. And we

15:57

just had a blockbuster. I

15:59

mean, block.

15:59

blockbuster GDP report.

16:02

I get it. I get it. I get

16:05

it. I get it. But by

16:06

the same token, what we were seeing was just a

16:09

trickle through effect of

16:11

the employee retention credit, which

16:14

pumped up $85 billion

16:16

worth of cash

16:19

into the economy in the

16:21

three months ended July. So

16:24

that's why we saw spending as strong

16:26

as it was, but what's coming behind

16:28

it since they pulled that program?

16:30

Not much. You know, that ERC is really

16:32

pretty fascinating. The companies that

16:34

went after that, even Kevin O'Leary

16:37

and some of these other companies that went at this whole

16:40

thing, like cramming it down your throat that you're

16:42

eligible even if you don't think you are, even

16:44

if you don't need the money, let's get some for

16:46

you. And then all the things they did to

16:49

create this

16:51

situation that where if

16:54

you were eligible for it

16:55

under

16:56

three or four different possible scenarios,

16:59

you can reclaim some of the taxes paid

17:01

that you paid for your employees for

17:03

the last like two years.

17:05

Unbelievable.

17:07

Unbelievable is one way to put it. I

17:09

mean, really, that was something. I

17:12

mean, we had people coming after us were like, look, we

17:14

didn't

17:15

lose any, we're fine. Just

17:17

leave us alone. And they're like, listen, whatever we collect,

17:19

what do you care? You get money from me, it will

17:21

take 25%. And

17:23

we knew it was all short lived, too. It was good.

17:26

And look,

17:26

if something looks like an ambulance

17:28

chaser,

17:29

likely it is. I had a situation

17:31

back a number of years ago, there was a hurricane in

17:33

Florida, and there

17:36

were,

17:37

you know, there was damage. There was no question about that. There

17:39

was damage, right? But my

17:41

house was fine. It was fine. A couple

17:43

of little things broke off the roof. Nothing

17:45

nothing. When I say nothing, nothing that even had

17:48

to be repaired. But other roofs around

17:50

the area got some damage. Well,

17:52

these roofers would come and knock on your door and say, hey, look,

17:55

let me do an inspection on your roof won't cost

17:57

you anything. And if in fact we need

17:59

to repair your roof, we

18:01

will put in the claim for you and do it all for

18:03

you and give you, and they

18:06

said, we can give you $10,000 of the payment. I'm

18:10

like, wait,

18:11

isn't that insurance fraud

18:14

that I'm getting back this on something

18:16

that doesn't really have to be done, but you're claiming

18:18

it does and we're now in collusion? Well

18:22

not really. All my neighbors took the money.

18:24

I did not. I just couldn't do it.

18:28

You never walk away. Look,

18:30

I believe in karma. Okay. You

18:33

don't walk away from that

18:35

kind of a decision knowing full

18:37

well that you're ripping somebody off.

18:39

It's just, it doesn't, karma doesn't work

18:42

that way. Yeah. So,

18:44

talk about the consumer now for a second. Now, these are things

18:46

that we knew about. This is something that we saw coming

18:48

and we're seeing a lot of blame is being put on

18:51

like, you know, from Target, from Walmart, and you

18:53

talk about the different companies,

18:55

even Best Buy,

18:58

talking about shrinkage, right? This whole issue

19:00

with the missing

19:02

earnings due to the fact that there

19:04

is all this stealing going on, which is the latest

19:07

rendition of the weather excuse.

19:10

You know, the weather isn't good. We aren't selling.

19:13

And, you know, but of course when the weather is

19:15

really good, they don't blame, they don't

19:17

take the credit for the weather. They take the credit for their managerial

19:20

abilities.

19:22

Okay. No. Which

19:26

companies are getting rewarded right now by the stock market?

19:29

They're the companies that have fired the most people.

19:31

It's just as blessed as I can be. That's

19:34

correct. And that's the way it's... But

19:36

there's a reason for that though. What else did Walmart tell you? Walmart

19:38

told you that they're going to be lowering starting salaries.

19:41

There you go. But you can't

19:43

blame the... I mean, we can't just always go

19:45

up in salaries and

19:48

have people on the books when, you

19:50

know, things aren't as good. And

19:53

the fact of the matter is, should

19:55

companies be rewarded for firing people? No,

19:57

they shouldn't be rewarded for firing people. That's not a... question

20:00

there. It's a morality issue,

20:02

right? That's not the point. The fact

20:05

is that they're being rewarded to a

20:07

degree because they

20:09

are taking control maybe not

20:11

the right way, but from an expense standpoint,

20:14

and that's something that needs to be done. Now, should they be rewarded?

