[00:03:17] Danielle DiMartino Booth: In the current episode. It’s been more so corporations that have put tons of debt on their balance sheet. But nonetheless, the main, the means by which we’ve grown the US economy. Has been through the generation of debt as opposed to making longer term type of investments that ensure prosperity going forward.

[00:03:37] Danielle DiMartino Booth: Investments that pay off in the end. We’ve done a lot of financializing and that never is productive. 

[00:03:44] Rebecca Hotsko: How can we get out of that cycle then? 

[00:03:48] Danielle DiMartino Booth: That is the multiple trillion dollar question, right? And some of it has to do with taking some pain because making investments requires patience and time . And there’s no instant gratification that you might get from doing a debt finance share buyback as a company that is automatically going to boost earnings.

[00:04:09] Danielle DiMartino Booth: But again, by creating debt and investing in, you know, there’s a lot of talk these days about, gee, gas prices are so high. Well, guess what? It’s a 10 year at least, minimal 10 year commitment, multiple billions of dollars to build a refinery to refine the light suite crude that we pull out of shale developments that we get from fracking.

[00:04:31] Danielle DiMartino Booth: It’s a lot of money. It takes a lot of time. You’ve gotta have the government in line with you. Would it have paid off at a time like this when energy prices have become very problematic? Yes, it would have, but we haven’t made the investment. We didn’t take the time and now the political wins are blowing such that it’s discouraged.

[00:04:48] Danielle DiMartino Booth: These are, especially, you know, when I hear the name of your program, millennial, these are things I think that some of the younger generations can’t put their, they can’t wrap their minds. They came of age during the inflating of the biggest housing bubble that we’ve ever. Building homes should be something that you see as being utilitarian.

[00:05:10] Danielle DiMartino Booth: You build a home to live in it. It has a use. You don’t build a home because it’s an investment or something that you can flip. And yet that’s what a generation was taught and that was a non-productive, massive 40% of all US jobs created in the lead up to that housing bubble bursting went into directly and indirectly residential real.

[00:05:31] Danielle DiMartino Booth: It gives you a good pop. It feels great. It’s fun to tell people that your house is doubled in valued. Fantastic. Does it create lasting prosperity? The answer’s. 

[00:05:41] Rebecca Hotsko: Yeah, I definitely want to get into the housing sector with you a little bit later. I want to chat with you first about the Fed’s meeting because they raised the short term borrow rate by 0.75 percentage points.

[00:05:55] Rebecca Hotsko: And so I’m just wondering if you can give kind of your stance on the Fed’s monetary policy actions and the guidance that they gave during this meeting. 

[00:06:04] Danielle DiMartino Booth: I think what investors are having a bit of a hard time grappling with is that this is not the same fed that they’d grown used to. This is not the fed that is afraid of its shadow.

[00:06:14] Danielle DiMartino Booth: That’s going to step back quickly because we do have the vestiges of inflation that was created by way of monetary policy makers monetizing what fiscal policy makers were. And when you take the bank out of the process of determining credit worthiness, and that’s what a bank typically does, does this person qualify to buy a home?

[00:06:35] Danielle DiMartino Booth: Does this person qualify to borrow to buy a car? That’s typically done by a lender assessing your credit worthiness. If instead, the US government directly deposits money into your checking account, they’ve effectively taken the role of the banker outside of this transaction and given money to people, whether they’re credit worthy or not.

[00:06:55] Danielle DiMartino Booth: Guess what? It was all spent and then some. Now we’re seeing credit card borrowing go through the roof. Now we’re seeing that the savings cushion has absolutely been demolished, and in fact is lower than it was going into the pandemic. Now we have inflation that we’re not used to having to deal with, and so the Federal Reserve is playing a different role.

[00:07:13] Danielle DiMartino Booth: They’re like the bad cop in a good cop, bad cop situation. They’re the bad guy. And what they’re telling you right now, what j Powell especially is telling, Against the will of many truly traditionally dovish members of the Federal Reserve Board on the Federal Open Market Committee. What j Powell message he’s delivering is until we get these price pressures under control, however long that takes.

[00:07:36] Danielle DiMartino Booth: I’m going to continue to be the bad guy and I’m going to continue to raise rates more than the market would want to be. The case, which is obviously manifested the day that the CPI report that was a little bit soft came out that notwithstanding when the NASDAQ exploded by seven and a half percent, beyond that moment in time, they’re going to continue with what a lot of people have correctly characterized as this wrecking. 

[00:08:00] Danielle DiMartino Booth: They’re going to continue to tighten into this and we don’t like it one bit as investors who’ve grown accustomed to, gee, the stock market went down, therefore the fed’s going to go on hold. 

