Washington, DC -- (ReleaseWire) -- 08/17/2016 --BENNETT: Danielle DiMartino Booth is the publisher of Money Strong, a financial forecasting outfit specializing in analyzing the inner workings of the Federal Reserve. She has special insight with them because Booth served as an advisor to the President of the Federal Reserve Bank of Dallas from 2006 until recently in 2015. This week Danielle wrote and published a clever article titled "The US Consumer: Are the Jetsons' Jets Still On?", which is where I want to start today. Danielle, welcome back to Financial Myth Busting.
DIMARTINO BOOTH: Happy to be back with you, Dawn.
BENNETT: So you wrote a clever piece this week centered around the optimistic vision portrayed in the 1960s cartoon, The Jetsons. Even as we've seemingly witnessed technology achieve these incredible things the daily lives of most modern Americans are hardly lives of ease today, or of comfort. Why do you think modern America is such a struggle despite technological progress mostly delivering as promised?
DIMARTINO BOOTH: You would think with some of the advances that we've had in living standards since September 1962, when The Jetsons premiered, that Americans would be immensely satisfied with their lives. But I think you have to go back to the influence of the central bank on American buying patterns, and actually encouraging American households to take on more than they can afford, to live outside of their means by using debt, and what a massive change that that has created for the average US household.
BENNETT: Is there any way to separate people who go into debt for strategic financing purposes, versus those who are trying to live beyond their means?
DIMARTINO BOOTH: Well that's certainly what we've been told. But even if you look at corporations, and their propensity to take on debt in recent years, it too has started to go to non-productive ends, and of course I'm speaking about borrowing to buy back your shares. Again, wherever you have an era where interest rates stay too low for too long then the idea of debt, which can be good, tends to be bent and contorted.
BENNETT: But how do you look at today's soaring debt levels? I mean optimistically, do you see it as a good thing, or as a warning sign of troubled waters ahead?
DIMARTINO BOOTH: Well I see the good unemployment, as I like to call it, has been declining. I also see that the quit rate has been declining. Now I've just named two of Janet Yellen's favorite indicators that flow into the labor market conditions index. These are indicative of people feeling less able to tell their boss where they can put their darn crappy job. When that happens it tends to accompany exactly what we're seeing in credit card borrowing, which is a surge in credit card borrowing. So if you feel like your job security is iffy, and you see credit card borrowing start to go up quickly, that means that we're actually seeing job losses start to pile up, and/or people losing high paying jobs being replaced by eating, drinking, and getting sick type jobs that pay a lot less, and them having to make it up somewhere in between; i.e. using their credit card.
BENNETT: I think you observed in your article that Americans' debt actually hit a fresh record high in June of this year, of 3.64 trillion, more than a trillion over than its 2008 peak of 2.7 trillion. Why are we back to borrowing as if there's no tomorrow? I mean I'm sure our collective wealth has not risen in the same fashion as our debt.
DIMARTINO BOOTH: Absolutely it has not. We know that median incomes have been stagnant for over a decade now. No, I think that what that reflects is two things. The fed encouraging homeowners to use their homes as ATM machines. We don't hear that anymore, you kind of have to dust off that statement. But one of the unintended consequences of that was that the cost to attend college skyrocketed because people were taking equity out of their homes. We see in this week's Wall Street Journal that those home equity loans are finally coming home to roost, and that defaults are increasing on them. But people ended up spending more on education than they would have otherwise because they could take cash out of their homes. What that ended up doing was fueling higher education inflation to such an extent that in order to keep going after we hit recession people had to take on a lot of student debt. I don't think people connect those dots as they should, that it was the home equity borrowing that fueled higher education inflation, that in turn fueled this huge increase we see in student debt, and of course we've got subprime auto lending. Because you have two categories of debt that prior to the financial crisis were south of a trillion, both of which are now north of a trillion dollars, and that is what has fueled this increase to 3.64 trillion.
BENNETT: What kind of recovery produces an American public that still struggles to build up any kind of savings, and lives paycheck to paycheck? Of course I don't think we are recovering, but I need to know what Janet Yellen is talking about when she tells us that we are recovering.