20:17

Maybe not knocked down as much, but the reality

20:19

is, and this is the point that I think you need to explore,

20:23

what does that mean that they're laying off people? That's

20:25

the point, right? The longer term point.

20:27

Of course. I mean, look, there's

20:30

a furniture retailer called Z Gallery.

20:33

I guess it's got nine lives because it just

20:36

went bankrupt. We have one down here. Yeah,

20:38

we went down here. Yeah, just

20:40

filed Chapter 11. It's the third Chapter 11 filing

20:42

that it's seen as a company. They're going to close 21

20:45

stores. Why are they doing that? Well,

20:47

because they're not seeing demand. People

20:50

do not appreciate the amount

20:52

of

20:53

demand that was pulled forward

20:57

by

20:58

the pandemic

20:59

stimulus spending

21:01

from the US government. They don't get it. Right

21:04

now, poor Janet Yellen, bless her heart.

21:07

She's out there saying the economy is doing

21:10

great. Maybe she

21:12

and Kevin O'Leary

21:13

should get in a room together, and he can

21:15

explain to her why the economy was great and

21:18

why things are hitting a wall so fast.

21:20

Are we hitting a wall so fast? Because

21:27

while we are seeing problems in certain

21:29

areas of the economy,

21:34

how is it

21:36

that generally speaking with GDP

21:39

that is decent, new housing

21:41

starts this week. We're like, wow, that

21:43

was pretty good. We saw

21:45

that, well, let's just get to the point of

21:48

employment. Nobody's firing anybody, or

21:50

at least the numbers don't show that they're firing anybody.

21:53

How does this all square? Because you've been doing this

21:55

a long time. I've been doing this a long time.

21:57

You really focus on this as the core of what you

21:59

do.

22:00

there's this very strange

22:02

relationship

22:04

of

22:05

cross-economic indicators

22:07

that aren't confirming.

22:10

No,

22:11

they are not confirming at all. And

22:15

one of the reasons actually is, it's

22:18

a dirty little secret inside the beltway.

22:22

One of the reasons is that when

22:24

a company used to lay off 100

22:26

people in any given

22:29

state, by law, they were

22:31

required to file what was called a warn notice.

22:34

And warn notices give you 60 to 90 days of severance pay.

22:38

You're being warned by the company and paid by the company

22:41

so that you can look for another job. But

22:43

warn notices were only required if the company fired

22:46

more than 100 people in a given state. Well,

22:49

the current administration, big labor,

22:52

said, you know what? If you're a company

22:55

and you lay off 100 people in four or five

22:57

different states, but it sums

22:59

to 100,

23:01

you're gonna have to file a warn notice in every single

23:03

one of those states and pay severance for 60 to 90 days.

23:07

Now, I just learned this a few days ago. I

23:09

didn't know, but it

23:10

helps fill in so many of the blanks.

23:15

I follow dailyjobcuts.com

23:18

every day. And you're seeing

23:20

all these companies close. So

23:22

it's not my imagination. They're actually, every single

23:25

one of them is linked to

23:27

a news story and you're

23:29

seeing layoffs,

23:30

but there's a pig in the python

23:32

effect. And that's one of the

23:34

reasons that, you know, a lot of economists

23:36

have been scratching their heads saying, you

23:38

know, why is the non-farm

23:41

payroll survey so much stronger

23:43

than the household survey? I just don't understand

23:46

where the disconnect is. Well,

23:48

think about it. If you've been

23:51

told by the company that

23:53

you've been laid off, you know, it doesn't

23:55

matter if you're getting severance or not, if some

23:57

statistician from Washington DC calls

23:59

you. says are you working or do you have a job

24:02

you're gonna say no I don't have a job I got fired.

24:05

But if you call the company where you're

24:07

you know conducting the nonfarm payroll survey and

24:09

you ask them the number of employees on the payroll as

24:12

long as they're still paying somebody they count

24:14

as an employee.

24:16

So it's like fill in the blank. So once

24:18

again this is the the same

24:20

old story that

24:22

figures never lie but liars always

24:25

try to figure right that we have statistical

24:27

models and information that whether it was

24:30

done purposefully or not there is some

24:33

inability for us to really glean information out

24:35

of it. In a time by the way we're talking about AI

24:37

in a time we're talking about computer models and ability

24:39

to crunch numbers like never before we're

24:42

talking about cloud

24:44

systems with extraordinarily

24:49

powerful

24:50

technology behind it we still can't get this

24:53

information and by the way

24:55

if we can't get the information here

24:57

can we at all believe some of the other places around the world

25:00

like China I've been there it is

25:02

it is of as we know a vast

25:04

country of places

25:07

that I can't imagine they're actually

25:09

the actual numbers that they

25:11

are presenting are accurate.