[00:08:10] Rebecca Hotsko: I guess I’m just wondering what trajectory should we expect for rates going forward? There’s been some guidance, I think, of reaching 5% as a real possibility, but given that we’re already within a 4% band, what’s kind of your expectation for that into 2020?

[00:08:27] Danielle DiMartino Booth: I do think that j Powell and some of the hawkish members of the Federal Reserve, I do think that they have 5% in their sites. Even if we get 50 basis points, a half a percentage point at the December F OMC meeting, you could still potentially see if we don’t see dramatically weaker prints with the consumer price index if we don’t see inflation coming down at an extremely rapid.

[00:08:51] Danielle DiMartino Booth: The odds of that are very low Winter’s finally coming, right? There’s finally a winter storm that’s going to sweep its way across the country. Heating oil bills are going to be going up. Natural gas is going to cost more inflation at the headline. Food is still expensive. Americans are pondering eating out this Thanksgiving instead of eating it home because eating out might be cheaper.

[00:09:12] Danielle DiMartino Booth: As long as we have these inflationary impulses driving the narrative, then I could see the Federal Reserve continuing into 2023 with more rate heights. Maybe it’s just 25 basis points, but what if it is just 25 basis points in February, in March? What if we turn around in next summer? We still have, and this is the more important aspect of what j Powell is.

[00:09:36] Danielle DiMartino Booth: What if comes summertime, we still have high rates. That is something that very few are accustomed to the Federal Reserve that most expect to be in their corner. When things get bad, they immediately lower interest rates to the zero bound and they fire up the quantitative EAs machine. I don’t think that that’s what’s going to happen in 2023, and we’re not used to that kind of federal reserve not being reactionary, responsive to our every.

[00:10:05] Danielle DiMartino Booth: I guess some 

[00:10:06] Rebecca Hotsko: people are worried that we could still see that sustained higher interest rates and inflation going into 2023. And I guess is your view then that the Fed will get this target by then, or what’s kind of your outlook on that? Or could we see persistently higher inflation as a real possibility?

[00:10:25] Danielle DiMartino Booth: I do think there are many disinflationary forces at. You’re watching the housing market implode at a very fast pace, even faster. If you go to ponder, I hear your accent. Something like Canada, it’s happening even faster north of the border. That will create a drag that will be very real and that the Fed will have to pay heat to, but it comes it through with a lag.

[00:10:47] Danielle DiMartino Booth: And that’s why you hear this term sticky as it refers to inflation because it’s not coming down as quickly as we would like. It’s not coming down as quickly as we’re accustomed to. And that does mean that we could see [00:11:00] rates be put to a high level and maintained there into 2020. Again, we’re not used to this.

[00:11:09] Danielle DiMartino Booth: It’s not an operating manual that we have. We can’t YouTube or TikTok it. We don’t know how to deal with it, and yet here we are looking at the precipice of 2023. Here we are almost in December, for heaven’s sakes, and we’re talking about the Fed continuing to go down this tightening path and how will we handle.

[00:11:28] Rebecca Hotsko: So it does seem like the markets largely anticipated this rate hike, and I’m just wondering what hikes does the market currently have priced in going forward? 

[00:11:39] Danielle DiMartino Booth: I think the market right now is anticipating and pricing in the 50 basis points on December the 14th at this upcoming F OMC meeting, and then potentially depends on the day of the market, but it looks like you’ve got at least 2 25 basis points hikes that are priced in in 2023.

[00:11:58] Danielle DiMartino Booth: I would argue it’s not the size of the rate. But I go back to sound like a broken record, but at the risk of repeating myself, the more important thing is if we do get those 25 basis point rate hikes in February, in March, what’s going to happen after that? And will we still be there in May in June? 

[00:12:19] Rebecca Hotsko: I guess the one thing is the Fed is receiving just a lot of criticism for both, not acting quick enough to now being overly aggressive with rate hikes and quantitative easing, but I’m just wondering from your perspective, you have a lot of experience working for them and in the field.

[00:12:36] Rebecca Hotsko: What else could they have done? Because after speaking with other guests like David Hay, I had him on a few episodes ago, and we just talked about how this problem has been long in the making and it’s not necessarily just over the past couple years really since the past decade and with the ramp up of qe.

[00:12:53] Rebecca Hotsko: So I’m just wondering what’s kind of your thoughts on that and what else could be done? 

[00:12:58] Danielle DiMartino Booth: To me at least, and [00:13:00] I’m very good friends with David and I, I sympathize with his. The challenge that we face right now is breaking the mindset. It’s maybe we never go back to the zero bound. Imagine that. What if j Powell is trying to get short term rates up to 5% so that he has enough room to lower them, maybe only lower them to 2%.

