We've been speaking with top economists to better
understand what this economic climate means for Companies bottom lines. Today I'm speaking with Danielle DiMartino Booth. She's the CEO and founder of QI research, a global
thought leader and a former member Of the Federal Reserve Bank of Dallas. Thanks so much for joining us. It's great to be here today. Thank you for having me
again. So what's the biggest risk to a company's bottom line
right now? I think it's how the bankruptcy cycle is gaining
momentum. I'm not focused on my bottom line as much as I am on
my top line, and right now it's Revenue's cash flow that really are the most at risk. You can't play a lot of accounting games with things
like, these are my sales. This is how much cash flow the company's throwing off. This is our ability because of that cash flow to
service our debt. This is just really black and white area right now in
the c-suites. So that's why they have to be even more cognizant of
the bottom Line. What I'm hearing is like, it's really about the money
coming in, how much money is coming out and keeping That book balanced. And that's the biggest risk is
like, can you keep that book balanced or not? Yeah, that that is where we are, the run rate that
we're seeing, um, early Summer, in terms of large companies, we say large, we
mean liabilities of 50 million or More. But the run rate that we're seeing of chapter
11, if not chapter seven liquidation, bankruptcy Filings, uh, really is on par with the worst, darkest
days that we Saw of the pandemic. What's keeping inflation so high? Is this higher for longer strategy coming from the
fed? Is that working. The Fed right now is in a really tight position when it
comes to making monetary policy for the Public good. You know, there were increased costs in the health
care system that were caused because of the Pandemic. Um, there was a shortage of semiconductors
that caused new car Prices and used car prices to rise off, well off of
their Trend after the pandemic hit. It is now more expensive to insure those cars.
These are what we call idiosyncrasies. They're one off events that raise inflation, But over which the Federal Reserve has no control. It's the decision of regulatory bodies. So I think what you're saying is, like all these
inflationary pressures, like the interest rates is just It's just one piece of the puzzle. It shouldn't be like, it's not the Fed's fault that
inflation is high. So that might be too broad of a statement. At the very peak of the post-pandemic stimulus, The part that the fed was involved with, you know, the
fed owned, I want to say, 38% of the mortgage Backed securities market. So the fed policy definitely had a hand in the run up
to these prices. But again, now we're watching the other side of that,
that there's such a long Lag time, 12, 18 months between what we're seeing now,
which is we're seeing the beginnings of home Price declines in in certain markets. And we're seeing apartment supply coming online at the
fastest pace in a half century. We're seeing that level of supply start to manifest as
falling rents, but it's going to take a Long time before you see that come through the
consumer price index. But the fed will probably still get the blame all
along the way. But again, you know, when I was at the fed for almost
a decade, they would always say that interest rate Policy is a blunt instrument. Do you see the fed lowering rates anytime soon? Do you think the election is changing their opinion? We have to take Federal Reserve officials at their
word, at least to the extent that It pertains to unexpected weakness in the job market. It doesn't matter how close to or far away from
Election Day We happen to be, if it's appropriate, if there is
unexpected weakening in the job market, I do think That the fed will move, uh, and will not hesitate to
move just because it's an election year. I think Powell's been pretty clear about that, but
that the pressure politically, this is the Most active fed chair in the history of the
institution. That's a matter of public record. He has been up to the hill and spoken to more
individuals, uh, representatives in Congress and the House of Representatives in the US Senate than any of
his predecessors. So he will definitely be feeling pressure coming from
by way of their
Constituencies and the relationships that he's built
up over the past 5 or 6 years on the Hill to be attentive to the weakening in the job
market. And I think he'll he'll he'll be listening for that. Do you think there will be more layoffs in other
sectors to come? And what industries do you think are the most at risk? We are indeed seeing a fanning out, a broadening of of
the pain In the job market. And this is where we get into the I overhired into the
pandemic, and Therefore I shrunk back to a regular sized into
chapter two, which is your Plain vanilla recession. And that's where we are right now. This is when your job losses begin at the lowest rungs
in terms of skills, educational Attainment, income making capacity. And this is why Federal Reserve officials do need to
be so in tune to what's happening right Now. If this is anything like what we saw in 2007,
2008, it was one tenth Of a move up in the unemployment rate. It's kind of where we are right now. And then we turned a corner in early 2008. All of a sudden then it was 3/10 and 4/10 of a
percentage move higher in the unemployment rate in any Given month. And that's what happens when recession
sets in. So then with all that said, are we actually in a
recession? I know we haven't declared one, but would you say
we're in a recession or are we nailing that soft Landing? Nobody's talking about that soft landing
anymore. Has that gone away? I think the soft landing chatter has, has dried up with
with good reason. We get quarterly, uh, revisions with a very long lag
time. The most recent that we got showed that rather than
640,000 jobs being created in 2023, third quarter, that there were, in fact, 192,000
jobs destroyed. But it does indeed look like we're in a situation
similar to that where we'll see probably October Be backdated by the National Bureau of Economic
Research. Their business cycle dating committee took exactly 366
days to date, the Recession that began in December of 2007. So because of all the noise introduced in the
post-pandemic environment, it could easily take them a Solid year again to be able to backdate the recession.
