The Weekly Quill — No Taxi Time Before Takeoff

The Immobilization of a Nation

“To appreciate this game to the full you must know something of its background. The two colleges were, and still are, of course, about 20 miles apart. The rivalry between them was intense. For years each had striven for possession of an old Revolutionary cannon, making night forays and lugging it back and forth time and again. Not long before the first football game, the canny Princetonians had settled this competition in their own favor by ignominiously sinking the gun in several feet of concrete. In addition to this, I regret to report, Princeton had beaten Rutgers in baseball by the harrowing score of 40-2. Rutgers longed for a chance to square things.”

Such was the recounting of the backdrop of events leading up to 3 pm on November 6, 1869 as written by John W. Herbert, Rutgers Class of 1872 and one of the inaugural players. The 100 spectators only outnumbered the 25 players on each team by a factor of 2-to-1. Forming anything but what we think of as a “formation,” and to not be confused with the visiting players from Princeton, the Rutgers players and fans wrapped their heads, turban-style, in scarlet scarves. William J. Leggett, captain of the Rutgers team who later became a distinguished clergyman of the Dutch Reformed Church, suggested that rules for the contest be adopted from those of the London Football Association. Leggett’s proposal was accepted by Captain William Gunmere of Princeton, who later became Chief Justice of the Supreme Court of New Jersey.

Though smaller on average, the Rutgers players “had ample speed and fine football skills.” As per the November 1869 issue of the Targum, Rutgers’ undergraduate newspaper, “Princeton had the most muscle, but didn’t kick very well, and wanted organization. They evidently don’t like to kick the ball on the ground. Our men, on the other hand, though comparatively weak, ran well, and kicked well throughout. But their great point was the organization, for which great praise is due to the captain. The right men were always in the right place.” And so it was that the first intercollegiate football game was won by Rutgers 6-4. Columbia University got onto the gridiron the following season and within a few years, most colleges and universities on the Eastern seaboard were in the game.

Though twice invited to join the Ivy League, that inaugural winning New Brunswick school has opted to maintain its public status that makes it appreciably more affordable. As such, 151 years after that first season, and unlike Princeton, as part of the Big 10, Rutgers will still be able to play conference teams on the gridiron this season. At least, that’s as things stand today. While no conference has followed the Ivy Leagues in fully cancelling all fall sports, the Big 10, followed by the Pac-12, have salvaged what little they can of the season by cancelling only out-of-conference matchups. By limiting play to within the conference, the schedule can be controlled – games can be postponed and rescheduled, and travel can be restricted, if need be in this post-pandemic world.

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The Weekly Quill — Commercial Real Estate meets Adam Smith

Even in 1893, $213.43 was a pittance of a profit on a $6,000 investment. This poor return might have had something to do with what Eadweard Muybridge was selling — plodding footage of California’s Yosemite Valley’s animals in motion. And yet, history cannot deny his charging a quarter to enter Zoopraxigraphical Hall which he’d paid to construct on the grounds of Chicago’s 1893 World’s Fair with the blessing of the Fine Arts Commission. As dry as the not-so animalistic images were, it was still a marvel to witness movement on Muybridge’s zoopraxiscope, a device he’d invented to project motion pictures to spice up his lectures. And the 25-cent price of admission did secure Muybridge’s distinction as the purveyor of the world’s first commercial movie theater.Unlike Muybridge, few dispute the business acumen of “The Wizard of Menlo Park.” While no fewer than 1093 US patents are credited to his name along with his founding of General Electric, one Thomas Alva Edison was caught on the wrong foot headed into the World’s Fair. That’s saying something considering he’d been in discussions with Muybridge about his invention since 1888. By 1891, the great inventor had a working prototype of a kinetoscope, an individual viewing device featuring a 35mm filmstrip conceived by George Eastman. Luckily, Edison’s building of his estimated $200 million net worth was not sidelined by his disbelief in the commercial viability of motion pictures. This hesitation was combined with a most unfortunate incident. Shortly before the Fair’s May 1st opening, the employee he’d charged with assisting on mass producing the device ahead of the Fair, William Dickenson, suffered a nervous breakdown.

And so, the kinetoscope’s debut was delayed until May 9, 1893 and took place not in Chicago, but Brooklyn. Three years on, Edison began public showings of his films at Koster and Bial’s Music Hall on 34th Street in New York City. By then, competitors had popped up across the country and around the world. Be that as it may, aesthetic purists didn’t embrace the venue until a dedicated structure was erected that commanded palace stature. And so it was on April 11, 1914 when the million-dollar ($26 million equivalent) Mark Strand Theatre opened its doors at the corner of 47th Street and Broadway. According to the New York Dramatic Mirror, part of the princely sum had gone to luring away Samuel “Roxy” Rothafel from the Regent Theater with the “highest salary ever paid to the manager of a theater of any kind.”