[00:13:21] Danielle DiMartino Booth: What if the floor is higher than what we thought it once was? What if we don’t go back to 0% interest rates? Because it’s been proven to encourage all manner of speculation and bad behavior on the part of I. What if quantitative easing is no longer going to be used as a tool? What if the toolbox is different than what we think it is and that we’re never going to go back to using that again?

[00:13:41] Danielle DiMartino Booth: This would be a full out regime shift for investors to not be able to count on the fed riding to the rescue with unconventional monetary policy. We could potentially be going back to a world of conventional monetary policy and not having rates at the zero bound. This would be [00:14:00] a rejection of the bean doctrine and a new way in which we had to approach the markets, investing, actually doing fundamental research.

[00:14:10] Danielle DiMartino Booth: It’s not the Feds got my back no matter what. I can blindly buy a passive index of the s and p 500 and walk away and. What if we have to go back to reading financial statements, you’d have to retrain an entire generation, for heaven’s sakes, that has not had to do that because the Fed’s always been there.

[00:14:28] Danielle DiMartino Booth: The fed’s always had investors’ backs as far as they’re concerned, except all they’ve ever known. It 

[00:14:33] Rebecca Hotsko: is very, very true. We’ve just been accustomed to the Feds stepping in when things get bad and the markets become so dependent on this, and just far beyond interest rate decisions or that conventional tools.

[00:14:46] Rebecca Hotsko: What are your thoughts on the Fed Saving the market? So we hear about the Fed put, do you think that this still exists? Or is the Fed trying to break this put and not save markets anymore? 

[00:14:59] Danielle DiMartino Booth: So that’s [00:15:00] my current claim to fame, is that I was the first to come out publicly and say, this isn’t about fighting inflation, this is about breaking the back of the Fed put, and if that’s really what the goal.

[00:15:10] Danielle DiMartino Booth: And he is trying to disabuse investors of this dependency of this syndrome. It’s revolutionary, right? I mean, 1987 when Allen Greenspan came to office was a long time ago, and going back to a world in which Paul Volker didn’t care. How Fed policy affected the markets when there was no fed put, when there was discipline in the office at the Federal Reserve.

[00:15:37] Danielle DiMartino Booth: Going back to a world like that, you’re not riding inside of a cream puff. It’s going to be very bumpy. Very volatile and change. Again, I’ll go back to that word, change the way we have to approach the markets, change the way we have to approach investing. I don’t think we’ll be going back to an SPAC world anytime soon.

[00:15:57] Danielle DiMartino Booth: Everybody who was a crypto billionaire [00:16:00] now, name one, it’s going to take some adjustment. We’re going to have to learn how to ride the bicycle all over again. And they’ve changed the way the bicycles crafted and. That’s really 

[00:16:11] Rebecca Hotsko: interesting. I want to touch on the one thing that you mentioned about, I guess, passive indexing, because we’re often taught as, especially retail investors who maybe invest themselves.

[00:16:20] Rebecca Hotsko: That’s just such a great tool to put our money in where it’s low risk, high diversification. What are some of the cons, I guess, of the passive indexing approach, and are you kind of a thinker that the passive indexing bubble is quite real and then it’s going to not benefit investors going 

[00:16:37] Danielle DiMartino Booth: forward?

[00:16:39] Danielle DiMartino Booth: That’s a great question because the passive structure has never been stress tested. Every time we’ve had passive called into question, the Fed has come right to the rescue. It’s never been tested. It’s especially never been tested on the fixed income side with bond backed exchange traded funds. And we forget that just because an exchange traded fund is has [00:17:00] instantaneous liquidity, that does not mean that the collateral backing it necessarily has that same instantaneous tradeability.

[00:17:08] Danielle DiMartino Booth: And again, none of this has ever been tested. You know, you hear about H Y G, the largest jump bond fund in the world Exchange traded fund. Thousands of bonds are in this one etf, but word on the street is only about 50 of them trade. Only about 50 of them have liquidity. What happens if that fifties cut in half?

[00:17:30] Danielle DiMartino Booth: What happens if the actual, I’m assuming that they can trade. Bonds don’t trade. You can’t get a. That is when you get to an existential moment, when the structure of the exchange traded fund comes into question. If the Fed does not ride to the rescue, and this is where I paused and say there are certain junctures that could prompt a Powell pivot, and if there was a moment, if there was a credit event in the markets, something that [00:18:00] threatened the livelihoods of millions of retirees, for example, something that threatened to be systemic in nature.

[00:18:06] Danielle DiMartino Booth: And put at risk the global financial system. Then he would bend and he would have to to be responsible because the alternative would be a global depression, which nobody wants to see occur on their watch. Barring that, I think that we will see some exchange traded funds that don’t survive. Just on 

[00:18:26] Rebecca Hotsko: that point, I’ve had some guests talk about how they think it’s a real possibility that we could see 20 to 30% down next year just give, if we end up in a recession and earnings have to downgrade more, that’s a real possibility.

