Loading summary
Transcript49 lines
- [00:00]
Mark Riepe
This episode is brought to you by Charles Schwab. Timing the market, Fighting inflation, Managing risk Financial decisions can be tricky. Investing isn't just math, it's psychology. Your neurons are playing favorites and the market doesn't care. Financial Decoder, an original podcast from Charles Schwab, can help join host Mark Riepe as he breaks down practical strategies to help overcome the mental traps that may affect your investing decisions. Listen@schwab.com FinancialDecoder
- [00:32]
Ann Barry
Eli Lilly is on a shopping spree. We explore which therapies the global pharmaceutical giant is looking to spend its money on. Next Micron Technology joins the Trillion Dollar Club to have the latest from the front lines of the AI memory boom. And coming out of a long weekend, I've invited fan favorite Danielle DiMartino booth back to the show. The Economist and Fed Insider is going to help us make sense of the conflicting macro moves play in the markets. Tuesday, May 26th is blue markets daily and I'm Ann Barry. More market details to come. But first, summer has unofficially kicked off. Stocks are up, Americans are spending, but consumer sentiment data shows that at some level the way people are feeling is declining. With anxiety over the job market on the rise, it's a challenging macro environment to pass through. So this morning I welcomed Danielle DiMartino Booth back to the show to share her unique perspective on it all. Now Danielle is the CEO and Chief Strategist of QI Research and a former Fed Insider, having worked for nearly a decade at the Federal Reserve bank of Dallas. She describes for us the quote can of worms that new Fed Chair Kevin Walsh is inheriting and why former chair Jerome Powell just may be his greatest ally. We also discussed the current disconnect between Wall street and Main street, one that has led pawn shop stocks to hit all time highs. While shares in buy now pay later, companies are feeling the pressure and we talk through why. In this conflicted environment, her mantra to investors is trade the narrative but own the truth. Danielle has enormous energy and insight. It's a conversation you won't want to miss. Coming up in just a moment. But first, this episode is brought to you by Charles Schwab.
- [02:21]
Mark Riepe
Is recency bias Skewing your potential stock picks Is attribution bias? Messing with your retirement plan? Overconfidence describes our tendency to overestimate our abilities. Loss aversion helps explain why losing a dollar hurts more than gaining a dollar. Financial Decoder, an original podcast from Charles Schwab explains how these cognitive and emotional biases can affect the decisions you make about your financial life.
- [02:43]
Ann Barry
Host Mark Reape, head of the Schwab center for Financial Research, and his guests offer actionable insights on what you can do to help fight off these decision making biases. Download the latest episode and follow@schwab.com financialdecoder or wherever you listen. And now my conversation with economist and former fed insider, Danielle DiMartino Booth. Danielle DiMartino Booth, you're back. I'm thrilled to have you. And you're back right as we go into a new regime. He's arrived. The Kevin Wash has landed. How are you feeling about it?
- [03:15]
Danielle DiMartino Booth
I'm feeling hopefully optimistic about Kevin Wirsch. I mean his hair is the same color as ours, even though I have to get mine dyed to keep it this way. But I hope we don't see 12 months from now somebody with a full head of white hair from the stress. But I am hopefully optimistic that he comes in with a younger perspective, that he has a greater appreciation for some of the economic indicators that we relied on during the government shutdown, that he actually introduces the word real time into the vernacular of the Fed staff and manages to get some better data in hand to make policy just for the modern world as opposed to through the rearview mirror. I hope that he has time. That's why I said I'm hopefully optimistic that he does not get hit with a liquidity crisis before then, given what we're seeing, the continued fallout in private credit, private equity, you name it. But put private in front of it and that's part of his future.
- [04:14]
Ann Barry
Well, let's, let's start that. The Financial Times ran a piece today and the headline was quote, kevin Wash, his complicated inheritance, paint the picture for us. Let's start with private assets because you started there. Paint the picture for us, Danielle, as to in your opinion, what he is inheriting as he starts.