25:14

Look I completely agree with you but at

25:16

this point because

25:19

of the endless

25:21

stream of revisions to the data

25:23

you know I don't think

25:25

we're doing a better job than the Chinese.

25:28

Well maybe not but and

25:31

the other point is I guess you know the question shame

25:33

on us well it's definitely shame on us there's no question

25:35

about that but you have to also

25:38

say to yourself

25:40

this is the data we have so

25:42

that is what we have to follow trying

25:44

to fight it is a fool's errand right?

25:46

No not I mean that's why that's

25:48

why at QI research we create our own data

25:50

set we've created a

25:52

full archive of dailyjobcuts.com that

25:55

goes back to 2009 so that we can follow the

25:57

actual trends in real time.

25:59

That's what computers were made,

26:02

that's what they were made for as you point out. There

26:05

are plenty of ways to follow the real data.

26:07

So what is it telling you? What

26:09

is your data telling you about the jobs and the employment

26:11

situation?

26:12

Oh gosh, it's telling me that layoffs and

26:16

announcements and

26:19

closure announcements are running at

26:21

the fastest pace since 2009. That's

26:23

what the data is telling me.

26:25

Yet we don't see that at all with the official

26:27

data.

26:28

We don't see it yet, at some

26:30

point, look, you're

26:33

gonna see yellow trucking

26:35

corporation.

26:38

It's not like they were, 30,000 people were hired right

26:41

after yellow declared

26:42

bankruptcy

26:43

who were fired, but they did start to collect

26:45

severance. But at some point, the

26:48

data is not gonna be able to gloss over

26:50

what's happening because the 60 to 90 day

26:53

period of severance is coming to an end. So

26:55

what about, what about- You know, even as, and

26:59

that's why you're seeing continuing

27:01

jobless claims stay as elevated

27:04

as they are. And that tells you

27:06

one thing, people are not finding work

27:08

once they lose it. Yeah.

27:11

It just seems that, you know, maybe

27:13

I'm in a bubble here in South Florida, maybe there's

27:15

some interesting things I wanna tell you about South Florida too, but

27:19

it seems like everybody's spending money, more

27:21

money. I go out and yes,

27:24

some of this can be vacationers and season's about to

27:26

hit so it can get even worse. But I go to some of

27:28

the restaurants and I mean, there

27:30

are not cheap bottles of wine on the tables.

27:33

And, you know, people are drinking and doing

27:36

and going and there's plenty out there. Mortgage

27:38

rates aren't really driving home prices

27:40

lower by any extent, at least what

27:42

we see is that, as a matter of fact, some

27:45

houses selling for record prices. Boats,

27:47

the boat show is this weekend in South Florida,

27:50

the boats, we're gonna probably do $800 to $900 million worth

27:53

of revenue in sales and

27:55

in weekend overall

27:57

revenue.

27:59

again this year,

28:01

which is probably going to be a record year in 2023. Car

28:05

sales are,

28:06

are still selling it above MSRP.

28:08

And one of the things really fast. Actually that ended

28:10

in February. Sorry. Down

28:13

here in Florida, down in Florida, you can still

28:15

get it. They're still above.

28:17

Well, but okay. To your point,

28:20

yes, you might be living in a bubble and

28:22

don't get me wrong. All States that

28:25

I'm in Texas, all States that don't have

28:28

a state income tax have been

28:30

major beneficiaries

28:33

of the post pandemic era. People were like,

28:35

if I'm going to move, if I'm going to have to leave

28:38

New York city, then I'm going to leave all the way.

28:40

I'm not going to move to a suburb

28:42

of New York just to get away from a pandemic.

28:45

I'm just going to go to Florida. I'm going to,

28:47

I'm going to take home 10% more of my pay. Goodbye.

28:53

And we have to bear in mind, you know, the stock

28:55

market is still way up

28:57

there. So people of

28:59

means,

29:00

people

29:01

who have been beneficiaries

29:04

of the employee retention credit, you

29:06

know, people who, whose home

29:08

values have appreciated it incredibly,

29:11

you know, they're feeling

29:13

very wealthy and they're going

29:16

to spend like they feel wealthy. So

29:19

that that's just something we should bear in mind. And

29:21

we know that, that, that credit

29:23

card lending has continued

29:24

to grow.

