Photography by Jonathan Zizzo

Shining a Light on the Fed

Analyst Danielle DiMartino Booth is making national waves with her criticism of the Federal Reserve, which she says has addicted the U.S. to the “heroin” of low interest rates.

Late this summer Danielle DiMartino Booth, a maverick market analyst and outspoken critic of the Federal Reserve System, was one of a dozen women attending an annual, invitation-only retreat for finance and economics influencers in a remote area of far eastern Maine. The 60 guests at the exclusive “Camp Kotok” meeting at the Leen’s Lodge fishing camp at Grand Lake Stream, less than 20 miles from the Canadian border, included some of the nation’s most prominent economists, money managers, and market strategists. 

For several days the guests fished for small-mouth bass, broke bread, and hotly debated economics and monetary policy—all mostly off the record, with a “what happens in Vegas, stays in Vegas” understanding. Attending what she calls the “shadow Jackson Hole” retreat every August, as DiMartino Booth has for the last five years, is a coveted—and welcome—respite from the contrarian analyst’s usual routine. “That’s the beauty of Maine; there’s not much Wi-Fi reception there,” DiMartino Booth says. “It’s the only time I truly unplug.”

Attending the retreat is also a measure of her standing among the nation’s most perceptive minds in finance and economics. A former Wall Street salesperson and “macro strategist”—she played that dual role for investment bank Donaldson, Lufkin & Jenrette in New York—the San Antonio-born DiMartino Booth, 45, served from 2006 until this year as a key adviser to Federal Reserve Bank of Dallas president Richard Fisher, the widely respected inflation hawk who stepped down from his post in March. She’d caught the Fed’s eye while writing a controversial daily business column for several years for The Dallas Morning News. There, DiMartino Booth was a lonely voice of reason about the easy-mortgage boom, which she argued was introducing “systemic risk” into the entire financial system. For her efforts, she was roundly criticized as an anti-business spoilsport and a “nattering nabob of negativism” (including, full disclosure, by yours truly). As it turned out, of course, her critics were wrong and she was right. 

Photo courtesy of the Federal Reserve Bank of Dallas
These days DiMartino Booth is continuing to rail against the Fed’s cheap-money policy, as well as the institution itself. (It’s opaque and “bloated,” she says, with “delusional” leadership.) She conveys these views as the chief market strategist for The Liscio Report, a pricey newsletter for institutional investors, and with interviews and commentaries for the likes of CNBC, Bloomberg TV, Fox Business, the Financial Times, and The Wall Street Journal. Through her various megaphones she contends, in a nutshell, that by “artificially” keeping short-term interest rates at near zero since the 2007-2008 financial crisis, the Federal Reserve has “criminalized” saving, “enabled and financed and underwritten” the soaring and unsustainable national debt, worsened income inequality, and propped up short-term corporate profits at the expense of productive, long-term business investment. At the same time, she argues, the Fed’s easy-money policy has allowed politicians in Washington to borrow and spend more, creating a “veneer of prosperity” when, in fact, the “country as a whole is still weighed down by a tremendous amount of economic stagnation.”   

As a result, DiMartino Booth says, the nation’s central bank has been “boxed in” by its zero-interest policy—no matter how much it might want to let rates rise to their natural levels, say, to 3 or 4 percent. “They’ve been so low for so long—the heroin, if you will, the drug, of low-interest rates—it’s become really hard to take the patient off the drug,” she says. “They’re trying to get out of a canyon this time.” 

Wall Street Roots

Over lunch one August day at Penne Pomodoro, an Italian restaurant in Snider Plaza, DiMartino Booth keeps one eye on her iPad, where she’s called up The Wall Street Journal’s market data page as she picks at her flounder picata, mashed potatoes, and mixed vegetables. The stock market has been plummeting this morning, and she wants to track just how far it drops before it rebounds, if it does. 