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The Fed’s Failures Are Mounting

In the decade between “60 Minutes” interviews, the central bank has sparked a recovery without inflation but not much else.


This article originally appeared in Bloomberg Opinions — 3.12.19

Friday marks the 10-year anniversary of the Federal Reserve Chairman Ben S. Bernanke’s groundbreaking “60 Minutes” interview. To listen to current Fed Chairman Jerome Powell on the same show a decade later, the central bank’s best laid plans since then would seem to have played out according to script with one glaring exception: the Fed’s balance sheet.

When “60 Minutes” reporter Scott Pelley asked Bernanke if the Fed was printing money, his reply was, “Well, effectively. And we need to do that, because our economy is very weak, and inflation is very low. When the economy begins to recover, that will be the time that we need to unwind those programs, raise interest rates, reduce the money supply, and make sure that we have a recovery that does not involve inflation.”

If the primary goal was recovery without inflation, the Fed delivered. Since the onset of recovery in June 2009, the core personal consumption expenditures index, which measures the prices paid by consumers for goods and services net of food and energy prices that tend to be more volatile, has been above 2 percent in in just five months in 2018, four in 2012 and one in 2011.

Critics of the central bank suggest that the massive surge in financial assets over the past decade starkly illustrates the need for the Fed to incorporate inflation gauges that take into account price gains of real estate and securities. One such gauge, the Underlying Inflation Gauge (UIG) created at the Federal Reserve Bank of New York, has hovered around the 3 percent level since last February. In other words, the UIG has been running north of the Fed’s 2 percent inflation target since November 2016. The justification for raising interest rates thus depends on the gauge used to guide policy.

As for Bernanke’s commitment to unwind unconventional monetary policy, it’s looking increasingly as if only a small portion of his promise can be fulfilled. Since last meeting in January, Fed officials have been publicly unified in their intention to present a road map to end quantitative tightening (QT) at next week’s Federal Open Market Committee meeting. The 16 percent to 17 percent of GDP estimate Powell offered Congress as the terminal size of the balance sheet implies QT will end with the Fed holding about $3.5 trillion in securities, compared with the peak of about $4.52 trillion in January 2015. (The Fed held less than $1 trillion of balance sheet assets before the financial crisis.)

Running monetary policy looser than need be for such a protracted period has benefited global asset prices. Even after the Fed began tapering its bond purchases, its central banking peers more than took up the slack. As of February, the collective balance-sheet assets of the Fed, European Central Bank, Bank of Japan and Bank of England stood at 36.3 percent of their countries’ total GDP, little changed over the past two years.

When Pelley asked Bernanke about banks that had paid perks and bonuses after taking bailout money, Bernanke replied: “The era of this high living, this is over now. And that they need to be responsible and use the money constructively. I’d say that their job right now is to find a way to make loans to creditworthy borrowers, to get their banks back on the path of making good loans, safe loans, and to have a reasonable sense of humility based on, you know, what’s happened in the last 18 months.”

But at the National Association for Business Economics recent annual conference, University of California-Berkeley economics professor Gabriel Zucman presented his findings on the widening divide between the “haves” and “have nots” in the U.S. His conclusion: “Both surveys and tax data show that wealth inequality has increased dramatically since the 1980s, with a top 1 percent wealth share around 40 percent in 2016 vs. 25 – 30 percent in the 1980s.” Zucman also noted that increased wealth concentration has become a global phenomenon, albeit one that is trickier to monitor given the globalization and increased opacity of the financial system.

That is not to say the most powerful players in finance haven’t had to adapt to a post-crisis world. The inability to undertake risky lending under tightened regulation has pushed business to an increasing degree out of the conventional banking system into the shadow banking industry. Private equity presides over more than $2.1 trillion in committed capital to be deployed outside the purview of regulators’ watchful eyes, according to research firm Preqin.

While, Powell acknowledged that risks had built up among highly leveraged companies, he said the scale is not “the kind of thing that we saw in the…subprime mortgage crisis. It doesn’t seem to be like that, generally. But at the same time, it could be an amplifier in a downturn.”

