Danielle Martino- Federal Reserve, Monetary policy, and Central Banking

We love talking to Wall Street Insiders. This week we have an insider from the Federal Reserve Bank of Dallas. We dig into why the Federal Reserve monetary policy is bad for America, but more importantly we discuss what the actual problem is... And its not what you think. 

We cover many of the problems the US Federal Reserve faces today as well as down the road.  


Rumors of My Birth Are Not Greatly Exaggerated

Summary:

  • The not seasonally adjusted BLS birth/death model is often misrepresented
    as the ‘culprit’ for exaggerated strength in payrolls given
    critics compare it to the seasonally-adjusted headline number; that
    said private-sector benchmark revisions in the year to March 2019
    of -0.4% are outside the +/- 0.1% band classified as statistical noise
    meaning births of 274,000 overstated strength
  • Continuing jobless claims provide hard data, and are much more
    reliable than payrolls which are subject to long-lagged revisions;
    claims fell (good) at a recent peak rate of -14.2% last September,
    and have since risen (bad) by 2.5%, the first increase of the current
    expansion
  • ASA’s nine-month deterioration depicting falling temporary employment
    corroborates the continuing claims signal; high-paying
    jobs for workers also contracted in October, which will hit spending
    given the top 40% of earners account for more than 60% of
    consumption
Federal Reserve Monetary Policy


Paul Revere did not ride into the Massachusetts night screaming, “The
British are coming!” Betsy Ross did not design the U.S. flag though
she did helpfully suggest five-pointed stars over those with six points
for ease of construct. The original cowboys donned derby hats, not
Stetsons, which weren’t even in existence until 1865. The Declaration
of Independence was ratified on July 4, 1776 but wouldn’t be signed
until August 2nd of that year. And the New York suicide rate fell following
the stock market crash of 1929. There were two prominent Wall
Street figures who took their lives, but there was no jumping out of
windows. And that’s just the short list of Americana myths.


Bearish investors also cleave to a myth, one they likely will for all
time – the fabled birth/death model. Every time there’s a jobs report
which surprises to the upside when it’s expected to disappoint, you
can set your watch to how long it takes for the birth/death model to be
trumped out to take the blame. Friday was no exception. The most strident
devotees cumulated the additions to further exaggerate payrolls
mythical strength over the past year. There’s just one problem. They’re
monkeying with the wrong math.


It’s important to understand the intent of the number crunchers at the
Bureau of Labor Statistics. Measuring the number of jobs created at
new firms and companies that shutter operations is an exact exercise
once a year when tax records are updated. So they created the birth/
death model to estimate it based on the trends of the past five years.
Cyclical inflection points, however, negate the efficacy of those historic
averages, which is where we find ourselves today given private-sector
benchmark revisions in the year to March 2019 of -0.4% are outside
the +/- 0.1% band classified as statistical noise. This dynamic renders
October’s addition of 274,000 via the model overly optimistic
.


But here’s the key that most miss – you can’t simply subtract that number
from the 128,000 that was reported for the month, a figure that’s
reported on a seasonally adjusted basis given the birth-death factors
are not seasonally adjusted. The mistake, however, is made with regularity
by angry masses of bears who want a simple scapegoat to explain
away the data coming in stronger than forecasts.


More to the point, why leave it at that when there are alternative
hard sources of data that can better reveal the truer underlying trend
in payrolls well before revisions are reported this coming February.


Continuing jobless claims (the red line) can get you there. This is hard
data representing those who are currently receiving unemployment
benefits, and they’re reported weekly. As you can see, after troughing
at a recent low of -14.2% last September, continuing claims are on the
rise – they’re up 2.5%, their first increase in the current cycle.


In the last cycle, claims first rose in February 2007, a point at which
we knew the economy was slowing as is the case today. But nonfarm
payrolls did not fall until July of that year nor did they stay in the red
until February 2008 when we were two months into recession. This is
why economists classify payrolls as a lagging indicator.


As you can see, the ASA Staffing Index doesn’t have a history that
stretches back to the years that preceded the last economic contraction.

In fact, it debuted in July 2007, when non-farm payrolls first printed
negative warning recession was imminent. The index then simultaneously
peaked in December 2007 with the highest non-farm number that
would be seen until March 2010.


If it wasn’t for the corroborating continuing claims signal, we’d be
reluctant to assign the term “definitive” to the ASA’s recent deterioration.
While temporary employment has been declining for nine
months, it lingered in contraction for an even longer stretch in the 13
months through May 2016, the last industrial recession.


