Dear Hedgeye Nation,
In this new edition of Real Conversations, Hedgeye CEO Keith McCullough sits down with outspoken fan favorite and former Fed insider and CEO/Chief Strategist of Quill Intelligence Danielle DiMartino Booth.
Watch as these two pros dissect the current macro environment, Janet Yellen’s yearning to solve Main Street’s inequality, the Fed’s policy handcuffs going forward, the inherent flaws of Modern Monetary Theory, and much more.
Below we have transcribed key excerpts from their conversation. You can watch the entire hour-long interview below.
McCullough: Just to cover the waterfront, everyone wants to know what you think of the new combo: Jay Powell and Janet Yellen.
Booth: What’s not to like – mentor & mentee, learned at the hip. Originally, he was the rebellious teenager; talking about being short volatility, and quantitative easing being addictive. But finally, he learned. He learned from his predecessors, and even one-upped them.
He made Draghi blush with the shock & awe, and he got to buy junk bonds before anyone else in the world.
I would say he’s learned very well, and this’ll be quite the dynamic duo.
McCullough: So how did Yellen come to be head of the Treasury, and why is it so important at this particular time?
Booth: Well, we know from public records that she became very embedded in the Wall Street community in her post-Fed life, raking in an ungodly amount of money at the podium (which is what they all do, it’s not as if she ‘broke the mold’).
After her tenure at the Fed, she became more well-versed in financial market-speak, and we know she can cross the aisle. So, what’s not to like? Wall Street is taking a huge risk here, but that’s not where their mind is at in the very immediate-term.
McCullough: So now you have Janet Yellen at the Treasury and C.C. Rouse at the Council of Economic Advisors, two labor economists. It looks like we’re trying to get to a place of empathy for all the things we have to do for people that need a job.
Booth: She remains bitter about income inequality. If there’s one thing she understands now, it’s that the Fed’s stimulus transmission mechanism to Wall Street is definitely not broken, but it is broken when it comes to Main Street. If there’s one thing COVID has taught us, it’s that the Fed has outright failed on its second mandate to maximize employment.
This risk is that she actually accomplishes getting money directly into the hands of people, and that would not be Wall Street-friendly at all.
McCullough: Yellen is bitter. The first thing she did in her mini-speech was talking about her father in Brooklyn, and how the ‘decency of having a job’ is the most important thing, and she always wanted to be on the front lines combatting that as a labor economist. So what does that all mean, the bitterness and the mission?
Booth: Well, we don’t know, because we haven’t seen anything like this since 1977, when the economic backdrop was dramatic enough to reopen the Federal Reserve Act of 1913. Wall Street is hoping that she stops with the Fed buying stocks.
What if she can fulfill her lifelong dream of getting money directly into hard working Americans' hands?
Well that depends on the Fed being able to step up to Auction and directly monetize the debt.
That would be opening the hornets' nest on inflation.
McCullough: And that’s already in motion. We’re in Quad 2 right now, where you have growth and inflation accelerating at the same time.
The dog has been chasing the fire truck, and he’s going to catch it.
So we’re going to have north of a 3% headline inflation rate, before we even hit summertime. And they’re going to have to deal with this, and they’ll be having that discussion after the inflation rate has a 3 in front of it. So how will Yellen and Powell react?
Booth: We have to remember, when Janet was at the podium, her favorite word was ‘transitory’. So we have these massive base effects, it’s just pure math. We’re going to see higher core CPI and PCE prints, but the Fed AND the Treasury are likely to look at this as being ‘transitory’.
There are still a lot of tensions trying to translate inflation beyond just a margin squeeze for corporations.
McCullough: What I’m trying to do is front run their behavior; people say, ‘Don’t Fight the Fed’.
Of course not – front run the Fed.
Booth: I think that if there’s one thing that'll happen tomorrow at the podium, it's that we’ll see fear in Jay Powell’s eyes.