As for any notion that Fed policy has elevated asset prices and left behind those without the means to benefit, circumstances that have skewed both wealth and income inequality, Pelley asked, “Where are we headed in this country in terms of income disparity?” Echoing his predecessors, Powell replied, “Well, the Fed doesn’t have direct responsibility for these issues.” Except that the Fed does have direct responsibility. If the “wealth effect” used to justify a generation of quantitative easing hasn’t kicked in yet, trickling down to those who need it most, it’s past time the Fed acknowledged its failings and opened the door to a new policy framework.

This article originally appeared in Bloomberg Opinions — 3.12.19

Bloomberg Opinion, Bear Market, Danielle DiMartino Booth, Quill Intelligence

How to Identify a Bear Market Rally

History is replete with examples of major stock market recoveries following big sell-offs, many of which turn out to be head fakes.

This article originally appeared in Bloomberg Opinions — 2.24.19


The remarkable rebound in the U.S. stock market from the lows in late December has resulted in gains that the analysts at Goldman Sachs rightly point out already constitute banner returns for an entire calendar year. History is replete with examples of major recoveries following big sell-offs, many of which turn out to be head fakes otherwise known as bear market rallies. At the end of the trading day, it’s still fundamentals that should drive investing decisions.

If the economy is, in fact, slowing and that is what has sidelined the Federal Reserve, then what we are witnessing at the moment is a bear market rally. AdMacro Ltd head of research Patrick Perret-Green recently warned the firm’s clients that though the January employment jobs report might have looked good on paper with 304,000 jobs created, it nevertheless flashed a bright recession signal as the unemployment rate ticked up to 4 percent, the highest since June.

According to historic payroll data and the National Bureau of Economic Research, every time the three-month average unemployment rate exceeded its six-month average at cycle peaks over the past 50 years — like it did in January — the U.S. economy has experienced a recession. In a 2016 speech to the International Monetary Fund, then Federal Reserve Bank of New York President — and current Bloomberg Opinion contributor — William Dudley corroborated the historic pattern citing research first conducted earlier in his career at Goldman Sachs:

“History shows it is very difficult to push the unemployment rate back up just a little bit in order to contain inflation pressures. Looking at the post-war period, whenever the unemployment rate has increased by more than 0.3 to 0.4 percentage points, the economy has always ended up in a full-blown recession with the unemployment rate rising by at least 1.9 percentage points. This is an outcome to avoid, especially given that in an economic downturn the last to be hired are often the first to be fired.”

To Dudley’s point, the odds that layoffs will continue rising are high. As per January data from Challenger, Gray & Christmas, layoffs have risen over the prior year for six straight months. Economists would characterize that as an established trend. Retail and more recently, energy, have been some of the weakest sectors. Media is another sore spot.

Backing out to the broader economy, one of the fastest growing reasons for increased layoffs last year was mergers and acquisitions. There’s likely to be no letup in 2019 after last year’s record M&A activity, which is just one of the more creative avenues companies have pursued to reduce costs in recent years. The looming earnings recession will compel firms to be more direct in their approach, as in outright headcount reduction to protect profit margins.

Auto dealers are struggling to shoulder the weight of the most crowded lots in almost two years. As a result, auto production contracted in January, promising to pressure Midwest manufacturing, a stand out area of the economy in recent months as other regions faltered. As is the case with the earnings sudden stop, motor vehicle and parts swung from 8.4 percent year-on-year growth in December to a 0.7 percent contraction in January, according to Industrial production data from the Fed.

Although autos were a sweet spot in the delayed December retail sales release, that strength appears to be wavering as cumulative tax refunds disappoint. In the first 18 days of the tax season through Feb. 21, cumulative refunds totaled $36.3 billion, down $61.7 billion, or 63 percent, from the same period last year. This portends poorly for the seasonal surge in auto buying and consumer spending tied to households’ propensity to spend the majority of their tax refund proceeds. If anything, Fed data show households are hunkering down, with checking and savings account balances rising dramatically, moves generally associated with spending pullbacks.

It is the combination of an earnings recession and an economic slowdown that derail parallels with the 2015-16 stock swoon and rebound. As breathtaking as the rally off the Christmas Eve lows has been, it is not at all unusual to see protracted and magnificent surges punctuate bear markets. In the five months through August 1989, the S&P 500 rallied 19.2 percent before backsliding.

What makes the current run historically remarkable is the magnitude of the 10.5 percent rally in such a short time span, which belies the bottoming of the unemployment rate in the face of accelerating layoffs.