- [04:36]
Danielle DiMartino Booth
Well, he's inheriting a can of worms. It's complicated. In 2024, the non banking global financial system was about $258 trillion. So two years ago that was 51% of global assets. So look at it that simplistically, that you are the lender of last resort. That's part of your job description. And you have to regulate. Basically you're the world's central banker. So you have to be cognizant of the fact that you're regulating a financial system that more than half of it is unregulated. And yet. So we had too big to fail prior to the financial crisis. We had globally systemic sifies, huge large regulated big banks that could not Fail. They were too big to fail. Kevin Warshaw is inheriting too big to fail. Non banks and banks. And we have to be aware of how quickly liquidity vacuums can happen. Just, you know what? Jay Powell is right there around the table with him. He's not going to have to go very far to ask him what it was like in 2018. And he was there. I mean, Kevin Warsh was there. Kevin Warsh quit in protest because he did not believe in the efficacy of quantitative easing the first time he was on the board. So he's had experience, he understands the financial markets. He's got plenty of people there. I think bizarrely that Powell might be one of his greatest allies going forward because Powell understands how difficult the position is that Kevin Warsh is walking into and relieved that it's not him.
- [06:16]
Ann Barry
Let's talk about the inheritance that Kevin Walsh is getting now when it comes to the state of the consumer. And you wrote a great newsletter this morning in today's edition of the Daily Feather called Packing the Packard. Danielle, talk to us about how the consumer is feeling right now and why it looks so disconnected from the way in which the market is performing. The equity markets are performing well.
- [06:40]
Danielle DiMartino Booth
You have to remember that the consumer involves the top 10% of the K and the bottom 90% of the K shaped economy. And when have the preliminary read for higher unemployment expectations looking out over the horizon from the perspective of U.S. households, when you have that rise in the second half of May to 69%, the cycle high, by the way, from 61% at the beginning of May, you've got problems. You have a consumer that does not have the same sense of security that owners of the stock market, the predominant owners of the stock market have. And that's a huge challenge for Warsh going forward because he's duty bound to make monetary policy not just for the top decile of income earners, but for all Americans. And it's very difficult because he's got that labor mandate. If it was just the inflation mandate, which I fully advocate for the Fed going back to having, because the inflation mandate and the labor mandate are inherently in conflict with one another when it comes to making policy. But as long as he's got that labor mandate on his plate, he has to pay heed to the fact that 69% of Americans do not perceive the job market as being solid or stable or anything near healthy. Once you cross 50%, that line of higher unemployment expectations, you're typically already in recession, to say nothing of 60%, to say nothing of 69%. We just saw a poll come out, a Harris poll come out that said that showed 66% of Americans right now believe that we are in recession. So these are things that are, they're going to challenge him from day one.
- [08:27]
Ann Barry
Let's talk about a specific set of metrics that you write about today. Danielle, I'm just going to read what you wrote. You saw in 2025's fourth quarter corporate profit to gross domestic income ratio reach a record high of 11.9%. The divergence between high hue, that's higher unemployment expectations and high profit share has never been greater. How is that talk about how that has come to be. Is that labor cuts by corporations in a push for productivity, is it something else? Talk to us about how that divergence has come about.
- [09:09]
Danielle DiMartino Booth
Well, at the same time we're seeing a near record divergence between the loss of work among managers, as the Bureau of Labor Statistics defines them, and the loss of work among worker bees. And what that typically means is that companies are cutting the highest level of cost that they can and those are the white collar workers who cost them more and they're keeping the lower level, lower income workers. But generally speaking, unless it's different this time, I'm loathe to say those words. When you see manager cuts rise to the extent that they have, then it's worker cuts that are coming behind them. Companies have been slammed by higher energy prices. And when you have perceptions of the job market where they are, when you have pawn shop publicly traded stocks at all time highs, when you have buy now, pay later, publicly traded stocks tanking, collapsing, that's telling you something about the ability to pass through higher input costs. What does that mean? It means that companies margins are set to get squeezed and that just is going to force them to push through more cost cutting where they have the control and that is over labor. So you can get into a very nasty spiral when you start to see corporate profit margins declining and that gap between higher unemployment expectations and corporate profit margins begin to narrow. It's never a comfortable time for corporate America.