Let’s let the last line, the blue line – high-paying job creation among
workers (as opposed to managers) – be the deciding factor, bearing in
mind one Jerome Powell has hung his hat on consumption sustaining
the current expansion. As a reminder, we define “high-paying” as jobs
excluding Retail, Education and Health Services, Leisure and Hospitality
and “Other” Services.


Presumably, consumption hinges on income and confidence in its
durability, which thereby encourages households to take on debt, the
other critical support that underpins spending. And that precondition
relies on high-paying job creation given the top two quintiles of job
earners account for more than 60% of consumption, not just retail sales
.


The current cycle has featured exactly three months in which high-paying
jobs among workers have contracted – January and May 2016 and
October 2019
. You might agree the economy then and now is in different
places, which we hope dispels the myth of it being in a “good place.”

Subscribe & Download

Never miss out on a new episode! Subscribe using your favorite podcast app.

Listen on
Apple Podcasts​​​​
Follow us on
Spotify
Follow us on
Stitcher Radio

Sign up to be one of our Money Tree Ultimate Insiders. You will have instant access to new episodes, automatically have access to our monthly giveaways, and the potential to be a guest panelist on our show


YCharts - Smart Investment Decisions Made Simple

We here at Money Tree Podcast use YCharts to uncover new investing opportunities, analyze trends and monitor our progress. YCharts is a powerful financial data platform designed for Individual Investors, Financial Advisors and Asset Managers. Their platform makes our lives easier. What can be better than that.

We struck a deal for our listeners where you get free access to YCharts for a month so you can test it out.


YCharts Of The Day:

This first chart looks at the Fed’s policy shifts in the last decade.

This second chart look at the historical performance of the S&P 500 and Nasdaq after the Fed makes a change to interest rates

The last one is how the 10-2 Treasury Spread relates to the S&P 500.



Today's Guest:  Danielle Martino

Danielle DiMartino Booth is CEO & Chief Strategist for Quill Intelligence LLC, a research and analytics firm celebrating its one-year anniversary of launching The Daily Feather and the four-year anniversary of the Weekly Quill.  

 

DiMartino Booth set out to launch a #ResearchRevolution, redefining how markets intelligence is conceived and delivered with the goal of not only guiding portfolio managers, but promoting financial literacy. To build QI, she brought together a core team of investing veterans to analyze the trends and provide critical analysis on what is driving the markets – both in the United States and globally.

 

Since inception, commentary and data from DiMartino Booth’s The Daily Feather have appeared in other financial sources such as Bloomberg, CNBC, Fox Business, Institutional Investor, Yahoo Finance, The Wall Street Journal, MarketWatch, Seeking Alpha, TD Ameritrade, TheStreet.com, and more.

 

A global thought leader on monetary policy, economics and finance, DiMartino Booth founded Quill Intelligence in 2018.  She is the author of FED UP: An Insider’s Take on Why the Federal Reserve is Bad for America (Portfolio, Feb 2017), a full-time columnist for Bloomberg View, a business speaker, and a commentator frequently featured on CNBC, Bloomberg, Fox News, Fox Business News, BNN Bloomberg, Yahoo Finance and other major media outlets. 

 

Prior to Quill, DiMartino Booth spent nine years at the Federal Reserve Bank of Dallas where she served as Advisor to President Richard W. Fisher throughout the financial crisis until his retirement in March 2015. Her work at the Fed focused on financial stability and the efficacy of unconventional monetary policy.

 

DiMartino Booth began her career in New York at Credit Suisse and Donaldson, Lufkin & Jenrette where she worked in the fixed income, public equity, and private equity markets. DiMartino Booth earned her BBA as a College of Business Scholar at the University of Texas at San Antonio. She holds an MBA in Finance and International Business from the University of Texas at Austin and an MS in Journalism from Columbia University.

Danielle's Online Presence:



Today's Panelists

Space Economy – Are There Moonshot Opportunities Or Is It Too Early To Shoot The Moon?

Space... The final frontier. A universe of endless possibilities.

There is a emerging trend of investing in the space economy. This week we discuss whether this is an early chance to shoot the moon one some space investments or whether these investments will fizzle out. We interview Andrew Chanin about how investors can participate in this sector.


Subscribe & Download

Never miss out on a new episode! Subscribe using your favorite podcast app.