Bear Market Rallies can be Protracted and Pronounced

It was a bit curious to read in his recent Bloomberg Opinion commentary that Dudley thought it was “hard to see how the normalization of the Fed’s balance sheet tightened financial conditions in a way that would have weighed significantly on stock prices.” The current bear market rally was, after all, catalyzed by Chairman Jerome Powell’s assurances that quantitative tightening might be suspended soon, a stance since corroborated by both hawkish and dovish Fed officials.

Skeptical investors have been badly bruised if they were emboldened to fight both the Fed and the C-Suite at the same time. There is one force, however, that trumps both of these faith-based investing approaches and that is economic fundamentals. This may be a bear market rally for the ages, but that shouldn’t imply investors should do anything other than rent it. Owning it promises to end in tears.

This article originally appeared in Bloomberg Opinions — 2.24.19

Rising Credit-Card Use Shows Consumers Are Strapped

Americans are increasingly reaching for the plastic in their wallets to cover what their paychecks won’t.


Even though evidence is mounting that the U.S. economy may be soon heading into a recession, there are plenty of analysts who say that the surge in credit card borrowing is a sign of strong confidence among households. That’s hardly the case. In fact, households’ confidence in the future growth of their incomes has been cooling since late last summer, which means borrowers will only reach for what’s in their wallet to compensate for what their paychecks will not cover.

Many working adults have no recollection of credit card borrowing not being a mainstay among their financing options. But then, few would be able to identify a Diners Club card, which was a popular brand during the 1980s “yuppie” era when Americans first began to embrace credit card spending in earnest. These days, consumers are not keen to lean on credit cards, partly due to a cultural and financial shift in the industry.

The financial crisis arguably altered households’ views on charging beyond their means. It didn’t hurt that the availability of subprime credit all but disappeared for a few years or that the interest rate on credit cards remained in double-digit territory despite the Federal Reserve’s zero interest rate policy. That said, the idea of frugality re-entered many households’ thinking in the wake of the severe hardship the foreclosure crisis brought to bear on millions of working Americans. Debit cards became the predominant form of plastic used at the checkout.

And yet, consumer credit likely rounded out 2019 at a new $4 trillion milestone as runaway higher education and car-price inflation coupled with ridiculously looser lending standards pushed households to take on record levels of student loan and auto debt. At roughly $1 trillion, credit cards are but a co-star in a star-studded, full-length feature film. A long history of credit card borrowing suggests that we would have multiples of today’s $1.04 billion in outstanding balances had the growth rate of spending on plastic maintained the headier double-digit paces clocked in the 1980s and 1990s.

Credit Card Borrowing Decouples from Income Expectations in Current Cycle

Several factors worked to slow the rate of credit card usage, few of which were virtuous. The past several recoveries were characterized as “jobless” due to the prolonged period required to recapture prior cycle highs in the employment-to-population ratio and anemic wage growth that persisted in such environments. And while credit card spending certainly held up during the years the housing bubble was inflating, households didn’t have to lean near as hard on plastic when their homes had infamously become de facto ATM machines.

The question is where credit card borrowing goes from here in view of the deteriorating economic outlook. August marked the high in income expectations as measured by Conference Board data. If history is precedent, there will be a rush to tap available credit as households become increasingly aware that the economy is headed into recession.

Challenger, Gray & Christmas layoff announcements began rising on an annualized basis in August. And the quits rate, as measured by the Job Openings and Labor Turnover Survey, or JOLTS, peaked in August. Janet Yellen, a labor economist by training, was known to lean heavily on the quits rate, which rises as workers gain increased confidence in the availability of jobs. And finally, confidence among small businesses, which we know are the largest source of job creation, also peaked in August. There is a pattern.

You may note that the effective personal income tax rate — defined as the taxes paid on income, including realized net capital gains and on personal property — has tended to move up alongside credit card borrowing with two exceptions in the history depicted. The 1980s and the current episode are marked by falling income taxes, hence the decline in this tax rate ahead of recession. It’s intuitive that this holistic tax rate also rises as stocks rally throughout an expansion and declines into recession as the swing factor of capital gains drives the marginal moves.

Add it all up and it’s likely that any rush to “charge it” will be a last gasp as income expectations continue to decline and eventually cross lines with credit card borrowing. The closer we get to recession, the more desperate a sign credit card borrowing is anything but a reflection on strengthening in household finances. Households wouldn’t be reporting that they expect their incomes to rise less if that was the case.



This article originally appeared in Bloomberg Opinions — 1.18.19


Danielle DiMartino Booth, a former adviser to the president of the Dallas Fed, is the author of “Fed Up: An Insider’s Take on Why the Federal Reserve Is Bad for America,” and founder of Quill Intelligence.