- [10:41]
Ann Barry
So when does the rubber hit the road, Danielle? Because what you've just described is that managerial level where you've seen a lot of job cuts are also an engine of consumer spending. Right. And if you take a look at the earnings season that we're sort of still in, you've seen a number of consumer products companies, not just Staples, but consumer discretionary. Yes. Talking about how they're trying to manage the impact of inflation, but also talking about the fact that the top line is still growing, not just because of prices, but they're actually still seeing demand in volumes, but not across the board, but in enough places to suggest that there's a disconnect between the level of layoffs that we've seen, the low consumer sentiment which you point out using data, and the fact that the earnings narrative, not just the earnings numbers, does not yet show a slowdown in demand for consumer products. So are folks just spending? Is this reckless spending? When do these two converge? When do we start seeing demand slow down?
- [11:40]
Danielle DiMartino Booth
Well, we've certainly seen savings depleted at a historic level outside of the housing boom years when the saving rate actually went negative. So that's one way that households are managing to continue to consume. We've seen credit card lending continue to rise and we've seen again, pawn shop stocks at the highest level on record. So American consumers are doing everything they can to access funding. We've seen FHA refinancing. FHA would imply a lower income homeowner, but we've seen FHA refinancing volumes come up appreciably. They're a good portion of refinancing volumes, a majority of refinancing volumes. So again, consumers are tapping into any source of monetization that they can find. But these are all attached to leverage. These are all attached to debt. Unless you own stocks. And in the event that you own stocks, well, you control half of spending. And you can continue to spend based on the wealth effect and the fact that you continue to feel wealthy based on what your portfolio is reflecting.
- [12:43]
Ann Barry
Let's face it, major medical might not have been designed to cover everything. And unfortunately, sometimes all it takes is an unexpected medical or dental bill to throw your carefully curated financial world into disarray.
- [12:54]
Aflac Representative
And your wallet isn't the only thing thrown off. Financial stress can also mean lost employee productivity impacting business costs.
- [13:01]
Ann Barry
That's why Aflac works to pay claims quickly, accurately and fairly to help employees find their balance.
- [13:06]
Aflac Representative
Again, offering Aflac plans comes at no direct cost to businesses. And these plans can save businesses and employees tax dollars when payroll deductions are pre taxed.
- [13:14]
Ann Barry
Learn more@aflac.com BrewMarkets that's athlac.com BrewMarkets so
- [13:21]
Mark Riepe
good, so good, so good.
- [13:23]
Nordstrom Rack Announcer
Everything you want for summer is at Nordstrom Rack stores now and up to 60% off. Stock up and save on the brands you love like Vince Sam, Edelman Frame and Free people. Join the Nordic Club to unlock exclusive, exclusive discounts. Shop new arrivals first and more. Plus buy Online and pick up at your favorite rack store for free. Great brands, great prices. That's why you rack.
- [13:47]
Ann Barry
Can we shift gears and look at the second order effect on this, which is on manufacturing? Danielle and one of the things I really appreciate about your writing is how much you actually delve into the manufacturing data. And your writing over the weekend talked a lot about what the Philadelphia Federal Reserve region is seeing. Talk to us about what you're seeing in domestic manufacturing trends.
- [14:12]
Danielle DiMartino Booth
So what we saw was a big surge of industrial activity in anticipation of higher energy prices, in anticipation of the potential imposition of higher tariffs going forward. So we saw a surge in inventory restocking. Towards the end of 2025, manufacturers had depleted their inventories to such an extent that they were either going to close the doors and close the manufacturing lines or they were going to restock. So we've definitely seen that. But now we're seeing the back end of that. When you have a big surge in pre buying, the backside of that, the payback, if you will, is the cliff effect. And that's what we're starting to see in anticipations for backlogs, which is a sign of future demand, the fact that manufacturers continue to be in layoff mode. If they thought that the demand on the industrial side was going to be persistent, they certainly would not be continuing to deplete their headcount. But that's what they're doing. In other words, we've seen an industrial renaissance, but a very brief one to restock the toy, close down or restock. We've seen the restocking. There's not much behind it.
- [15:32]
Ann Barry
So we truly are now at the point where we should see the cost pressure, right, doubling down, give it, given that we're at that moment where it's caught up. So when you put this all together, Danielle, both in your own investing, I'm not asking you to give investment advice, but I know that you spend a lot of your time on TV in thought leadership. So you spend a lot of your time with money managers when you're laying out these facts to them and your analysis to them. What did they say to you in terms of where the market is trading at and the valuation levels right now? Because everything that you are saying that I'm hearing you say does not point to the levels that you would expect to see. Yet we are seeing in today's US Equity markets.
- [16:11]
Danielle DiMartino Booth
Absolutely. Look, the engine of passive investing, the structural inflows into the market, is something that is absolutely undeniable along with pot shops that have over 100 pots massive hedge funds that are going to trade however they want to trade and move the markets on their own. They're incredibly powerful forces. So you have those structural inputs into the stock market at the same time that you have this very weak macroeconomic data. And what we tell our investors is our mantra is trade the narrative, own the truth. So understand that there could be massive moves in markets own volatility because it's not going anywhere anytime soon. But trade the narrative. If the front headlines say the unemployment rate's at 4.3%, trade it, because that's what traders do. But understand that underneath that, that you've got a college graduation, college graduate underemployment rate in this country of 45% and people not getting jobs who've just completed their four year degrees. So own the truth. Understand that at some point this tension is going to become so acute that hopefully Kevin Warsh is able to push through a few rate cuts in 2026, even though markets are pricing in the OPP. But again, that's how you're prepared. If you know the underlying true state of the economy, then you're prepared for a pivot in monetary policy and how markets trade that as opposed to just being long. The narrative only you have to be positioned, you have to be at least hedged for what you know. The economy is telling you, truth telling you, but you trade the narrative in the meantime.
- [17:55]
Ann Barry
So what does own the truth look like? Does that mean go buy dollar stores? Right? Does that mean go buy the pawn shop stocks? Like what, what is a portfolio of truth ownership look like?
- [18:08]
Danielle DiMartino Booth
Well, you've certainly seen a lot of consumer discretionary heat. I mean, for Home Depot to have reported, I think nine consecutive quarters of negative year over year, same same store sales growth is incredible. And their stock, their stock price reflects that. But you see, pawn shops are doing better business than they have in the history of pawn shops and their stocks are at all time highs. So in that sense, the market does reflect macroeconomic reality and you can position yourself for that. If you look at the stocks that buy now, pay later vendors, which by the way are funded through the private credit channel, their stocks are not looking so hot because people know that US consumers have actually moved on to pawning their possessions. So if you follow it closely enough, you know how to position yourself on the micro side. But as far as the macro goes and indexing and where you are positioned on the curve, that's all about the narrative.
- [19:12]
Ann Barry
So, Danielle, tell us what you're watching again. Kevin was freshly into the seat. We've got a slew of data coming out before we see things get a little bit quieter over the summer. So for the next eight weeks you've heated up your popcorn. What are you watching out for?
- [19:29]
Danielle DiMartino Booth
So we're going to be following services inflation very closely. Outside of that top 10% we're hearing that, that that road trips for vacations over the summer are going to be much shorter, that people are spending less time vacationing, that people are. Right. Canceling their vacations. Again, I'm not talking about the people who are jetting off. Yeah to nice for the, for a long weekend. I'm talking about the other 90% of Americans with, with pump prices as high as they are.
- [19:58]
Ann Barry
Because we haven't seen that yet, Danielle, have we? Because if you take a look at the earnings of the travels of the travel companies, most of them have said that the consumer's been pretty resilient. So I'm curious, where are you, are you seeing that in survey data? Where are you getting that insight?
- [20:11]
Danielle DiMartino Booth
We're seeing that in AAA reports saying yes, Americans are still going to go on vacation but they're not going to go as far. A lot of Americans are going to be doing or they're going to be going and visiting their family instead of going to a hotel. We're seeing that in the earnings of Six Flags and other types of recreational theme park types saying we're certainly not selling as many annual season passes as we'd anticipated. We're seeing real revenue pressure and again the top 10% that's flying private is not going to six flags but you're seeing it in very discretionary areas of the economy and what's being reported by these companies who are interfacing directly with the bottom of the cake.
- [20:56]
Ann Barry
So last question for you Danielle, because you do such a good job of unpacking this and it's hard to find voices that can really break this down in an accessible way. Treasuries. Where are Treasuries going to head over the next couple of months do you think?
- [21:09]
Danielle DiMartino Booth
Oh, I mean that's the trillion dollar question.
- [21:12]
Ann Barry
That's why I asked you.
- [21:13]
Danielle DiMartino Booth
Yeah, for Chair wars. It really is. It was fascinating to see over the weekend that treasury yields came down across the globe to the extent that they did after this massive run up and expectations again for a Fed rate hike. And yet you've got blackrock coming out over the weekend saying that they could just as easily see the next move coming out of the Fed being a Fed rate cut rather than A rate hike. Given the accelerating deterioration in the US labor market and the fact that we're wage growth is now being outpaced by inflation, which is never a comfortable place to be when wage growth is already back to where it was according to the Atlanta Fed, where it was in 2019. So that's problematic when your inflation is outpacing the pace of, at which your paycheck is growing.
- [22:01]
Ann Barry
And just in terms of what you think the global central banks are going to be doing, Danielle, because that's an important part of this too, what do you think? Europe and Asia, European ECB and the Asian central banks, what do you think is on the horizon for them?
- [22:15]
Danielle DiMartino Booth
I think it's going to be, I think they want to be in a tightening mode. I think it's going to be very difficult for them to do so. I think we may look back when, when history is written with the Australians and say, you know, was, was that the ECB blunder from the last cycle? Should they have been raising rates at a time that their housing markets are obviously getting, getting hit very hard. So the media has been covering what's been happening down under very well. So it'll be interesting to see what the desire to tighten is versus what the actual capacity to tighten is.
- [22:54]
Ann Barry
Everything you're saying, Danielle, screams to me, dollar volatility. Right? That's what I mean. With all this uncertainty I'm hearing, it's not yet clear where the dollar is going to shake out over the next couple of months. Do you think that's a fair assessment?
- [23:06]
Danielle DiMartino Booth
I do think that. I think FX volatility is a really good place to be right now, Ann. Yes, I do.
- [23:11]
Ann Barry
Trading the narrative. Danielle DiMartino Booth, thank you so much.
- [23:14]
Danielle DiMartino Booth
Appreciate you joining and thank you for having me in.
- [23:18]
Ann Barry
Well, huge thanks to Danielle DiMartino Booth for joining us. Hugely busy as she does the rounds now that that new Fed chair Kevin Walsh is in the seat. There it is, the closing bell. It's 4pm on the east Coast. The market's wrapping up for the day and we don't have a ticker tape, but as always, let's throw it over to our human ticker, our producer John.
- [23:36]
Mark Riepe
And The S&P 500 finished up 6, 10 of a percent, the Dow down about a quarter of a percent the day and the NASDAQ finishing up 1 and 210 of a percent for the day.
