Enterprising Investor Podcast Summary

Episode: Danielle DiMartino Booth: Recession Signals, Inflation Trends, and Market Implications
Host: Mike Wahlberg
Release Date: April 1, 2025
Guest: Danielle DiMartino Booth, Founder of QI Research

Introduction

In this episode of Enterprising Investor, host Mike Wahlberg welcomes Danielle DiMartino Booth, a renowned expert in monetary policy, economics, and finance. Danielle brings a wealth of experience from her tenure at DLJ, Credit Suisse, and the Federal Reserve Bank of Dallas. As the founder of QI Research, she offers deep insights into the economic landscape, making her a valuable guest for investment professionals seeking to navigate the complexities of the current market.

Are We in a Recession?

Timestamp: [01:44]
Mike opens the conversation by addressing the pressing question: “Are we bound for a recession this year or are we maybe already in one?”

Danielle's Insight:
Danielle confidently asserts, “So yes, I do think we actually are already in recession” ([01:57]). She references systematic downward revisions in payroll data, emphasizing that private sector full-time employment peaked in April 2022, signaling the onset of a recession. Danielle underscores the statistical anomalies that traditional metrics may not fully capture the economic downturn, reinforcing her stance that the recession has already commenced.

Key Economic Benchmarks and Indicators

Timestamp: [02:36]
Mike probes further into the benchmarks Danielle monitors to foresee economic shifts.

Danielle's Analysis:
Danielle highlights the significance of the credit cycle, particularly within the fixed income ETF universe, which has expanded to over $1 trillion, a stark contrast to pre-2009 figures. She explains that high yield spreads are now influenced more by ETF inflows and redemptions rather than inherent credit risks. Additionally, she tracks the bankruptcy and distressed debt cycles, noting a rise in distressed debt exchanges as companies navigate defaults. This shift indicates deeper underlying financial strains within the market.

Store Closures and Private Equity Impact

Timestamp: [03:51]
The discussion shifts to Danielle’s report, Inflation Illumina Alumin, Inflationista Illuminati, focusing on store closures and bankruptcies.

Danielle's Insights:
Danielle elaborates on the alarming trend of store closures, citing CoStar data: “in the year 2024, calendar year, there were 7,400 store closures in the United States” ([04:37]) and projecting up to 15,000 by the end of 2025. She attributes this surge to excessive leverage and overexpansion financed by private equity. These entities, with ample "dry powder," have enabled retail and restaurant chains to pursue aggressive growth, often resulting in non-viable locations that eventually succumb to financial pressures.

Key Point:
The reliance on variable rate debt is finally catching up, forcing companies to confront unsustainable financial obligations, leading to widespread closures and bankruptcies.

Risks in Private Credit Markets

Timestamp: [06:54]
Mike inquires about the surge in private credit products and the associated risks.

Danielle's Warning:
Danielle warns of the fragility within private credit markets, referencing the abrupt collapse of Zip Car Wash. She explains, “...private credit has been marketed as a much more, as a much safer alternative to private equity... blindsided by those bonds going from 93 cents on the dollar on their books” ([06:54]). The episode highlights the potential for private credit funds to fail similarly to private equity when faced with defaults. Danielle advises investors to prioritize veteran players in the private credit space who have a long-standing track record over newer entrants motivated by the sector's perceived vulnerabilities.

Job Cuts and the Gig Economy's Role

Timestamp: [08:56]
The conversation moves to employment trends and their economic implications.

Danielle's Observations:
Danielle discusses the paradox of low initial jobless claims despite significant layoffs, attributing this phenomenon to the rise of the gig economy. She states, “the number of Americans working as freelancers... is estimated to be up 23% from 2020 in 2025” ([10:28]). This surge in gig work acts as a buffer, absorbing those exiting full-time employment and preventing spikes in unemployment claims. Moreover, the increasing prevalence of underemployment, as indicated by the U6 rate rising to 8%, further underscores the shifting dynamics of the labor market.

Additional Insight:
Danielle notes a reversal in wage growth patterns, where job stayers are now experiencing higher wage inflation than job switchers, signaling evolving employment conditions ([12:20]).