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A Room with a Due — A Glut of Units to Let Hits Lodging & Multifamily

Denialists may disagree but it’s plain to see the Gilded Age pales in comparison to the current era of excess. If you’ve doubts, you might should get out more. The good news is that if modern adventurers choose well, they can partake of both ostensibly opulent periods at once. Of course, to truly enjoy the dual-age experience, one must be accepting of a few apparitions. Aficionados of luxurious other-worldly travel need book no further than the Omni brand and its penchant for all things paranormal. Try Boston’s Parker House, Bretton Woods’ Mount Washington Resort or Ashville, North Carolina’s Grove Park Inn. They all fly the Omni flag to welcome the intrepid traveler.

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The U.S. Economy Is on a Sugar High

The U.S. Economy Is on a Sugar High —

Many companies are rushing to secure products and materials before the trade war worsens

Across the U.S., companies are hitting the panic button. The Trump administration has levied 10 percent tariffs on $200 billion of Chinese goods, a charge that is expected to rise to 25 percent by 2019. This tops the tariffs on $50 billion of Chinese goods that were imposed in August, and is an effective tax on U.S. consumers, who will soon be paying more for everything from cosmetics to clothing to cars if they aren’t already.

Against that backdrop, it’s becoming clear that many companies are rushing to secure products and materials before prices rise regardless of current demand. You could say they are in panic-buying mode. The upside is that this behavior bolsters economic growth in the short term. The downside is that there is likely to be a nasty hangover. The noise in the economic data will be amplified by the rebuilding from Hurricane Florence. The estimates of the storm’s damage span from $20 billion to $50 billion.

Evidence that panic buying has set in was seen in the September Chicago Purchasing Managers Index report, which is a bellwether for the broader national manufacturing sector. While the results “disappointed,” with the index falling from 63.6 to a still high 60.4 and the new orders component sinking to a six-month low, the inventory component surged above the 60 mark. (In these diffusion indexes, readings above 50 denote expansion.) To put the stockpiling in context, inventories have only breached 60 twice this year. Such nosebleed readings are so rare that they rank in the 97th percentile over the last 30 years.

As per the Chicago PMI: “Firms continued to add to their stock levels, building on August’s marked rise. The scarce availability of inputs continued to encourage stockpiling while forecasts of higher future demand also contributed to the rise in inventories.”

There’s also been a pronounced increase in railcar volume. But the thing to know here is that data from the three biggest California ports, where the vast bulk of Chinese goods land on U.S. shores, arrives with a lag. We won’t have September data in hand until mid-October. Absent this port data, study the activity on BNSF and Union Pacific’s “Overland Route.” This old-school term begins at the West coast ports and ends at the railroads’ easternmost points. Take the number of rail cars in service and multiply it by how long these cars “dwell at terminal” to get a proxy of hours worked. That derivation roughly equates to aggregate hours worked in the employment report, due out Friday.

Indications that the tariffs will rise to 25 percent by year-end suggest the panic-buying mode will stay in effect for the next few months, making labor resources even more scarce. The latest Duke University CFO Survey reveals that those who set compensation budgets anticipate wages will rise by 4.8 percent over the next 12 months, the biggest increase in 18 years.

Artificial supply was evident in the August trade deficit, which came in at the widest in six months as exports slowed even as panic buying fueled imports. At the same time, wholesale inventories came in at nearly three times their expected rate while those of retail inventories came in stronger than their upwardly revised July levels.

The upshot is that economists have had to react in two ways. First, they’ve had to take down their third-quarter GDP estimates to account for weaker exports. On top of that, they’ve had to downgrade the quality of economic growth to account for the reasons behind the inventory build. Or, in the words of JPMorgan Chase & Co. chief economist Michael Feroli, the economy is looking “less boomy, more noisy.”

In the event you’re hoping the virtuosity of panic buying can become a permanent prop to the economy, you might want to rethink your thesis. To Feroli’s point, “less boomy” indicates a fundamentally weaker demand backdrop as the U.S. economy stretches into the final months to claim the trophy of the longest expansion in history.

Rather, artificial, tariff-driven panic buying pumps up GDP growth in the short term but ensures it will disappoint in the future. Look for fourth quarter estimates to be revised upwards and then look out below into the first of the year. And no, the first-quarter disappointment will not be the seasonal anomaly many economists typically ascribe to economic growth in the first three months of the year. In other words, it could be that much worse.

This article originally appeared in Bloomberg Opinions — 10.4.18

Danielle DiMartino Booth, a former adviser to the president of the Dallas Fed, is the author of “Fed Up: An Insider’s Take on Why the Federal Reserve Is Bad for America,” and founder of Quill Intelligence.