“For the record, I didn’t eat my mashed potatoes,” she says, glancing up from the screen and smiling. Since leaving the Fed in June she’s been trying to lose a few pounds, conscious of the way the TV camera gives the illusion of extra weight. That’s important, because one of her main preoccupations these days is elevating her national profile as an economic expert, including on television. Liscio, where she’s one of three equity partners, gives her a primary writing platform for an audience of influential investors. Besides the broadcast appearances, she’s also been speaking to various business groups: to a brokerage company in Las Vegas, in Philadelphia to NASDAQ, to a money-management firm in Orlando. 

Watching the market while she eats is nothing new for DiMartino Booth. She says she picked up the habit on Wall Street, where she landed after earning a BBA from the University of Texas at San Antonio and an MBA in finance and international business from UT-Austin. (She also has a master’s degree in journalism from Columbia University.) On Wall Street, “we were never allowed to go to lunch,” she recalls. Instead, she ate at her desk, eyes glued to a Bloomberg terminal or to CNBC. Today she has nine TV sets at her house in University Park, where she lives with her husband, John, a packaging executive, and children William, 11; Henry, 9; and 7-year-old twins Caroline and John Jr. It’s indicative of her drive that, even while the twins were in the hospital’s neo-natal intensive care unit shortly after their birth in late 2007—“they weren’t quite baked,” she explains—DiMartino Booth continued to write a daily briefing for Fisher as the Great Recession approached. When the housing bubble finally burst—just as she had predicted—her stature was bolstered at the Fed, where academic economists—not analysts with real-world markets experience like DiMartino Booth—dominate the policy discussion. 

“Ph.Ds are from Mars, and she’s from Venus. They don’t speak the same language,” says Harvey Rosenblum, who hired DiMartino Booth in 2006 and retired seven years later as the Dallas Fed’s executive vice president and director of research. “But if you’re in an organization where everybody has the same point of view, you’re in a danger zone.” 

DiMartino Booth, Rosenblum says, is “a natural skeptic; it’s part of her personality. She’s got a natural tendency to dig deeper. She also brought with her a network of friends, a small army of friends, other data. She added value. 

“She brought a fresh approach, thinking out of the box, in a period when we needed it,” Rosenblum goes on. “You can’t look at the world through [an economic] model. You need a different mix of analytics. I’m glad we had her in the room to look at what was actually happening in the marketplace.”

While most of the Fed’s 12 district governors rely on the New York Fed for their market intelligence (that’s where Wall Street is located, after all), Dallas’ Fisher, a former money manager who was a member of the Federal Open Market Committee, which decides monetary policy, wanted his own independent analysis. So he says he asked DiMartino Booth—who “could get information out of a rock”—to be his eyes and ears.

“There are many brilliant economists at the Dallas Fed and throughout the Federal Reserve System. However, none that I had access to were trained from a financial markets perspective,” says Fisher, who’s now a senior adviser at Barclays bank. “I wished to have my own direct line to financial markets and a different perspective. Thus, I decided to augment the collective brain power of my economic advisers at the Dallas Fed and the briefings from the New York desk with Danielle, who I would deploy to New York frequently to meet with and listen to (but never give my opinion to) various financial operators, comb through analysts’ reports, and closely follow the financial press, then keep me advised both through oral briefings and written reports. 

“It helped that having had experience as a financial journalist, Danielle speaks and writes crisply and with wit—attributes I greatly appreciate,” Fisher goes on. DiMartino Booth “performed superbly, and helped me and the Dallas Fed provide a fresh perspective at FOMC meetings. I attribute some of our success in putting the Dallas Fed on the map to Danielle.”

As an independent analyst and commentator, DiMartino Booth continues to visit Wall Street on a regular basis. “What do you do when you go to New York?” I ask during one of our many interviews. “I visit with people,” she explains. “I ask them, ‘What’s happening in your market?’ I’ll go talk with the real estate handler with Morgan Stanley, for example, and I’ll say, ‘How is your sector doing?’ … And then I’ll go down the street to the next one, some credit analyst, and I’ll say, ‘What worries you? Any pockets of risk bubbling up? Any areas of over-valuation? Is everything hunky-dory?’ I’ll go until I’ve covered every asset class, then I hit rewind and start all over again.”