[00:18:42] Rebecca Hotsko: But even with 20% down, do you think that would be enough for the Fed to step in or it would have to be way more significant 

[00:18:49] Danielle DiMartino Booth: than. I think really it’s not a matter of the level or the amount of wealth that is destroyed, I think it’s the manner in which it’s destroyed. If [00:19:00] it is a controlled demolition, as I like to call it, where you have one company at a time going bankrupt.

[00:19:07] Danielle DiMartino Booth: And no contagion in the system, then I don’t think it’s a matter of the level of where the stock market or the bond market, the corporate bond market is trading. I think it’s whether or not you can wake up the next day and not have had contagion affect the entire system. I think that that’s the way that j Powell wants to see this play out.

[00:19:28] Danielle DiMartino Booth: Is to take one bad business model, one zombie corporation where you’ve had zombie corporation is defined as could not survive three years on. Its on the, on the free cash flow that it’s throwing out given its interest expenses. If you were to put one zombie at a time in the grave for once and for all, I think that j Powell would stomach that.

[00:19:48] Danielle DiMartino Booth: If you were to have a systemic event in contagion, that’s a different. What are some 

[00:19:54] Rebecca Hotsko: warning signs that there is a contagion event? What kind of companies would be going under, or what would we see in [00:20:00] the macro data that would suggest it is a contagion event? 

[00:20:04] Danielle DiMartino Booth: You know, yesterday, not to timestamp this, but we’re speaking the day after the NASDAQ rose by seven and a half percent.

[00:20:10] Danielle DiMartino Booth: Some of the biggest gainers have been companies that have been doing mass layoffs in the middle of the trading day. When the NASDAQ is seven and a half percent, we see come across the news wires that Amazon is going to undertake a major restructuring, second largest employer in the United States of America.

[00:20:25] Danielle DiMartino Booth: If you see the damage from the recession, At some point overwhelm. Gee, this is going to really pump up Amazon’s profits to not have so many darned employees. And it’s going to go straight to bottom line. It’s all good. Or meta, you’ve seen Facebook stock Finally crawl off the bottom and come up with the announcement that was going to laugh.

[00:20:44] Danielle DiMartino Booth: 11,000 people. That works until it doesn’t. And it’s, if the damage to the real economy is deep enough that you then have to step back and say What’s good for the stock or the stock market is not good for the real economy. If we [00:21:00] get to that Rubicon and we cross it, then I think all bets are off. So 

[00:21:05] Rebecca Hotsko: I think that some investors have taken investing off the table in this environment, or maybe they’re sitting on the sidelines just with uncertainty with the fed’s actions, how high rates will go.

[00:21:16] Rebecca Hotsko: What is your outlook then, for the s and p for next year, and how can investors think about investing in this environment? Especially as millennials who are looking to build long-term wealth? We maybe don’t care about what happens next year, but our decisions today will affect our future wealth. So we want to position ourselves 

[00:21:32] Danielle DiMartino Booth: correctly.

[00:21:34] Danielle DiMartino Booth: At the risk of being her, there is something called cash and you’re actually getting paid to hold cash these days. I mean, look at a one year rate for heaven’s sake. Fidelity’s got a four and a half percent money market fund that you can go park your money in, in these kinds of environment. If your dollar cost averaging in, if you’re slowly but surely investing your money for the long haul in the stock market, so be.

[00:21:58] Danielle DiMartino Booth: But be defensive in your [00:22:00] posture. Understand that cash actually pays in these kinds of environments. Keep your powder dry, is what I would have to say. Guessing where the s and p 500 is going to be next year is a fools game. I’m not going there, but we will go into an earnings recession. We will have a global economic recession and pull back.

[00:22:15] Danielle DiMartino Booth: We will have multiple housing bubbles explode, implode, whether you’re talking about Australia, New Zealand, the Nordic States, Canada. There is something to be said for being opportunistic in your positioning so that when opportunities really do avail themselves, before you were born 1981, the price to earnings ratio on the stock market was one third of what it is today.

[00:22:39] Danielle DiMartino Booth: Now, that was a buying opportunity when you jump in with both hands and you just put it all on red and roll the roulette. But we’re not there. And I think that even for young people, I think it’s appropriate to be defensive. So again, if you want to step into the stock market a little bit of time, do that and don’t watch, take it off your screen, [00:23:00] but also keep an extraordinary amount that you normally wouldn’t give in your age in dry powder, so that when the real opportunities present themselves, you can jump in.

[00:23:09] Danielle DiMartino Booth: Let’s 

[00:23:10] Rebecca Hotsko: talk about some of those opportunities, I guess, what do you think are some of the best assets or investments that will be the greatest outperformers coming out of this? We’ve had lots of guests talk about energy being in a new bull cycle, as well as the valuation gap between value and growth.

[00:23:26] Rebecca Hotsko: Stocks is so massive now that value stocks look really great. But what are your thoughts on investments? 

[00:23:33] Danielle DiMartino Booth: There is something to be said for if you look at a chart of earnings reports, So many US companies right now are talking about onshoring and bringing manufacturing back to the United States. I think about robotics.

[00:23:46] Danielle DiMartino Booth: I think about the fact that California doesn’t have enough water. So I think about desalinization. I’m looking at the next generation of technology that’s going to change the way we live today, and that I think, is [00:24:00] where you’re going to find the diamonds and the rough, the opportunities. Traditional energy companies, boy, they’ve had one hell of a run.

[00:24:07] Danielle DiMartino Booth: Do we see that repeated? Typically, not the case, especially if we’re going to be in a recession where there’s true demand destruction and people aren’t driving as much as they would, they’re not vacationing as much, they’re staying closer to home. They’re not consuming as much fuel. I look to the next generation and given the pandemic that we’ve come through, a lot of these NextGen technologies have been expedit.

[00:24:32] Danielle DiMartino Booth: There are good places to park your, your money in the years to come, and there will be great opportunities in real estate in residential real estate. Once we have the air come out of this bubble, there will be opportunities for millennials to finally take up house and home. But you gotta wait. You have to be patient.

[00:24:49] Rebecca Hotsko: I do want to chat with you about that Next, I just have one quick question on the defensive part. So you mentioned being defensive in this environment and sometimes we think of defensive as being [00:25:00] like low beta stocks or things with less volatility, but is your idea of defensive than cash or money market securities and not investments 

[00:25:08] Danielle DiMartino Booth: per se?

[00:25:09] Danielle DiMartino Booth: Well, that’s about as defensive as you can get. That being said, you know, we are bullish on utilities in general actually, to bring up that asset. People have to buy staples, they have to put food on the table. So there are certain places that there’s no choice. You have to be there. But yes, again, I’ll go back to this example.

[00:25:26] Danielle DiMartino Booth: People don’t realize four and a half percent on cash is a lot. It’s a strong return in this environment, especially when you consider the fact that inflation appears to be turning around. So when you can get that kind of a return safely, for heaven’s sake, why wouldn’t. 

[00:25:40] Rebecca Hotsko: I guess just for our listeners, what do you think the biggest challenge will be for them going forward?

[00:25:46] Rebecca Hotsko: Investing in the next decade or two decades compared to what we’re used to? 

[00:25:50] Danielle DiMartino Booth: I think that fundamental analysis is going to make a comeback, and I probably sound like a dinosaur saying that. I’m not suggesting that passive investing is going to go away, but I do think that [00:26:00] we will be in a more value driven type of investing environment where you actually have to run the discounted cash flow spreadsheets and you actually have to figure out.

[00:26:09] Danielle DiMartino Booth: Is cash flow, not cash to distinguish what we’ve been talking about, but people are going to have to start not necessarily looking at earnings because earnings is something that you can fabricate out of thin air for a company. We’re going to go back to looking for companies with strong cash flow that pay dividends that are not at risk.

[00:26:26] Danielle DiMartino Booth: And to do that, you’re going to have to learn how to read a financial statement, a p and l, a balance. 

[00:26:33] Rebecca Hotsko: I do want to move on to a couple sectors now and get your thoughts on the housing sector, because a lot of indicators are pointing to this year being worse and far more rapid decline than what was experienced in 2008-2009.

[00:26:46] Rebecca Hotsko: Can you kind of walk us through on some of the details of what key indicators are telling us in your current assessment of the housing market? 

[00:26:54] Danielle DiMartino Booth: What we’re seeing right now, whether you’re talking about Austin, Texas, Boise, Idaho, it’s breathtaking. [00:27:00] I mean, breathtaking. If you look at, and I love as a former Fed Insider, I cannot stand long lead time seasonally adjusted data.

[00:27:08] Danielle DiMartino Booth: I just put that in the BS can. I like to look at real time indicators. Every Wednesday morning you’ve got the Mortgage Bankers Association has a report out about purchase application activity. Who is applied to buy a. If you look at the run up to the housing bubble bursting in 2008, 2009, it’s taken us half of the time to see the same magnitude of decline in that purchase activity.

[00:27:35] Danielle DiMartino Booth: I’ve never seen a housing market unwind as quickly as we’re seeing. You know, one of the major factors here is that the Chinese are not with us. Right. Foreign buyers that would typically be getting their money offshore? I’m not. It’s not to say that they’re absent, but they’re certainly not in number as they have been in the past.