29:26

So it's, it's easy to buy

29:28

things when you don't have to pay for

29:30

it today. And it's easy

29:32

to buy things when you feel wealthy because your

29:35

stock market portfolio is nice

29:37

and fat and because your home price on Zillow

29:39

is multiple millions of dollars. Yeah. Right.

29:42

But try, you know, try dealing with what's to come

29:44

in the next 12 months. When, you

29:46

know, when maybe 10 blocks

29:49

away, people are getting thrown out

29:50

of their homes because they can't pay their homeowners

29:52

insurance. Well, that's interesting point. I just want to bring, want to

29:54

bring up right now. And I want to let you in on a little secret that's going

29:56

on. Uh, in South Florida, there is a

29:58

substantial amount of increased. in homeowners insurance.

30:01

And one of the things that we have is underfunded

30:04

or neutrally funded or non-funded,

30:07

I guess not non-funded is about the best word to describe

30:09

it, condos and homeowners associations

30:12

because every year they come out like, hey, do you want to put

30:14

some extra money in towards the funding? Everybody

30:16

votes no, of course. So they don't fund their

30:18

homeowners association or condo association and

30:21

they live on year to year what the appropriate amount

30:23

is going to be. They divvy it up and that's what your HOA

30:25

fees are going to be appropriately.

30:28

And what happened is I saw

30:31

a few different circumstances but I'll give you this one.

30:33

That's not as much of an outlier but as a reality

30:36

check. There's a homeowners association where

30:38

they look, you see the entirety of the

30:40

cost factors for the year and

30:42

then you divide it and it's what you pay. Well,

30:45

this particular homeowners association, pretty much everything

30:47

stayed about the same. One

30:49

of the items on the line was insurance

30:52

for the common areas, for the

30:55

liability and all that for the community. $400,000 last

30:58

year

30:59

for the entirety of the community.

31:00

This year is 1.4 million. Now you divide

31:04

that by each house and it comes out to approximately give

31:06

or take a couple of bucks about $500 per

31:09

month

31:11

per house,

31:12

per condo, per townhouse. Now

31:14

if you think about that, this is townhomes that were in

31:17

the range of about $100,000 a number of years ago and now

31:20

they're about $200,000. And $200,000 townhomes then and now, it's

31:21

still

31:23

owned by

31:26

people who could afford a $100,000 townhome. You follow me? And now all of a

31:28

sudden you're taking

31:32

a situation where they're probably paying $500 for their

31:34

mortgage and not only are

31:37

they paying their homeowners, which is $750

31:39

a month, they just got a bump of $500. That's

31:43

a lot of money.

31:45

Yeah, I mean there was a

31:48

YouTube spot

31:51

of older retirees

31:54

in a Florida retirement

31:57

community that

31:59

were

32:00

You know just about borderline

32:01

rioting when they

32:03

found out that their homeowners fees were going up so much this

32:10

Lot of homeowners are also like wait a

32:12

minute my property tax is what

32:15

right right and my mortgage

32:17

payment Just went up by how much mm-hmm

32:20

I thought I had this 3% mortgage rate

32:23

and that my mortgage payment was nice and low and

32:25

The bank just raised my mortgage payment by 20%

32:29

What just happened to me?

32:30

Mm-hmm,

32:31

and then they get the bill for their homeowners insurance,

32:33

right? Right, and then their air conditioning goes out

32:37

Bad bad bad bad. So all

32:39

I'm saying is we're it's it's

32:41

we're on we're on a little bit of borrowed time

32:43

here That's all I'm saying it if you know,

32:46

hey if the stock market hangs in there, then the wealthy will remain

32:48

wealthy They can continue driving

32:50

their McLaren's well the stock market doesn't have to be

32:52

rational at all at all zero ever by

32:54

the way It doesn't have to you know, some people think well eventually

32:57

they'll get the point. Yes and no

32:59

It doesn't necessarily have to be in fact if

33:02

the Fed keeps interest rates

33:04

as high as J Powell wants to keep

33:06

them then

33:08

Then you

33:10

know the stock market will not hang in there because

33:12

it's a credit markets that feed the stock

33:15

market

33:16

Yeah, no, I agree with that entirely and

33:18

obviously what we saw the last number of weeks with an

33:20

ever-increasing almost a You

33:22

know a hockey stick like move in rates

33:25

was pretty substantial and in a way though

33:28

You could save the markets have done a lot of the work for

33:30

the Fed in this last go-round

33:32

the last, you know 50 basis points

33:35

Well, yeah, I mean if

33:37

if and J Powell will

33:39

tell you that, you know, one of his goals was tightening

33:42

financial conditions

33:43

Well, that's works Yeah, that's worked But it only

33:46

was finally where there was like a bunk on the

33:48

head of the of the markets in total

33:50

saying hey You know what? Maybe maybe he

33:53

is serious Maybe

33:55

you know for this first time the

33:57

Fed that says what they're gonna do. They're not gonna

33:59

back off here What do you think is going

34:02

on inside the Fed in terms of markets

34:06

had been, markets had been for a while pricing

34:09

in a drop of

34:11

Fed funds rates. Some thought

34:13

the end of this year and possibly even to the first

34:16

quarter, but most people were thinking about the second

34:18

quarter or so of 2024, the pricing model

34:20

and the Fed fund

34:23

futures were looking at 25 to 50 basis point cut.

34:28

The Fed is trying their best to say, Hey,

34:30

Hey, Hey, Hey, wake up, right? We're

34:33

not doing this right now. You know, the

34:35

old, we're not thinking about thinking about thinking about

34:37

reducing rates. I mean, that's where they are

34:39

right now, right?

34:41

It is where they are. And

34:44

what we have to monitor really closely

34:46

are the funding markets.

34:49

So as long as we don't have, you know,

34:51

a heart attack in the funding markets,

34:54

then, you know, PayPal can maintain

34:57

his higher for longer stance,

34:59

you know, and at last check, this

35:01

has been going on. I mean, he, he, he basically

35:04

gave us the news in

35:07

late 2021. So

35:11

the transitory was going away. He gave us the fair

35:13

warning. Nobody believed him then. But

35:16

all I'm trying to say is it's been two years

35:18

and people are still like, ah, he's teaches

35:21

bluffing. And I'm like, two years

35:23

is a long time to bluff. At some point,

35:25

you start to think that he's serious.

35:27

Right. Exactly.

35:29

Exactly. So

35:32

what happens though,

35:33

with

35:35

the high cost now that the

35:37

government has to pay for their debt financing,

35:39

servicing and renewal, you

35:42

know, if, if we're going to go through this reversal

35:46

of quantitative easing or what we

35:48

call quantitative tightening, because we have to have a name for everything,

35:50

of course, you know, an acronym is even better if

35:52

we could. The

35:54

any catchy one to that one that

35:56

rhymes somehow. But

35:58

what about the.

35:59

trillions of dollars of debt that's on the Fed

36:02

balance sheet. I mean,

36:03

they tried

36:06

to pair that back a bit in March. It

36:08

blew up a number of banks. They ramped it

36:10

back up again by going out and

36:12

saying that we will buy all your bonds that don't

36:15

look good on your balance sheet. We'll take them. We'll

36:17

take them. And got that off the balance sheet and flooded

36:19

the markets once again with

36:22

money, right? That was that big initial

36:24

move. Then we had the discussion about AI.

36:27

Everybody got all excited

36:29

and moved by

36:31

the opportunity. Reality setting

36:33

in and now quantitative tightening or at

36:35

least non-renewal

36:38

of buying, we'll call that. I don't know what you want to call it.

36:40

It's once again starting.

36:45

Where do we go from here?

36:47

Well, the Fed has,

36:49

the Fed's balance sheet is a

36:53

trillion dollars smaller than it was

36:57

when this whole process started. And

37:01

it looks like if they're going

37:03

to lower interest rates in 2024,

37:05

they might see mortgage

37:08

prepayment

37:08

speeds increase.

37:11

So people might be paying off their

37:13

mortgages or refinancing

37:17

if mortgage rates actually start to come down.

37:20

So maybe what we'll see is the continued

37:23

shrinkage of the balance sheet and

37:25

an acceleration in the pace of

37:28

the Fed rolling the mortgage back securities

37:30

off its balance sheet, which it has not been able to

37:32

do. Has not been able to hit those

37:34

targets because people

37:36

have the golden handcuffs of really low mortgage rates

37:38

so they're not refinancing or

37:42

selling their homes. But

37:44

is

37:46

this going to be further pressure on yields for

37:50

a much longer period of time?

37:52

If they're not, if they're not. Oh yeah,

37:55

yeah, yeah. Look, what quantitative

37:57

tightening does

37:58

is it depletes. It's

38:01

the market's lifeblood. It

38:04

depletes liquidity, just

38:06

like the human body absolutely needs

38:08

water.