DIMARTINO BOOTH: Well what she is talking about is the fact that the labor force participation rate appears to have bottomed. Of course when you give people 99 weeks of unemployment insurance rather than do as the Danes or the Australians have done time and again, and that's retrain their workforce so that they can remain contributors, then you have this stealth area of the labor force that is permanently non-contributory. That's when you start to feel like this recovery isn't a recovery at all, and you question where Yellen is coming from.
BENNETT: Do you think we are heading into a recession, or are we already in one? Virtually no capital investments are going on, it's a very immobile labor market, stagnant new business creation. There's so much hard data out there that supports that we're probably in a recession already, but I'm just curious what your thoughts are.
DIMARTINO BOOTH: Well, there is of course what I wrote about this week, and that is consumption holding everything up. But you saw in the retail sales data that it looks like auto purchases have peaked and rolled over, and we're starting to see that become more apparent in subprime auto losses, and defaults as they start to pile up. Look, if you have the U.S. consumers step back in any shape or form, and you add it to all of the indicators that you've just detailed, we're in recession.
BENNETT: Right. Why won't the Federal Reserve or our government admit that?
DIMARTINO BOOTH: Well they're a little afraid, Dawn, of having nothing in their toolbox besides quantitative easing that failed, negative interest rates that are failing in other countries. There are no interest rates to cut because they didn't normalize and raise interest rates back in 2012, and 2013 when the opportunity was afforded them, which is exactly what Richard Fisher and I were arguing for at the time.
BENNETT: So the government continues to ignore this type of hard data. Instead they want us to pay attention to, what I would call, headline data, like Nonfarm Payroll. Do you think the media knows what's going on, or are they just oblivious to it?
DIMARTINO BOOTH: It's really hard to say. There has been so little work done about things, like the Nonfarm Payroll, and the Birth/Death Model. To say nothing of the false signal that emanates every single Thursday morning with the official jobless claims, because it only reflects half of the picture. It only reflects the fact that because there was no job retraining in the aftermath of the Great Recession, that if companies do have decent employees, that they're holding onto them for dear life. But that reflects a skill mismatch and nothing more.
BENNETT: You're right. Every Thursday we seem to receive more bad economic data. Yet look what happened last Thursday, all the major US indices closed at record highs. The trifecta hasn't been done since 1999. Could there possibly be a greater divergence today in what we're seeing in the markets, and the actual health of the US economy?
DIMARTINO BOOTH: I don't think there's any doubt about it. There have been numerous data releases. Once you start looking at 10Ks, and individual company filings that are released that show the number one purchaser and holder of a lot of American household names, it's Japan, because their insurance companies and pensions have been forced into dividend yielding US stocks as they have faced negative interest rates at home. So I think the divergence is because there is a new player in town. It's kind of like when you walk out onto that floor in Vegas as a new player coming out. Well there is a new player, it has come out, and it's a central bank. That's a lot of firing power when you consider their ability to buy US shares, and you add that to the fact that share buybacks by American companies are through the roof. Yes, sure you'll see a flaw in the market. But does it reflect the economy? Absolutely not.
BENNETT: When we're in an economy like we've been in over the last, let's say, decade where we're consuming more than we're producing, becoming increasingly indebted along the way, what's the end game here? How do we create a real economy out of the artificial debt fueled growth we've been relying on for so long?
DIMARTINO BOOTH: Look, getting from point A to point B is not going to be pretty. You're going to have to allow for a recession to be cathartic in nature. I know people hate to hear that. Oh, you don't have to clean off the slates, and make industries competitive again. No, surely there's a Goldilocks solution. No, that's not true. You have to take the excess capacity out of the system once and for all. I've listened to both candidates talk about infrastructure spending. There's a way to do this without taking on any debt. It's called public-private partnership, and you do it without wasting a whole bunch of money. You put Americans back to work. You build the stupid pipeline, you put the oil workers back to work as well. There is so much low hanging fruit that politicians in DC just can't seem to see staring them in the face that has nothing to do with increasing public debts.