[00:27:55] Danielle DiMartino Booth: And I think that that’s one of the reasons that we don’t have the same backstop as we’ve had in other [00:28:00] unwinds of real. And plus, when you’re talking about a Vancouver, a Toronto, a Sydney, a Hong Kong, these are markets that never corrected a decade. They were little blips, but they certainly didn’t implode in the same fashion the United States has.

[00:28:17] Danielle DiMartino Booth: And that means that you’ve had latent in the background bubbles that continue to inflate over the last 10, 12 years. And when you have multiple bubbles bursting around the globe as we’re seeing today, Singapore’s another example that tends to be something that feeds on itself. And bleeds from one country to another.

[00:28:38] Danielle DiMartino Booth: And oh, by the way, Russia invaded Ukraine. So oligarchs don’t have the same ability, again, like the Chinese to come in and be as aggressive as foreign buyers in a lot of these markets. So the backstops just aren’t there, and that’s why we’re seeing this unwind so quick. I would not want to be in Vancouver today.

[00:28:56] Rebecca Hotsko: I actually live very close to Vancouver, and [00:29:00] I can say as prices are just astronomical, and I think it’s been long overdue for a correction in this space. But I want to ask you, you wrote in one of your recent Quill reports, something to the effect of the downturn in residential real estate won’t be short or shallow.

[00:29:15] Rebecca Hotsko: So I’m just wondering who are the winners and losers from this? Because on one hand, millennials looking to buy a house. You kind of mentioned before, does this present an opportunity for them in the next year or two to actually buy their first 

[00:29:28] Danielle DiMartino Booth: home? Potentially. Yeah. And I think your timeframe is correct, right?

[00:29:34] Danielle DiMartino Booth: Because it takes a very long time for sellers who are told lies by the realtor community that they can still get a certain price tag for their home. It takes a long time for sellers mindsets to. So patience is the key here. But to answer your question, this will be the buying opportunity of a generation for an entire generation of buyers, and that’s going to be a good thing.

[00:29:57] Danielle DiMartino Booth: And you want to see the economic [00:30:00] activity that’s generated by the millennial generation getting into homes. In the meantime, the baby boomers are aging, and I think something that we’re going to have to get used to in the United State, which is a cultural shift as well as other countries, is multiple generations living under one.

[00:30:17] Danielle DiMartino Booth: And it’s going to become a reality because childcare is as expensive as it is. You might need your parents, you know, living in the basement. Maybe mom and dad move downstairs and the kids move upstairs and start a family. But that’s something I think that is going to become more of a reality is, is the unification of America is having multiple generations under one roof, out of necessity and out of being pragmatic in your approach to having.

[00:30:43] Rebecca Hotsko: So we talked about before how it could be a possibility of interest rates staying higher for longer. So how can we disentangle those two where housing prices might go down and present an opportunity for millennials to buy a home, but is that under the expectation that interest rates [00:31:00] would have gone down as well by 

[00:31:02] Danielle DiMartino Booth: then?

[00:31:03] Danielle DiMartino Booth: When I say that Powell’s going to bring interest rates to a higher level and keep them. I’m not talking about years plural, but I do think that the unwind in the residential real estate market is going to take enough time, as you said, one to two years. I think that that’s reasonable and realistic. So I do think that mortgage rates will be at a much more manageable level for buyers when the market actually does begin to find a bottom, but we are not there yet by any stretch.

[00:31:31] Danielle DiMartino Booth: As you said, pricers are still at nose bleed levels in one of the pubest markets in the. 

[00:31:37] Rebecca Hotsko: I think that was really helpful for us to all think about and consider and hold on some cash for maybe a home purchase in the next year or two. 

[00:31:45] Danielle DiMartino Booth: Absolutely. And grab four and a half percent along the way, and that way you know you’re actually building your down payment cushion and making a return as you do so.

[00:31:55] Rebecca Hotsko: Another sector I’m really interested to get your thoughts on, I’ve heard you talk about this before, is the auto sector. There are so many issues that were happening in this, we haven’t talked about it yet on the show. So I just wanted to ask you if you can explain what’s going on in this sector, how did it happen, and kind of what are the implications?

[00:32:13] Danielle DiMartino Booth: Sometimes you see polls of, you know, who are the least popular types of professions and you know, right above the bottom rung, which is members of Congress, you get a car sales. The drags of society right there with people in Congress. What happened during the pandemic was quite extraordinary. You had the semiconductor market shut down.

[00:32:32] Danielle DiMartino Booth: I’m going to get in the weeds here a little bit. If you have a franchise that’s a general motor franchise, or a Toyota or a Honda, you typically, in order to have that brand on the neon sign with the flags flying on the side of the highway, you had to agree as a franchisee that you would only sell 10% of your inventory in used cars.