38:11

The US financial system, the global

38:13

financial system needs liquidity.

38:16

And without it, things

38:18

start to go wrong. And

38:21

that's why you're seeing

38:24

some big names go belly up

38:27

and not even go to chapter 11. You're

38:29

like, oh, we're going straight to chapter seven liquidation. Bye-bye.

38:33

That's why you're seeing this, because things

38:35

do go wrong in these types of environments.

38:39

I don't know.

38:41

Have we seen that many

38:42

chapter sevens? I mean, big names

38:45

that are... I don't remember seeing a lot

38:47

of those. I mean, a couple, yes, here or there, but it

38:50

seems like it's not

38:53

any that much greater than I remember

38:55

a few years ago. Well...

38:59

I can be wrong.

39:01

Yeah, we've definitely seen a pickup in liquidations.

39:04

And what you're seeing, even with chapter 11 filings

39:06

like Rite Aid, for example, their chapter 11

39:09

filing came along with somebody who...

39:13

with hundreds of stores closing.

39:16

Right. But I mean Rite Aid was

39:18

a company that was dead for years and didn't

39:20

know it. So

39:23

that was the final...

39:24

So was yellow trucking,

39:26

but yellow trucking employed 30,000 people. Right.

39:30

Well, that was the unions for them too. That was a problem,

39:32

right? Yes, it was. But there are

39:34

plenty of other... I mean, look, there

39:36

are 65 hospitals in America in the

39:38

past few months have closed down entire departments.

39:43

That's not good. We need hospitals.

39:46

Well, yeah.

39:47

One of them was like, we're closing our maternity

39:50

ward. And I'm like, uh... Right. How's

39:52

that work? What's the way did you

39:54

do? Yeah. I guess I want

39:57

to finish on this question and

39:59

explore this a lot. little bit because all things

40:01

we're talking about with regard to

40:03

higher rates, with regard to the Fed

40:06

taking a much harder line on

40:08

where things are going and they're taking

40:10

liquidity out of the system, which

40:12

is what you said, right? And

40:15

the yield curve being inverted and screwy

40:18

and one of the things, I don't know if

40:20

I ever

40:21

talked about this, I'm sure I did though, but you

40:23

know, you remember the two tens, two tens, two tens, I'll tell

40:25

you about two tens, two tens, they're inverted and

40:28

in Palisas, we don't really look at the two tens,

40:30

that's not very predictive. And

40:33

then he said, what we look at is three months and

40:36

three months of ten year, do you remember he said that?

40:38

Oh yeah, that's the one they follow

40:40

on the inside. And I'm like, okay, oh,

40:42

wait

40:43

a minute,

40:44

that's pretty ugly

40:46

if that happens, right? You know, the three month goes

40:49

above the ten year, that's a significant

40:51

inversion, it has to be, right,

40:54

when he said it. And I'm thinking, he probably

40:56

says it to pad it so that doesn't happen very

40:59

often at all. And here we are with

41:01

the inversion, not only of the

41:04

three tens, but the two tens, the

41:06

one tens, all those, the

41:09

scary thing is that it's going on a

41:11

long time.

41:12

And

41:14

so here's the follow up to that point, which is

41:16

everything we know, there's no questions about that, that's what's

41:18

going on.

41:20

What's your real estate?

41:22

It seems to be

41:25

all the news as the ticking time bomb,

41:27

you know, the underlying the surface,

41:30

seeing occupancy rates in New York

41:32

City are, you know, at historic

41:34

highs, yet rents are ridiculous also. What's

41:38

your take on this and is this going to be

41:40

a nationwide situation? Is it going to be big?

41:44

Is it going to be just something

41:46

that is a little bit of a headache? How is

41:48

this going to play out?

41:50

Well,

41:53

I think it's unlike

41:55

prior unwinds.

41:59

Unlike prior unwinds of

42:02

other commercial real estate cycles,

42:05

there's nothing to do with

42:08

many of the buildings

42:11

when recovery comes.

42:13

And that's a sea change. In

42:16

other words,

42:18

companies have adapted.

42:20

And

42:21

even companies that have

42:24

called people back

42:27

to work, nonetheless,

42:30

we still have office

42:32

occupancy at about half of what it

42:34

was prior to the pandemic. That's

42:36

not a problem that gets fixed with any

42:39

level of interest rates, because some

42:41

of these buildings are just going

42:43

to come down. And so

42:46

this is going to be something that

42:49

plays out over a number of years,

42:51

but in a way that we're not familiar with,

42:53

because there's been structural impairment.

42:57

And that's why you saw a mall

43:00

trade for 10 cents on the dollar a few

43:04

days ago. That's why you're seeing recoveries

43:06

lower than they've ever been. And

43:09

companies

43:12

walking away from

43:14

buildings, because the difference between where

43:17

they first financed the structure, and

43:21

where they could refinance the structure, and the amount of equity

43:23

that they would have to put into

43:25

it to get the deal closed are like,

43:27

no way, no how, not worth it, bye bye. Here's

43:30

the keys.

43:31

See, I see this, I see this, all I see is

43:33

this, every time you say it is an indoor pickleball

43:35

court.

43:37

How many does it

43:40

have? Pickleballs, you know, every

43:42

time these JC Penney's closes, they

43:44

just gut it and put it into a pickleball court

43:47

there.

43:48

I love that. I

43:49

mean, you

43:52

can only do that, you

43:54

know, so many times. Look, I fit in a hotel a few years

43:56

ago, I

43:59

did a staycation. so to speak, in

44:01

an office building that had been converted into

44:03

a hoity-toity hotel in downtown

44:06

Dallas. I kept on running the columns.

44:09

It was just awkward. That is weird.

44:11

That is weird. Well,

44:13

but office buildings are not designed

44:15

to be homes or apartments

44:18

or hotels.

44:19

That's why

44:21

there's one men's

44:23

room and one lady's room or maybe two

44:26

on each floor of an office building and

44:28

they're in the center of the building. So you only have, you can save

44:31

money building the building by only running plumbing

44:33

up the center.

44:35

But I think there's going to be an equilibrium coming. I do

44:37

think there is a force that is

44:39

happening. I see it anecdotally

44:42

with people I know, companies that I know.

44:44

Then I also see it in things that I read and

44:46

the research. There's a, there's a get

44:48

back, get your ass back in the freaking office

44:51

movement

44:52

going on that you work. I don't want to

44:54

hear out of your mouth that, oh,

44:56

I don't want to work unless it's from

44:59

my house because, and we had some people

45:02

on the show a few months ago that looked

45:05

into this and they look at the productivity

45:08

and it's very clear that

45:10

productivity, now there's not for every situation,

45:12

but generally speaking is much lower

45:15

when you have the very

45:17

basic distraction of the dog kids and

45:19

of course that dreaded refrigerator in your house.

45:23

Look,

45:25

I am who I am and my

45:28

QI research has been a

45:30

work from home, if you will, company

45:33

from day one

45:34

and all of the people who

45:36

work for me made

45:38

their bones in an office setting, including

45:41

me. So had I not

45:43

had two Navy SEALs

45:46

in my MBA training class when I was in New York,

45:49

I wouldn't be the person I am today. I

45:51

wouldn't have toughened up and

45:54

just getting a whole

45:56

bunch of people on a Zoom call, it's like hurting

45:58

cats. Oh.

45:59

time do you need to waste in any given

46:02

day? I wasted today, by the way, 20 minutes

46:04

because one of the people on a

46:06

client call, one of the professionals,

46:09

had to reset

46:11

the links, had to then download and upgrade

46:14

the software, and then finally

46:16

got on 20 minutes into the meeting.

46:20

Yes,

46:21

but there are some podcasts that

46:23

require,

46:25

they run across the Google

46:28

Chrome platform, which I'm not on because

46:30

I don't like the spying aspect,

46:32

and it's just a pain. Are

46:34

you a duck, duck, doe girl?

46:37

No, I use fire or whatever it's called.

46:39

Firefox, I love Firefox. That's what I use.

46:41

Everybody's like, what do you use Firefox? I love Firefox.

46:43

It's just my core. I use both, but I

46:46

prefer Firefox. Anyway, listen,

46:48

we're going to wrap it up because there's

46:50

a lot more data coming out of the next few months. I agree

46:52

with you, by the way, for the most part, that

46:55

a slowdown is happening, and not for

46:57

anything else other than the fact that that is what

46:59

the Fed wants, and what the Fed wants the Fed gets.

47:01

What baby wants, baby gets. The

47:04

truth is that why is that?

47:06

Because they hold the purse strings. For all those people

47:09

out there that want to fight the Fed,

47:11

and I'm not saying go along with every single

47:13

thing they do, because you know that

47:15

I think that most of their economic

47:18

outlook and projections

47:21

are bogus, just like Jamie Dimon said. By

47:24

the way, just like my good friend, Danielle

47:26

DiMartino Booth will say that they're

47:28

terrible at it, right?

