This is an exclusive "Hedgeye Investing Summit" interview between former Federal Reserve advisor Danielle DiMartino Booth and Hedgeye CEO Keith McCullough. Also below is an excerpt transcribed from the conversation.
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Keith McCullough: We’re talking to someone else about the Fed now. That’s Daniel DiMartino Booth, former chief advisor to the Dallas Fed president, who isn’t worried about being politically correct.
Danielle DiMartino Booth: I am. I'm a lot less political than the Fed. Let's put it that way – which makes me non-PC.
McCullough: So we know it's really bad when SPYs are down 30 to 40 handles in the morning, credit's not trading, and you have New York Fed head John Williams scheduled on CNBC to be followed [National Economic Council Director] Larry Kudlow.
DiMartino Booth: Yeah, people think that [Fed Chair] Jay Powell has been influenced by the Trump administration. That's the one area where I will come to his defense. Jay Powell understands that Supreme Court precedent dictates he can't be fired. Senators from Democrats and Republicans have come out and said to the Trump administration, ‘Try us.’ You can't get it passed the Senate.
McCullough: What I should have asked you right away is what do you think happened [during the March FOMC meeting] yesterday? I called it triple dovish.
DiMartino Booth: As you know, August 29th the S&P 500 hits its all-time high and around the same time quantitative tightening hits a run rate of about $233 billion on an annual basis. Every $250 billion of quantitative tightening equates to a rate hike.
I’ve been saying this but Powell didn't believe it. Fast forward 17 weeks from that August 29th high and stocks in America lost $4 trillion of market capitalization. Credit markets froze solid. For 41 days there was no high yield bond issuance. That's the longest span ever, with data that goes back to 1995 or so.
Powell gets it. He has a private equity background. If you read transcripts from 2012 and 2013, I don't get out enough. I read all of them. If you read his comments from back then, this is the man who said in October 2012, ‘We are blowing a duration bubble across the entire credit spectrum.’ Those are not my words. Those are his words. So he thought we could have real issues when we started to tighten that we just won't understand.
McCullough: That transmission mechanism to credit is important and anyone who's grown up in private equity or certainly who’d been Carlyle’s lawyer would be aware of that. My old boss actually was David Rubenstein at Carlyle.
DiMartino Booth: Who hired Jay Powell.
McCullough: Yes. I was shocked to see such a thing. Uh, not really. So getting back to the credit market transmission mechanism.
DiMartino Booth: Yeah. I mean, you've got leverage loans. They had their worst month of issuance in December since 2011. I mean, that is the lifeblood of these crazy private equity deals.
McCullough: So while you said, you don’t think he’s in Trump's back pocket, he's in private equity’s back pocket, isn't he?
DiMartino Booth: I think he’s always been embedded in that community. I think he also considers himself to be part of Corporate America. When he was at Carlyle, he founded the industrials group. So he's talking to the president of Cummins.
So He's speaking to hundreds of CEOs worldwide. He knows already that manufacturing is turned in this country. He's known it.
McCullough: The Fed isn’t going to change what they do.
DiMartino Booth: No their models tell them that stock matters not flows. Not what reality dictates.
McCullough: So now you've got a transactional head of the Fed. I don’t want to exaggerate it or understate it either. He is commercially tied to the transmission mechanism that is commercial credit, corporate credit and easy money.
DiMartino Booth: So this what we know. General Electric (GE) blew up on Halloween GE bonds traded down and all hell broke loose in credit. It was only 14 days later that issuance came to a halt. So, that tells us other companies started being told, “You're not gonna be able to do these share buy backs anymore. You're going to have to shift your focus to your balance sheet.” Markets did not want them to shift their focus. And part of Powell’s effort to reopen the credit markets has to do with the stock market.
McCullough: So, I'm just trying to figure out how this part of the movie might manifest. We agree on who Powell is, what he does and what he's paying attention to. He all but said yesterday, “Yeah, my outlook is still positive but I'll go dovish at any turn in the credit market.” That's basically what he's going to do.
DiMartino Booth: Yeah. I agree.