I spent several hours today listening to and summarizing Tom Luongo’s (TL) podcast discussion with Danielle DiMartino Booth (DDB). I won’t pretend that I understand it all—a fair amount is framed in what I consider “insider” lingo—but it does seem to me that in the context of a world war that is as much economic and monetary as military these issues are supremely important. Understandably, Luongo wanted to sound out DDB on here views of his Theory of Everything—the conflict between the Fed and Davos. To my way of looking at it, DDB is more or less on the same page in a practical sense, but might question where Fed Chair Powell is actually coming from on a theoretical level—does he really have a worldview of where he wants to go, or is he simply trying to do the best he can as a public servant of the United States?
Obviously, what comes through is that DDB is more comfortable with the technical details rather than with geopolitics. What’s clear, however, is that however you express it, there is a definite antagonism between Powell and the globalists and that Powell is refusing to go along. That is causing very real pain for the EU, and that trend is likely to continue. Interestingly, DDB maintains that for the next year or two Powell and the McCarthy House will be in a practical alliance against the Zhou regime on the debt question. This takes on added significance in the context of the war on Russia, with Matt Gaetz saying that support for pulling the Ukraine plug is growing. Think about that in the context of the clear moves under way to undercut Zhou.
See what you think. What follows is a summary/partial transcript. I hope it’s faithful to the general content. Here’s a definition of The Fed Put:
The Fed put is the general idea that the Federal Reserve is willing and able to adjust monetary policy in a way that is bullish for the stock market.
https://www.spreaker.com/user/tomluongo/episode-133-danielle-dimartino-booth-and
Episode #133 -- Danielle Dimartino Booth and Why the Fed Put Has to Die
Quill Intelligence Chief Strategist Danielle Dimartino Booth joins me for a peak [sic] into the culture of the Federal Reserve and what is driving FOMC Chair Jerome Powell to pursue the most aggressive rate hike cycle in the Fed's 110 year history.
TL: Personnel is policy, so what's the culture difference at the Fed, given that Powell comes from the private sector and his predecessors Bernanke and Yellen were academics.
DDB: It's more that leadership has changed. The staff had failed to understand that things had changed and had continued to press with the narrative that inflation is "transitory". They should have been focused on the fact that the "transmission mechanism of monetary policy" had changed. "Instead of using the banking system as a conduit to make loans, to assess credit worthiness, the Fed had just monetized money that was then deposited directly into the checking accounts of American consumers." That change caused inflation that was NOT transitory. That change was "critical" and the staff missed that because academics seem to have a problem with the vision thing. Powell, by following his staff, ended up with egg on his face--and a determination to get things right. As a result Powell is looking outside the organization more for advice and intel.
TL:
DDB: Vice Chair John Williams, considered a Yellen protege, is Vice Chair of the FOMC. If anything happens to Powell, Williams is in charge of interest rate policy. Williams has usually been considered a "dove" [keep interest rates low], yet he has remained "very loyal" to Powell throughout the interest rate hikes. That means Williams is opposing Vice Chair Lael Brainard [leaving the Fed, she's the one that the Zhou regime wanted to replace Powell with] and Janet Yellen at Treasury.
TL: Who is behind these people?
DDB: "People need to understand that these are bureaucrats who have been given lots of power--there is no Rothschild in the background pulling strings." Powell knows how to operate as a bureaucrat. "I think he thinks he's serving his country."
11:00
TL: Powell is trying to regain control of US monetary policy from people who have a more "globalist" outlook. I see Bernanke/Yellen as doing the bidding of the world.
DDB: That's a reflection of naivete on the part of Bernanke/Yellen. They lacked market acumen, and that led to them to become puppets to the reality around them--that naivete is "frighteningly genuine."
12:00
TL: Bernanke/Yellen are doctrinaire Keynsians and the Fed is a Keynsian institution. It has two tools: 1) manipulation of short term interest rates and 2) the ability to manipulate the money supply. Rates are a "demand side" tool, and Keynsians don't care about "aggregate supply." But since rates are a "demand side" tool, they can't help with cost/push inflation--which is what we're facing: a massive pump and dump in commodities, massive supply chain disruptions. Raising interest rates doesn't address those problems. That raises the question: Why is Powell raising interest rates so aggressively? Is there "some other dimension" to the interest rate hikes?
DDB: I've been on the record saying that Powell wants to put monetary policy making back in the hands of the Fed, and that means breaking the dysfunctional relationship between the markets and the Fed. Wall St. has been making policy for generations now. "Greenspan was in awe of being the savior of the stock market." Greenspan was, like, Dude, I was unpopular in HS--this is so awesome, I'm so popular now. But Greenspan was a bit savvier than Bernanke/Yellen, yet he gave away control of monetary policy to Wall St.--the "Fed put" [Fed will always bail out Wall St. with easy money]. To break the "Fed put" you have to actually show that you will not tolerate malinvestment. He has to keep rates at that level. He has slowed the hikes but as long as he doesn't stop he's getting the message across. That allows him to keep "unwinding the Fed balance sheet."
16:00
TL: "We now have an historic 2/10 inversion on the yield curve." [Huh?] The markets are screaming "mistake" and tomorrow we have the CPI--projections are Powell will be vindicated [CPI did go up]. "It's the international markets where credit is mostly being pulled back, by Powell raising interest rates, because he's raised the cost of offshore credit as termed in dollars. What happens with CPI and have the markets woke up to the fact that Powell hasn't made a policy mistake?
