Quill’s Quintessential Quest — The Neverending Search for the Holy Grail of Economics

To be truly faithful, one must commit to the seemingly impossible. Add acts of apparent random to the faith, and sometimes the impossible becomes the possible. So it was for two faithful researchers whose journey had them stumbling upon the Holy Grail of an ageless quest. In a 2014 book, “Los Reyes del Grial,” (“The Kings of the Grail), Margarita Torres and Jose Miguel Ortega del Rio maintain that the quest had ended. They had definitively identified the most sought after chalise from which Jesus Christ drank at the Last Supper, one in the same with that then used by Joseph of Arimathea to collect Jesus’ blood as it flowed from His side at the crucifixion.

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

For a full archive of my writing, please visit my website —  www.DiMartinoBooth.com

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

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Danielle Dimartino Booth, Quill Intelligence, Federal Reserve, Jerome Powell

The Powell Punt — Markets Score Winning Points to Defeat Fed

Markets Score Winning Points to Defeat FedWhere have you gone, Nick Rose? Our nation turns its lonely eyes to you. Actually, we know the answer to that question. It was not that long ago, on July 11, 2015, that Rose posted a video of himself kicking an 80-yard field goal at Austin’s Darrell K. Royal Texas Stadium. As much pride as this Longhorn (you didn’t know?) has in boasting of collegiate pigskin record proportion lengths, Rose now plays for the San Antonio Commanders of the Alliance of American Football. You’d have thought that converting 76% of his field goal attempts and 97% UT extra points for a career high of 77 points, he’d have played a few more Sundays. Alas, some legs don’t stand the test of time, unless that is you’re Gus of Disney fame. But that’s make believe.

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

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To Protect and to Herd — Fading the Consensus — The Quill 2019 Outlook

A young deer said to his mother, “I’m larger than a dog and swifter and I have horns to defend myself with. Yet when a dog appears I run away with the others. I have decided not to run from dogs, in future.”

Just then they heard the bark of a dog.

The young deer was filled with fear and forgetting his resolve, took to his heels along with his mother and the rest of the herd.

Moral: Fear drives away Reason.

English mathematician and philosopher Alfred North Whitehead once said, “The safest general characterization of the European philosophical tradition is that it consists of a series of footnotes to Plato.” Without a doubt, Greek philosophy has made an indelible imprint on western thinking since the dawn of literacy. Yours truly is thus unexceptional in returning time and again to the font of ancient Greek inspiration to pen these weekly missives, this being the 186th in a nonstop succession that began in June 2015, five days after leaving the halls of the Federal Reserve blessedly behind.

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

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DiMartino Booth, Money Strong, Quill Intelligence, Federal Reserve

Stress Testing the Fed — Passing the Liquidity Baton

A dozen years before Great Britain boasted Harold Abrahams, Lord David Burghley and Eric Liddell at the 1924 Paris Olympics, the United States had Edward Lindberg, Ted Meredith, Charles Reidpath and Mel Sheppard. This four-man team ran for gold in the inaugural 4×400 relay at the 1912 Stockholm Olympics. At 3:16.6 minutes, the Americans set the first Olympics Record and smashed the prior world record by nearly two seconds. As extraordinary a film as Chariots of Fire is, the powerful story line does play fast and loose with history. While Liddell does refuse to run on Sunday and in so doing, truly makes history, Abrahams never competes to win the court race at Cambridge University and it isn’t until 1935 that he meets the hauntingly beautiful opera singer he will later marry.

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

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Danielle DiMartino Booth, Daily Feather, Money Strong, Quill Intelligence

The Nothing Beyond — Australia: The Final Frontier of Economic Civility

Ne plus ultra, “Nothing More Beyond,” was the warning that greeted navigators and sailors at the opening of the Strait of Gibraltar. The message was clear: Cross this maritime Rubicon into the realm of the Unknown at your own risk. Legend has it that Hera, the queen of the gods, drove Heracles mad, which ended tragically with the greatest of Greek heroes slaying his wife, son and daughter. His sanity restored, he sought to atone for his atrocities. Pythia, the Oracle of Delphi, instructed Heracles to humble himself at the disposal of his cousin, King Eurystheus, for 12 years in whatever capacity requested. The result was the 12 labors of Heracles, the tenth of which involved cattle raiding from the monster Geryon’s herd at the edge of the Unknown. Hence that great Rock which stands sentry to this day.

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

For a full archive of my writing, please visit my website MoneyStrong at www.DiMartinoBooth.com

Click Here to buy Fed Up:  An Insider’s Take on Why the Federal Reserve is Bad for America.

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Messing with Texas

“Whoever drops their litter on the street owes 51 drachmae to whoever wishes to claim them.” In other words, Don’t Mess with Paros. At least that’s what historians gathered from a road marker dating back to the times of ancient Greece, the first documented evidence of anti-littering legislation. For aesthetes, the municipal motivation is self-evident. Forget Greek islands. Picture downtown Toronto or Chicago for a moment, so clean you could eat off the sidewalks. Contrast that with the once-pristine city we know as San Francisco before unheard wealth literally laid waste to that city, a perverse tragedy for young tourists who’ve no memory of the beautiful city of yore.