BENNETT: That's right. This past week Trump spoke at the Detroit Economic Group.
DIMARTINO BOOTH: I would say his best speech yet.
BENNETT: I agree. Finally.
DIMARTINO BOOTH: He's finally building a good team.
BENNETT: That's right, finally. It was good to hear that. Then of course it was followed up by Hillary's take on how she wants to conquer, and build out our economy. What's your feeling about Hillary?
DIMARTINO BOOTH: Well listen, Hillary scares me because of my background. That is simply when you hear that somebody on the Federal Reserve Board of Governors has made campaign contributions to Hillary's campaign, I pretty much stop listening at that. "You had me at hello", in that great movie Jerry Maguire. You had me at campaign contribution, because I fear that she will stack the Federal Reserve Board with more doves in order to fulfill an agenda that has to do with taking on debt to create these jobs. Rather than doing it organically, again as I mentioned, more of a public-private partnership. Also, I come from Wall Street. I'm a wee bit cynical when I hear her say that she's going to get rid of the loopholes in the tax code that have filled her campaign coffers. I just see it as being a serious issue of talking out of both sides of her mouth.
BENNETT: It has built out the Clinton Foundation.
DIMARTINO BOOTH: You can just keep going Dawn.
BENNETT: I'm not going to, but I could. One of the things that surprised me about Trump is he did say that now is the time to borrow more money. I was a little concerned with that statement. Do you have any thoughts on that? Because to me that means he wants to print more money.
DIMARTINO BOOTH: Again, he said he would not reappoint Janet Yellen.
BENNETT: I heard that. That's right.
DIMARTINO BOOTH: That has also gotten my attention.
BENNETT: Me too.
DIMARTINO BOOTH: But what I heard from him is that we should be borrowing longer. Remember Ireland borrowed, just in February, a hundred year note with a 2.35 percent rate. I optimistically interpret what he said as we should be doing as other rational developed countries have done by tapping into the sovereign bond market, and elongating the duration of the US Treasury portfolio. So that we're not reliant upon the kindness of strangers in Shanghai the next time there's a bump in the road to show up at our auctions, and play nice.
BENNETT: That's right. What about the negative interest rates? What do you think will happen? Do you think they'll come over to our shores too?
DIMARTINO BOOTH: Again, I fear that that would be the outcome with a Hillary presidency. I fear that we will go in that direction. Here's a little fine point, the largest banks in the country that have the biggest lobbying power would get out of the way, and all the money market fund industry would go out of business lock, stock, and barrel. They would do that with their eyes closed.
BENNETT: There's that new regulation that's coming out in October that could do it for them anyways. You know that, right?
DIMARTINO BOOTH: We've been some of those stresses emanate from the overnight LIBOR market. I was actually Tweeting the other day about TED spreads. I haven't Tweeted about TED spreads in forever.
BENNETT: It's fascinating the world that we're heading into Danielle. I just wonder if Americans are actually going to be able to see through what Hillary is offering, versus what Trump is offering for our economy. You're right, he really came out strong this week, so it was good to hear you say that. Listen, we're heading into the end. What's your last thought you want to share with our listeners?
DIMARTINO BOOTH: Look, maybe Trump is the great unknown. But again, if we listen to what he said about the economy this week, and say a little prayer that his really bad case of foot in mouth disease goes away, we might be able to have a more rational discussion going into November about policy. That's what has been missing from this campaign.
BENNETT: Perfect. Thanks Danielle.
For over a quarter century, Dawn Bennett has been successfully guiding clients through the complexities of wealth management. Her unique vision and insight into market trends makes Bennett a much sought after expert resource with regular appearances on Fox News Channel, CNBC, Bloomberg TV, and MSNBC as well as being featured in Business Week, Fortune, The NY Times, The NY Sun, Washington Business Journal in addition to her highly regarded weekly talk radio program - Financial Mythbusting. Through prudent and thoughtful advice, Dawn Bennett has strived to consistently provide the highest quality of guidance.
About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com.
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett.