Ask The Expert - Danielle DiMartino Booth - February 2021

Man: You are listening to "Ask the Expert" on Sprott Money News.

Craig: Welcome back to the Sprott Money News at sprottmoney.com "Ask the Expert" series for February 2021. I'm your host Craig Hemke. Joining us this month is Danielle DiMartino Booth. Many of you might be familiar with Danielle. After a lengthy Wall Street career, she spent nine years at the Dallas Fed. She's now an author and an analyst. She's the CEO of her own business. Also chief strategist at quillintelligence.com. And that book she wrote called "Fed Up: An Insider's Take on Why the Fed is Bad for America" is really a must-read for everybody. Danielle, you're a busy lady. I appreciate you taking a few minutes to join us.

Danielle: It's great to be with you today. We're living in historic times in many ways.

Craig: Oh, man, you're not kidding. Again, we've got questions submitted by Sprott Money customers, so please always visit Sprott Money, become a customer for great bullion deals, great bullion storage deals, and of course, if you enjoy listening to "Ask the Expert," "Weekly Wrap-Up," or other new precious metals projection video, please like that wherever you find it, maybe subscribe and share it on the channel you're listening to too. That'll help our distribution get the word out. Danielle, in terms of getting the word out, I've got six questions that have been submitted by Sprott Money customers over the last couple of weeks in preparation for this. If you're ready, I'll just hit you with the first one.

Danielle: Let's do it.

Craig: This one, I think it goes right into what the subtitle of your book is. People like to say, "End the Fed." I see that on Twitter all the time, myself. But in your view, if we ended the Fed, what would come next?

Danielle: You know, the best...First of all, I need to dispense with the conspiracy theorists, so Jay Powell and the most powerful members of the Federal Reserve, their email addresses end in .gov because they're a full federal agency. That's number one. But to answer your question, I think the most critical parallel you can draw is what China has done with a fairly open and vulnerable information technology infrastructure in the world. So, they've been able to come in and rob multiple countries blind of all kinds of IT secrets and what have you. So, I say what happens to our financial system if there's nobody looking over it, and how quickly does it succumb to espionage on the part of frenemies of the United States? So, people need to understand that the Federal Reserve needs to be completely apolitical, completely independent, which it is not. It needs to be taken down to the studs and fully reformed, but it does not need to be destroyed.

Craig: All right. I laugh every time we see Yellen or even Powell in public. Powell's always got a purple tie on and Janet Yellen always wears some kind of purple combination as well. I guess trying to be apolitical? I sense maybe you don't think they're doing too good of a job.

Danielle: Well, that's the goal but, I mean, if...you know, a monkey right now could tell you that there have been effectively a merger between the two entities, between the Federal Reserve and the Treasury.

Craig: Yeah, especially with former Federal Reserve head now at the top of the Treasury. Do you think that would...? As an aside, Danielle, was that, kind of, by design you think because they're going to have to work so closely together in the months to come?

Danielle: Yes. That could very well be the case. We have to keep in mind the trillions of dollars of stimulus being pondered in Washington, D.C. It is the treasury that issues the debt, but the Fed is in the driver's seat when it comes to how that is placed into the market and what rates do because of that massive supply.

Craig: Yeah. It makes sense. They'd have to work pretty closely together. All right. Danielle, let's move on to question number two. There has been a lot of movement in the bond market lately as inflation fears are creeping in. You often refer to the MOVE index, which I think is something that deals with the bond market. What is it, and how do you interpret it?

Danielle: The MOVE index is...the easiest way to think of the MOVE index is the sister index to the VIX index. The VIX index is a volatility gauge for the stock market. The MOVE index is a volatility gauge for the bond market, and it is what Jay Powell follows the most closely. It is what began to be unhinged in the fall of 2018. It started to become unhinged again when the Fed had to roll out Not QE in the fall of 2019. And it has started to perk up, which really makes the Fed nervous because it tends to be a precursor to credit starting to become unhinged. And that is what they do not want because there's a massive negative feedback loop between credit and the stock market. One feeds off the other. People have it completely backwards if they think that the stock market decline triggers anything. It's the credit markets, which are massive because it's been the Fed's only tool, right? Lower interest rates to the zero balance [inaudible 00:05:21] that there's enough credit created to gloss over the problem. But in doing so, you end up with, you know, the IIF and the report out that shows that global debt has risen by $24 trillion to an all-time record high, and, you know, it's 355% of global GDP. These are massive numbers. And so, again, it's the bond market that I follow the most closely, and to do that, follow the sister index, follow the MOVE.