But from all the evidence that we've seen, it does
look like recession began in October of 2023. Will AI transform the way that companies do business? And what does that mean for workers and what does that
mean for employers? Well, I think AI already has transformed the way that
business is conducted in America, especially when companies are dealing with
recession. They're going to look to whatever the latest
technology happens to be to help Them really, uh, protect their profit margins. There's going to be a much happier ending to AI. It's going to revolutionize the efficiency of health
care. But I would say in the nearest term, call it the next
6 to 18 months, AI is going to be where it's at least going to feel
like a weapon of mass destruction, because it's going To be wielded for the purpose of cutting costs. What impact do you see cryptocurrencies having on the
broader stock market? So to me, cryptocurrencies are the best reflection, the
the best Reflection of what I learned all those years at the
fed are called animal spirits. So to the extent that the cryptocurrency market is
behaving well, that you're going to See buoyancy in the stock market, I really do think
it's that simple. I'm a I'm a superficial economic, financial market
historian. Every single time the Federal Reserve has cut interest
rates, the stock market has finally turned tail. And that's always how it's worked. There's been no exceptions to that rule. So I don't think cryptocurrency is a reflection or a
matter of inflation or deflation. I think it is a reflection of people having continued
risk appetites, because everything in their Portfolio is doing nicely. What's the future of globalization and is it declining? It depends on who the allies are of any given country. You have a coming of age in Mexico to our border and a
higher Educational attainment and a higher homeownership rate
just south of our border. Maybe we made a mistake by becoming so deeply embedded
economically with China. But we know how globalization can work to help us be
more efficient and Thereby build out our allied networks, possibly
between Canada, the United States and Mexico, as It's always been envisioned. But of course, if there are far right contingencies in
any given country that Want to put up trade barriers, it's not going to
matter what and who your political
Allies are. It really is going to come down to the
leadership of individual Countries. The fear, of course, with one far right
wing government after another being Elected, that it's going to be a potential wave of
isolationism and protectionism and Nationalism. And that means that that we could, in the
longer term, see inflation be higher Than it otherwise would be. How does the ongoing war in Israel, and also the one in
Ukraine, how do you see those Impacting companies bottom lines? It's a very company specific question, and whether or
not you sell into those, into those Markets. We have seen that social strife and
divisiveness Has its economic price. None of this is free, and a divided America will fall. And make no mistake about that. So I think that we have to be cognizant of The price that we will pay if we decide to be an
isolationist nation. When it comes to our allies, we have to always bear in
mind what made our nation great to Begin with. We didn't pick and choose back then. It was liberty. Give me liberty or die. So I'll get off my soapbox. But I think we should be cognizant not just of direct
companies selling into War torn lands, but also how the war and other areas
of the world Affects the social standing, the social fabric of the
United States, because there's a very real economic element
to that.