[00:32:53] Danielle DiMartino Booth: Well, when the pandemic hit, the new car supply dried up. And so in order to keep [00:33:00] franchisees in business so that when the worst of the of the storm did pass, major manufacturers allowed franchisees to sell more than 10% of their inventory in used cars. But try explaining that to somebody selling the cars, because people in finance only know one thing.

[00:33:18] Danielle DiMartino Booth: They only know how to put backend products that you do not need on top of the price of the car. Selling the car itself is not a profitable proposition. Selling the extended warranty much more lucrative, put much more money in your pocket In terms of your commission, this is a long story. You ask the question.

[00:33:35] Danielle DiMartino Booth: And so you have a Toyota Camry that’s being sold by typically a, somebody used to selling new cars and they put all the whistles and bells on this used car with a very long term. What you’ve ended up with today, as we’re seeing used car prices come down at Biblical just as quickly as they went up, they are coming.

[00:33:58] Danielle DiMartino Booth: And it’s a major source [00:34:00] of disinflation right now in the CPI that I would dare say is welcome. But now what you’re seeing is you’ve got cars that are 130, 140% loan to values that we used to joke about subprime mortgages being back in 2006 and 2007. So you can actually Google a seminar, how do I walk Away from a car?

[00:34:19] Danielle DiMartino Booth: And you can go and get a guidebook that walks you through how to send the keys to your car, back to the lender and walk. That’s how big the used car bubble is and it is imploding and we’re used to our cars. A lot of people have had to go back to the office. Work from home is no longer an option for quite a few, and in fact, employers are using that as a reason to.

[00:34:40] Danielle DiMartino Booth: This is going to be the first person cut. If we’re doing layoffs, we’ll cut them off. You need your car to get around. It’s essential. And yet we will see repossessions absolutely go through the roof as people can no longer afford to make payments on a car that is not worth what they borrow. 

[00:34:56] Rebecca Hotsko: So was that basically then exactly what happened in the ‘08, ‘09 crisis, but now it’s with cars where they were just giving car loans to anyone who wanted it without doing any background checks.

[00:35:08] Rebecca Hotsko: Wasn’t it based on stimulus checks or something?

[00:35:10] Danielle DiMartino Booth: It was. So the government came in and said, if Joe Q J Q got a stimulus check, you can substitute that for income verification. You no longer have to make sure that this person has a J O B that has a steady income. And that actually happened. People who would not have otherwise qualified to buy a cart.

[00:35:31] Danielle DiMartino Booth: Just like the people who could fog a mirror and managed to borrow to buy a home in ‘05, ‘06 and’07, they all of a sudden had access to automobile financing and that became a real thing. And the government said, by the way, give them the financing even though they don’t qualify and don’t collect any payments for 18 months because it’s a.

[00:35:49] Danielle DiMartino Booth: So put that on hold and that’s why we’re, I was tickled pink when you heard this notion that there’s not going to be a household credit cycle. I’m like, how could there be a household credit cycle? You’re not [00:36:00] collecting people’s rent, mortgage, student loan or car payment. Of course there’s not a household cycle and now the household cycle is really kicking in and it’s not 

[00:36:08] Rebecca Hotsko: pretty.

[00:36:09] Rebecca Hotsko: And I think that just speaks to how consumer cyclicals or the consumer spending stocks and companies, we just have to put that into perspective with people can’t afford the same stuff they used to when they were getting stimulus checks. Credit cards are at all time highs. We’re not going to seem to see the same spending that we did in the past couple years.

[00:36:30] Rebecca Hotsko: It’s going to 

[00:36:30] Danielle DiMartino Booth: dry up. We’re not, and I think that a Republican LED House of Representatives, no matter how razor thin that margin is, is certainly not going to be of a mindset to spend a bunch of money in the same way that it was after the pandemic hit. There’s not another federal stimulus check that’s going to be rolled out anytime in the next 12 months.

[00:36:49] Danielle DiMartino Booth: That’s a game changer because people, as you rightly note, have maxed out their credit lines on their credit cards. So what are they going to fall back on? They’re not, they’re going to reduce their consumption. And by the way, that’s exactly what the Federal [00:37:00] Reserve is banking on, is destroying demand, demand destruction.

[00:37:03] Danielle DiMartino Booth: There’s also 

[00:37:04] Rebecca Hotsko: some charts flying around I see on LinkedIn and whatnot about how stocks typically perform with midterm elections and whatnot. Do you see that as any important indicator, kind of the outcome of what happens with that, or is it just more random in your 

[00:37:18] Danielle DiMartino Booth: view? So I think midterm election years are a very real phenomena, as is the third year of a presidential cycle.