This boots-on-the-ground approach has helped shape her controversial views. “I’m completely off the rails,” DiMartino Booth says, almost proudly. “I’m saying things about the Fed that no one else is.”

An Exchange About the Economy

But what is it, exactly, that she is saying? 

By raising rates to their “natural” levels, I ask, playing the devil’s advocate, wouldn’t everyday people be hurt, because it would become more expensive to borrow money? “Well, there’s expensive, and then there’s normal,” DiMartino Booth replies. “It’s a crime in this country to save money, to be conservative, to be in your retirement years and try to [increase] your portfolio, what little portfolio you have. Retirees don’t have the option of going down to Bank of America and putting their money in a five-year CD.”

Because the rates are so low? “Yes. The rates are so low that savers have been punished for years and years,” she says. On the other hand, “I don’t know why anybody should have the right to have a 2.5 percent mortgage for 30 years. It actually puts borrowers in a bind, because they end up buying more than they can truly afford, because they’re basing it on a very false level of interest rates.”

FEDERAL FORTRESS: The ground floor of the Dallas Fed headquarters in Uptown, where DiMartino Booth used to work, covers six acres. Photo courtesy of the Federal Reserve Bank of Dallas
By keeping rates near zero, though, hasn’t the government maneuvered somewhat adroitly past the Great Recession, with a relatively low unemployment rate, for example? While Texas has done well, she answers, high-tax states like Illinois, California, and New York have not, and many states have stagnant economies. As for unemployment, “You have 93 million Americans who are out of work who could be in the workforce,” she says. “I would call that nearly a third of the population who could be working who are not working, out of the labor force entirely. Then there’s the third that is this growing population of people who are part-time—some of them involuntarily, some voluntarily. (Think of a millennial part-time Uber driver.) Then think of the final third as being true, full-time workers, highly productive. They have all the pricing power when it comes to wages, while the other two cohorts have none.”

But, the unemployment rate is still around 5 percent, I say. “Sure it is, because they don’t count these people,” DiMartino Booth replies. “It’s very conveniently measured. Trust me; I’ve been hanging around economists for the last nine years. You can measure anything any way you want.”

Even though the national debt is around $18 trillion—about 100 percent of the country’s GDP—we still seem to be clipping along in decent shape, I say. And, to the extent that debt contributes to “over capacity” in various industries, doesn’t that lead to lower prices, which benefit consumers, and especially retirees? “Well, you’d like to think in terms of higher wages as well. That’s the flip side,” she responds. “We do not have declining wages, by any stretch. But, every generation of Americans has been able to successfully make more than their parents did—up until 2006. That’s when this trend line was broken. … The fruits of [low rates and the Fed’s quantitative easing policy] have flowed mainly, by a great majority, to the wealthiest Americans, who have access and exposure to the financial markets.

“The national debt is a huge problem,” DiMartino Booth goes on. “When I hear politicians brag about reducing the [annual budget] deficit, it makes the hair on the back of my neck stand up, because it’s been enabled and financed and underwritten by extremely low interest rates. If rates were at a more historically ‘normal’ level—3 or 4 percent, call it—you would see a doubling in the deficit overnight. We have not killed the business cycle, but easy monetary policy provides that illusion. 

“It’s the exact same situation with corporate earnings,” she continues. “There are numerous studies that corporate earnings have been boosted by 25, 30 percent … and Corporate USA has never carried the amount of debt that it is carrying now. Corporations are buying back their shares—we call it financial engineering—and they’re buying other companies, engaging in mergers and acquisitions.”

Because the rates are so low, CEOs are merely taking advantage of the cheap money, aren’t they? “Get cheap money, go buy a company, fire half the workforce, consolidate, realize those beautiful synergies, blah, blah, blah,” DiMartino Booth says. “But in terms of productive investment in the long-term future of the country, not so much.”