Student Debt Repayment and Credit Implications

Timestamp: [16:37]
Mike transitions to discuss the impacts of student debt repayment on the economy.

Danielle's Analysis:
Danielle highlights the ramifications of resuming student loan repayments after 43 months of forbearance, as detailed in recent New York Federal Reserve reports. She explains, “9.67 million student loan borrowers would have their FICO scores adversely impacted” ([16:37]). This decline in creditworthiness could hinder access to credit for a significant portion of the workforce, affecting consumer spending—a critical component of the U.S. economy, which accounts for 71% of GDP. The inability to expunge student loans through bankruptcy exacerbates financial strain, potentially leading to reduced consumption and increased dependence on debt financing.

Inflation Trends and Market Implications

Timestamp: [19:45]
Mike seeks a more optimistic view on inflation, asking whether the worst is over.

Danielle's Response:
Danielle affirms, “We are” ([19:45]), noting that inflation has been falling significantly, particularly in the shelter sector, the largest contributor to inflation. She references her colleague Ivy Zellman's forecast predicting a decline in new home prices for 2025 due to an oversupply of apartments and spec homes. Additionally, the reduction in wage inflation and the shift towards gig work are contributing to decreased spending on services, further dampening inflationary pressures.

Impact on Businesses:
Danielle explains that businesses are facing a "margin squeeze" where they cannot pass increased input costs to consumers, leading to reduced profitability and subsequent job cuts ([24:30]). This scenario forces companies to absorb costs rather than increasing prices, impacting corporate earnings negatively.

Tariffs, Reshoring, and Friend Shoring

Timestamp: [25:00]
Mike introduces the topic of reshoring and its future prospects.

Danielle's Perspective:
Danielle differentiates between reshoring and "Friend Shoring," emphasizing the need for consistency in trade policies. She critiques the current administration's approach, which appears inconsistent in handling investments made in Canada and Mexico. Danielle advocates for a balanced strategy that supports reshoring while honoring existing trade agreements and investments, ensuring that the transition does not undermine established economic ties.

Policy Implications:
She calls for a coherent and continent-wide campaign to facilitate reshoring, combining incentives (the "carrot") with regulations (the "stick") to encourage businesses to rebuild the U.S. industrial base without disregarding prior commitments to neighboring countries.

Final Thoughts and Personal Insights

Timestamp: [27:26]
As the episode nears its conclusion, Mike asks Danielle about her first job in the industry and the advice she would give her younger self.

Danielle's Reflection:
Danielle shares, “read the fine print, but I would also say start in sales” ([27:26]). Her first role in sales taught her the importance of attention to detail and the foundational skills of persuasion and negotiation, which she asserts are essential in all subsequent career roles. Despite early challenges, Danielle emphasizes that starting in sales provides invaluable experience that benefits one's professional trajectory.

Conclusion

Mike wraps up the episode by thanking Danielle for her insightful contributions, highlighting the valuable knowledge shared on recession indicators, inflation trends, the gig economy's impact, and the intricacies of private credit and student debt repayment. Danielle's expertise offers listeners a nuanced understanding of the current economic landscape, equipping investment professionals with the perspectives needed to make informed decisions.

Key Takeaways:

• Recession Status: Danielle believes the U.S. is already in a recession, based on payroll data trends.
• Credit and Bankruptcy Cycles: Monitoring fixed income ETFs and distressed debt provides crucial recession signals.
• Store Closures: A significant rise in retail and restaurant store closures is linked to over-leverage and private equity financing.
• Private Credit Risks: Investors should be cautious with private credit funds, favoring established players over newcomers.
• Gig Economy's Role: The surge in gig work absorbs layoffs, maintaining low unemployment claims despite job cuts.
• Student Debt Impact: Resumption of student loan repayments may adversely affect credit scores and consumer spending.
• Inflation Trends: Inflation is declining, especially in shelter, but businesses face margin squeezes impacting profitability.
• Reshoring Strategies: Effective reshoring requires consistent policies that support both domestic manufacturing and existing international investments.

This comprehensive discussion with Danielle DiMartino Booth provides essential insights into the current economic challenges and trends, offering valuable guidance for investment professionals navigating these turbulent times.