[00:37:24] Danielle DiMartino Booth: If you go back and look at the charts, history doesn’t lie. That being said, I don’t know how a stock market necessarily outperforms if you really are going into a recession and therein lies the key, could we rally? Sure. Absolutely. We’ve seen it. Will it have sustainability? I doubt it. Not in a recession.

[00:37:44] Danielle DiMartino Booth: And if you look at other charts that show when recessions kick in, you tend to see once a bear market has, this is a good friend of mine, Mike Green, he brings this data point up. Once you’ve seen a bear market surpass 200 days in [00:38:00] length, you typically have to get to 300 days before it’s all said and done.

[00:38:04] Danielle DiMartino Booth: So will we have bear market rallies? Absolutely. But is the bear market finished? Not. 

[00:38:11] Rebecca Hotsko: I want to ask you one quick thing on the Fed again, because I forgot to ask this above, and I just found it really interesting. I saw this graph on LinkedIn where quarterly report by the World Gold Council showed that the central banks accumulated nearly 400 tons of gold in Q3 of 2022.

[00:38:28] Rebecca Hotsko: Which is a ton of gold, most on record. So the players that accumulated the most were anonymous. I’m just wondering if you have any thoughts on this. I just thought it was interesting, kind of the motive behind that. Was it maybe people or players with depreciating 

[00:38:42] Danielle DiMartino Booth: currencies? That certainly could be the case.

[00:38:46] Danielle DiMartino Booth: And there’s also something to be said for, you know, the geopolitical backdrop right now as a world we haven’t come this close to having a World war in 70 years. So we’ve completely grown unaccustomed [00:39:00] to the idea of having to have a store of gold in case something really dramatic does happen. But it’s been a very long time and you can see various reasons, whether it’s sovereign, national security, or economic with weakening currencies, you can certainly see many rationales for building up those gold stockpiles.

[00:39:22] Danielle DiMartino Booth: And you’re right, we have seen it, and these are record levels. 

[00:39:25] Rebecca Hotsko: Because I think some investors are perhaps interested in investing in gold and kind of seeing this chart. I was, I mean, for Canada, it hasn’t really performed that well compared to other countries that have very like emerging markets where it was a good investment.

[00:39:42] Rebecca Hotsko: But it does make me kind of consider if it’s something worth a small hedge in a portfolio going 

[00:39:47] Danielle DiMartino Booth: forward. Well, it is the only true diversifier. So, in other words, your commercial real estate, your residential real estate, your stocks, your bonds, they all high. They’re all highly correlated at a time of financial [00:40:00] disruption.

[00:40:00] Danielle DiMartino Booth: Gold is the only one that’s going to be completely immune to any of these moves, and it is the ultimate safe harbor. It’s always wise to have precious metals as a hedge, just in case I do. 

[00:40:13] Rebecca Hotsko: Well, that is all I have for you today. I want to thank you so much for coming on and helping us disentangle these very confusing topics on the Fed.

[00:40:22] Rebecca Hotsko: Before I let you go, where can the audience connect with you and kind of learn more about what you do and the work that you put out? 

[00:40:29] Danielle DiMartino Booth: I like to toot my horn because I do run a business and I do have employees and I have to think about them. But Quill intelligence. Quill, like you would think of as a feather quillintelligence.com is where you can go.

[00:40:40] Danielle DiMartino Booth: Many of my young subscribers, their clients on a monthly basis, my daily feathers only $60 a month and it is truly an institutional level of research. You learn so, so, so much. So I would recommend giving it a try, subscribing for a few months. Reading is believing and also, you know, if you have insomnia, trouble sleeping, follow me on Twitter at DiMartino-Booth.

[00:41:02] Danielle DiMartino Booth: It is always an education and I seem to always be awake tweeting, so definitely follow me on Twitter as well. 

[00:41:08] Rebecca Hotsko: Thank you so much, Danielle. 

[00:41:10] Danielle DiMartino Booth: Thank you. I appreciate your time today. 

[00:41:12] Rebecca Hotsko: All right. I hope you enjoy today’s episode. Make sure to subscribe to the show on your favorite podcast app so that you never miss a new episode.

[00:41:21] Rebecca Hotsko: And if you’ve been enjoying the podcast, I’d really appreciate it if you left us a rating or a review. This really helps support us and it’s the best way to help new people discover the show. And if you haven’t already, be sure to check out our website, theinvestorspodcast.com. There’s a ton of useful educational resources on there, as well as our TIP Finance tool, which is a great tool to help you manage your own stock portfolio.

[00:41:47] Rebecca Hotsko: And with that, I will see you again next time. 

[00:41:50] Outro: Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday, we teach you about Bitcoin. And every Saturday, we study billionaires and the financial markets. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com.

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