Listen on
Apple Podcasts​​​​
Follow us on
Spotify
Follow us on
Stitcher Radio

Sign up to be one of our Money Tree Ultimate Insiders. You will have instant access to new episodes, automatically have access to our monthly giveaways, and the potential to be a guest panelist on our show


Looking for a better way to invest? 

Consider Betterment.

It doesn’t cost much to start, and you get access to a portfolio built around your risk tolerance and your goals. Using Modern Portfolio Theory, pioneered by a Nobel laureate, Betterment can help you build wealth without getting caught up in the noise of the market.


Today's Guest:  Andrew Chanin

Andrew Chanin, Co-Founder and CEO of ProcureAM. ProcureAM is a new ETP issuer behind The Procure Space ETF (UFO), the world’s first pure-play space ETF. UFO tracks the S-Network Space Index, the first Certified Space Data Product™ to be recognized by the nonprofit Space Foundation. Andrew is "famous" in the ETF industry for launching various successful thematic ETFs, most notably cybersecurity ETF HACK that surpassed $1B in less than a year. 

Andrew's Online Presence:


Today's Panelists

How Money Works: The Federal Reserve, Interest Rates, Inflation and Deflation – Interview with David Stein

Are you wondering how the Federal Reserve interest rates impact your life? Probably not... But you should. Interest rates impact everything that you do related to money.

This week we are discussing how the Federal Reserve's actions effect interest rates, inflation and deflation. We discuss why they manipulate interest rates, how this can effect your money, and what the Federal Reserve fears most (hint, its not ghosts).

How Many Works: How the Federal Reserve Impacts Investors

Authored by: David Stein

We often hear how the Federal Reserve just cut interest rates and perhaps the stock market rallied because it did so. Who is the Federal Reserve, what does it mean that they cut interest rates, and how does it impact you as an individual investor?

What Central Banks Do

The Federal Reserve is the U.S. central bank. It is also called “the Fed” for short. The Fed was created in 1913 when President Woodrow Wilson signed the Federal Reserve Act into law.

Most countries and regions have central banks. Examples include the Bank of England, the Bank of Japan and the European Central Bank. The purpose of central banks is to ensure stability in the financial system. That means making sure there is not too much inflation, which measures the rise in prices over time. Financial stability also means the economy is growing, but not too quickly since a rapidly expanding economy can lead to inflation. 

The Dual Mandate

The U.S. Congress has given the Federal Reserve two primary objectives: ensure stable prices and full employment. The primary way the Federal Reserve seeks to accomplish this dual mandate is through its monetary policy, which are actions the Fed takes to influence interest rates. For example, as part of its monetary policy, the Fed sets a target for very-short-term interest rates such as the interest rate it pays on deposits commercial banks hold at the Federal Reserve. Another short-term interest rate target is the Federal Funds rate, which is the interest rate that banks charge to lend money to each other overnight.

When the financial media says the Federal Reserve cut interest rates they are referring to the central bank lowering the Federal Funds target rate as well as the interest rate the Fed pays on deposits held at the central bank, which are known as reserves. 

How the Fed Influences Longer-term Interest Rates

While the Federal Reserve typically only directly controls short-term interest rates, its actions can also influence longer-term rates. A long-term interest rate can be decomposed into a series of short-term rates. For example, you could choose to borrow money for five years or you could take out a loan for one year and then refinance it every year for 5 years. Or if you could find a lender, you could take out a loan and refinance it every month for five years. There are even some businesses that borrow money for one day and refinance the loan every single day.

Because borrowers and lenders have the flexibility to choose their time frame for lending and borrowing, the level of long-term interest rates is directly influenced by households’ and businesses’ expectations for short-term interest rates. The biggest driver of those expectations is what central banks are doing with regards to monetary policy. Is the Federal Reserve lowering short-term interest rates and communicating that it will continue to do so? Or is the Fed increasing short-term rates? The short-term interest rate along with expectations for future short-term rates influences longer-term rates, which in turn influences how much households and businesses want to borrow. Lower interest rates encourage more borrowing while higher interest rates encourage less.