- [23:48]
Ann Barry
Now to some headlines. Moving the markets. Over the course of the trading session, we saw Micron Technology ticker Mu join the trillion dollar club, finishing the day With a market cap that puts it in league with a dozen other club members, including Nvidia, Apple, Amazon and Walmart. Well, Micron is one of the world's three major memory chip makers and the only major one based here in the United States. Well, with memory chips in high demand, owing, of course, to the AI buildout, Micron shares have soared over 800% through the past 12 months.
- [24:21]
Mark Riepe
And its commitment to domestic manufacturing has been a big part of that story. Micron has already announced that it will invest up to $100 billion over 20 years to build the largest semiconductor factory in the United States, located in upstate New York. And last Friday at a New York rally, President Trump expressed confidence in the company, saying, quote, micron boy, Micron's great. They're investing hundreds of billions. And just today, an analyst at Wall Street Bank UBS tripled his target price for the stock to over $1,600 a share, contending that the rise of AI has fundamentally altered how the company deserves to be valued. Shares are up over 20% today, bringing the stock price to nearly $900, over half of that analyst's target price.
- [25:05]
Ann Barry
And investor appetite for the AI trade didn't stop there. Up across the board today when it came to semiconductor stocks. SanDisk up 10%, another one that's been on absolute tear. And Advanced Micro Devices at AMD up 6%. While pivoting to health care, Eli Lilly is making a major pushback into infectious disease prevention after riding the GLP1 wave. Shares of the pharmaceutical giant ticker LLY traded about a percent higher after it agreed to buy three vaccine vaccine developers in deals worth roughly $3.8 billion combined.
- [25:39]
Mark Riepe
In addition to those acquisitions in recent weeks, Lilly has pledged to spend up to $7.8 billion for sleep drugmaker Contessa Pharmaceuticals and up to $7 billion for cancer drug developer Colonia Therapeutics. It would appear that the world's largest pharmaceutical company by market cap is using the windfall from its weight loss and diabetes shots to diversify its drug pipeline, acquiring medicines in early stage development rather than pay for existing blockbusters. Shares are up 50% over the last 12 months in Eli Lilly. And finally over to software. Shares in Dropbox ticker DBX were down nearly 2% after its CEO and founder Drew Houston, said he'll step down after more than two decades at the helm of the company, eventually transitioning to the role of executive chairman.
- [26:25]
Ann Barry
Well, Dropbox's new CEO, who by the way has already changed their title on LinkedIn, was previously Dropbox's senior vice president of core products. That's Ashraf Al Khami. In a note to employees, Houston said Alkami has been, quote, leading from the front on AI. He was previously chief product officer at Vimeo and before that held roles at Meta and Amazon. Dropbox's market cap currently just over $6 billion, down almost 50% from its market debut in 2018. So as far as executive moves go, this could be similar to what we've seen recently at Walmart and Coca Cola, with CEOs stepping down to make way for a new generation of leaders who may be better suited to navigate AI disruption. Particularly Big one, though, Drew Houston, still very young and being the founder and stepping away. A big moment in Dropbox's history. Well, a final thought. We have been absolutely underwater with earnings season, but as it comes to a visible end, we're starting to clear through the fog and the backlog of questions that have been coming in from the audience. So stay tuned this short week for our breakdowns of the stocks and stories that you all have been emailing in and commenting on asking for our views. That's it for today's Brew Markets Daily.
- [27:35]
Mark Riepe
Brew Markets Daily is hosted by Anne Barry and produced by John Carteau, Taka Villatic, Avni Laroya, and Emily Milliorn. Our technical director is Uchenawa Ogu, Brittany De Taco is our audio engineer and the president of Morning Brew Inc. Is Devin Emery.
- [27:46]
Ann Barry
Wake up tomorrow with the Morning Brew newsletter and tune in to Neil and Toby on Morning Brew Daily. See you back here tomorrow, same time, same place.