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Fed’s Inflation Focus Needs a Tuneup

Past errors by the central bank compel it to put less emphasis on consumer prices and more on financial stability.

What now? Continued Federal Reserve interest-rate increases for as far as the eye can see? Those are the primary questions with the last inflation target standing essentially hitting the central bank’s 2 percent bullseye.

The core personal-consumption-expenditures price index (PCE), a broad measure of inflation that excludes food and energy, rose 1.98 percent in July from a year earlier. The core PCE has long been the gentlest measure of inflation, so for many economists the evidence that it’s catching up to every other similar metric, such as the widely recognized consumer price index, that have long since pierced 2 percent is akin to the end of a vigil. (The government is expected to say Thursday that the consumer price index rose 2.4 percent in August from a year earlier when excluding food and energy.)

So, let’s get on with more rate hikes already — right? Perhaps, but such rigidity in the approach to monetary policy is a vestige of the past. Federal Reserve Bank of St. Louis President James Bullard has risen to the forefront of questioning the sanctity of relying solely on inflation in guiding policy. But it’s not because he feels inflation is too hot or too cold, but rather it is inappropriate.

Bullard can always be relied upon to strike a dovish tone — so much so that many consider him dovish for the sake of being dovish. He warned in a speech last week that Fed policy was already “neutral or somewhat restrictive” as reflected in a very flat yield curve, which is one of Wall Street’s most reliable indicators for forecasting recessions. He downplays inflation as a reliable metric given how the economy has evolved, with financial assets becoming a bigger part of the economy. “Neither low unemployment nor faster real GDP growth gives a reliable signal of inflationary pressure because those empirical relationships have broken down,” Bullard said.


There’s some irony in markets branding Bullard as the most dovish member of the Federal Open Market Committee while placing Chairman Jerome Powell at the opposite end of the spectrum in the hawkish camp. The two are literally echoing one another’s views. Consider this from Powell’s Jackson Hole speech last month:

“Inflation may no longer be the first or best indicator of a tight labor market and rising pressures on resource utilization. Part of the reason inflation sends a weaker signal is undoubtedly the achievement of anchored inflation expectations and the related flattening of the Phillips curve. Whatever the cause, in the run-up to the past two recessions, destabilizing excesses appeared mainly in financial markets rather than in inflation. Thus, risk management suggests looking beyond inflation for signs of excesses.”

In an Aug. 15th interview with Central Banking, Bullard also said financial excesses should be monitored closely given the growth of the shadow banking system since the crisis a decade ago. Here, the Fed has always been handcuffed, limited to regulating bank holding companies and financial institutions with a bank charter. It has no jurisdiction over private equity or technology firms that have crept into the world of finance, entities Bullard said are in the business of avoiding regulatory overview:

“The whole game in Silicon Valley is to do regulatory arbitrage: ‘Let’s provide financial services in ways that are not covered by ordinary laws, and let’s build up a business, like Uber. Let’s build up a business and a constituency for that business outside of the normal legal framework, and then we will wait for the legal system to catch up, and then we’ll litigate at that point.’”

The geographic parallels with pre-2008 are striking. As the subprime mortgage lending apparatus was being built out in the housing boom years, then Fed Chairman Greenspan was repeatedly warned that the central bank would have to catch the falling knife when housing turned. To this, Greenspan’s stock reply was that the Fed only regulated a quarter of mortgage lending and therefore was not exposed to the mania building in Janet Yellen’s San Francisco Fed District, with Countrywide Financial at its epicenter. “It’s that shadow world where the next crisis will be brewing,” Bullard said, “and how is the regulatory apparatus going to handle that going forward?”

Bullard and Powell are both clearly looking back to the Fed’s past errors in judgment and questioning the efficacy of core PCE dictating monetary policy. They know that what started in the shadows of subprime lending ended with the fall of Lehman Brothers Holdings Inc. and the unleashing of systemic risk, the dangers of which were absent in a broken inflation metric. The question for the here and now is whether their shared perspective proves to be prescient, but at the same time, too late.

This article originally appeared in Bloomberg Opinions — 9.12.18

Danielle DiMartino Booth, a former adviser to the president of the Dallas Fed, is the author of “Fed Up: An Insider’s Take on Why the Federal Reserve Is Bad for America,” and founder of Quill Intelligence.

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Danielle DiMartino Booth is CEO and Director of Intelligence at Quill Intelligence LLC.