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

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Danielle DiMartino Booth, Powell, Bloomberg

High Earners Are Making the Fed’s Job More Difficult

In a rare occurrence, households with the most purchasing power are more pessimistic than those with the least.

By Danielle DiMartino Booth

December 5, 2018, 6:00 AM CST

This article originally appeared in Bloomberg Opinions — 12.5.18

If data dependency is the name of the game, then Federal Reserve Chairman Jerome Powell has his work cut out for him. In an economy driven by consumption, the key is having a firm grasp on how spending is poised to perform in the future. The effects of monetary policy play out with a lag of around one year, which suggests any emerging weakness could be exacerbated by the tightening that’s already taken place.

The challenge posed to policy makers in the current environment is the deafening noise in the data. By some measures, spending trends are at multi-year highs. Forward-looking indicators and anecdotal evidence, however, suggest a hard stop is in the offing.

It all comes down to who in the economy is on the receiving end of what. Lower-income earners have been buttressed by rising minimum wages and tax cuts. At the opposite end of the spectrum, high-income earners started 2018 by being rudely shaken out of last year’s state of Nirvana in financial markets. Those stuck in the middle are the most discomfited. They haven’t benefited enough from the tax cuts to see a meaningful difference in their household budgets, and they’ve also had to watch their 401(k) balances yo-yo with the markets’ machinations.

This is a problem because the top third of income earners account for 54 percent of consumption while those in the middle contribute 29 percent and the lower-income tier make up the final 17 percent. What this means is that the economy stutters to a halt if the middle and upper-earners ratchet back their spending.

Put another way, households with the most purchasing power are more pessimistic than those with the least purchasing power, which is a rare occurrence. It happened in the aftermath of the recession that officially ended in March 1991 but felt as if it had no end as the unemployment rate continued to rise to almost 8 percent by June 1992. It happened again in 2008-09 following the collapse of Lehman Brothers. There were recurrences after the U.S. lost its AAA credit rating in August 2011 and during the euro crisis that spanned 2011 and 2012.

It’s Rare To See Lower-Income More Ebullient Than Middle- & Upper-Income Earners

The current episode is against the backdrop of simmering trade war tensions between the two biggest economies in the world, the U.S. and China, and a Fed that’s still in tightening mode. These scarcely-seen conditions have historically played out in a distinct way in the stock market. With the exception of April 2009, optimism among those who spend the bulk of their marginal income gives discretionary stocks an advantage over consumer staples. Mid-tier car manufacturers and retailers are the primary beneficiaries while companies that produce necessities tend to be the laggards.

At the opposite end of the spectrum, stocks that key off strength at the high end have fallen victim to the relatively dour outlook of middle and upper income earners. To take but one example, shares of Sotheby’s are off by more than a third from the all-time high earlier this year. Meanwhile, shares in BlackRock, the world’s largest money manager, are off their lows for the year on recent signs the Fed may pause its rate hiking cycle.

The challenge for Powell and his colleagues at the central bank is making sense of what’s to come. The shelf life of the U.S.-China trade war détente is unknown. The global economic slowdown continues to spread like a bad virus, which has manifested in the recent drop in oil prices.

That same decline in oil prices will, however, lead to continued exuberance among the lowest income earners who are the most sensitive to prices at the pump. That could render the upcoming string of retail sales data all the more misleading. Moreover, though nowhere near as strong as the impetus from the 600,000 cars replaced in the aftermath of 2017’s hurricanes, the estimated 45,000 cars lost to Hurricanes Florence and Michael will also introduce a distinct form of noise to the data.

Perhaps the best the Fed can do is follow the housing market rather than retail sales to get a feel for where the economy is headed. The most recent pending home sales report put the tracking index at the lowest level since the summer of 2014. This coincides with the softness in furniture sales that emerged this spring.

As for what’s at the forefront of housing’s infirmity, that would be luxury homes where inventory is amassing at a faster pace. The risk posed by continued pessimism among those responsible for 83 percent of consumption should be front and center for Powell. Key data points due out in coming days and weeks should clarify the outlook. In the meantime, the national day of mourning that’s postponed Powell’s Wednesday appearance before Congress is no doubt a welcome reprieve as he prepares to defend or deny his dovish pivot at the New York Economics Club last week.


This article originally appeared in Bloomberg Opinions — 12.5.18

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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From Prussia with Dove — The ECB’s Mettle Put to the Test

Desmond Llewelyn knew how to make an entrance. In his 1964 debut as Q, a role he would play for 36 years, he armed 007 with an attaché case that concealed a throwing knife, gold sovereigns, a nifty tear-gas booby trap connected to the lock mechanism and ammunition for an Armalite AR-7 folding sniper rifle with an infrared night scope. Whether any of these cool spy toys were as menacing as the poison-tipped shoes donned by the ex-KGB agent in pursuit of James Bond in From Russia with Love is debatable. But what difference does that make? In the end, Bond outwits the bad guys on behalf of Her Majesty’s Secret Service and of course, gets his Bond Girl.

 

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

For a full archive of my writing, please visit my website MoneyStrong at www.DiMartinoBooth.com

Click Here to buy Fed Up:  An Insider’s Take on Why the Federal Reserve is Bad for America.

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