Craig: Okay. Moving on to question number three, Danielle, and this is a pretty straightforward one. How much do you trust the monthly job numbers and the monthly inflation numbers that we see get cranked out? Do you think maybe they're understated, overstated? What do you think?

Danielle: So, I think that the Bureau of Labor Statistics, particularly in a post-pandemic world, are having a [inaudible 00:06:15] with the monthly jobless data. I always direct people to instead follow the weekly jobless claims data to get a better, more accurate real-time read on what the labor market is doing. That said, I'm going to talk out of the other side of my mouth just like a former central banker should and say that I do follow the labor force participation rate very closely that we get in that monthly data because it, to me, is one of the most honest reflections of the percentage of people who are able to work, who are working. And that is something that has been declining for decades now unlike many other places in the world.

Craig: And how about inflation, Danielle? It seems to me there's definitely an incentive for the government to understate it, rather, you know, cost of living adjustments, keeping interest rates low, even making real GDP look better. What do you think there?

Danielle: So, inflation has been systematically understated for generations. The inflation metrics don't properly account for healthcare or housing. We pay much higher levels of rising prices when it comes to going to the doctor and when it comes to putting a roof over the head. The one funny thing of late is that we've seen rental prices falling in so many cities that inflation is less understated than it normally is. So, there is your post-pandemic irony is that inflation is actually more accurate than it's been in the past because we are seeing falling rents.

Craig: How about that. All right. Let's move on to question four. We're halfway done. And we're going to stick with that inflation topic for this one and the next question. Do you think that this latest round of Fed stimulus and large-scale asset purchases, as they call it, will lead to a surge of inflation this year?

Danielle: I think that the greatest risk is mathematical. Base effects are going to count in March, April, May of 2020. Post-pandemic, we had some extremely low inflation prints, so just mathematically. If we just have inflation steady as she goes, we're going to see higher prints than we're used to seeing. On top of that, we've had the mother of all supply chain disruptions that, by the way, started with the trade war and was just exacerbated by the pandemic and is still getting worse because you actually have the virus revisiting China and a slow-down again in the supply chain. So, you're going to have real forces of inflation that push up those prints to very uncomfortable territory for investors and for the Federal Reserve, but at the same time, you've got almost 20 million Americans collecting unemployment benefits. That is disinflationary at its root. So, the question I think that should be asked right now is, is this going to be an inflation scare, or is it going to have staying power after we come through the supply chain disruptions which are...? That is a supply shock that should fade.

Craig: Well, let's then segue to question five because it's, kind of, the flip side of that. As, you know, Chairman Powell back at the virtual Jackson Hole conference talked about his fear of disinflation or deflation leading to deflationary expectations, which leads to more deflation, and this, kind of, vicious cycle that Japan has been on. Jim Rickards has suggested that if the inflation doesn't pick up that maybe the Central Bank should consider an official revaluation of the gold on their books. What do you think of that idea?

Danielle: Well, so it's really hard to say. I understand where Jim Rickards is coming from, but I doubt...This will be my shortest answer ever. You'll never get a central banker to agree to that, not in a million years. That being said, gold is my favorite place to be right now, hands down. I think it has been left [inaudible 00:10:11] by this Bitcoin craze and gold and silver are fantastic places to be right now.

Craig: Yeah. I agree with that, for sure. All right. Then one last question for you, Danielle, and I think this is timely as we record this. We're just a few minutes away from the latest FOMC minutes being released. This is going to be a very busy year for Chairman Powell and the FOMC. One of the policy tools that they've yet to implement but they've, kind of, hinted and trial-ballooned might be out there is yield curve control. Do you think that's a possibility if inflation continues to pick up and there continue to be pressure to push longer rates higher?