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Housing’s Headwinds Are Getting Stiffer

Plans to buy a home in the next six months have tumbled to the lowest level since June 2016.

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Expectations were approaching ebullience heading into this spring’s U.S. home-selling season. The National Association of Realtors entered the year expecting home sales to grow by 3.7 percent in 2018 after last year’s lackluster 1.1 percent increase. But now, the NAR’s chief economist has tempered his call with existing homes changing hands at the slowest pace since September and new home sales having fallen to the lowest level since October 2017.

With home prices at or near record highs, it takes more than a small boost to income to call potential buyers to action. The average household has to save for almost six and a half years to cover a 20 percent down payment on a home at current prices, according to a recent study by Zillow’s HotPads. That’s based on the steep assumption that workers can sock away 20 percent of their monthly take-home pay. Saving money is especially tough for renters. Zillow calculated last year that just 42 percent of rentals were affordable, defined as requiring 30 percent or less of one’s median monthly income to cover rent payments.

Perhaps reflecting the affordability obstacles, the Conference Board’s consumer confidence data for July released Tuesday showed that plans to buy a home in the next six months tumbled to the lowest level since June 2016.

The cost to rent and buy has become particularly acute in major markets, especially if you prefer a home to an apartment. Renting a three-bedroom house is more expensive than buying a median-priced home in 54 percent of major markets, according to ATTOM Data Solutions. The average three-bedroom runs renters 38.8 percent of their annual income.

There are other factors that have hamstrung the housing market in 2018 besides record-high home prices. Mortgage rates for 30-year fixed loans are up by more than 0.8 percentage point on average. Separately, the new tax law limits all state and local income taxes and property taxes that can be deducted to $10,000.

Affordability is even more elusive among middle-tier income earners, who tend to be in the market for move-up homes after they’ve outgrown their starter home. And that’s in second-tier markets. In the nation’s costliest cities, median home prices often exceed the wherewithal of most regardless of how much they make. In San Francisco, average home prices exceed $1.6 million.

Let’s take the example of moving from what Zillow classifies as the middle third of homes nationwide, which is the median price we always hear quoted of $217,300, up to what Zillow categorizes as the top third of homes by price nationwide, the median price of which is $380,100. Those are what many realtors would call “move-up” homes.

For the sake of simple illustration, let’s compare the rate two years ago to what it is today for a 30-year fixed mortgage. Back then, the rate was (assuming no points) 3.63 percent compared with 4.75 percent today. The monthly payment for a couple who has just had a second child and wants to upsize would double from about $792 to $1,585. Had mortgage rates stayed where they were two years back, that same payment to move up today would be $1,386. It’s no wonder that according to the University of Michigan, buying conditions among middle-tier income earners has fallen out of bed of late. If you have designs on living in a better school district that doesn’t require private school tuition for the tykes, be prepared to pay a hefty premium.

The Bottom of the Housing Market Falls out of the Middle

The protracted decline in top-tier home-buying conditions could be a mere starting point that trickles down through the lower tiers. The top third of income earners account for 60 percent of the dollar value of “owned dwellings,” as per the Bureau of Labor Statistics Consumer Expenditure Survey. This group, albeit small, has more incentive than ever to stay put or move to a lower-tax state.

Consider a homeowner who bought a home a few years back who locked in a low rate on a $700,000 mortgage. That home has appreciated to $1 million, but interest payments remain about $24,500 a year, or $15,500 when adjusted to a top 37 percent tax rate and principal paid down. If this homeowner upgrades to a $1.2 million abode with a $975,000 mortgage, which takes into account transaction costs, mortgage interest would jump to $45,500. Adjusted for taxes, the marginal cost would be $32,500.

The alternative to the $17,000 budgetary upcharge is a facelift. For the same homeowner, a maximum of $50,000 would be deductible on a home equity line of credit given they would bump up against the new $750,000 limit. Even so, if the homeowner plunked $100,000 into an upgrade, the tax-adjusted, bottom-line interest increase would only be $4,000.

It would seem mobility will no longer be a hinderance unique to the millennials. The economy has always keyed off residential real estate. Investors would be well-advised to keep housing at the top of their watch lists.

Danielle DiMartino Booth is CEO and Director of Intelligence at Quill Intelligence LLC.

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DiMartino Booth, Bloomberg Opinion, Corporate bonds are a potential bomb ready to explode. Photograph: Three Lions/Hulton Archive

The Corporate Bond Market Is Getting Junkier

Few investors realize the ticking time bombs populating what they believe are the safest parts of their portfolios.