Can you blame them, I ask, for capitalizing on the current environment? “If I’m Joe Q. CEO and interest rates have been at zero since 2008 and I’m trying to grow the company,” she replies, “am I really gung-ho to make a huge commitment to the future if I’m worried that I can’t look down the road and tell you what the operating environment is going to be once interest rates start to increase? Is it going to slam the housing sector? Is it going to cause another recession? So, should I be more conservative and just sit on my hands and wait for that eventual day to come when the Fed normalizes rates and, in the meantime, buy back more shares so that I can juice my earnings on paper, so that I can pay myself a higher bonus? The cycle feeds on itself, and it’s ‘all good!’ If you’re Joe Q. CEO, you’re between a rock and hard place.”

In terms of the stagnating wages since 2006, doesn’t globalization have a lot to do with that? “It has a lot to do with it, but that’s the easy answer,” she replies. “That’s why we’ve had several jobless recoveries. … At the same time, companies are trying to figure out how to better automate their processes all along the line. It’s not so much that jobs are being sent offshore, but, three human beings are being replaced by a machine. I see it in my husband’s industry—industrial packaging—where they’re able to take four people off the factory line and replace them with a machine that can fold boxes, close them up, put the tape on, send them down, and have the merchandise dumped into them.”

So, should we not be doing this? “You’re not going to stop progress or innovation,” DiMartino Booth answers. “But, the investment we need to make in the future is going to take a long time to bear fruit. I’m talking about science, math, the STEM subjects. That’s the gulf, the vacuum. That’s the great sucking sound in this country—the roots of our children’s education, educating future generations to be world-class innovators, Silicon Valleys coast to coast. Let’s bring it. We need smarter ways of tackling our education system, smarter ways of tackling healthcare, smarter ways of tackling our [physical] infrastructure problems.”

And, the Fed’s easy-money stance has been an impediment? “Yes. I think the Fed has been complicit— not in a malicious way. I would say the Fed has been the chief enabler, the facilitator,” she says. “So, there should be a timeline limit to how long policymakers can be ‘well-intentioned’ in their decision-making framework. [We needed to say], ‘Wait a minute, we’ve got a lot of silly investing going on, and there will be a price to pay.’ Whether the price is Congress abdicating all of its responsibility to policymakers … who provide the groundwork, via very low rates, to paint the veneer of prosperity, which works until it stops working. And then we go into another crisis, which is what we’ve been doing for cycle after cycle after cycle.”

The Fed, for its part, of course, sees things much differently. Interest rates have been held down so long mainly because inflation’s in check and the U.S. and global economies have been relatively weak, policymakers argue. And, raising rates could have hobbled whatever recovery has taken place since the Great Recession. In a March blog post hosted by the Brookings Institution, where he is a distinguished fellow in economics, former Fed Chairman Ben Bernanke argued that low rates are part of a long-term trend and necessary to be “consistent with the healthy operation of the economy.”  

Recalls Rosenblum, the former vice president at the Dallas Fed: “When the post-crisis plan was put into place in December 2008, I was in the room. At that time, we didn’t believe zero percent interest rates would be around one year later—let alone seven or eight! We’re just in a very unusual environment. It happens once every 20 or 30 years, when you have global recession.”

In September, the central bank declined to lift its benchmark rate even by an expected 25 basis points, citing concerns about the global economy. But a few days later the Fed chairwoman, Janet Yellen, said a hike was likely this year. DiMartino Booth, not surprisingly, was pleased. The choice is “either hike now and hope the recession is shallow,” she said, “or stay on hold, and the financial imbalances grow to such an extent that we have another crisis.” 

Meantime, the maverick analyst and proven soothsayer has her own personal plan for growth. Heading into next year’s election, DiMartino Booth says her goal is to become a national thought leader, helping voters by “shining a bright light” on the Fed’s outsized role and connecting the dots for them. “I’d like to open the black box for the average Joe, so they can vote people into office who can make better decisions on behalf of the economy,” she says.

Is this smart, ambitious woman having an impact? “Can’t tell yet,” says Fisher, the former Dallas Fed chief. “But I know her—and she will.”

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