How the Federal Reserve Chooses the Level of Short-term Interest Rates 

Currently, short-term interest rates are about 1.5% in the U.S. while in other countries short-term rates are close to zero. Central banks set short-term interest rates at a level that approximates what is known as the neutral rate of interest. This is an unobservable interest rate or a theoretical rate. Central banks believe this neutral rate of interest is low enough to encourage businesses to borrow money to invest in new projects including hiring more workers. It is also the interest rate that motivates households to borrow to buy a new home or buy a car, which can keep construction and manufacturing workers employed. In other words, the neutral rate of interest is the rate of interest that ensures everyone that wants a job can get a job and that the economy continues to expand, but not at a pace that leads to too much inflation. The Federal Reserve sets a target for short-term rates that it believes matches the unobservable neutral rate of interest, which is the rate the Fed believes will ensure financial stability.

Additional Interest Rate Drivers

There are two other factors that influence the level of interest rates. The first is inflation expectations. When lending money, if investors and banks believe inflation will be higher in the future then they will want additional compensation in the form of higher interest rates to protect them against that loss of purchasing power.

In addition, if investors and banks are uncertain regarding future central bank actions or future inflation then they will want a higher interest rate to compensate for that uncertainty. That additional compensation is called a term premium.

These three factors: future short-term interest rate expectations, inflation expectations, and the term premium are the theoretical basis for the level of interest rates. Of course, the actual level of interest rates is set in the market based on the willingness of banks and investors to lend and the willingness of households and businesses to borrow.

How the Federal Reserve Impact Investors

Actions by Federal Reserve and other central banks can influence interest rates as individuals adjust their expectations based on what central banks say and do. In turn, fluctuating interest rates impact the prices and returns of numerous asset classes including bonds, stocks, and real estate. 

Extended periods of low interest rates like we have seen in the past decade mean investors earn less on their conservative investments such as savings accounts, bank certificates of deposits, and short-term bonds. Those low interest rates push individuals saving for retirement to save more while motivating retirees to spend less or find other ways to generate additional income.

Given the significant influence the Federal Reserve and other central banks have over interest rates, financial markets and the economy it is important that as individual investors we stay aware of what central banks are doing.


Subscribe & Download

Never miss out on a new episode! Subscribe using your favorite podcast app.

Listen on
Apple Podcasts​​​​
Follow us on
Spotify
Follow us on
Stitcher Radio

Sign up to be one of our Money Tree Ultimate Insiders. You will have instant access to new episodes, automatically have access to our monthly giveaways, and the potential to be a guest panelist on our show


Looking for a better way to invest? 

Consider Betterment.

It doesn’t cost much to start, and you get access to a portfolio built around your risk tolerance and your goals. Using Modern Portfolio Theory, pioneered by a Nobel laureate, Betterment can help you build wealth without getting caught up in the noise of the market.


Today's Guest:  David Stein

David Stein helps individuals become more confident investors via audio, video and books. For the past five years, he has hosted the weekly personal finance podcast Money For the Rest of Us. The show has more than 250 episodes and over 10 million downloads. David's upcoming book, Money For the Rest of Us: 10 Questions to Master Successful Investing will be published by McGraw-Hill in October 2019. Previously, David was Chief Investment Strategist and Chief Portfolio Strategist at Fund Evaluation Group, LLC, a $70 billion institutional investment advisory firm, where he co-headed the 21-person research group. David's former institutional clients include The Texas A&M University System, the University of Puget Sound, and the Sierra Club Foundation.

David's Online Presence:


Today's Panelists

How Do Bloggers Make Money? Zero to Financial Independence in 1 Year

Have you ever been sitting in your job wondering how you could quit and be financially independent? You are in for a treat. Logan Allec became financially independent in one year from blogging. This is a great episode if you have ever wondered, how do blogger make money? Ever thought of becoming a blogger or content creator for a living yourself?

Its not all sunshine and rainbows, but Logan shares some of his secrets and shows you how he did it.


Subscribe & Download

Never miss out on a new episode! Subscribe using your favorite podcast app.

Listen on
Apple Podcasts​​​​
Follow us on
Spotify
Follow us on
Stitcher Radio

Sign up to be one of our Money Tree Ultimate Insiders. You will have instant access to new episodes, automatically have access to our monthly giveaways, and the potential to be a guest panelist on our show


Looking for a better way to invest? 

Consider Betterment.

It doesn’t cost much to start, and you get access to a portfolio built around your risk tolerance and your goals. Using Modern Portfolio Theory, pioneered by a Nobel laureate, Betterment can help you build wealth without getting caught up in the noise of the market.