  • Corporate bonds rated BBB now total $2.56 trillion, having surpassed in size the sum of higher-rated debentures, which total $2.55 trillion.
  • And then there’s the massive market for leveraged loans, where covenants protecting investors have all but disappeared.
  • In 2000, BBB bonds were a mere third of the market, net leverage was 1.7 times. By the end of last year, the ratio had ballooned to 2.9 times.
  • So why not treat the BBB portion of the bond market for what it is: a high-risk slice of the corporate debt pie.
  • Add the BBB market to what are already designated high-yield bonds and leveraged loans and you arrive at $5 trillion, twice the size of what investors should realistically classify as money-good investment-grade debt.
  • Ask yourself this question: How many small investors perceive the corporate debt market as two parts high-risk and one part low-risk? The reality is precious few retail investors conceive of the ticking time bombs populating what they believe to be the safest slice of their portfolio pie.


Much has been made of the degradation of the $7.5 trillion U.S. corporate debt market. High yield offers too little, well, yield. And “high grade” now requires air quotes to account for the growing dominance of bonds rated BBB, which is the lowest rung on the investment-grade ladder before dropping into “junk” status. And then there’s the massive market for leveraged loans, where covenants protecting investors have all but disappeared.

How does that break down? Corporate bonds rated BBB now total $2.56 trillion, having surpassed in size the sum of higher-rated debentures, which total $2.55 trillion, according to Morgan Stanley. Put another way, BBB bonds outstanding exceed by 50 percent the size of the entire investment grade market at the peak of the last credit boom, in 2007.

But aren’t they still investment grade? At little to no risk of default? In 2000, when BBB bonds were a mere third of the market, net leverage (total debt minus cash and short term investments divided by earnings before interest, taxes, depreciation and amortization) was 1.7 times. By the end of last year, the ratio had ballooned to 2.9 times.

The True $2.5 Trillion Investment Grade Bond Market
Dwarfed by $5 Trillion in High Risk Debt



Given the marked deterioration in fundamentals, bond powerhouse Pacific Investment Management Co. worries that “This suggests a greater tolerance from the credit rating agencies for higher leverage, which in turn warrants extra caution when investing in lower-rated IG names, especially in sectors where earnings are more closely tied to the business cycle.”

In the event this warning rings a bell, be heartened that your memory is still largely intact. Investors blindly following credit rating firms’ designations on subprime mortgages despite a clear degradation in the due diligence upon which the ratings were assigned ended up regretting such faith when the financial crisis hit.

So why not treat the BBB portion of the bond market for what it is: a high-risk slice of the corporate debt pie. Keeping count of “fallen angels,” or those investment-grade bonds that are downgraded into junk territory, will become a spectator sport.

With that as a backdrop, add to the BBB market what are already designated high-yield bonds and leveraged loans and you arrive at $5 trillion, twice the size of what investors should realistically classify as money-good investment-grade debt. The leveraged loan market is generally where companies whose credit is so weak they can’t access the high-yield bond market go to attain financing. It just exceeded the high-yield bond market in size, growing to $1.22 trillion compared with high-yield’s $1.21 trillion, according to Fitch Ratings.

Query institutional investors and they will answer that they’re increasingly guarded in their approach to the market. The investment community’s suspicions are amply reflected in the awful performance put in by the investment-grade market this year, with the Bloomberg Barclays U.S. Corporate Bond Index dropping 2.80 percent through Friday. Among 19 major parts of the global bond market tracked by the Bloomberg Barclays indexes, only dollar-denominated emerging-market debt has done worse.

The extra yield investors demand to own investment-grade corporate bonds instead of U.S. Treasuries is equally indicative of investor skepticism. At about 1.25 percentage points, the spread has expanded from an average of 0.85 percentage point in February to the widest since 2016.

But ask yourself this question: How many small investors perceive the corporate debt market as two parts high-risk and one part low-risk? According to State Street Advisors, despite the underperformance of investment-grade funds, June saw continued inflows of $2.8 billion into the space while high-yield sustained outflows of $2 billion. Through the first six months of this year, investment-grade inflows totaled $5.6 billion while high-yield funds bled $5.9 billion.

The reality is precious few retail investors conceive of the ticking time bombs populating what they believe to be the safest slice of their portfolio pie.


Danielle DiMartino Booth is CEO and Director of Intelligence at Quill Intelligence LLC.

Visit to find out more.


For a full archive of my writing, please visit my website Money Strong LLC at

Click Here to buy Fed Up:  An Insider’s Take on Why the Federal Reserve is Bad for America. | Barnes & | Indie  |  Books•A•Million