DDB: Powell made a “deliberate mistake”—he knowingly changed the way CPI is weighted, so that inflation was bound to go up. That insured hotter inflation in the official stats, even though inflation is abating for now--fertilizer prices have fallen, which means food costs will come down. What fewer people realize is that there is a cottage industry to claw back up to $26k per employee in payroll taxes. This is a loophole that was extended by Zhou. "In the 31 months since July, 2020, the USG has paid out $343 billion in business income tax refunds. In the 31 months that preceded July, 2020, the USG paid out about $174 billion. So a really nice slush fund for the wealthy was extended by Zhou--there's a certain irony there--and in December there was about $24 billion dollars of these business income tax refunds, the second highest month on record. In January $19.5 billion was pumped into the economy. Again--to the wealthiest. Spending has been strongest in hotels, airfares, entertainment--that additional $20 billion per month to the wealthy is a big pickup. Nobody talks about this.
TL: I hadn't even considered that.
DDB: The industrial sector is definitely in a recession. Consumer spending will be ugly once we get back IRS refunds.
24:00
TL: Lot's of stuff going on around the world that the Fed has to deal with--dedollarization, international flow of dollars. In the Eurodollar market the Fed has huge power, unlike other banks that just create credit, because it can pull money out of the system. When you listen to all the squawking about Powell raising rates, that sounds like a lot of people overseas--that's where the end of the Fed put really exists. I wanted you to really think about that.
DDB: Think back to the weekend before the Fed pushed through it's first 75bp rate hike. Who was losing her mind? Christine Lagarde was publicly saying: You can't do this. You can have rodents of unusually large size in The Princess Bride. You cannot have unusually large rate hikes without blowing something up. [Powell knows that, and he did it anyway.] Janet Yellen is depleting the Treasury general account because she's allowed to, because she's deploying emergency measures. This is a sign of panic. Lending standards are tightening across the board, whether it's commercial and industrial, commercial real estate, residential, autos, credit cards--across the board. And [Powell's] QT just quietly churns on in the background, pulling liquidity out of the global financial system. Taking everything into account, we're still seeing negative liquidity.
TL: The reverse repo facility is down to about $2 trillion, down from $2.5 trillion.
DDB: That's people pulling money out of--example, BoA--and putting it where they can get a real yield. And the money market funds are turning to the Fed.
TL: Lagarde has been screaming about Powell since June, 2021, when Powell broke the Euro bull market overnight. All this has continued.
DDB: Janet Yellen is saying "June," but the Republicans are saying, Maybe as far as October. As long as the Treasury isn't out there FLOODING the market with bill issuance, this probably can keep going. Obviously these are domestic forces, but they're very globally influential.
TL: I look at the CARES Act as nothing more than globalist blackmail to force the Fed to monetize more debt. Powell has no desire to get back on that train. So how do "they" get Powell to monetize another $5-10 trillion?
DDB: That will not happen with a McCarthy House of Representatives. Not in 2023. The GOP wants its pound of flesh. Plus the credit agencies are demanding that Congress address entitlement spending. It's not because the GOP are good people--"politicians are not good people." But they hope to appear responsible and try to remain king of the world. The Fed's not going to have to monetize squat.
TL: The end of LIBOR and flip to SOFR happens in June, 2023--all old debt has to switch over. There's still $220 trillion in dollar denominated debt offshore and that's indexed to LIBOR. So, why does the Eurodollar futures market keep signaling "June" as the big thing? Yellen wants to fight over the debt ceiling--in June. The Brits are now screaming about maybe pulling out of digital CBDC in--May. Talk about the disconnection from LIBOR to SOFR.
DDB: I'm still learning, but the pushback to SOFR has been huge and I think it has to do with repricing risk.
TL: It's very clear from the European system that there's a push to end commercial banking and move to a central banking model. I don't think Schwab and those guys have the power to pull that off.
DDB:
TL:
DDB: You can see from Powell's face a lack of fear. We'll try to be a good global partner, but doing policy for the US comes first. He's got more tools to do that than Bernanke had.
TL:
DDB: Only over Powell's dead body are we gonna get CBDC.
TL: Powell has a big stock of Treasuries on his balance sheet that he can supply the market with through QT, and he's got a big chunk of change in the reverse repo facility--so, whatever the market needs, whether collateral or liquidity, he can be Santa Claus. That's domestic markets. The Eurodollar markets? They can go F themselves. The EU types have no accountability to national governments--I'd love to see the EU pushed to the dustbin of history. I still think the US has the most dynamic capital markets and best legal structure ...
DDB: I'm right there on the US. If China is as weakened as I think it is, then there's good chance that Europe has its allegiances out of alignment. [Is she referring to EU countries going to China for "sustainable" stuff?]
TL: Most definitely.
Thank you very much for the great work, Mark! I think you have captured the tone and the highlights well.
It was very interesting to hear DDB's view that Powell is basically a very competent bureaucrat who cares about his country and about it securing independent control of its own monetary policy. Although his purpose might not be explicitly to be a foil to Davos and the ECB, he is certainly acting in a way that is at odds with their needs and desires, as evidenced by Lagarde's reaction to him.
DDB also mentioned that Powell has no need for money and is adept at wielding political power so is incorruptible in that way; and that he is certainly not a puppet of some behind the scenes force. It strikes me how hard it is for us to even conceive of this level of integrity and independence in this day and age. To state the obvious, we are very fortunate that he is chair of the Fed at this moment in history.
TL: The EU types have no accountability to national governments--I'd love to see the EU pushed to the dustbin of history.
Me too Tom! The EU, UN, NATO and etc. all of the Cold War artifacts should have been trashed 3 decades ago.