Danielle: Oh, I certainly do. I think yield curve control...I think the Fed wants to avoid it. I think we've seen that in Powell press conferences and their statements, but I think that yield curve control will certainly be implemented. Look, this is a year of massive corporate debt refinancing in America of massive commercial real estate refinancing needs in America. Chairman Powell does not have the option of having long-term rates rise because you'll have a credit crisis overnight. So, if need be, I think yield curve control is definitely where the Fed would pivot.

Craig: Do you think, Danielle, I've, kind of, postulated this in my annual forecast, and as we've gone here now two months into the year, that they'll really try hard to avoid an actual policy change? They'll start with just, kind of, job owning, you know, that they're looking at longer maturities.

Danielle: Yes. They have been job-owning for a very long time, very, very long time. They've got issues at the short end of the curve because the Treasury's general account, call it the United States government's checking account, is going to go from $1.6 trillion to about $500 billion in fairly short order. So, you're going to be flooding the system with reserves, which means the Fed is going to have to be defending the lower bound, trying to keep interest rates positive at the lowest end of the yield curve, and trying to prevent rates from rising at the highest end of the yield curve. This is threading a needle, and it is the continuation of the Fed trying to have this crazy monetary experiment continue to move forward without anything major breaking. So, I mean, get your popcorns, sit down, get a front-row seat.

Craig: One last thing, Danielle, because I've heard you mention this before, and I think that's something that not a lot of people are watching. I mean, we're all watching the long end, but what you're describing here is a really extreme challenge to keep rates from going negative on the short end. Can you elaborate on that just a minute before we wrap up?

Danielle: Sure. So, when the Fed does quantitative easing, it is buying treasuries up from the secondary market, and in doing so, it's creating reserves at these big U.S. banks. At the same time, if the Treasury general account starts to pay out and send checks to Americans, every time an American deposits one of the checks that they received from the Treasury department into their bank account, banks get more reserves yet. And that means that the amount of collateral in the system is being drawn down, and the United States has a massive money market fund industry, multiple trillions of dollars, and they have less collateral that they can source to give their investors in these money market funds any, kind of, a yield. So, they're going to be chasing after the shortest rate paper at a time when it is conspicuous and it's threatening...the short end of the yield curve with going negative, right? Because it's a supply-demand thing, and the more demand there is for a [inaudible 00:14:05] the price goes the lower the yield goes, and so you start to see the threat of...at the very short end, we're talking 90-day paper here, but the threat of negative interest rates, which is another Fed nightmare.

Craig: Oh, my gosh. What an interesting year we have ahead of us. That's just not something many people are thinking about, but you've clearly laid out. That's a double-edged, kind of, barbell, a double-edged sword or a barbell, whatever, that Powell has to manage.

Danielle: Oh, yes.

Craig: Danielle, before we go...

Danielle: Yeah. The best analogy is that the Fed is fighting a war on two fronts.

Craig: A war, yeah, which doesn't usually work too often. Danielle, before we go, tell everybody a little bit about your company and what you do.

Danielle: So, after I left and started writing "Fed Up," I founded a research company and I produce the same independent, crazy, off-the-wall, extremely honest research every single day at Quill Intelligence, so please come subscribe. I'd be happy to have you and find out what it's like to have absolutely no agenda from an insider at the Fed. If you read "Fed Up" and you liked it, you will love Quill Intelligence research, quillintelligence.com. If you don't follow me on Twitter, then clearly you've been on vacation for years, @DiMartinoBooth.

Craig: And that's a must-follow as well. I'll give that a big thumbs up too. Danielle, thank you for all you do. Your sensible analysis at a time when things are so crazy is just invaluable, and we very much appreciate you sharing some of it here with us at Sprott Money. Have a great rest of your day.

Danielle: Thank you. Likewise. Take care.

Craig: And from all of us at Sprott Money News and sprottmoney.com, thank you for listening. We'll talk to you again with another "Ask the Expert" segment next month.