47:33

Very much so. Yeah. It's

47:36

just, you know what? It's an embarrassment.

47:38

It's an embarrassment that they think they could do

47:41

it, and they can't, and they keep on

47:43

trying to do it. But you know what? Why

47:46

do they do it? Listen, in the background, I

47:48

think we'd both agree the entirety

47:50

of our financial system is a confidence game. And

47:52

when I say confidence game, I'm not saying a con job

47:54

per se, but it's all about confidence

47:57

in the game. Otherwise, the thing falls upon itself.

48:01

That's all very true. I mean, a buddy of mine

48:03

said it best, Peter Brookvari, years

48:06

ago he said, this is all about,

48:08

this is the only bubble

48:11

that defines all bubbles is

48:13

the bubble in the confidence

48:16

we keep in central

48:17

bankers. That's it. Yeah, terrible.

48:20

Terrible.

48:20

I mean, I was shocked if Jamie Dimon

48:22

came out. I think it was last

48:25

week, this week. He came out and he said

48:29

how terribly wrong they are and how

48:31

they really should do something about how

48:33

their projections are, because they're terrible.

48:36

They're just awful. They're awful at it. They're

48:39

all ... And the funny thing is we continue to believe,

48:41

right? So we believed in transitional inflation

48:44

back in the day, and now we believe

48:46

in that they have to be ... Now all

48:49

of a sudden we believe, all this

48:51

light went on, that the markets believe that he's

48:53

going to be keeping interest rates high because

48:55

he needs to when next month we could

48:57

see a deflationary spiral start. I

49:00

mean, it's from all the things you talked about. The

49:03

fact that we have to repay student loans, the fact that we have

49:05

to ... We're looking at starting

49:07

to ... Not repay, but pay,

49:10

starting to pay the mortgages

49:12

back and the layoffs and all that. All

49:15

of a sudden you could have this major deflationary spiral out of nowhere.

49:17

Look, in the

49:20

GDP data that's fresh

49:22

off the wires, the core PCE,

49:25

which excludes energy and food, which I

49:27

understand we all pay for it, but still, if

49:29

Ed watches it pretty closely, that was 2.4%. Right.

49:33

Right. Getting close to

49:35

right of line. I watch this gauge called

49:38

Truslation TRU every day. It's

49:40

about 2.3%.

49:42

So

49:44

that's what happens when people

49:46

aren't getting ... That's what happens when

49:48

Walmart starts to lower starting salaries

49:51

and when the wage price spiral ends

49:53

up being a myth.

49:55

That's what happens. Yeah.

49:57

Crazy stuff. Danielle DiMartino-Brock.

49:59

Tell everybody where they can get all the information

50:02

that they need and how to get in touch with

50:04

you.

50:06

Please come on over to demartinobooth.subset.com.

50:10

If you're an institutional investor, come to QI Research.

50:13

And if you don't follow me on Twitter, please do, at demartinobooth.

50:17

Demartinobooth. Thank you so much for

50:19

joining us. I appreciate that.

50:21

Thank you for your time. Thank you.

50:24

Bye. Always a great show with Danielle. I mean,

50:26

a wealth of knowledge. And I think

50:29

a real nice breath of reality, maybe

50:32

a smash in the head or a bonk on the head of

50:34

reality, sometimes things that we don't want to really talk

50:36

about. But the fact of the matter is that she did

50:40

provide us with, I think, some really good insights

50:42

and insider take on what's

50:44

going on and what the Fed is thinking. And the reality

50:47

is, once again, that we are going to have

50:49

to play along with the idea that

50:51

it is, you know, a hire for longer

50:53

or more appropriately, that they are trying to slow

50:55

the economy. And let's figure out what they're going

50:57

to do about that. I'll

51:00

mention again, if you're still interested,

51:03

there is a link on the disciplinedinvestor.com

51:06

for the webinar that we're doing on November 15th,

51:09

What's in Store for 2024. And

51:12

take a look at that and make

51:14

sure to register because you're not going to get in if you don't

51:17

register. So we'll be at five o'clock on

51:19

Wednesday, the 15th of

51:21

November for you

51:23

to check out our thoughts and

51:26

direction and portfolio and all

51:28

things we're doing. So make sure to go over there. Thanks for joining

51:30

me this week and every week. I'll see you again next

51:32

week with another great guest. We have so many lined

51:34

up for the final months

51:36

of this year. Thanks again for joining us. See you again next

51:38

week. Bye bye.

51:40

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51:42

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51:47

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