Today's Guest: Logan Allec

Logan Allec is the founder of Money Done Right, a personal finance website devoted to helping everyday Americans live happier lives by giving them actionable ideas on building, growing, and maintaining wealth. Money Done Right is an affiliate partner with over 100 brands, primarily in the fintech space.  Before becoming an Internet entrepreneur, Logan was a practicing CPA with a multinational professional services firm serving large, publicly-traded companies. His experience helping large corporations save millions of dollars in taxes inspired him to help everyday people lead better financial lives as well. This desire became his motivation for founding Money Done Right in July 2017 as a hobby and then a side hustle while he was still working at a CPA firm. Within eight months of launching, Logan quit his day job and started working full-time on Money Done Right.

 

Logan has been recognized as a personal finance, tax, and credit expert in publications such as CNBC, USA Today, MarketWatch, U.S. News & World Report, HuffPost, Reader’s Digest, and more.  Living in the Los Angeles area with his also-entrepreneurial wife Caroline and his son Hunter, Logan enjoys playing basketball at the gym and exploring local hikes. He’s also been known to be quite competitive at board games.

Logan's Online Presence:


Today's Panelists

ESG Investing Socially Responsible Investing and Climate Change – Dale Wannen

Want to invest to make the world a better place? Want to invest in companies that are changing the world? Interested in ESG Investing?

You have come to the right place. This week we discuss socially responsible investing, ESG Investing , Impact Investing and the pros and cons of trying to change the world with your investing dollars. We also discuss what people get right and what they get wrong about socially responsible investing.

esg investing


Subscribe & Download

Never miss out on a new episode! Subscribe using your favorite podcast app.

Listen on
Apple Podcasts​​​​
Follow us on
Spotify
Follow us on
Stitcher Radio

Sign up to be one of our Money Tree Ultimate Insiders. You will have instant access to new episodes, automatically have access to our monthly giveaways, and the potential to be a guest panelist on our show


Looking for a better way to invest? 

Consider Betterment.

It doesn’t cost much to start, and you get access to a portfolio built around your risk tolerance and your goals. Using Modern Portfolio Theory, pioneered by a Nobel laureate, Betterment can help you build wealth without getting caught up in the noise of the market.


Today's Guest:  Dale Wannen

Dale Wannen runs Sustainvest Asset Management, an investment advisory firm solely focused on the world of sustainable and responsible investing.  He is passionate about getting investors to realize that how they invest can in the long run, effect what this world will look like in 10, 20 or 50 years.

 

Dale Wannen, founder of Sustainvest Asset Management LLC,  has over 20 years experience in wealth management and financial services. He specializes in ESG investment strategies, securities analysis, and shareholder advocacy.  He is often a guest speaker on the topic of ESG investing and shareholder activism. Dale has an MBA in Sustainable Management from Presidio Graduate School in San Francisco and a B.A. in Economics from Rowan University and currently sits as a Board of Director of non-profit Stewards of the Coast and Redwoods and is an investment committee member of the Sonoma County Community Foundation.

 

Dale's Online Presence:


Today's Panelists

Investing in Pot Stocks – Are They On Fire … Or Going Up In Smoke

Are you wondering if you should invest in Cannabis? No, not for personal reflection or chilling out. This week we discuss the enormous potential for the new trend of investing in pot stocks. We interview Kip Meadows about his views on the cannabis industry and we have some interesting guests who have experimented with some very creative ways to invest in pot stocks.

You are going to be s"toked" that you listened to our guests and panelists discuss how you can take part in this industry.

investing in pot stocks


Subscribe & Download

Never miss out on a new episode! Subscribe using your favorite podcast app.

Listen on
Apple Podcasts​​​​
Follow us on
Spotify
Follow us on
Stitcher Radio

Sign up to be one of our Money Tree Ultimate Insiders. You will have instant access to new episodes, automatically have access to our monthly giveaways, and the potential to be a guest panelist on our show


Looking for a better way to invest? 

Consider Betterment.

It doesn’t cost much to start, and you get access to a portfolio built around your risk tolerance and your goals. Using Modern Portfolio Theory, pioneered by a Nobel laureate, Betterment can help you build wealth without getting caught up in the noise of the market.


Today's Guest:  Kip Meadows

Kip Meadows is the Founder and CEO of Nottingham, a fund administration firm and white-label ETF issuer headquartered in Rocky Mount, NC. The firm has been servicing the fund accounting, organization and administrative needs of clients nationwide since 1989 and seeks to be the primary destination for small and emerging fund issuers in need of back-office and administrative support.

Kip's Online Presence:


Today's Panelists